Morning Note

Institutional Research October 14, 2010

Indices Last Close % Chg 1-d % Chg mtd Contents
Sensex 20,688 2.4 3.1
Nifty 6,234 2.4 3.4 • Coal India Ltd.– Company Note
CNX 500 5,122 1.9 4.0 Headlines
BSE Bank 14,479 2.2 3.2
BSE IT 6,249 3.2 5.1
• NTPC plans to set up a merchant power capacity of around 6000MW by 2017.
BSE Oil & Gas 11,017 1.6 5.5 (Mint)
Dow Jones 11,096 0.7 2.9 • The Government has asked Cairn Energy to resolve cess, royalty and oil field
Nasdaq 2,441 1.0 3.1 management issues before its stake sale. (ET)
FTSE 5,747 1.5 3.6 • The holders of Standard Chartered Bank’s IDRs will not be able to subscribe to
DAX 6,435 2.1 3.3 its $5.3bn rights issue but will be distributed the gains arising out of the sale of

Advance Decline Unchanged

their entitled shares post the rights issue. (BL)
Mkt Breadth
Nifty 48 2 0
• Mahindra Satyam has secured a contract to provide IT services to the state of
Sensex 28 1 1 Kentucky,US over a period of 20 months . (Mint)
• The DoT is considering merging 22 telecom circles to a single license with pan-
Turnover INR Bn % Chg
India coverage or to four regional zones. (BL)
BSE Cash 66 23.6
• The Government reportedly plans to propose new SIM card delivery model which
NSE Cash 195 31.2
involves mailing SIM cards and personal ID numbers separately to customers. (ET)
NSE F&O 1,566 57.4
• Shipping Corp. of India Ltd is planning to pick up a stake in a deepwater
Total 1,827
seaport at Vizhinjam and is in the process of raising Rs13bn via a FPO. (Mint)
Fund Flows US $ mn MTD YTD • The Union Government plans to sell 10% in IOC and 5% in ONGC next year.
FII Equity 156 2,578 21,832 (Mint)
MF (58) (579) (5,522)
• JSW Steel Ltd is considering spinning off its overseas ore and coal assets to fund
expansion. (Mint)
Forex/Bond Last Close Chg 1-d Chg mtd
• Adani Group is reportedly in talks with CIL to develop the recently bought
INR/USD 44.52 (0.14) (0.45)
USD/EUR 1.396 0.00 0.03
Australian mines. (Mint)
YEN/USD 81.8 0.09 (1.71) • Bajaj Holdings and Investment Ltd has acquired a 12.82% stake in NMCE for
10 yr G-Sec 8.02 0.18 0.18 Rs250m. (Mint)
• Kumar Mangalam Birla plans to raise his stake in Aditya Birla Nuvo Ltd to 51%
Commodities Last Close % Chg 1-d % Chg MTD
from the current 46% by December. (Mint)
Brent ($/bbl) 84.6 1.4 2.8
• The Government has decided to set up an Rs8bn fund to encourage banks to reach
Gold ($/oz) 1,372 1.6 4.9
out to the financially excluded population. (ET)
Copper ($/mt) 8,362 0.2 4.3
Aluminium ($/mt) 2,417 (0.8) 2.8
• Yes Bank increases deposit rates by 25bps to 7.5% from 7.25%. (BL)
• Tata Motors Ltd plans to launch new light commercial vehicles by the first half of
Most Traded FY12. (Mint)
Scrip Last Close % chg Value*
• HSIL plans to invest Rs3.5bn in the next 30 months for capacity expansion. (BL)
VA Tech 1,708 30.4 25.1
• Gayatri Infra plans to raise around Rs15bn debt to fund a road project in Andhra
Reliance Ind 1,073 1.7 6.9
Pradesh. (ET)
SBI 3,306 2.2 6.5
• Magma Fincorp’s net profit up by 28% at Rs11.4bn for 2QFY11. (BL)
Infosys Tech 3,153 2.5 5.6
ICICI Bank 1,159 1.8 5.5 • Castrol India’s net profit up y 22.3% at Rs1.16bn for the 2QFY11 against Rs956m
* INR Bn. a year ago. (ET)
• IGate’s net profit up by 61% in its 3QCY10 results at $143m. (Mint)
ADR GDR
Sensex
Scrip Last Close* % chg % Prem.
140 22000
Dr Reddy's 36.1 2.4 1.2
HDFC Bank 188.5 2.2 14.6 120 20000

ICICI Bank 52.6 2.3 1.0 18000

100
ITC 3.8 (0.7) (3.4) 16000
80
Infosys 71.2 3.3 0.5 14000
Satyam 3.8 1.9 (2.8) 60
12000
Ranbaxy 13.7 1.0 0.4 40
10000
Reliance 48.2 2.0 (0.0)
20 8000
Wipro 16.2 2.7 49.6
SBI 150.0 2.6 1.0 0 6000

Tata Motors 27.9 2.7 5.4 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

* US$ BSE Volumes (Rs. bn) Sensex

HDFC Securities Research is also available on Bloomberg HSLB <GO>

 Morning Note
Institutional Research

From the Blogosphere

Foreign Policy: Think Again: Global Aging (Source)

A gray tsunami is sweeping the planet -- and not just in the places you expect. How
did the world get so old, so fast?

"The World Faces a Population Bomb."

Yes, but of old people. Not so long ago, we were warned that rising global population
would inevitably bring world famine. As Paul Ehrlich wrote apocalyptically in his 1968
worldwide bestseller, The Population Bomb, "In the 1970s and 1980s hundreds of
millions of people will starve to death in spite of any crash programs embarked upon
now. At this late date, nothing can prevent a substantial increase in the world death
rate." Obviously, Ehrlich's predicted holocaust, which assumed that the 1960s global
baby boom would continue until the world faced mass famine, didn't happen. Instead,
the global growth rate dropped from 2 percent in the mid-1960s to roughly half that
today, with many countries no longer producing enough babies to avoid falling
populations. Having too many people on the planet is no longer demographers' chief
worry; now, having too few is.

It's true that the world's population overall will increase by roughly one-third over the
next 40 years, from 6.9 to 9.1 billion, according to the U.N. Population Division. But
this will be a very different kind of population growth than ever before -- driven not
by birth rates, which have plummeted around the world, but primarily by an increase
in the number of elderly people. Indeed, the global population of children under 5 is
expected to fall by 49 million as of midcentury, while the number of people over 60
will grow by 1.2 billion. How did the world grow so gray, so quickly?

Salmon: The enormous mortgage-bond scandal (Source)

You thought the foreclosure mess was bad? You’re right about that. But it gets so
much worse once you start adding in a whole bunch of parallel messes in the world of
mortgage bonds.

The key firm here is Clayton Holdings, a company which was hired by various
investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman
Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage
pools they were buying from originators.

Here’s how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with the
intention of slicing it up into mortgage bonds and selling those bonds off to investors
at a profit.

After submitting the winning bid, the bank would commission Clayton to take a closer
look at a representative sample of loans in the pool. Clayton controlled as much as
70% of the market for this service, which is known as third-party due diligence. But
Clayton’s not at fault here, and the problem is likely to apply no matter who
performed this service.

The size of the representative sample would vary according to the size of the loan
pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially,
Clayton would go back to the loans, one by one, and re-underwrite them after the
fact, checking that the originator’s underwriting standards were in fact being upheld.

Page | 2
 Materials & Mining
Coal India Ltd.
Company Note

October 14, 2010 Indian Coal –Coal shortage expected, logistics another concern
India experienced a shortage of coal in the past with a deficit of 47mt in FY2008,
56mt in FY2009 and 50mt in FY2010. We forecast this deficit to rise to 220mt by
FY14, with supply lagging demand. Overall, we forecast Coal demand to reach
987mtpa by 2014, which is an additional 404mtpa from today’s demand. We
believe, Coal India Limited (CIL), the world’s largest producer, to bring in 119mtpa
of additional capacity, which still leaves a gap of 285mtpa of unfulfilled demand.
This gap can be met either through captive mining or through imports.

Due to regulatory and logistic issues, we would expect captive players to increase
their production by 64.6mtpa leaving a deficit of 220mtpa. Import seems the only
Issue Snapshot solution. However lack of sufficient port capacities could lead to stiff hurdles to the
import route. The Indian Ports Association has started work on increasing the
Size (mn shares) 631.6
capacity of Coal terminals by 17.3mtpa. This, as per our forecast can cater to only
Price Band (INR) 225-245
50% of the additional current fiscal import requirement of 34mt. We do not see port
Issue opens 18-Oct-10 capacity gearing up soon enough to meet the incremental import requirement. Thus
Issue closes 21-Oct-10 we expect the severe shortage of coal in the Indian subcontinent to persist.
Market cap (in INR bn) 1547.42**
Coal India – world’s largest coal producer
** - At higher of the price band Coal India is the largest coal producer in the world with a production of 431Mt in
FY2010. It has an average of 30mtpa of incremental annual capacity coming online
Ownership (%)
for next four years. It is one of the lowest cost producers in the world with USD16/t
(INR745) which is half the global average. The company has INR390bn cash and
Pre issue
insignificant debt. We believe that CIL is slated to benefit the most from the Indian
Government of India 100 coal scenario.
Post issue
Play on India’s coal shortage
Government of India 90
We believe Coal India will be a compelling play on the Indian commodity sector
Public 10 given its significant size (Post issue market cap of US$35bn). Commodities have
experienced a very good run in the recent months; a large part of which we believe
is due to passive investments. Investors could use coal as a safe sector play, given
the fundamentally strong Indian demand. Global coal players see the market
tightening due to the Asian coal demand. Coal India’s distinct geographical
advantage of being the largest player globally and in India, we believe would be of
distinct interest to global investors.

IPO valuations remain attractive - SUBSCRIBE

We estimate CIL’s fair value at Rs324 – implying an attractive 32% upside to the
higher-end of the IPO price band. We have considered EV/ (ton of production) for
leading global thermal coal producers and applied a 67% discount factor to account
for the low calorific value of Indian Coal and inefficient pricing.

Key risks: inefficient pricing, production losses, capacity expansions

CIL’s pricing based on Fuel Supply Agreement is not determined by market forces
thus making it inefficient. Over the last decade, CIL announced four price increases
resulting in a net 54% increase. In the same timeframe global thermal coal
experienced over 200% increase in price. We believe that this pricing mechanism
could therefore fail to reflect the true value of the company.

Secondly, we have concerns regarding its production and capacity expansions.

Some of CIL’s subsidiaries operate in politically troubled areas, which have and
Dicksey Mathew could lead to production losses. The capacity expansion plans depend on political
Dicksey.mathew@hdfcsec.com and regulatory approvals. Any delay could hamper the timelines set for adding
91-22-6171 7320 capacity.

HDFC Securities Research is also available on Bloomberg HSLB <GO>

 Coal India Ltd. – Company Note
Institutional Research

Indian Coal – Widening deficit

Demand : 70% increase over the next 4 years

Planning Commission – Coal to Coal accounts for 55% of India’s energy needs and we expect that it will continue to
account for 50% of energy needs by contribute significantly, given the rich resource base and lack of competing
2032, currently at 55%. resources. The Planning Commission forecasts coal to account for 50% of the
primary commercial energy consumption by 2032.

The figure below provides the share of coal consumed by different sectors.

Chart 1: Coal consumption by different sectors

Non coking - Coking coal
Others 7%
15%
Non Coking -
Steel
4%
Non Coking -
Cement
3%

Non Coking -
Captive
7%

Non Coking -
Power
64%

Source: Coal RHP

All these sectors are undergoing high capacity additions, owing to the booming
Indian economy.

52 GW of Coal based power Power sector would see an addition of 66GW FY2014, of which Coal based power
translating into 658mn tonnes by FY addition, is forecast to be 52GW. This converts to a coal demand of 658mtpa by
2014 FY2014 as against the FY2010 figure of 411mtpa.

Chart 2: Capacity additions in Power Sector in GWs by 2014

250 (GW) 231

200
162
150 138

100 86

50 37 44
17 24 16 16
1 3 5 5
0
Coal Gas Diesel Hydro Nuclear RES Total
Jun-10 FY2014E

Source: CEA, June 2010 Power Scenario, CIL DRHP

Page | 2
 Coal India Ltd. – Company Note
Institutional Research

The table below provides the estimated additional demand requirement by the
different sectors.

404 mn tonnes of additional coal Table 1: Additional coal requirement by FY2014

requirement by 2014
Mn tonnes Additional units FY2010 FY2014E Additional Coal demand by FY2014
Power (Coal) GW 86 138 220.5
Steel mn tonnes 74 139 74.2
Cement mn tonnes 224 447 21.1
Others (Incl captives) 88.5
Source: Cement Manufacturers association, CEA, HDFC Sec. Institutional Research

Chart 3: Coal demand from FY2008 till FY2014E (in mn tonnes)

1,200 (Mn tn)

1,000

800

600

400

200

0
FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Non coking -Others Non Coking -Steel Non Coking -Cement

Non Coking -Captive Non Coking -Power Coking coal

Source: CIL DRHP, HDFC Institutional Research

Supply – beset with problems

India is the third largest producer of Coal in the world with a production of 492.8mn
tonnes in FY2009 and a projected production of 532.06Mt in CY2010. This is next
to China at 3050mn tonnes and US at 973mn tonnes.

As on April 1 2010, the geological survey recorded that India has 276.81bn tonnes
of coal resource. IEO in its 2010 report states that India has around 7.1% (64.6 bn
ST as against 909.4bn ST) of the world's total recoverable reserves. Of India’s
proven reserves, 84% is non coking coal, 12% is medium coking coal, 4% prime
coking and 1% semi coking coal.

Demand to grow by 70% and supply However the supply side would find it hard to match the soaring demand. While we
lagging at 30%
forecast 70% demand increase by FY2014, we expect supply to increase by a
modest 30% creating a wide gap.

Page | 3
 Coal India Ltd. – Company Note
Institutional Research

Chart 4: Capacity Forecast by CIL and others till FY2014

800 (Mt)

700
98 115
600 96 50 50
66
500 50 47
44 46
37 50
400 45
41
300
534 551
461 487
200 404 431
379
100
0
FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Others SCCL CIL

Source: CRISIL Coal Outlook, CIL DRHP, HDFC Institutional Research

While Coal India Limited is expected to increase its production by an average of

30mnt tpa for the next four years, there arises a need for an average of 101mn
tpa. This creates the real gap.

While the captive players would step in, we believe the gap too large to fill in. We
would expect captive capacity addition of an average of 16mtpa on an optimistic
note and an average of 10-11mtpa on a conservative note.

Hurdles for timely capacity addition

Coal capacity addition is rife with problems, which are regulatory, logistics related
and access related.

The regulatory hurdles would be related to land and surface access clearances to
actually start using coal reserves. This coupled with delays in allocation of coal
blocks would hamper capacity expansions.

Of the allotted mines, only few have commenced operation. According to the
Ministry of Coal, only 15% of the allotted mines are currently operational. Post
allocation it takes an average of 4-5 years to commence commercial operations.

Assuming that the regulatory and governmental sanctions are in place, logistics
assumes a huge hindrance. According to CIL, there have been delays in dispatch
due to shortage of rail capacity. Therefore it would seem further difficult to manage
the transport logistics with captive capacity additions.

Annual plan revised production The 2010-11 Annual Plan has revised its targets for the production, downward twice
forecast downward twice
in the recent past. As against the original production target of 680mn tpa and the
first revision of 630mn tpa, the latest assessment target stands at 592mn tpa.

We expect Coal India to add 119mtpa by FY2014.

Page | 4
 Coal India Ltd. – Company Note
Institutional Research

Chart 5: Year wise capacity addition by CIL

140 (Mt)

120
16.8
100

80 47.5

60

40 26

20
29
0
FY11E FY12E FY13E FY14

Source: Annual Plan 2010-11, HDFC Institutional Research

We expect SCCL to operate at current capacity. The captives are forecast to grow at
16% adding another 41.6mtpa. This leads us to our estimate of a realistic capacity
addition of 161mtpa.

Demand Supply Gap

We forecast the demand supply gap which was at 50.2mtpa last fiscal to grow
almost six folds to 293mtpa. We expect a surge in the imports in the years to
come. Global coal players are extremely bullish on the Indian Coal demand and
expect that it would hold a significant role in spot and contractual pricing of coal.

Chart 6:Realistic capacity addition vs. Estimated and Deficit (in mtpa)
294mn tonnes of deficit pa by
1,200 (mtpa)
FY2014
1,000

800 682 644 716 693

630 592
572 572
600

400
293.9
200 213.0
83.9 121.5
0
FY11E FY12E FY13E FY14E

Supply planned Realistic Supply Demand Deficit

Sources: Annual Plan 2010-11, CIL, HDFC Institutional Research

Page | 5
 Coal India Ltd. – Company Note
Institutional Research

Coal India Limited

Company Background
Largest producer of Coal with a Coal India is the largest producer of Coal in the world with a raw coal production of
production of 431.2mn tonnes in 431.26mn tonnes in FY2010, accounting for 81.9% of India’s coal output. Of the
FY2010 production, 90.6% was non coking coal and the rest metallurgical coal. Coal India
operates 471 mines across 21 major coalfields and eight states in India. It is a
Proven reserve base of 52.5bn government owned enterprise. It does not have any significant competition
tonnes domestically.

The company has a proven reserve base of 52.5bn tonnes, with a reserve life of
114 years, the highest globally.

Table 2: Production and reserve base for global players

Production volume Reserve (mn Number of years
(mn tonnes) tonnes) of life
Coal India Limited 460.5 52546 114
China Shenhua 210.3 11306 54
China Coal 77.46 8700 112
Xstrata 82.6 4487 54
Peabody 210.8 4159 20
BHP Billiton 66.1 2947 45
Anglo American 69.3 1783 26
Coal and Allied 18.9 1479 78
Yanzhou Coal 3.18 98.3 31
Source: Company data, HDFC Institutional Research

Production CAGR – 5.9% over the Coal India Limited has a history of methodically increasing the production by
last commodity cycle. growing 6.4% even during the last commodity cycle downturn, starting in 2008 and
ending mid 2009.

Chart 7: Coal Production in mn tonnes(FY2006-FY2014E)

600 (Mn tn)

534 551

500 487
461
431
404
400 379
343 361

300

200

100

0
FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Source: Coal India RHP, HDFC Institutional Research

Page | 6
 Coal India Ltd. – Company Note
Institutional Research

In FY2010 The company sold 415mn tonnes of coal, of which 92% was non coking
coal.

Table 3: Sales of Coal India from FY2007 to FY2010

Sales in mn tonnes Mar-07 Mar-08 Mar-09 Mar-10

Total Non-coking coal 326.2 349.32 373.24 381.09
Total Coking Coal 24.1 25.25 27.51 34.13
Beneficiated Non-coking Coal 10.25 10.58 11.21 11.66
Beneficiated Coking Coal 3.90 3.88 3.70 2.94
TOTAL 350.3 374.57 400.75 415.22
Source: Coal India DRHP

Coal India Pricing

Pricing of two kind– FSAs and E- CIL’s pricing depends on two factors – grade of coal and mode of pricing.
auctions The company prices its coal based on either fuel supply agreements (FSA), E-
auctions or any specific MoUs with customers. The pricing accounts for the different
grades of coal.

FSA – Significantly less than market
price
FSA Pricing
The company enters into FSAs with large customers by basing it on a number of
factors like inflation, production cost increases that cannot be offset through
efficiency measures, project viability and to a small extent on the price of the
imported coal. The prices are notified from time to time.

Coal India Linkages

Coal Linkages are decided by two linkage committees – the Standing Linkage
committee (Long term) and Standing Linkage Committee (Short Term). The long
term coal linkage committee decides on the coal allocation to the customers based
on the initial capacity plans of the customers. The short term coal linkage
committee decides on quarter to quarter allocation to the customers based on coal
production and logistics involved around the time.

Coal linkages are allocated to CIL’s customers as follows:

• Defense and railways: To receive their full normative coal requirement in

accordance with the prevailing system at the price notified by CIL.

• Other consumers: Classified based upon their entitlement through the FSAs

ƒ Power utilities, (including independent power producers and captive power

plants) and fertilizer sector are entitled to receive their full normative coal
requirement through FSAs;

ƒ All other customers are entitled to receive 75.0% of their normative coal
requirements through FSAs, while they can meet their remaining 25.0%
requirement at their option, through CIL’s e-Auction scheme or through
import of coal.

Page | 7

Institutional Research
ACQ shortfalls would mean
importing coal or paying penalty
Currently CIL receives incentives for
delivering 96% of ACQs
CIL increased price by 54% over the
last decade while global thermal coal
increased by over 200%
E-auction pricing – reflects market
realities
Coal India Ltd. – Company Note
Penalty for falling short of annual contracted quantity (ACQ)
– According to FSAs entered into, CIL is expected to compensate for falling short on
delivering the ACQ. We believe that Coal India would have to import coal at global
prices on two conditions:
• More customers being allotted to CIL (power sector is gearing up, so is steel
and cement) and CIL not being able to ramp up production as planned to meet
the timely delivery
• CIL not being able to deliver due to logistic concerns.
Currently, CIL has an ACQ delivery of 96%, and received incentives for delivering
more than 90%.
Overall, we believe that the FSA pricing mechanism brings in inefficiencies. CIL has
raised the coal pricing four times post the coal deregulations resulting in a net
increase of 53.9% while global coal price experienced an increase of over 200% in
the same time frame.
E-auction pricing
E-auction prices are significantly higher than the FSA pricing, since this is pegged to
the market price of imported coal. E-auction however accounts for only 11-13% of
the coal sold but accounts for more than 16% of the sales revenue, due to the high
price received. Though increasing the share of E-auctions would work to CIL’s
advantage, it has a mandate to sell only 10-12% of its coal through E-auctions. The
remaining quantity falls under FSAs.
Table 4: FSA pricing vs. E-auction
FY10 FY09 FY08
Volume sold under E-auction (mn ton) 45.73 48.87 28.79
Volume share under E-auction 11.6% 12.9% 8.9%
Sales revenue thru E-auction (in INR mn) 72,385 72,371 38,773
Sales share through E-auction 16.2% 18.7% 11.9%
Pricing (in INR per ton)
Average Sales price of raw coal 1,045.26 925.73 841.14
Average sales price : E-auction 1582.9 1,481 1,347
Average sales price of beneficiated coal 2,134.21 2,267.49 1,890.25
Source: Coal India RHP
Page | 8
 Coal India Ltd. – Company Note
Institutional Research

Coal India Logistics

Rail accounts for 48% of transport The Company’s main mode of transport for coal is the Rail network, which accounts
for 47.6% of transport. It transports 20.8% of coal through rails owned and
operated by customers (MGR). Road accounts for 30%.

Chart 8: Mode of Coal Transportation (FY2006-FY2010)

3.9 3.7 3.5 3.3 3.0

100%
90%
22.1 22.2 24.4 28.2 29.5
80%
70%
60% 24.2 22.5 21.6 20.6 20.8
50%
40%
30%
49.8 51.6 50.5 47.9 46.7
20%
10%
0%
FY06 FY07 FY08 FY09 FY10
Others Road MGR Rail

Source: Coal India DRHP

Financial Performance
EBITDA Margin at 29.3% The company recorded revenue of INR525.9bn and an EBITDA of INR154.2bn.
competitively placed on a global
Coal India has a lower EBITDA margin mainly due to the low pricing as compared to
scale.
global peers. We expect the margin to increase on two conditions

• By increasing the quantity of washed and beneficiated coal, thereby increasing

the average pricing

• By increasing the price of raw coal produced, more frequently than the current
trend. CIL has raised its coal prices only 4 times in the last decade.

EBITDA margins for global peers for last fiscal are provided below.

Table 5: EBITDA Margins and Production volumes of Global peers

Thermal Coal EBITDA Margin Production volume (mn tonnes)

Xstrata 42.6% 82.6
Coal and Allied 37.8% 18.952
China Shenhua 36.5% 210.3
Anglo American 35.1% 69.3
Yanzhou Coal 34.6% 3.18
Coal India Limited 29.3% 460.5
Peabody 24.9% 210.8
China Coal 24.7% 77.46
BHP Billiton 20.7% 66.1
Source: Company Data, HDFC Institutional Research

Page | 9
 Coal India Ltd. – Company Note
Institutional Research

Table 6: Financial Summary

Financial Summary FY10 FY09 FY08

Revenue (in mn INR) 525,923 460,641 386,167
Change YoY 14.2% 19.3%
EBITDA 154152 75581 98703
EBIT 141014 58952 83404
Net Income 96224 20787 52433
EBITDA Margin 29.3% 16.4% 25.6%
EBIT Margin 26.8% 12.8% 21.6%
Net Margin 18.3% 4.5% 13.6%
Capex
Capital expenditure (in mn INR) 26,750 26,678 22,333
Capex as % of sales 5.1% 5.8% 5.8%
Ratios
Basic EPS 15.56 6.43 6.78
Return on net worth 38.03% 21.37% 24.91%
Net asset value per share 40.92 30.09 27.23
Source: Coal India DRHP

Investment Rationale

Indian coal demand to increase more than supply

Indian coal industry is well poised for growth and Coal India being the dominant
player is in an excellent position to benefit. An upbeat economy, coupled with
staggered capacity expansion plans and lack of competition, we believe would
propel the company’s value northward.

Good pipeline of Capacity expansion and Greenfield projects

INR 101bn of capex approved Coal India has 77 capacity expansion projects with a capex of INR 110 bn
approved, which would eventually increase the capacity by 184.7mn tonnes. Of the
77 projects, 45 are in different phases of implementation.

The Company also has plans for building seventeen beneficiation plants, 12 for
coking coal and 5 for non coking coal.

Table 7: Capacity addition and Approved Capex

FY11E FY12E FY13E FY14-18
Capex (INR bn) 38 46.5 25.6 NA
Capacity addition (mn tonnes) 29 26 47.5 81.5
Source: CIL RHP

Low cost producer, to further increase margins

Cash cost lowest among global peers
Coal India is one of the lowest cost producers of thermal coal globally. Based on the
2010 fiscal data, Coal India had cash cost of 745 INR per ton. Using an Fx rate of
47.4, it translates into USD 15.7. CIL produces 90% of its coal from surface mines
and the rest from underground mines. Cost of surface mining is only 18-19% of
cost of underground mining.

Table 8: CIL’s average cost of Surface and Underground mining

Cash cost per ton of raw coal (INR) FY10 FY09 FY08 FY07
Surface 520 507 476 447
Underground 2796 2660 2584 2254
Average cost per ton 745 738 715 660
Source: CIL RHP

Page | 10

Institutional Research
Cash balance of INR 390.8bn, with
negligible debt
Coal India Ltd. – Company Note
Employee cost accounted for 41% of the total cost in FY2010. CIL has the
advantage of low cost labour in India as compared to other global producers.
We further expect a significant increase in margins from FY2013-14, due to three
reasons:
• The company has plans to increase the percentage of washery grade coal. The
management plans to increase the percentage of washed coal to 40% from the
current 8.4% by FY2017, which as per the company guidance would be 300mt.
This will help the company to improve its average selling price, since washed
coal fetches high price. It guided to a capex of USD800mn over the next five
years to build 20 washeries. The company however expects to price the
washed coal at a 10-15% discount to imported coal, as a customer retention
tool. The washed coal will start flowing in from 2013-14.
• We expect the E-auction price to increase significantly, since the end
customers would bid aggressively, due to the rising demand.
• The company expects to reduce their manpower, as they marginalize some of
their high cost underground mines. CIL has a proven record of doing so, as
they registered a 10% reduction in manpower from 2007-2010.
Strong cash position, possibilities for overseas exploration
As on 31 March 2010, the Company had INR 390.8bn as cash balance. The debt is
a meager INR 20.8bn. This will allow it finance new expansions and explorations /
acquisitions without leveraging the books. It has a joint venture ICVL, with SAIL,
NTPC, NMDC and RINL to explore coal assets outside India. Coal India has also
established a division called Coal Videsh, which would cater to sourcing of coal from
International markets to meet the demand supply gap.
Valuation
We believe that the price band of INR 225-245 has a significant upside. We have
considered leading global thermal coal producers and arrived at a weighted average
EV/ (ton produced). Based on this methodology, we have a global average of USD
268.
Table 9: EV / ton produced of global peers
Production (mn tonnes) EV (in USD bn) EV/ton
Peabody 210.8 15.31 72.6
China Coal 77.5 22.20 286.6
Consol Energy 59.5 12.64 212.5
Coal and Allied 19.0 9.23 487.0
Yanzhou Coal 36.3 18.69 514.9
Shenhua 210.3 86.42 410.9
Source: Company data, Bloomberg, HDFC Institutional Research
However, since Indian coal has a low calorific value (3650units vs. global peer
average of 5600units), we have applied a discount of 0.35. This gives us a factor of
0.65. Further, since CIL sells its coal at a discount to global prices, we apply
another discount of 0.5, thus arriving at an EV/ton multiple factor of 0.33. We
arrive at a price target of INR 324 per share.
Page | 11
 Coal India Ltd. – Company Note
Institutional Research

Table 10: Valuation methodology using EV/ton of production

Valuation based on EV/ton produced

Peer Average - EV / Ton produced (USD) 268.0
Coal India
Production (FY2010) in mn tonnes 431
Factor for low calorific value 0.652
Factor for price discount vs. global price 0.5
Multiple applied to EV/ton produced 0.33
USD - INR Fx assumed 44.6
Number of Shares (in mn) 6316.4
EV based on tonnes produced (bn USD) 37.6
Coal India EV in INR bn 1679
Minus Net debt and Minorities (INR bn) -370
Value to equity Shareholders (100% basis) INR bn 2049.0
Value per share (in INR) 324
Source: HDFC Institutional Research, Bloomberg

Risks
We see the three eminent risks as meeting production targets, setting logistics in
place and probability of a dwindling coal market.

Margin maintenance to be main focus
Production targets
As stated in the “Investment rationale”, Coal India has an ambitious and well
staggered pipeline of projects at different phases. The main challenge would be to
implement the same as planned, given the regulatory approvals and various land
clearances required. While implementing the production, focus needs to be on the
cost control aspect. Given that the five largest customers of Coal India are public
sector companies, we would expect fair amount of check on price increase.

Logistics – Transportation and coal handling and loading infra critical

Rail network critical for timely factors
delivery and historically a constraint Historically there has been a constraint in transportation and mine infrastructure,
hindering the quantity of dispatch as mentioned in the RHP,” Our dispatch is
dependent on the availability of adequate coal transportation capacities and the
efficiency of coal handling and loading infrastructure at our mines. The success of
our expansion projects will also depend on our ability to access or develop adequate
additional coal transportation and coal handling and loading infrastructure”.

Global coal trend – cleaner energy alternatives and slow recovery

Clean energy and global recovery
trigger points for depressing import
prices
Global economic recovery has very high sensitivity to coal demand. During 2006-
2009, thermal coal has seen highs of USD 200 and above in mid 2008 versus lows
of USD 68 in early 2009. A significant contributor of the high prices was freight
charges. The trend could repeat in the event of a faster than expected recovery of
global economies. The reverse could make imports significantly cheaper than Coal
India’s prices.

Clean energy initiatives are becoming of increasing significance. Many of the

European countries have set targets to move to cleaner energy and other
alternatives (like nuclear energy). Any regional policy accelerating this could affect
coal demand worldwide. This coupled with a slow recovery would depress thermal
coal prices globally, thus trickling into the Indian market through a low import
price.

Page | 12
 Morning Note
Institutional Research
Company results calendar
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
14-Oct-10 15-Oct-10 16-Oct-10 17-Oct-10
Axis Bank Development Credit Bank Godrej Properties
Gruh Finance HeidelbergCement India Unichem Laboratories
LIC Housing Finance Infosys Technologies
Rallis India Karnataka Bank
UTV Software
Maharashtra Scooters
Communications
Manappuram General
Infotech Enterprises
Finance & Leasing
VST Industries
18-Oct-10 19-Oct-10 20-Oct-10 21-Oct-10 22-Oct-10 23-Oct-10 24-Oct-10
Bajaj Finance Bajaj Auto Agro Tech Foods ACC Bank of Maharashtra Dr Reddy's Laboratories
Bajaj Holdings and
Bajaj Finserv Ashok Leyland Allahabad Bank Binani Cements Edelweiss Capital
Investment
Camlin Cadila Healthcare Bombay Dyeing Ambuja Cements Binani Industries Torrent Pharmaceuticals
Crisil Container Corp Of India Canara Bank eClerx Services Biocon
Indiabulls Financial
Essar Oil Coromandel International Ceat Chennai Petroleum Corp
Services
HDFC HCL Technologies GNFC JM Financial Finolex Industries
Indiabulls Securities HDFC Bank GSFC SKF India Indian Bank
ING Vysya Bank MindTree Kotak Mahindra Bank South Indian Bank Ipca Laboratories
Navin Fluorine Mahindra Lifespace
Larsen & Toubro Sterlite Technologies JSL Stainless
International Developers
NIIT Technologies Polaris Software Merck /India Tata Consultancy Services Kirloskar Industries
Mahindra & Mahindra
Sesa Goa Religare Enterprises Pidilite Industries TVS Motor Co
Financial Services
Zydus Wellness Tanla Solutions NIIT
Yes Bank Tata Elxi
25-Oct-10 26-Oct-10 27-Oct-10 28-Oct-10 29-Oct-10 30-Oct-10 31-Oct-10
Deepak Fertilizers &
Adani Power Asian Paints Cairn India ABB Action Construction
Petrochemicals Corp
Amara Raja Batteries Hindustan Media Ventures Bata India Colgate-Palmolive India Bharat Petroleum Corp Aditya Birla Nuvo
JB Chemicals & Chambal Fertilizers &
Clariant Chemicals Bajaj Electricals Essar Shipping Blue Star
Pharmaceuticals Chemicals
GIC Housing Finance Patni Computer Systems Carborundum Universal Glaxo Smithkline Hindustan Construction Co Maruti Suzuki India
Cholamandalam Hitachi Home & Life
Goodyear India Tinplate Co of India HEG Ramkrishna Forgings
Investment and Finance Co Solutions India
HSIL TRF Dabur India Noida Toll Bridge ICICI Bank Zuari Industries
Lakshmi Machine Works Hindustan Copper Phoenix Mills Kansai Nerolac Paints
Mahindra Holidays &
HT Media Mahindra & Mahindra
Resorts India
Rural Electrification Corp Karur Vysya Bank Meghmani Organics
Sona Koyo Steering
Titan Industries Max India
Systems
Ultratech Cement Thermax TTK Prestige
United Bank of India TIL
Trent
01-Nov-10 02-Nov-10 03-Nov-10 04-Nov-10 05-Nov-10 06-Nov-10 07-Nov-10
JSW Energy 3i Infotech
Berger Paints India Ltd

HDFC Securities Research is also available on Bloomberg HSLB <GO>

Institutional Research

Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained
herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently
verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject
to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to
be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments.
This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or
located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what
would subject HDFC Securities Ltd or its affiliates to any registration or licensing requirement within such jurisdiction.
If this report is inadvertently send or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This
document may not be reproduced, distributed or published for any purposes with out prior written approval of HDFC Securities Ltd .
Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the
income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.
It should not be considered to be taken as an offer to sell or a solicitation to buy any security. HDFC Securities Ltd may from time to time solicit from, or perform broking, or
other services for, any company mentioned in this mail and/or its attachments.
HDFC Securities Ltd, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments
made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the
NAVs, reduction in the dividend or income, etc.
HDFC Securities Ltd and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments
dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies / organisations described
in this report.