india+ +cutting+through+the+overburden

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Coal India (COAL IN)Energy

Coal India Cut t ing through the overburdenIndian energy giant on the block

Largest coal company in the world

Coal India (CIL) is the worlds largest coal company, both in terms of its reserves and

production. Its JORC compliant reserves and resources are expected to last for >40 years

based on the current production rates. Coal production is expected to grow at a ~5%

CAGR till FY22.

Unmatched strategic importance

Coal is the primary source of power generation in India and CIL sits right at the pit-head

of this fuel source. It accounted for 81% of Indias coal production in FY10 and ~42% of

primary commercial energy needs.

Increasing productivity and outsourcing gains waiting to be delivered

Employee costs, which currently form ~35% of total sales, are expected to grow

modestly from current levels. Higher levels of outsourcing (targeted at 48% of coal

production in FY11E) in its large open-cut (O/C) mines can help it deliver incremental

productivity gains. (Refer page 11).

Valuations and view

We estimate the fair value of Coal India in the range of US$41- 45bn (`306-329/sh) on

our base case estimates (Refer page 5).

Risk to thesis

(In) ability to pass on increased employee costs. The company has implemented only

4 price rises in past 10 years.

Execution risks associated with a significant proportion (20-37%) of future

production (Refer page 15).

Lack of evacuation infrastructure at key coalfields (Refer page 16).

Off-take to be determined by railways ability to deliver rakes (Refer page 17).

05 October 2010

IPO NOTE

REDUCESector view: Underweight

Sector relative view:Underperform

Target Price: `453 (100%)

CMP:`2

Company data

Shares o/s (mn) 00

Market cap `-2,146,826,273bn/US$00bn

52-wk high/low `00/ 00

Avg daily trade vol -2,146,826,273(mn shrs)

Promoter FIIs DII Othersxxx xxx xxx xxx

Shareholding patt ern (%)

Click here to enter text.

Ankur Kulshrestha, +91 22 66399132

[email protected]

Downgrade from

Financial summary

Year-end March ( mn) FY09A FY10A FY11E FY12E FY13E

Net sales 407,466 464,129 534,457 574,463 675,741

EBITDA 67,421 152,273 187,745 173,446 244,819

EBITDA Margin (%) 15.8% 31.4% 35.1% 30.2% 36.2%

PAT 42,232 125,794 126,871 116,449 175,512

PAT (Reported) 40,628 98,294 126,871 116,449 175,512

EPS 6.7 19.9 20.1 18.4 27.8

ROE (%) 11.5 42.9 41.6 29.6 35.1

ROCE (%) 13.1 41.5 50.0 35.7 41.3

Source: Alchemy Research, Company

Six key facts about Coal India

CIL produced 431mn tonnes of coal in

FY10, which is ~81% of Indias coal

production.

CIL sells its coal at a considerable

discount to prices of international coal,

even after accounting for differences in

energy content.

It is expected to produce ~460mn

tonnes in FY11E. Of this, 48% will be

extracted by contract mining.

HEMM hiring expenses, which form

about 5% of the total cost in CILs P&L

in FY10, are expected to account for

48% of the coal production and 42%

of overburden removal in FY11E.

It employed 550,000+ employees as of

March 2001. The number has steadily

reduced since then to ~390,000 in

FY10.

20% of CILs target production in FY17

is expected to come from new projects.

For FY22, this number is ~37% .


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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 2

Coal India Energy

Table of contents

Indian energy giant on the block ............................................................ 3Valuations and view ............................................................................... 5Investment argument ............................................................................. 8Investment risks .................................................................................... 14Coal India Ltd. ...................................................................................... 19Appendix ............................................................................................. 22


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Coal India Energy

Indian energy giant on the block

The offer

Indian government proposes to sell a 10% stake (631mn shares) in CIL through a public of fer.

Of this, 10% is reserved for CIL employees. The proceeds of the sale will be utilised for

meeting governments divestment target of`400bn for FY11.

Coal India Ltd (CIL)

CIL is the holding company of seven coal producing subsidiaries, a technical and consultancy

services provider and a unit producing coal in Assam.

The coal producing subsidiaries are:

1. Eastern Coalfields Ltd (ECL)

2. Bharat Coking Coal Ltd (BCCL)

3. Central Coalfields Ltd (CCL)

4. South Eastern Coalfields Ltd (SECL)

5. Western Coalfields Ltd (WCL)

6. Northern Coalfields (NCL)

7. Mahanadi Coalfields Ltd (MCL)

Central Mine Planning and Design Institute Ltd (CMPDIL) located in Ranchi, Jharkhand carries

out exploration activities for CIL subsidiaries and provides technical and consultancy services

to CIL and other coal companies in India

North Eastern Coalfields (NEC), a coal producing unit operating in Margherita, Assam, is

under the direct operational control of CIL.

Investment arguments

Largest coal company in the world

Coal India is the worlds largest coal company, both in terms of its reserves and production.

Its JORC compliant proven + probable (2P) reserves stood at 18.8bn tonnes, and are expected

to last for >40 years based on current production rates. The company produced 431mn

tonnes of coal in FY10, which is more than the next two largest companies put together.

From this base, production is expected to grow at a ~5% CAGR for the next decade.

Unmatched strategic importance

Coal is the primary source of power generation in India and CIL sits right at the pit-head of

this fuel source. It accounted for 81% of Indias coal production in FY10 and ~42% of

primary commercial energy needs.

Increasing productivity and outsourcing gains waiting to be delivered

Employee costs, which currently form ~35% of total sales, are expected rise modestly from

current levels through reduction in manpower and despite scheduled wage increases.

Additionally, higher levels of outsourcing in its large open-cut mines can the company deliver

incremental productivity gains.


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Coal India Energy

Higher realisations from market linked prices

CIL sells some proportion of its coal at prices which are higher than notified prices. These

include E-Auctions (~10%), supplies through memorandum of understanding (MoU) route

and beneficiated coking coal (0.7%). Volume upside to the last two remains constrained due

to the nature of Indian coal reserves. E-Auctions could provide substantial gains. Premiums

over notified prices are expected to remain strong for the next few years given the constrictedsupply of coal in the country (premium of 51% over notified prices in FY10, 60% in Q1FY11).

.

Large cash position to fund future growth

CIL has cash of `390bn (~`62/sh) on its books. A look at its visible spending plans indicates

that current cash levels are sufficient to fund its capex plans and other commitments.

Investment risks

(In) ability to pass on increased employee costs

Power utilities accounted for 80% of supplied coal in FY10. Any increase in the price of coal

will increase the cost of electricity generation. It is unlikely that the buyers, particularly the

state electricity boards (SEBs), will be able to pass on the rise in costs to the end consumer.

This will further impact their financial health of SEBs/Discoms. This underlines CILs limited

ability to raise coal prices and pass on increased operating costs.

Execution risks associated with a significant proport ion of future production

Future projects (i.e. projects currently not operational or on the drawing board) form a

significant proportion (20-37%) of CILs production over the future decade. However, several

key projects have been delayed; a few by more than 2-3 years (refer to page 15). Land

acquisition and environment & forest clearances are the biggest challenges in projectexecution. This delay forms the biggest risk to volume growth in future.

Lack of evacuation infrastructure at the key coalfields

Inadequate evacuation infrastructure has resulted in additional project delays. Key evacuation

railway infrastructure projects have been delayed due to forestry and rehabilitation &

resett lement (R&R) issues (refer to page 15). Development of railway inf rastructure is crit ical

for coal evacuation, and these delays form the biggest risk to volume growth in future.

Off-take to be determined by railways ability to deliver rakes

Transport by rail (46.7%) and merry-go-round (20.8%) system accounted for ~68% of thetotal coal off-take from CIL in FY10. Insufficient rake supplies over the past 2-3 years have led

to an increase in pithead coal inventories at CIL subsidiaries to 62mn tonnes (~52 days of

production). A continued shortage of railway rakes will render ineffective any production

growth.


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Coal India Energy

Valuations and view

We estimate the fair value of CIL in the range of US$42-45bn.

We value Coal India on discounted cash flow methodology. We have also compared the

company with global peers based on financial and operational metrics. CIL is unique in itsscale, strengths, constraints and prospects. Thus, a comparative valuation of the company

would, at the best, serve limited purpose. However, we do include a comparative evaluation

to serve as validity test.

We evaluated the company on the basis of a number of scenarios which could play out:

For production (and hence off-take), we have assigned varying risk weights to

ongoing and future projects.

For E-Auction, we have assumed a range of premium over notified prices and a % of

raw coal offered in E-Auction.

For the notified prices of raw coal, we assumed a range of scenarios from full pass-through of employee costs to 50% pass-through. The below table outlines these

scenarios and the valuation implied there-in.

Scenarios Production E-Auction

As a of %raw coal

Pricepremium

Notif ied priceincrease as % ofemployee cost hike

Valuation(US$mn) Price/sh

High case 100% of ongoingprojects + 75% offuture projects

15% 75% Full pass-through, yearfollowing the hike

48,373 356

Base case 100% of ongoingprojects + 75% of

future projects

10% 70% Full pass-through,spread over 2-3 years

following the hike

43,034 317

Low case 100% of ongoingprojects + 50% offuture projects

10% 65% 50% pass-through 27,551 203

Other key inputs into our valuation case

Production and off-take

Explicit projections till FY22, as CILs production targets are known till that date

(implied exit reserve life ~17 years based on the current 2P reserves).

Off-take is assumed to be ~98% of production in each scenario.

An 8% CAGR in beneficiated coal production (25mn tonne in FY17). Although CIL

has formulated plans for ~110mn tonnes of washeries by FY17 (implying an output

of ~83mn tonnes), we assume a more conservative growth in the beneficiated coal

production.

Realisation

Raw coal prices increase driven by rise in employee cost.

Beneficiated coal prices to increase at the same rates as raw coal over the forecast

period.

Employee costs

Increases as per previous trends for National Coal Wage Agreements (24% hikes

each in 2004 and 2009).

Steady reduction in headcount due to natural attrition and VRS schemes (Reduction

at a CAGR of ~3%).

A ~4% annualised increase in total employee costs over the forecast period.


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Coal India Energy

Other production costs

Assumed to increase with inflation from current levels.

DCF assumptions~13% cost of capital and 2% terminal growth rate

Sensitivity (Base case valuat ion)

Terminal growth rate (%)

1% 2% 3% 4%

WACC(%)

11% 51,006 53,515 56,650 60,68212% 45,610 47,453 49,706 52,52213% 41,614 43,034 44,740 46,83114% 37,570 38,621 39,863 41,35315% 34,516 35,328 36,274 37,392

Our key assumptions underlying the valuation are laid out in the next page.

Relative valuation

Globally, coal companies trade at about a ~11x (historical) and 7x (1-yr fwd) multiples (Please

refer Appendix - Valuation of coal companies globally). Based on CILs EBITDA (ignoring the

effects of OB removal expense), the estimated value works out to be US$46.8bn on a

historical basis (last financial year) and US$41.2bn on a forward basis (1stforward year).

US$ (except share pr ice) LFY FY1 CommentsMult iplier 11.6 7.3 This is essentially implied EV/EBITDA

CIL EBITDA/t 8.0 10.0 Based on EBITDA for CIL

Implied EV/t 93.1 73.4

Off-take(mn tonnes) 415 451 Historical and Alchemy forecasts

EV 38,634 33,027 Implied firm value for Coal India

Cash 8,220 8,220 Cash on CIL books as of March 31, 2010

MCap 46,854 41,247 Implied market capitalisation

# of shares (mn) 6,316 6,316

Share price () 334 294 Implied price/share


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Coal India

ALCHEMY SHARE & STOCK BROKING PVT. LTD.

Volume project ions (mn tonnes) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 F

CIL targets 460 486 515 543 575 609

Production 379 404 431 460 485 511 537 563 589

Off-take 375 401 415 451 475 500 526 551 577

Growth in off-take (%) 7% 7% 4% 9% 5% 5% 5% 5% 5%

Total raw coal (net of feed for washery) 354 380 395 420 442 464 487 509 531

Growth in raw coal off-take (%) 7% 8% 4% 6% 5% 5% 5% 5% 4%

Total beneficiated coal 14 15 15 16 17 18 20 21 23

Growth in beneficiated coal off-take (%) 2% 3% (2%) 6% 8% 8% 8% 8% 8%

Volume in E-Auction 29 49 46 42 44 46 49 51 53

Volume in -Auction (%) 8.1% 12.9% 11.6% 10% 10% 10% 10% 10% 10%

Pricing assumpt ion s (` /tonne) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Price of raw coal 841 925 1,045 1,066 1,087 1,218 1,364 1,391 1,419 1

Increase in price (%) 4% 10% 13% 2% 2% 12% 12% 2% 2%

Price of beneficiated coal 1,890 2,267 2,134 2,177 2,220 2,487 2,785 2,841 2,898 2

Increase in price (%) (3%) 20% (6%) 2% 2% 12% 12% 2% 2%

Price in E-Auction 1,347 1,481 1,583 1,812 1,849 2,071 2,319 2,365 2,413 2

Premium over raw coal (%) 60% 60% 51% 70% 70% 70% 70% 70% 70%

Average sales price 871 968 1,074 1,167 1,191 1,334 1,494 1,525 1,557 1

% Increase in price 3% 11% 11% 9% 2% 12% 12% 2% 2%

Employee costs FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Number of employees 426,077 412,350 397,138 385,224 373,667 362,457 351,583 341,036 330,805 32

Employee cost/head (`) 296,547 478,770 419,388 431,970 535,643 551,712 568,263 585,311 602,871 78

Employee cost/tonne (`/tonne) 333 489 386 362 413 392 372 355 339

Increase in employee cost/head (%) 31% 61% (12%) 3% 24% 3% 3% 3% 3%Increase in number of employees (%) (4%) (3%) (4%) (3%) (3%) (3%) (3%) (3%) (3%)

Key assumptions underlying our base case valuation


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Coal India Energy


Investment argument

Worlds largest coal company

CIL is the largest coal producer in the world. It is also unique as it supplies ~81% of India coal

requirement and ~42% of primary commercial energy needs. CIL holds the largest coal

reserves in the world (based on proven + probable (2P) reserves).Exhibit 1: Company-wise coal production

Source: Company, CIL RHP

Note: Production for each company taken for the last financial year (LFY)

Exhibit 2: Coal reserves and R/P rat io

Source: Company, R/P based on the current production rates

Note: Reserves not adjusted for calorific value. Marketable reserves have been taken in case they have been disclosed by

companies

431

211 210

140120 109 105 95 93

63

Coal India Peabody Shenhua Rio Tinto Arch Coal China Coal BHPBilliton

Xst rat a CloudPeak

BumiResources

Production (mn tonnes)

18.8

8.7 8.26.9

3.5 2.9 2.4 2.3

-

20

40

60

80

100

Coal India China Coal Peabody Shenhua Xstrata Bumi Massey Alpha NaturalResources

Reserves (bn tonnes) (LHS) Reserve life (years) (RHS)

CIL produced more coal in

FY10 than the next two largest

companies put together

Reserve life of ~44 years based

on the current production rates

and JORC reserves


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Coal India Energy


CIL reserves and resources summary

The company has JORC compliant 2P reserves of 18.8bn tonnes and resources of 64bn

tonnes. As per Indian Standard Procedure (ISP) code, CIL has extractable reserves of 22.3bn

tonnes and total resources of 66.7bn tonnes.

Exhibit 3: CIL 2P reserves (mn tonnes)

Source: CIL RHP

Exhibit 4: CIL Resources (mn tonnes)

Source : CIL RHP

Coal reserves are predominantly of lower grade, with superior quality coal (A, B and C grades)

forming only 6% of the total thermal coal reserves. Coking coal reserves are ~9.1bn tonnes,

of which only ~900mn tonnes are qualified as reserves.

Of the 64bn tonnes of resources, 37bn tonnes have not been projectised or evaluated for

mineability. Although, this indicates a huge upside to the reserve base, there are someconcerns.

Jharia and Raniganj fields, which are amongst the oldest coalfields in India, have only 7% and

4% of the resources classified as reserves respectively. Jharia coalf ield is the only source of

prime coking coal in the country and is beset with coal mine fires.

These coalfields are also densely inhabited and extraction of the coal will require rehabilitation

& resettlement of people living there. (CIL has to contribute`3,500mn annually towards the

Jharia and Raniganj Master plans for rehabilitation of these two coalfields. The aggregate

expenditure sanctioned by government towards these master plans is`97,738mn).

10,595

8,268

Reserves

Proved Probable

51,326

9,924

2,967

Resources

Measured Indicated Inferred

JORC compliant reserves

provide additional comfort to

international investors

Low level of 2P reserves in

Jharia and Raniganj coalfields a

key concern


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Coal India Energy


Employee costs Things can only get better from here!

Employee costs form the most significant cost item in CILs P&L. Large increases in employee

compensation in the past have resulted in the erosion of profitability (for e.g. National Coal

Wage Agreement VIII and Executive Pay revisions in 2008-09)

Exhibit 5: Cost breakup

Source: CIL DRHP

Note: Percentages do not total to 100 as inventory changes have not been taken

into account

Exhibit 6: Effects of revisions on profitability

Source : CIL DRHP

Majority of employee costs flows from older subsidiaries which have a large number of legacy

underground (U/G) mines in operation. However, the overall headcount has seen a decrease

at a steady rate for the past ten years (CAGR (3)%)

Exhibit 7: Employee count vs U/G product ion (FY10)

Source: Company

Exhibit 8: Number of employees

Source: Company

Natural attrition in older subsidiaries coupled with higher open cast (O/C) production in future

should result in a steady decline in headcount from here, even as production increases.

Employee pay revisions

Scheduled pay revisions for employees and executives will determine the true extent of

employee costs. The current level of non-executive pay was determined in National Coal

Wage Agreement which was finalised in May 2009 and effective from July 1, 2006. For

executive pay, the level was revised as of January 1, 2007 and is effective till 2017.

30.7% 30.9% 35.1%46.2%

34.4%

33.8% 34.4%34.5%

33.7%

31.3%

30.6% 29.5% 25.5%15.8%

31.4%

FY06 FY07 FY08 FY09 FY10

EBITDA Other expenses Employee costs

(9%)

7%

31%

61%

(12%)(12%)

3%

25%

56%

(16%)

18.4% 17.4%13.1%

4.9%

19.8%


Increase in employee cost/head Increase in total cost

Net profit Margin (%)

(5%)

0%

5%

10%

15%

20%

25%

30%

- 20 40 60 80 100

%p

roductionfrom

U/Gmines

# of employees ('000s)

552 531 511 493 477 460 446 426 412 397

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Number of employees ('000s)

Employee costs one of the key

drivers of profit ability

Majority of employees in older

subsidiaries with high U/G

production

ECL

WCL

SECL

BCCL

CCLMCLNCL


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Coal India Energy


Higher outsourcing can drive incremental productivity gains

CIL subsidiaries outsource varying proportions of their production. O/C mining is easy to

outsource and hence the proportion of outsourcing is larger in subsidiaries with higher O/C

production. For example, MCL outsources its entire O/C coal production while OB removal is

done by the company, except in a few cases (Source: MCL Annual Report 2010). SECL has a

target of ~97% of coal production to be done contractually for FY11.

On an average, CIL plans to outsource 42% of OB removal and 53% of O/C coal

production for FY11. The O/C production from outsourced operations is expected to

be ~48% of the total coal production.

Exhibit 9: Outsourcing in CIL subsidiaries (FY11 targets)

Source: Company

The outsourcing cost is reflected in CILs P&L through heavy earthmoving machinery (HEMM)

hiring expenses. These expenses represent a small proportion of costs (~5% of total operating

expenses), but have grown exponentially in the past 5 years. (CAGR of ~47% versus

production CAGR of ~5% and transportation charges CAGR of ~11%)

Exhibit 10:HEMM Hiring expenses vs production and ot her costs (% grow th)

Source: CIL DRHP

Outsourcing contracts are awarded based on the quoted cost/cubic meter of material

removed (coal or overburden). Based on CILs disclosed figures for HEMM hiring, we have

calculated the cost of outsourced coal and compared it with production cost for in-house

production. In case of hired production, the figure works out to less than a third of in-house

production. This underlines huge scope of productivity improvements which could flow from

outsourced production.

97%

81%

0%

18%

32%24%

29%37%

34%

49% 46%

29%

37% 37%

SECL MCL NCL WCL CCL ECL BCCL

Outsourced O/C product ion (%) Outsourced OBR (% of t otal)

0%

200%

400%

600%

800%

FY05 FY06 FY07 FY08 FY09 FY10

Coal production Total contractual charges

HEMM Hiring expenses Transportation costs

Outsourced operations form a

significant proportion of CIL

O/C production

HEMM hiring expenses have

outpaced production growth,

implying increased levels of

outsourcing in recent years


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Coal India Energy


Exhibit 11:Outsourced vs own production cost (`/tonne)

Source: CIL DRHP, Alchemy Research

Note: Approximate calculation. Based on the breakup of outsourced vs in-house production as per FY11 targets. Coal density

assumed at 800kg/cu.m.

Increased realisations from market linked prices

CIL sells a portion of its coal at prices which are higher than notified prices. This includes:

- E-Auction CIL targets to sell 10% of its total production through E-Auction, a spot

and forward electronic auction mechanism. Realisations through E-Auctions have

historically been 50-60% higher than the notified prices of raw coal.

- Coal sold through memorandum of understanding (MoU) This applies to A, B

and C grades, with gross calorific value >5,597kcal/kg produced in some of the

subsidiaries. The coal is sold at a 15% discount to landed price of international coal

resulting in higher realisations. For example, in FY10, ECL sold ~4.1mn tonnes

through the MoU route and earned an incremental `.8,639mn (`2,107/tonne) over

notified prices. The exact proportion of coal sold through this route in not known in

other subsidiaries.

- Beneficiated coking coal This is also sold at negotiated prices which are generally

at a discount to landed cost of imported coal. In FY10, CIL sold ~3mn tonnes of

beneficiated coking coal.

Increase in proportion of any of these categories should provide a boost to the earnings

especially through first two routes as they do not entail additional production costs. However,

the scope of volume improvement for MoU and beneficiated coking coal routes is limited.

Reasons include:

- The higher grade A, B and C coal is more likely to be found at greater depths andwould necessitate U/G production. The scalability in U/G production is not high and

costs are also higher.

- Jharia and Raniganj, the oldest coalfields of the country, also have the best quality of

deposits. Jharia accounts for 51% of Indias coking coal reserves (and 100% of

prime grade coking coal). Raniganj accounts for ~41% of countrys superior grade

thermal coal (A, B and C grades).

These coalfields are beset by a number of problems. These include coalfield fires,

population living on the top of coalfields and high level of disruptions owing to

bandhs and other naxalite activity. This is also evident in CILs low estimate of

extractable reserves from these mines (~1.8bn tonnes out of a total of 13.6bntonnes of proved reserves).

188

653

- 100 200 300 400 500 600 700

Hiredproduction

Ownproduction

Employee cost HEMM hiring Transportation Other cont.exp

Repairs Stores cons. Power and fuel Misc expenses

Outsourced coal is considerably

cheaper than in-house

production

Market linked portion of sales

provides upside

It might not be easy to

significantly upscale sales of

high grade thermal and

beneficiated coking coal


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Coal India Energy


We believe that any relaxation in E-Auction volumes to the higher side will result in large

gains for CIL. E-Auction premiums over notified prices are expected to remain strong for the

next few years given the constricted supply of coal in the country.

Exhibit 12:E-auction price and premiums


Large cash position to fund future growth

CIL has cash of `390bn (~`62/sh) on its books. A look at its visible spending plans indicates

that the current cash levels are more than sufficient to fund its capex plans and other

commitments. Cash flows from operations are expected to generate sufficient cash to fund

the future projects, for which the visibility is low. Net aggregate cash flows in FY06-10 were

~`310bn.

`mn US$bn

FY11 & 12 expected capex 84,500 1.88

Earmarked for overseas acquisitions 60,000 1.33

Capex for washeries 23,275 0.52

Capex for 12th

plan period 25,762 0.57

Total 193,537 4.30

Net cash 369,909 8.22

Source: Company, MoCNote: CIL is required to contribute`3,500mn annually towards Jharia and Raniganj rehabilitation master plans. Current balancein the rehabilitation fund is 14,774mn. CIL also has contingent liabilities amounting to`117,776bn

1,3471,481

1,5831,748

35%

45%

55%

65%

75%

FY08 FY09 FY10 Q1FY11

E-Auction realization (LHS) Gain over notified price (RHS)


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Coal India Energy


Investment risks

(In) ability to pass on higher costs

A major proportion of CILs production is sold at notified prices which are at considerable

discount to prices of imported coal (in kcal terms).

Exhibit 13:Comparat ive prices of coal

Source: CIL DRHP

The company has implemented only four price rises in the past ten years with increases of

approximately 8.5%, 16.2%, 10.0% and 11.0 effective from January 31, 2001, June 15,

2004, December 12, 2007 and October 16, 2009 respectively. Several factors limit CILs ability

to raise coal prices and pass on increased operating costs

Power utilities accounted for 80% of supplied coal in FY10. Any increase in price of

coal increases the cost of generation of electricity. It is unlikely that the buyers,

particularly the SEBs, will be able to pass on the rise in costs to the end consumer.This will further impact their financial health. This underlines CILs limited ability to

raise coal prices and pass on increased operating costs.

NTPC, which accounted for ~27% of CILs coal off-take in FY10, will have to enter

into competitive bidding process for any capacity it installs after April 2011. Any

increase in coal prices under the FSAs may not be completely pass-through (non-

escalable component of fuel cost).

0

200

400

600

800

2005 2006 2007 2008 2009

Rs/mnkcal

Indoesian coal (6,200 kcal/kg) South African coal (6,200 kcal/kg)

Grade E coal from NCL (4,502kcal/kg)

CIL prices at considerablediscount to international coal

prices on an energy equivalent

basis

Limited ability to raise prices

due to sensitive end-use sectors


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Coal India Energy


Execution risks associated w ith a significant proportion of CILsfuture production

From the base of ~430mn tonnes, CIL aims to grow to 648mn tonnes by FY17 and 770bn

tonnes by FY22. The incremental 340mn tonnes (plus the replacement production due to

decline in existing mines) are expected to come from future projects (currently not operational

or on the drawing board) and expansion in ongoing projects.

Exhibit 14:Product ion targets

Source: Company

The company has shown a remarkable capability to grow its production by ~5% CAGR over

the past 10 years. However, the growth plan envisages a CAGR of ~6% till FY17 and 5% till

FY22, over a larger base. A quick look at the data from Ministry of Statistics and Program

Implementation (MOSPI) reveals that projects with ~55mn tonnes of capacity, which were

expected to be commissioned by FY10, have been delayed by 2-3 years.

Project CompanyCapacity(mn tpa)

Originalcompletion

date

Revisedcompletion

date

Delay(months)

Reason f or d elay

Rajmahal O/C Exp. ECL 17.0 Mar-10 Mar-14 49 Diversion of forest land and delay inEMP clearance

Kulda O/C Exp MCL 10.0 Mar-10 Mar-12 24 Land acquisit ion and rehabilitat ion ofPAPs

Gevra Expansion O/C SECL 10.0 Mar-10 Mar-12 24 N/A

Dipka Expansion O/C SECL 5.0 Mar-10 Mar-14 49 Delay in f inalisat ion of tender and workaward for construction

Lakhanpur O/C Exp MCL 5.0 Mar-07 Mar-11 49 N/A

Krishnashila NCL 4.0 Mar-10 Mar-13 37 Delay in supply of mining equipment

Jhanjhra U/G Ph III ECL 3.5 Nov-09 Mar-15 65 Delay in tender process

Total projectsdelayed

54.5

Source: MOSPI as of April 2010

Note: EMP Environment Management Program, PAP Project Affected Persons

234 226 181 156

197 252 333 334

9

134280

431487

648

770

0

200

400

600

800

2009-10 2011-12 2016-17 2021-22

mntonnes

Future Ongoing projects Existing/completed

Future projects to form a

significant proportion of CILs

production

Several key projects have been

delayed, few by more than 2-3

years

20-37% of CILs futureproduction to come from

future projects


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Coal India Energy


Key challenges faced by CIL in achieving its stated production targets include:

Land acquisition Under XIth

plan, envisaged land acquisition target was 62,000 hectares.

Against this, CIL was able to acquire only 6,000 hectares until 2010. The target for 12th

plan is

65,000 hectares.

Bulk of the land targeted for acquisition in 11th

plan is tenancy land. Acquisition of tenancy

land suffers from problems such as:

- Non availability of proper records for identification of land ownership

- Lack of support from local and state governments

- Non-uniformity in R&R process

Another key issue is the high proportion of forest land required for coal mining. Currently, the

proportion of forest land in land to be acquired is ~30%. This is expected to go up to 50% in

future years.

Environment and forest clearances Time taken for environment clearance currently

averages about seven years against a normative timeline for 2-3 years. This results in delays in

commissioning of projects.

Lack of evacuation infrastructure at key coalfields

Maximum growth potential exists in North Karanpura (CCL), Ib Valley and Talcher (MCL),

Mand-Raigarh (SECL) coalfields. Key infrastructure projects for coal evacuation have been

delayed, resulting in lack of evacuation capacity at these major coalfields. MCL, CCL and SECL

are the worst affected due to non-availability of key infrastructure.

Railway lineLength

(km)

Projectedcapacity(mn tpa)

AssociatedCoalfield

CurrentStatus Key issues for delay in progress

Tori-Shivpur-Hazaribagh

93 168 NorthKaranpura

10km FC for forest land acquisition

Angul-Kalinga 13 100 Talcher 7km so far Project stalled due to R&Rissues

NTPC dedicatedtrack

60 35 Mand-Raigarh

Master planprepared

Reserve forest

Dharamjaigargto Bhupdeopur

91 35 Mand-Raigarh

Master planprepared

Reserve forest

trans-Mand toKorba

66 36 Mand-Raigarh

Master planprepared

Reserve forest

Source: Company, Status as of March 2010

Note: FC Forest clearance, R&R Rehabilitation and resettlement

Land acquisition and

environment and forest

clearances are the biggest

challenges in project execution

Key evacuation railway projects

have been delayed due to

forest and R&R issues


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Coal India Energy


Non availability of railway rakes for coal off-take

Transport by rail accounts for ~68% of the coal off-take from CIL. This includes merry-go-

round (MGR) rail systems operated by customers near the pithead. For example NTPC

operates MGR systems for its plants located near Nigahi & Amlohri (NCL) and Lingaraj &

Lakhanpur (MCL) mines.

Exhibit 15:Modes of off-take

Source: Company

Note: Rail transport Includes movement of coal by rail to ports for coastal shipment. Others includes coal transported directly

through conveyor belts / rope ways to pit head customers

CIL dispatch volumes have historically been constrained by inadequate transportation

capacity, including non-availability of adequate railway rakes. For the past three years,

number of railway rakes provided have fallen short of targets and have resulted in lost off-

take to the tune of 13.9mn tonnes in FY10.

Exhibit 16:Availabilit y of railway rakes

Source: Company, Alchemy Research

Note: Calculations based on 3,800tonnes/rake

50% 52% 50% 48% 47%

24% 23% 22% 21% 21%

22% 22% 24% 28% 29%

4% 4% 4% 3% 3%

333 350 375 401 415

2006 2007 2008 2009 2010

mn

tonnes

Rail MGR Road Others

156

163 165

183

153156 155

120

140

160

180

200

FY08 FY09 FY10 FY11

rakes/day

Target Availablity

Availability of rakes limits off-

take

13.99.7

4.2

Shortfall (mntonnes)


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Coal India Energy


Insufficient rake supplies over the past 2-3 years have led to an increase in pithead coal

inventories at CIL subsidiaries to ~62mn tonnes (~1.5 months of production).

Exhibit 17:Pithead coal stocks at CIL subsidiaries

Source: Ministry of Coal

Availability of wagons will be one of the most critical determinants in CIL off-take in future.

Continued shortage of railway rakes will render any production growth ineffective.

-

10

20

30

40

5060

70


mntonnes

ECL WCL NEC SECL NCL CCL BCCL MCL

Pithead coal inventories have

zoomed in recent years


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Coal India Energy


Coal India Ltd.

Introduction

CIL is the single largest coal producing company in the world and the largest corporate

employer in India. It contributed 81% of Indias coal production in FY10 and meets 42% of

primary energy requirement. CIL has seven coal producing subsidiaries and one division, NorthEastern Coalfields, which mines coal in Assam. CIL is directly under the control of the Ministry

of Coal, Government of India, and is responsible for all corporate, finance, legal and

marketing issues, whereas its subsidiaries are responsible for coal production.

The producing subsidiaries are:

1. Eastern Coalfields Ltd (ECL), in Sanctoria, West Bengal

2. Bharat Coking Coal Ltd (BCCL), in Dhanbad, Jharkhand

3. Central Coalfields Ltd (CCL) in Ranchi, Jharkhand

4. South Eastern Coalfields Ltd (SECL) in Bilaspur Chhattisgarh

5. Western Coalfields Ltd (WCL) in Nagpur, Maharashtra;

6. Northern Coalfields (NCL) in Singrauli, Madhya Pradesh

7. Mahanadi Coalfields Ltd (MCL) in Sambalpur, Orissa.

Central Mine Planning and Design Institute Ltd (CMPDIL) located in Ranchi, Jharkhand carries

out exploration activities for CIL subsidiaries and provides technical and provides technical and

consultancy services to CIL and other coal companies in India

North Eastern Coalfields (NEC), a coal producing unit operating in Margherita, Assam, is

under direct operational control of CIL.

Coal India operational snapshot

No. of M ines

Company UG OC Mixed Total Reserves Resources2010

Production

2017Production

target

Reservelife

(currentreserves)

O/Cproduction

(% oftotal)

Str ippingratio

(FY10)

SECL 68 22 1 91 3,561 10,266 108 165 33 82.6% 1.13

MCL 9 16 0 25 7,574 13,616 104 180 73 97.9% 0.65

NCL 0 10 0 10 1,891 3,480 68 87 28 100.0% 2.63

CCL 24 37 2 63 3,242 11,653 47 85 69 96.9% 1.23

WCL 45 38 2 85 1,168 5,474 46 45 26 79.0% 3.69

ECL 82 19 7 108 878 12,352 30 47 29 72.6% 2.29

BCCL 40 18 23 81 499 7,024 28 35 18 85.8% 2.61

NEC 5 3 0 8 51 353 1 4 45 100.0% 6.50

CoalIndia

273 163 35 471 18,863 64,218 431 648 44 90.0% 1.69

Source: Company, All reserves and production figures in mn tonnes

Note: Raniganj field is attributed to ECL while calculating reserves. BCCL also shares a part of the field


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Coal India Energy


Coal India Grade-wise coal reserves and resources (mn tonnes)

Measured Indicated InferredTotal

Resources Proved ProbableTotal

ReservesProduction

(2010)Reserve

lifeS-I 41 0 - 42 0 0 1 0.1 6

S-II 275 9 - 285 1 2 3 1.4 2

W-I 407 17 - 424 3 2 5 0.3 16W-II 661 25 - 685 5 7 12 1.6 7

W-III 1,359 218 - 1,577 29 66 95 8.0 12

W-IV 3,238 1,213 78 4,528 316 423 740 24.6 30

Ungraded 1,119 452 12 1,583 31 16 47

Totalcoking coal

7,099 1,934 89 9,123 385 517 902 36.0 25

SC - I 61 - - 61 - 2 2 0.2 18

SC - II 36 3 - 39 - 2 2

Total Semicoking

97 3 - 100 - 3 3

A 647 144 11 802 77 6 82 4.6 136

B 2,392 325 31 2,748 289 99 389 23.7 63

C 4,244 517 48 4,808 468 163 631 44.4 90

D 6,053 834 29 6,916 1,057 430 1,487 34.7 268

E 9,814 2,166 323 12,303 2,736 1,239 3,976 95.7 22

F 15,773 3,473 1,212 20,458 4,426 4,871 9,297 191.9 0

G 5,083 465 129 5,677 1,152 941 2,093 0.0 N/M

Ungraded 125 64 1,095 1,284 4 0 4

Totalthermal

44,130 7,988 2,878 54,995 10,210 7,748 17,957 395.1 45

Source: CIL RHP

S-I & II: Steel grade coal, W-I to IV: Washery grade coal, SC I & II Semi coking coal

N/M Not meaningful


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Coal India Energy


Location of key coalfields

Company

Command

area

BCCL 1,3

CCL 4,5

ECL 1,2

MCL 7,8

NCL 6

NEC 16

SCCL 15

SECL 9,10,11

WCL 12,13,14

Source: CMPDIL, Geological Survey of India

Note: The map indicates command areas of CIL subsidiaries and Singareni Collieries Company Ltd (SCCL). It is not an accurate

representation coalfields owned by these companies


22/25

C

A

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EV/tonne

al India

LCHEMY SHARE

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-

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200

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EV/Reserves a

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-

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23/25

Coal India

ALCHEMY SHARE & STOCK BROKING PVT. LTD.

EV/EBITDA P/E ROE (%)EV/

ReservesR/P

Company Market Cap FV 2011E 2012E 2011E 2012E 2011E 2012E

US$mn US$mn US$/t Years

China

China Shenhua 84,655 83,124 7.8x 6.9x 15.2x 13.5x 19.5 18.5 12.0 32.9

China Coal 22,245 18,370 6.7 5.6 14.3 12.1 15.1 15.5 2.1 80.1

Yanzhou Coal 12,808 13,375 7.2 6.3 11.7 10.2 21.6 21.6 8.4 43.6

US

Peabody 13,263 15,032 7.6 6.1 14.5 10.5 18.1 22.5 1.8 38.8

Arch Coal 4,258 6,013 7.5 5.5 17.7 9.4 9.9 14.6 2.9 17.4

Alpha Natural Resources 4,948 5,243 5.3 4.1 12.0 8.3 10.9 18.0 2.3 49.8

Massey 2,660 3,302 5.7 3.3 25.6 8.1 6.2 22.4 1.4 63.5

Australia

Coal & Allied 8,663 8,383 8.7 6.4 13.4 10.3 33.5 46.9 9.9 44.7

Macaurthur 2,789 2,550 6.6 5.3 12.7 10.0 20.4 20.3 13.9 28.6

Whitehaven 2,412 2,367 15.7 8.2 34.5 16.3 10.5 18.3 7.3 86.7

Indonesia

Bumi Resources 4,660 8,480 6.0 4.6 12.2 8.9 20.3 24.3 2.9 46.1

Adaro 7,336 7,856 6.9 5.3 16.7 11.5 18.5 24.0 8.4 24.2

Bayan 4,252 4,427 18.1 11.3 37.8 20.7 24.5 42.8 9.3 41.8

ITMG 5,284 4,911 8.8 6.6 14.2 10.3 36.9 44.0 17.4 13.2

Median 7.2 5.6 14.5 10.3 18.5 21.6 7.3

Average 8.4 6.1 18.3 11.5 17.6 23.8 6.4

Source: Alchemy Research, Company, Bloomberg

Market data as of 4 October 2010

Global comparables


24/25

Coal India Energy


Profit and loss account

Year to (Rs mn) FY09A FY10A FY11E FY12E FY13E

Net Sales 407,466 464,129 534,457 574,463 675,741

Raw Materials (1,336) (6,672) 0 0 0

Employee Cost 197,421 166,555 171,252 205,982 211,790

Other Expenses 166,369 182,897 175,460 195,035 219,132

Total Expenditure 362,454 342,780 346,712 401,017 430,922EBITDA 67,421 152,273 187,745 173,446 244,819

Other Income 31,613 34,426 24,436 24,961 29,898

Interest 28,447 26,940 1,530 1,434 1,338

Depreciation 16,629 13,138 18,423 20,535 22,648

PBT 78,853 169,214 192,229 176,437 250,731

Total tax 36839 44332 65,358 59,989 75,219

PAT 42,232 125,794 126,871 116,449 175,512

Less: Adjustments 0 0 0

Adjusted PAT 40,628 98,294 126,871 116,449 175,512

Balance sheet


Equity capital 63,164 63,164 63,164 63,164 63,164

Reserves & Surplus 126,918 195,289 287,905 372,912 501,036

Net worth 190,081 258,437 351,069 436,076 564,200

Minority interest 19 236 236 236 236

Total debt 21,485 20,869 19,128 17,929 16,730

Total 223,824 294,316 388,707 476,015 606,440

Net block 110,088 120,310 139,887 165,852 181,204

Capital WIP 18,223 20,909 20,909 20,909 20,909Total fixed assets 129,283 142,416 161,994 187,958 203,311

Investments 15,052 12,823 72,823 72,823 72,823

Net Working capital (227009) (261359) (218763) (215005) (219194)

Current Assets 469,364 543,244 539,013 603,299 750,245

Inventories 36,669 44,018 43,928 47,216 55,540

Debtors 18,475 21,686 21,964 23,608 27,770

Cash & bank 296,950 390,778 355,980 406,565 518,827

Other Current Assets 117,271 86,762 117,141 125,910 148,108Current Liabilities &Provisions 399,423 413,825 401,796 411,739 450,613

Creditors 8,663 7,725 7,725 7,725 7,725

Other liabilities 315,251 325,193 364,067

Provisions 116,733 82,396 78,821 78,821 78,821

Net Deferred Tax Assets 9,548 9,658 9,658 9,658 9,658Miscellaneous Exp - - 0 0 0

Total 223,824 294,316 381,691 461,999 585,424


Ratios


% of net sales

Raw material costs 0 -1 0.0 0.0 0.0

Employee costs 46 34 32.0 35.9 31.3

Total expenses 34 31 64.9 69.8 63.8

EBIDTA 16 31 35.1 30.2 36.2PAT 5 20 23.7 20.3 26.0

Asset based ratios (%)

ROCE 13 41 50.0 35.7 41.3

ROE 11 43 41.6 29.6 35.1

Turnover ratios (days)

Debtor days 15 15 15 14 14

Inventory days 30 30 30 29 28

Creditors days N/M N/M N/M N/M N/M

Working capital days 54 75 91 104 133

Growth ratios (%)

Net Sales 19 13 10.2 7.5 17.6

EBITDA -27 126 23.3 (7.6) 41.1

EPS -5 142 29.1 (8.2) 50.7

CEPS -24 136 4.6 (5.7) 44.7

Per share (Rs)

EPS 6.4 15.6 20.1 18.4 27.8

CEPS 9.3 22.0 23.0 21.7 31.4

BV 30.1 40.9 55.6 69.0 89.3

DPS 2.7 3.5 4.0 3.7 5.6

Valuations (x)

P/E N/M N/M N/M N/M N/M

P/CEPS N/M N/M N/M N/M N/M

P/BV N/M N/M N/M N/M N/M

Yield (%) N/M N/M N/M N/M N/M

EV/EBITDA N/M N/M N/M N/M N/M

EV/sales

Solvency ratiosCurrent ratio 1.2 1.3 1.3 1.5 1.7

Quick ratio 0.7 0.9 0.9 1.0 1.2

D/E ratio 0.1 0.1 0.1 0.0 0.0

Interest coverage ratio 17.9 78.7 111.6 107.7 167.1

Cash f low statement


PAT 20,758 96,224 126,871 116,449 175,512

Add: Depreciation 16,629 13,138 18,423 20,535 22,648

Add: Interest expense 1,565 1,365 1,530 1,434 1,338

Less: Other income (31,613) (34,426) (24,436) (24,961) (29,898)

Change in working capital 74,373 34,350 (42,596) (3,758) 4,189Others - - 0 0 0

Cash flow from operations 81,712 110,651 79,792 109,699 173,789

Change in fixed assets (25,841) (26,272) (38,000) (46,500) (38,000)

Change in investments 2,127 2,228 (60,000) 0 0

Other income 31,613 34,426 24,436 24,961 29,898

Others - - 0 0 0

Cash flow from investing activities 7,899 10,383 (73,564) (21,539) (8,102)

Change in debt 2,646 (616) (1,741) (1,199) (1,199)

Dividend & dividend tax (22,548) (29,871) (34,255) (31,441) (47,388)

Change in equity & share premium - - 0 0 0

Interest paid (1,565) (1,365) (1,530) (1,434) (1,338)

Other Adjustments (1,671) (109) 0 0 0

Cash flow from financing activities (23,138) (31,962) (37,526) (34,074) (49,926)

Change in cash & cash equivalents 69,253 91,607 (34,798) 50,585 112,262

Opening cash and cash equivalents 209,615 296,950 390,778 355,980 406,565



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Coal India Energy

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