Coal India Ltd. – IPO Analysis 11th Oct.

2010

Coal India Ltd. IPO provides an opportunity to invest in world’s largest

coal reserve and coal producing company. The company is planning to
Recommendation: Subscribe ramp-up its production capacities to meet increasing demand of coal
across various industries in India. The company is also increasing
Issue Highlights capacities of beneficiated coal, a value added activity. These capacity
Sector – Coal Mining ramp-up are expected to increase topline of the company. On the
Issue Opens – 18 Oct 2010 profitability front, the company is taking various steps like increasing
Issue Closes – 21 Oct 2010 revenue contribution from beneficiated coal, increasing production of
Face value – Rs 10 high grade non-coking coal and increasing sales through e-auction.
Price Band – NA Going forward, these measures are likely to improve margins of the
Bid Size – NA company. In India, the power sector is the largest consumer of coal;
therefore the planned increase in power generation capacities in the
Issue Type country provides ample opportunities to the company. Coal India Ltd. is
100% Book Built Issue well positioned to tap the opportunity as it dispatch nearly 80% of its
production to power sector. Investors with long term horizon can
Issue Size subscribe the largest IPO in the history of the Indian markets.
631,636,440 equity shares

Issue Allocation
Investment Summary
Category No. of Shares World’s Largest Coal Reserve Holder and Coal Producer
Employee Reservation 63,163,644 The company is the largest coal reserve holder and the largest coal producer
in the world. Further, the reserves of the company are well diversified among
Net Issue to Public 5,684,727,796
various locations in India. The company accounts for around 82% of coal
QIB's 284,236,398 production in India.
Non Institutional 85,270,919
Production Capacity Ramp-up
Retail 198,965,479 The company has plans to increase raw coal production capacity from
current of 461.9 MTPA (Million Ton Per Annum) to 486.5 MTPA by FY’12.
Shareholding Pattern (%) The company is also planning to add 20 coal beneficiation facilities with an
Pre-Issue Post-Issue aggregate additional capacity of 111.10 MTPA taking the total coal
Promoters 100% 90% beneficiation facilities to 37 with beneficiated capacity to 150.5 MTPA.
Public NIL 10%
Measures to Improve Profitability
The company is taking following steps to improve its profitability.
Shares Outstanding (Nos.) ¾ The company is looking to increase its beneficiated capacity.
Pre-Issue Post-Issue Beneficiated coal commands significantly higher market prices than
6,316,363,800 5,684,727,360 non-beneficiated coal with no significant rise in cost. Therefore, with
the increasing capacity, the revenue contribution from the
Grade beneficiated coal is not only increase the topline but also improve
Crisil Rating - 5 out of 5 profitability.
¾ The company intends to increase contribution of coal sold through e-
Book Running Lead Managers auction scheme. Since, the price of raw coal sold under the e-auction
Citigroup Global Markets India Private Ltd scheme is significantly higher than the price under FSA (Fuel Supply
Deutsche Equities India Private Ltd Agreement), the move is expected to improve topline as well as
DSP Merrill Lynch Ltd profitability.
Enam Securities Private Ltd ¾ The company is making efforts to increase revenue contribution from
Kotak Mahindra Capital Company Ltd high grade non-coking coal. As the pricing of high grade non-coking
Morgan Stanley India Company Pvt Ltd coal is generally based on price of landed cost of comparative quality
imported coal, which is significantly higher than the FSA, such move
Registrar will also add to the margins of the company.
Link Intime India Pvt Ltd
To Capitalise upon Increasing Power Generation Capacity in India
Listing The country is expected to add 66 GW of power generation capacity during
NSE, BSE the 5 year period of FY’10 – FY’14, of which coal based capacity additions is
expected to be approximately 52 GW. This translates into a huge opportunity
for the company given the fact that the 80% of its production dispatched to
the power sector during FY’10. The company is well positioned to tap the
available opportunity.

Peer Valuation
We have compared the company with other Indian PSUs and international
coal producers. We believe that the company should draw a similar valuation
as its peers. (Please refer to page no. 5 of this report)

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Coal India Ltd. – IPO Analysis

Coal Reserves MT Investment Rationale

Proved Reserves 52,546
Indicated Reserves 10,298 World’s Largest Coal Reserve Holder and Coal Producer
Inferred Reserves 1,942 The company is the largest coal reserve holder in the world with its
Total 64,786 extractable reserve base of 21,754 MT. The company is the largest coal
producing company in the world with raw coal production of 431.26 MT
Extractable Reserves 21,754 during the FY’10. The reserves of the company are well diversified among
various locations with the largest mine accounting for 8% of the production
Coal Production in India during FY’10.
1.1% 6.4%
1.5%
The current extractable reserve is the 50x the raw coal production during the
9.0% CIL FY’10 translating into a 50 years mine life ratio.
SCCL
TISCO India is the world's third largest producer and consumer of coal. The
82.0% MEGH company accounts for around 82% of coal production in India.
Others
Production Capacity Ramp-up
The company has plans to increase raw coal production capacity from
current of 461.9 MTPA to 486.5 million tons by FY’12 through a mix of
expanding existing mine capacities and the development of new mines. At
Production Capacity (MTPA) present, the company has received relevant investment approval for 45
490 486.5
expansion and new projects, which are in various stages of mine planning
480 and development.
470
461.86 Apart from this, the company has plans to add 20 coal beneficiation facilities
460 with an aggregate additional capacity of 111.10 MTPA taking the total coal
450 beneficiation facilities to 37 with beneficiated capacity to 150.5 MTPA.
440 Measures to Improve Profitability
Current Proposed Increasing beneficiated capacities: Given that the cost of production of
beneficiated coal is not significantly higher than the cost of production of non-
Beneficiated Capacity (MTPA) beneficiated coal. Further, beneficiated coal commands significantly higher
200.0 market prices than non-beneficiated coal. The company intends to increase
150.5 beneficiated coal capacity, when become operational will add to margins.
150.0

100.0
Increasing coal sale through e-auction: During the FY’10, the company
sold 89% of its total dispatch under the Fuel Supply Agreement (FSA) and
50.0 39.4 balance under e-auction scheme. The company intends to increase
contribution of coal sold through e-auction scheme. Since, the price of raw
0.0 coal sold under the e-auction scheme is significantly higher than the price
Current Proposed under FSA (Fuel Supply Agreement), the move is expected to improve
topline as well as profitability.
E-auction of Coal Production
Increasing sales of high grade non-coking coal: The company intends to
14.0% 12.9%
11.6% increase the sale of higher quality non-coking coal (Grade A, B and C), which
12.0%
10.0%
is generally priced at a discount to the prevailing landed cost of comparative
8.1% quality imported coal, and is significantly higher than the price of non-coking
8.0%
6.0%
coal of the same grades sold under FSAs. With the increased revenue
4.0%
contribution from high grade non-coking coal, profitability is likely to improve.
2.0%
0.0% To Capitalise upon Increasing Power Generation Capacity in India
FY'08 FY'09 FY'10
At present, the total installed power generation capacity in India is 162 GW
out of which the total installed thermal power generation capacity is 104 GW.
Further, coal based power plants accounts for 82.4% (86 GW) of the total
Coal Based Power Generation thermal power generation capacity.
150 Capacity (GW)
128 The country is expected to add 66 GW of power generation capacity during
the 5 year period of FY’10 – FY’14, of which coal based capacity additions is
100 86
expected to be approximately 52 GW. This will to take the total installed
capacity of coal based power plants to approximately 128 GW.
50

This translates into a huge opportunity for the company given the fact that the
0 80% of its production dispatched to the power sector during FY’10.
Current Proposed

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Coal India Ltd. – IPO Analysis

Financial Analysis
Net revenue (Rs Cr)
50,000 47,351.4
40,944.4 Net Revenues
40,000 34,852.5 The company Net revenues increased by CAGR of 10.8% from Rs. 34,852.5
30,000 Cr in FY’08 to Rs 47,351.4 Cr in FY’10 mainly on account of increase in sales
volume of raw coal as well as increased average realizations of raw coal. The
20,000 coal realizations have been steadily increased as shown in the below chart.
10,000
0 2500 Raw E-auction Benficiated
FY'08 FY'09 FY'10
2000 2267.5
2134.2
Raw Coal Production (MT) 1890.3
440 1500 1582.8
431.3
1480.8
420 1346.7
1000
400.75 925.7 1045.3
400 841.1
500
380 374.57
FY '08 FY '09 FY '10
360

340
FY'08 FY'09 FY'10 EBITDA
EBITDA of the company increased by CAGR of 19.5% from Rs. 5,995.0 Cr in
FY’08 to Rs 10,288.0 Cr in FY’10. The increase in EBITDA is mainly
EBITDA (Rs Cr)
attributable to decline in employee cost and higher sales realizations.
12,000
10,228.0
10,000
Employees cost forms the significant portion of the total cost of the company.
8,000 The company has been able to significantly reduce the manpower.
5,995.0
6,000
4,000
2,410.7 25% 21.6%
2,000
20%
0
17.2% 20.3%
FY'08 FY'09 FY'10 15%
15.0%
10%
5.9% PAT Margins
No. of Employees
5% EBITDA Margins
430000 426,007 5.1%
420000 0%
412,350
410000
FY '08 FY '09 FY '10
400000 397,138

390000
However, employee cost was abnormally high during the FY’09 resulting into
the low EBITDA and EBITDA margins.
380000
FY'08 FY'09 FY'10 PAT
PAT of the company increased by CAGR of 22.4% from Rs. 5,243.7 Cr in
FY’08 to Rs 9,622.4 Cr in FY’10. PAT was significantly down during the
PAT (Rs Cr)
12,000
FY’09 on the back lower profitability at EBITDA level.
10,000 9,622.43
Unleveraged Balance Sheet
8,000 As of March 31, 2010, the company has cash balances of Rs.39,077.8 Cr,
6,000 5,243.70 while total debt stood at Rs.2,086.9 Cr.
4,000
2,078.64
2,000
0
FY'08 FY'09 FY'10

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Coal India Ltd. – IPO Analysis

Business Analysis
Subsidiaries Status The company was established in 1973 and is wholly owned by the GoI.
Bharat Coking Coal Ltd -
The coal production operations of the company are primarily carried out
Central Coalfields Ltd Miniratna through seven wholly-owned Subsidiaries in India. In addition, another wholly
Eastern Coalfields Ltd - owned subsidiary, CMPDIL, carries out exploration activities for all the
Mahanadi Coalfields Ltd Miniratna subsidiaries and provides technical and consultancy services for company’s
operations as well as to third-party clients for coal exploration, mining,
Northern Coalfields Ltd Miniratna
processing and related activities. The company also has a wholly-owned
South Eastern Coalfields subsidiary in Mozambique, Coal India Africana Limitada ("CIAL"), to pursue
Miniratna
Ltd coal mining opportunities in Mozambique and have acquired prospecting
Central Mine Planning and licenses for two coal blocks in Mozambique.
Miniratna
Development Institute Ltd
Western Coalfields Ltd Miniratna The company has been conferred the Navratna status by the GoI, providing
certain operational and financial autonomy. In addition, six of the wholly
owned Subsidiaries of the company, including CMPDIL, have also been
Type Mines accorded the Mini Ratna status by the GoI.
Open Cast 163
Underground 273 The company is the largest coal producing company in the world based on
Mixed 35 raw coal production of 431.26 MT during FY’10. The company is also the
largest coal reserve holder in the world.
Total 471
The company has 471 mines in 21 major coalfields across 8 states in India,
Raw Coal Production (MT) FY'10 including 163 open cast mines, 273 underground mines and 35 mixed mines
(which include both open cast and underground mines).
Coking Coal 8.4%
Non Coking Coal 91.6% The company produces non-coking coal and coking coal of various grades
for diverse applications. Non-coking coal represents a substantial majority of
the raw coal production. The majority of the coal production is come from
Mine-wise Production (MT) FY'10 open cast mines.
Open Cast 90.0%
Underground 10.0% Some of the raw coal produced by the company is used for the production of
beneficiated coal. At present, the company has 17 coal beneficiation facilities
with an aggregate capacity of 39.40 MTPA.
Sector-wise Production
2.1% Dispatch The company sells substantially all of the raw coal production in the Indian
1.6% 11.2%
market to a diversified set of customers including large thermal power
5.2% Power generation companies, steel producers, cement producers and other
Steel
industrial companies in the public and private sector. Majority of the coal
Cement
production is used in the thermal power sector in India. NTPC, a public sector
Others
power generation company and utility, is the top customer of the company.
79.9%
SMEs

Employees Base
Executives 15,092
Supervisors 38,475
Workmen 343,571
Total 397,138

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Coal India Ltd. – IPO Analysis

Peer Analysis

We have compared the company with following two different types of peer group:

¾ International Coal Producers

¾ Top 5 Indian PSUs

International Peers Top 5 Indian PSUs

Peers Coal India Rio Tinto Vale Shenhua ONGC BHEL NTPC SAIL GAIL

Sale (Rs Cr) 44,615.3 188,212.5 107,725.5 81,339.7 101,760.0 33,173.0 48,256.0 40,600.0 27,035.0

EBITDA (Rs Cr) 14,741.5 33,777.0 41,242.5 31,585.9 44,439.0 5,588.0 13,075.0 9,234.0 5,453.0

EBITDA Margins (%) 33% 18% 38% 39% 44% 17% 27% 23% 20%

PAT (Rs Cr) 9,622.5 24,007.5 24,070.5 24,262.7 19,403.0 4,326.0 8,837.0 6,790.0 3,327.0

PAT Margins (%) 22% 13% 22% 30% 19% 13% 18% 17% 12%

CMP (Rs) NA 2692.4 1386.0 280.5 1394.0 2619.0 218.0 225.0 489.0

Equity Cap (Rs Cr) 6,316.3 23,265.0 109,125.0 13,336.2 2,139.0 489.5 8,245.0 4,130.0 1,268.0

Networth (Rs Cr) 25,843.7 361,854.0 268,947.0 272,735.3 101,407.0 15,896.0 62,628.0 33,739.0 17,810.0
Face Value (Rs) 10.0 112.5 225.0 6.7 10.0 10.0 10.0 10.0 10.0

Shares outstand (Cr) 631.6 209.4 485.0 1,989.0 213.9 49.0 824.5 413.0 126.8

EPS (Rs) 15.6 114.6 49.6 12.2 90.7 88.4 10.7 16.4 26.2

PE (x) NA 23.5 27.9 23.0 15.4 29.6 20.3 13.7 18.6

PBV (x) NA 1.6 2.5 2.0 2.9 8.1 2.9 2.8 3.5
Note: Financial numbers of international player are converted into Indian rupee assuming USD rate of 45.

International coal producers are trading at an average PE of 24.8x of annual earnings; Indian PSUs are trading at an
average PE of 19.5x of annual earnings. Though, the price band for the IPO is not yet finalized, we believe that the
company should trade near to its peers valuations.

Risk & Concerns

Operations of the company are subject to various risks inherent to mining activities and the company does not maintain
insurance coverage in accordance with applicable industry standards. These risks and hazards could result in personal
injury, grievous hurt or even death of personnel.

The company requires various approvals, licenses and permits and must comply with various statutory and regulatory
requirements in connection with its business and operations, and any failure to comply with such requirements in a timely
manner may adversely affect its operations.

Coal mining operations are subject to various operating risks, which could materially increased operating expenses and
decreased production levels and could materially and adversely affect profitability.

The company faces various risks related to its expansion programs; its capital investment projects may exceed original
budgets, may not generate the expected benefits or may not be completed.

The recent proposal of the Govt. of India to demarcate certain coal-bearing forest areas in India into various categories,
which is proposed to include a category in which mining activities are prohibited, may adversely affect company’s
business prospects, results of operations and financial condition.

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Coal India Ltd. – IPO Analysis

Income Statement

Income Statement (Rs Cr) FY '08 FY '09 FY '10

Fiscal Year Ending 31-Mar-08 31-Mar-09 31-Mar-10
Net Revenue 34852.5 40944.4 47351.4
Net Revenue Growth NA 17.5% 15.6%
Raw Material 7,923.1 8,448.5 8,638.6
As a % age of Net Revenue 22.7% 20.6% 18.2%
Manufacturing Expenses 20,934.4 30,085.2 28,484.8
As a % age of Net Revenue 60.1% 73.5% 60.2%
EBITDA 5,995.0 2,410.7 10,228.0
EBITDA Margins 17.2% 5.9% 21.6%
Depreciation & Amortization 1,529.9 1,662.9 1,313.8
Total operating Exp. 30,387.5 40,196.6 38,437.3
EBIT 4,465.0 747.8 8,914.2
EBIT Margins 12.8% 1.8% 18.8%
Other Income 3,764.1 5,119.6 5,240.8
As a % age of Net Revenue 10.8% 12.5% 11.1%
Interest 149.9 156.5 136.5
EBT 8,079.20 5,710.94 14,018.53
EBT Margins 23.2% 13.9% 29.6%
Income Tax provision 2,835.5 3,632.3 4,396.1
PAT 5,243.70 2,078.64 9,622.43
PAT Growth NA -60.4% 362.9%
PAT Margins 15.0% 5.1% 20.3%
No. of shares outstanding (Cr) 631.6 631.6 631.6
EPS (Rs) 8.30 3.29 15.56

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Coal India Ltd. – IPO Analysis

Balance Sheet

Balance Sheet (Rs Cr) FY’08 FY '09 FY '10

As on 31-Mar-08 31-Mar-09 31-Mar-10
Sundry Debtors 1,657.2 1,847.5 2,168.6
Cash & Bank Balance 20,961.5 29,695.0 39,077.8
Loans and Advances & Other Current Assets 10,266.3 11,727.0 8,676.2
Inventories 3,407.4 3,666.9 4,401.8
Total current assets 36,292.3 46,936.3 54,324.4

Current Liabilities & Provisions 30,594.5 39,942.3 41,382.5

Deferred Tax Liability 180.1 - -
Total Current Liabilities 30,774.5 39,942.3 41,382.5

Net Current Assets 5,517.8 6,994.0 12,941.90

Miscellaneous Expenditure - 0.0 1.5
Gross Block 31,859.2 33,260.0 34,945.3
Less: Depreciation 21,009.5 21,802.8 22,491.1
Provision for Impairment 410.6 443.0 422.8
Net Block 10,439.1 11,014.2 12,029.8
Capital Work in Progress 1,539.2 1,822.3 2,090.9
Investments 1,717.9 1,505.2 1,282.1
Surveyed Off Assets 29.1 97.2 119.8

Total Fixed assets 13,725.4 14,438.8 15,522.6

Total Assets 19,243.1 21,432.9 28,466.0

Secured Loans 242.4 454.9 977.2

Unsecured Loans 1,619.9 1,968.0 1,619.9
Total Debt 1,862.34 2,422.90 2,597.14

Minority Interest - 1.9 23.6

Equity Share Capital 6,316.4 6,316.4 6,316.4

Reserve & Surplus 10,884.3 12,691.8 19,528.9
Deferred Tax Liability 180.1 - -
Total Shareholder funds 17,380.77 19,008.16 25,845.27

Total Liabilities and Shareholder funds 19,243.1 21,433.0 28,466.0

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