Coal India

November 11, 2012 November 8, 12,

Coal India



2QFY13: Low non-FSA realization caps earnings 

November 12, 2012 Rating Remains Target price Remains  Closing price November 9, 2012

INR 398 INR 347

Quick Note
2QFY13 earnings a tad below forecast as realization dips QoQ At INR30.9bn, Coal India’s (CIL’s) 2QFY13 normalized net profit came in marginally below our forecast (5.5% below consensus) of INR31.3bn; reported PAT INR30.8bn (up 19% YoY) was ~2% below our forecast. At INR28.6bn, 2QFY13 EBITDA missed our forecast by 2.4% (although EBITDA margin was in line) on the back of muted revenues – blended realization dropped 2% QoQ vs. our forecast of a 0.5% QoQ uptick. Cash on hand as of September 2013 stood at ~INR647bn (USD12bn).
Fig. 1: COAL – 2QFY13 Consolidated Earnings – Actual vs. Estimates
Robust incentives partially mitigate margin compression on wage revision impact, treasury gains surprise

Research analysts India Power & Utilities Anirudh Gangahar - NFASL +91 22 4037 4516 Kashish Tandon, CFA - NSFSPL +91 22 403 74008

COAL - 2QFY13 Results (INR m n) Sales EBITDA EBITDA (Pre-OB) Net Profit Reported PAT Actual 145,725 28,617 35,358 30,869 30,781

Nom ura Estim ate 149,038 29,308 36,058 31,306 31,306

Actual vs. Est. -2.2% -2.4% -1.9% -1.4% -1.7%

Cons. Actual vs. Estim ate 147,327 32,214 NA 32,676 32,332 -5.5% -4.8% Cons. -1.1% -11.2%

Note: Consensus = Bloomberg mean estimates, OB = Overburden Removal Adjustment Source: Company reports, Bloomberg, Nomura estimates

E-auction/washed coal realization down 11%/10% QoQ… For 2QFY13, CIL posted a blended realization of INR1,432/ton (vs. our forecast of INR1,466/ton); the implied 2% QoQ drop led to revenues (at INR145.7bn) also coming in ~2% below our forecast. Drilling down the revenue build-up and offtake mix (Figure 4), we note:  CIL liquidated 12.7mt inventory in 2QFY13 (13.4mt in 2QFY12); lower inventory reduction despite a 12% YoY rise in wagon loading (163 rakes/day in 2QFY13 vs. 146 rakes/day in 2QFY12) is surprising.  Although e-auction sales volume (11.7mt in 2QFY13) as a proportion of raw coal sales expectedly posted a QoQ drop to 11.5% vs. 12% in 1QFY13, e-auction sales realization exhibited a surprisingly steep 11% QoQ decline to INR2,282/ton (vs. our forecast at INR2,706/ton).  At 3.2mt, beneficiated (washed) coal sales were virtually flat QoQ, but higher QoQ as a proportion of offtake (3.2% vs. 2.9% in 1QFY13); however, realizations dropped 10% QoQ to INR2,086/ton largely on the back of non-coking washed coal realization dropping 8.5% QoQ.  Realization from notified (FSA) coal sales stood at INR1,287/ton, up 1.6% QoQ (vs. our forecast of INR1,292/ton); the rise was on expected lines following the first full quarter of impact of price hike for a few grades of coal from WCL. In volume terms, sales under FSA were flat QoQ at 84.5%  In terms of sector-wise sales split, power sector accounted for 74% of the offtake (vs. 71.4% of offtake in 1QFY13 and 71% of offtake in 2QFY12).

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

1% -2.1% 19.0% -2.781 QoQ (%) -13.460 491 426 165.5bn of this amount may pertain to FY12 (we hope to seek clarity on the same from CIL over the next few days).138) (12.056 44.5% 32.745 (102) 20.103) 33.006 (61.1 101.9% 8.341) (18.363) 24.942 36.585) (11.2% -12.2% -18. PAT looks conservative Pending a few clarifications sought from the management.963) (12.4bn employee expense recorded in 2QFY13 includes ~INR2.417) 30.6% -27. Nomura estimates 2QFY12 Sept-11 80.3% 16.325 52 40.403 311 265 131.085 (128) 17.790 (126) 20.722 (13.3% 1.6 110.3% 30.8% 18.9% 0.9% -29. normalized realization (i.6% 1.6% (3.432 348 281 145.8% 149.493 (56.1% 4.6% -1.306 31.7% 6. our implied 2HFY13F reported EBITDA potentially appears a tad high.084 34.086) 37.9% -0.2% 40.190 (90.064) (4.25bn on account of festival bonus Our interaction with the management suggests that the INR65. 2012 …as grade mix.3x EV/EBITDA and FY14F 12.693 2QFY13 Sept-12 89.6 1.500) 24.611) (10. the stock trades at FY13F 14.734) 19.280 56.3% -2.929 45.500/ton 2 .7% (4.466 355 288 Act vs Est -0.2% (5. On adjusted earnings (pre-OB removal adjustment EBITDA & PAT.0% -0.9% 13.819 18.5% -13.5% -3.5% -2.741) 28. but PAT post a potential incidence of mining tax).131) 56.134 1QFY13 Jun-12 102.2% 54.0% -28.931 3QFY12 Dec-11 114.566) (5.181 22.609) 45.1% YoY 2QFY13F (%) 10.581 464 308 194.481 (56.8 1.898 (11.308 19.571 (14. We understand that bulk of the inventory liquidation comprised Grade E/F from MCL and SECL.320) (5.1% 11.6% 6.582) 29.5 113.0% -40.2% 1.907) (12.392 481 412 153.9% 9.688) (17.1% -20.366) (12.909) 35. Employee cost includes ~INR2.248) (9.25bn for the ~30% rise in festival bonus to non-executive workers. Implied 2HFY13: EBITDA seems a tad high.378 (18.750) 29.473 33. adjusted for incentives ) was ~INR.1% -1.9% 1. but implied PAT appears conservative (excluding the impact of ‘mining tax’.847 (17.336) (5. we currently maintain our earnings forecast for CIL. based on CIL’s reported 1HFY13 financials.5% 29.3 1.559 58.678) 53.257) 40.617 19.221) 30.4x EV/EBITDA.1% -18.7 1. drop in imported coal cost likely took toll Our brief interaction with the management suggests that a potential combination of grade mix.6 122. which we assume in our base case).334) (5.6% (5.474 29. As per our calculations.484) (12.1% -10.Snapshot (INR m n) Operational Metrics Production (mn tons) Offtake (mn tons) Realization (Rs/ton) Pre-OB EBITDA (Rs/ton) Reported EBITDA (Rs/ton) Key Financials (INR m ) Revenues Employee cost Consumption of Stores & Spares Pow er & Fuel Contractual Expenses Others EBITDA (pre OB rem oval) Margin OB removal EBITDA (reported) Margin Depreciation EBIT Interest expenses Other income PBT Taxes Effective tax rate Net Profit (Norm alized) Extraordinary / Prior period items Reported PAT Source: Company reports.645) (18. Fig.132) 30.872) 24.5% 2.221) (14.1% -2.856 19.808 (142) 20. sharp QoQ decline in landed cost of low-grade imported coal and relative slackness in demand lead to the weakness in e-auction realization during the quarter.3% (19.0 1.326) 48.2% (4.5% (4.714 63.6% 23.e.6% (7. ~INR1.364) (12.7% 10.2% 25.626 508 40. As shown in Figure 3.9% -31.917) (15.168) 29.703) 32.1% 0.2x P/E.9% 6.6% (7.7% -42.1 101.796 (103) 44.647 (18. for 4QFY12.5% 15.3% 44.287) (15.0x P/E.941 29.752 (185) 23.058 24.6% -36.420) 55. 7.7% (64.306 Notes: OB = Overburden Removal Adjustment.1% -31.4% 21.2% Sept-12 89.2% -11.0% 31.270) (19.3% (6. 2: COAL – 2QFY13 Consolidated Earnings Snapshot 2QFY13 EBITDA / PAT a tad below forecast on the back of a 11%/10% decline in e-auction / beneficiated coal realization Qtrly .378 4QFY12 Mar-12 144.218 (129) 18. 6.7% -20.3% 39.725 (65.6% 1.422) 36.766 165 25.9% 1.822) (8.4% -1.3 93.9% 9.2% (6.3% -8.038 14.4% -14. We reiterate our Buy rating.332) (5.869 (88) 30.Nomura | Coal India November 12.0% -11.301) (12.358 24.0% -1.146 29.322) 31.2% -34.9% (5.3% -28.3% -32.7 1.356) 42.

4% 3.970 (314) 41.206 26.074 24.4% Likely to be in-line or marginally low er 11.7 6.731 (126.5% 9.0% To be potentially low er.4% 2.411 21.0% 560 80.9% 11. but implied PAT appears conservative Qtrly .435 2.406 27.025 31. hence total does not add up to 100% Source: Company reports.1 6.159) 51.6 200.5% 1.6% -0.287 1.6% Note: * Mining Tax = 26% of FY12 PAT treated as an outgo.543) 30.5 3.465 34.089 1.750 (258) 30.561 16.0% -10.7 11.588 31.0% To be potentially higher 18.472 (105.0 1.3 78. incl.4% 67.175) 112.9% 4.5% 6.664) (93.108 116.2% 2.9% 84.750) 110.7% 73.395 32.524 120.8% 13.4% 3.5% Likely to be higher 26.201 1. dispatch to power sector at 74% (71.471 458 395 361.8 12.1% (10.460 1.651 20.620) 83.628) (87.1 1.851 2.8% 79.6% 74.7% 8.432 1.6% 16.5 12.5% Jun-12 Sept-12 13.1% 28.217 1.2 101.6% -1.4% 70.190 26.9% 8.9% 1.9% 24.7% 3.033 21.0% 2.4% -23.1% (15.5% 2.838 115.0% Note: Volume and Revenue mix is based on total raw coal dispatched (including by-product sales).562 (141.7% 9.6% 84.8% -10.939 (226) 33.3% (191) 75.8% 2.4% 2.0% Likely to be in-line / marginally higher 6. our implied 2HFY13F reported EBITDA is potentially a tad high.4% (10.2 233.0% 2.7% 5.244) 72.392 1.6% 7.0 245.2 3.205 1.0% To be potentially higher 0.360) 73.9% 14.5 3.440) 86.386 57.602 19.3% 191 (26.6% (26. OB Removal) EBITDA (pre OB rem oval) Margin OB Removal EBITDA (reported) Margin Depreciation EBIT Interest expenses Other income PBT Taxes (Ex.276 1.535 (229) 41.3 166.852 2.5% 14. Mining Tax) Margin Extraordinary / Prior period Mining Tax * Reported PAT 1HFY12 176.382 416 365 276.6% 4.0% 3.4% 2.2% 84.370 2HFY12 259.382 1.225 1.7% YoY (%) 4.3% -6.283 230.5% Likely to be low er 10.447 1.0% 82. Mining Tax) Effective tax rate Net Profit (Ex.086 1.2 85.3% 10.163 1.0% 84.583 41.5 214.398) 97.282 2.980 26.217 20.267 1.447 423 357 310.3% 2. 2012 Fig.432 2.608 96.403 1.744 7.642 108.522 7.321 (29.3% -7.7 7.2% -10.5% 13.908) (90.7% 4.7% (9.6% 75.068) 76.9% -2.3% 14.7% -2.949 (33.9% 4.7% 5.3% -9. 3: Coal India – Implied 2HFY13F Based on CIL's 1HFY13 financials. Source: Company data.330 24.228) 67.042) 62.664 26.683 (146.4 93. Nomura research 3 .3 95.081 109.2% 3QFY12 Dec-11 11.8 1.298 18.1% -27.2% -11.6% 72.248) 30. Nomura research Fig.373 137.590 6.4% in 1QFY13) Key Revenue Metrics Sales volum e (m n tons) E-auction Beneficiated coal Notified (FSA) Sales Mix (%) E-auction Beneficiated coal Notified (FSA) Realization (INR/ton) E-auction Beneficiated coal Notified (FSA) Blended (based on offtake) Blended (based on dispatch) Revenues (INR m n) E-auction Beneficiated coal Notified (FSA) Revenue Mix (%) E-auction Beneficiated coal Notified (FSA) 2QFY12 Sept-11 11.5 180.2% (14.492 472 357 347.581 1.430 26. but realization down 11% / 10% QoQ.974 14.8% 1QFY13 2QFY13 QoQ (%) -13.798) (107.224 30.140 4.600 (39.237 Im p. H/H Rem arks on im plied 2HFY13F 36.8% 25.315 1.331 2.0% 5.154 7.951 23.Snapshot Operational Metrics Production (mn tons) Offtake (mn tons) Realization (Rs/ton) Pre-OB EBITDA (Rs/ton) Reported EBITDA (Rs/ton) Key Financials (INR m ) Revenues Employee cost Other Opex (Ex.7 11.9% -9.237) 90.3% -0.9 1.0% 4QFY12 Mar-12 14.2% 4. 4: Coal India – 2QFY13 Revenue and Offtake mix E-auction / washed coal sales steady at ~12%/~3% of offtake.2% 1HFY12 1HFY13 QoQ (%) 1.8 10.3% 2.3% 297 67.763 24. net of tax benefit.474 2HFY13F 261.8% 5.8% 77.1% 85.0 12.303 20.349 1.3% 4.Nomura | Coal India November 12.7% Likely to be higher (close to 1HFY13 level) 7.2% -8.830 29.6% 75.0% 2.695) 83.394) 33.6% 71.5 12.5% -2.112 14.7% Sept-11 Sept-12 24.533 96.561 2.6% Likely to be marginally low er / in-line 8.9% 73.512 1HFY13 191.758 110.448 61.494 (35.5% 3.6% 200.9% 5.7 3.318 1.0% (9.262 1.1% 1. festival bonus To be potentially low er CIL on track to exceed our forecast CIL likely to meet / exceed our forecast Realization uptick to be potentially low er 24.0% 0.1% -10.285) 30.9% (10.7% 83.

Anirudh Gangahar. Risks that may impede the achievement of the target price Key risks to our investment thesis include: 1) regulatory uncertainty around pricing flexibility and restriction on e-auction coal sales. Issuer Specific Regulatory Disclosures The term "Nomura Group Company" used herein refers to Nomura Holdings. Nomura Group Companies involved in the production of Research are detailed in the disclaimer below. 2012 November 8. hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report.00 Closing price 327.5bn tons as per the JORC Code) at INR83/share.00 Buy 433. is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International. 4 . Inc. Nomura International plc or any other Nomura Group company.. including rake availability.35 368. Inc. Inc. 2) bottlenecks in coal handling and dispatch logistics. (2) no part of my compensation was. 12. and 3) delays in land acquisition/possession and law & order issues hampering production growth.Nomura | Coal India November 11.90 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We arrive at our INR398/share 12-month target price for CIL using a sum-of-the-parts of: 1) FCFFbased methodology to value the cash flows from its 10. Appendix A-1 Analyst Certification I.90 368. and 2) MCap/ton based value of CIL’s probable reserves (8.3bn tons) and remaining resources (45. Issuer name Coal India Ticker COAL IN Price INR 347 Price date Stock rating Sector rating 09-Nov-2012 Buy Not rated Disclosures Previous Rating Issuer name Coal India Previous Rating Not Rated Date of change 18-Jul-2011 Coal India (COAL IN) Rating and target price chart (three year history) INR 347 (09-Nov-2012) Buy (Sector rating: Not rated) Date 03-Feb-12 18-Jul-11 18-Jul-11 Rating Target price 398. or any affiliate or subsidiary of Nomura Holdings.6bn tons of proven reserves at INR315/share.

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