Coal India - Edelweiss

COMPANY UPDATE
COAL INDIA
A volume play but intermittent hiccups persist
India Equity Research| Metals and Mining
We revise FY17E EPS down 6% and FY18E EPS up 5% based on our revised
demand-supply forecast due to the following: (a) greater amount of
domestic coal usage versus imports as the government seems to be
monitoring imports carefully as it envisages INR400bn savings; (b) Coal
India (CIL) is now more flexible in approaching e-auctions which entails
further medium-term volume boost; and (c) quality of CILs coal
dispatches is significantly better. We agree infra challenges remain as
commissioning of the Tori-Shivpur railway line has now been delayed by
a year, but good progress has been made to ensure water way route gets
commissioned by year end. Factoring in volume CAGR of 8% versus
government estimate of 11% over FY16-18, we believe CIL has a good
chance to meet consensus expectations. On revised estimates, we raise
TP to INR367/share (earlier INR349) and maintain BUY.
Evacuation infrastructure will remain an interim bottleneck

We were a tad disappointed that the Tori-Shivpur line, slated to be commissioned in
H1FY17, is now delayed to FY18, implying that the 40mt additional coal evacuation is
unlikely in current fiscal. However, good progress has been made on the sea route to
access markets in South and West India. As per the management, sea route will start
by Dec-16 and has a potential to rise from an annual levels of 4mt to more than 50mt.
Government move to cut imports structurally beneficial

Our revised demand-supply forecast assumes that Indian thermal coal imports will fall
by 40mt (Indian coal equivalent), that may well rise if international coal prices remain
at the current level. On a long-term basis, the insistence of use of more domestic coal
by Indian regulatory authorities as well the environment ministry, suggests that CIL
should be able to achieve a robust dispatch growth in the medium term.
Outlook and valuations: Positive; maintain BUY

We believe that led by governments endeavor to cull imports and prevailing high
import prices, CIL will be able to meet its output target for FY18 despite evacuation
infrastructure constraints in FY17. Based on higher medium term volume dispatches
and building for small increase in e-auction prices, we raise our FY18E EPS by 5%. We
maintain 'BUY/SO' with a revised TP of INR367 (earlier INR 349).
Financials
Year to March
FY15
FY16
FY17E
FY18E
Revenues (INR mn)
741,194
780,101
828,690
954,460
EBITDA (INR mn)
173,347
183,063
169,068
231,176
Adjusted Profit (INR mn)
137,228
142,469
121,595
144,807
Adjusted Diluted EPS (INR)
21.7
22.6
19.3
22.9
EPS growth (%)
(9.2)
3.8
(14.7)
19.1
Diluted P/E (x)
15.4
14.8
17.3
14.5
EV/EBITDA (x)
9.0
9.4
10.7
8.9
ROAE (%)
33.1
38.3
40.3
62.3
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
EDELWEISS 4D RATINGS
Absolute Rating
BUY
Rating Relative to Sector
Outperform
Risk Rating Relative to Sector
Medium
Sector Relative to Market
Underweight
MARKET DATA (R: COAL.BO, B: COAL IN)

CMP
: INR 334
Target Price
: INR 367
52-week range (INR)
: 368 / 272
Share in issue (mn)
: 6,316.4
M cap (INR bn/USD mn)
: 2,107 / 31,450
Avg. Daily Vol.BSE/NSE(000) : 4,224.4

SHARE HOLDING PATTERN (%)
Current
Q3FY16
Q2FY16
Promoters *
79.6
79.6
79.6
MF's, FI's & BKs
9.8
8.6
8.6
FII's
8.1
8.5
8.8
Others
2.5
3.2
2.9
* Promoters pledged shares

(% of share in issue)
NIL
PRICE PERFORMANCE (%)

Stock
Nifty
EW Metals
and Mining
Index
1 month
1.7
1.7
5.7
3 months
14.4
7.7
25.0
12 months
(9.0)
10.2
33.5
Amit A Dixit
+91 22 6620 3160
amita.dixit@edelweissfin.com
Manish Saxena
+91 22 6620 3105
manish.saxena@edelweissfin.com
August 31, 2016

Edelweiss Securities Limited
Metals and Mining

Sales volume uptick with declining days inventory at power plants
After a rather lackluster first 2 months of the year, CILs sales clocked an uptick in June. For
FY17, the government has set an off take target of 598.6mt for CIL, up 11.6% compared to
FY16, of which 450mt is expected to be supplied to power sector utilities. We believe, given
the slow start, CILs sales volume may fall ~7% short of its stated FY17 target.
Chart 1: Sales volume uptick imminent

55
(mn tonnes)
50
45
40
35
30
Apr May
FY15
Jun
Jul
Aug
FY16
Sep
Oct
Nov
Dec
FY17 (YTD July)
Jan
Feb
Mar
FY17E (Aug-Mar)
Source: Company data, Edelweiss research
Another positive externality for CIL is that coal inventory at power plants has progressively
declined from 38 38.9mt in March 2016 to 30.3mt in July 2016. In terms of days inventory,
stock at power plants was at 22 days in July 2016. Thus far in August, inventory has declined
further to 28.9mt (21 days stock).
Chart 2: Coal inventory at power plants has declined progressively in FY17

40
(mn tonnes)
32
24
16
8
0
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Coal inventory at power plants

Source: CEA, Edelweiss research
Coal India
FY20 volume target ambitious; recent government moves encouraging
The government has set a target of 1bt per annum of coal output for CIL by FY20. In our
view, it appears ambitious at the moment and is contingent on elimination of evacuation
constraints. We believe inland waterway will be functional by the year end, facilitating the
supply of coal to Gujarat-based power plants, besides reducing cost of transportation for the
end user. However, the Tori-Shivpur railway line will start operating only from FY18 after a
delay from the earlier envisaged plan. We also believe that the recent move by railways of
reducing tariff by 4-13% for distances above 700km will enable landed cost of coal to be
cheaper for power plants located far away from mines such as those in Punjab.
Coal output can clock 8% CAGR through to FY18

We believe reduced inventory at power plants, the government moves to curb coal imports
and changes in regulatory framework will ensure that domestic coal is preferred. This is
likely to bolster intrinsic consumption growth and absorb higher production by CIL.
Table 1: High likelihood of CIL achieving its FY18 volume target

Particulars
FY15 FY16P
Non coking coal demand supply
Domestic Supply in Indian coal equivalent
551
576
Imports in Indian coal equivalent
249
244
Total Supply possible in Indian coal equivalent
800
820
Demand in Indian coal equivalent
765
773
Surplus / (Deficit)
34
47
Surplus as days of consumption
(1)
21
FY17E
FY18E
609
211
820
830
(10)
15
695
192
888
885
2
15
Source: SteelMint, CEA, Edelweiss research
Our demand-supply dynamics for coal in India factor in demand CAGR of 8% assuming 8.5%
volume growth in thermal power. Our supply-side assumptions factor in uptick in CILs
production to meet demand. Effectively, we assume that regulatory averseness for coal
imports will result in imports contracting 9% in FY17 and by further 11% in FY18 (refer
Appendix 1 for key rationale for these assumptions).
We expect CILs off take to post ~11% CAGR to 818mt through to FY20, owing to higher reordering by power plants and reduced imports. This implies that the company may have to
supply 556mt in FY17 and ~620mt in FY18. This is slightly lower than what we had
anticipated at start of the year (638mt) due to delay in evacuation channels. The increase in
off take is expected to be 6% in FY17 owing to estimated surplus of 47mt in the system and
evacuation constraints. Hence, a portion of demand is likely to be met by inventory
drawdown.
Metals and Mining

Chart 3: CILs FY20 off take estimated at 11% CAGR to 818mt
900
(mn tonne)
720
540
360
180
0
FY16
FY17E
FY18E
FY19E
Production
FY20E
Offtake
Source: Company, Edelweiss research
Price hike, changing product mix to hold margin

CILs price hike and its Q4FY16 performance surprised us, coming ahead of finalisation of
wage negotiations. In the analyst meet to discuss Q4FY16 results, CIL had mentioned that: 1)
price hike will be more frequent hereon; and 2) incremental volumes will largely come from
higher priced e-auctions; and 3) linkages expiring progressively through to FY19 will not be
renewed. Consequently, we believe that blended realisation will improve keeping margin
intact, contingent on wage negotiations.
Price hike in May surpassed our expectation

CIL hiked prices w.e.f., May 31, 2016, by 6.29% for lower grade coal (G6 and below). Prices
of higher grade coal (comprising 10-12% of sales volume) were slashed to restore import
parity at that point of time. Even post the hike, we believe prices of lower grade coal are
likely to remain at a 20-21% discount to import prices. We expected a price hike post the
wage negotiations. Hence, the timing came as a surprise.
.with incremental volume growth to come via e-auction

CIL mentioned during the analyst meet that incremental volume growth is expected to come
from e-auctions. Further, linkages of 12mt expiring in FY17 will be transferred to the eauction route. Hence, e-auction volumes are pegged at 120mt (10mt every month).
and base price to be recaliberated with change in notified price

Also, changes in the notified price will be more frequent hereon and base price for forward
auctions will be recalibrated accordingly. Coupled with higher volumes for e-auctions and
dynamic pricing, we believe margins are likely to remain stable.
Recent uptick in global thermal coal prices, a shot in the arm

We believe such progressive increase in global prices is likely to lend impetus to demand
and price of e-auctions. It will also boost demand for higher grade coal, particularly from
power plants located along the western coast. Although e-auction premiums have remained
staid until May, our channel checks indicate that e-auction prices rose 5-6% in June. We
Coal India
believe that if the high sea-borne thermal coal prices persist, e-auction prices are likely to
rise further.
(Refer Appendix for a brief situation analysis in China and drivers of the unseasonal rally in
thermal coal.)
but, higher green energy cess may spoil the party

The government recently increased green energy cess by 2x to INR400/t. CIL management
stated that the cess hike will be passed on to customers. However, if the green energy cess
is further increased and international prices cool off, CIL may have to partially or fully absorb
the same. This will constrain the companys ability to avail full benefits of future price hikes,
if any.
However, some concerns persist

We see some near-term concerns despite an improving demand scenario and likelihood of
margin being maintained as: 1) cash is depleting from the balance sheet; 2) average cost of
consumables, such as diesel, may have gone up; 3) the labour union may call for a strike; 4)
operating costs could escalate on higher diesel price; and 5) RoE could slip pursuant to
adoption of IND-AS.
Cash and equivalents have dipped mainly due to dividend payout
Cash and equivalents, as on March 31 2016, at INR402bn are down ~36% from FY13 level,
primarily owing to high dividend payout. Currently, cash and equivalents are at levels lower
than at end FY11.
Chart 4: Cash and equivalents expected to dive at current dividend levels

700
(INR bn)
560
420
280
140
0
FY11
FY12
FY13
FY14
FY15
FY16
Cash and equivalents

Dividend payout from FY14 has been >1.5x of cash flow generated from operations (CFO)
resulting in significant reduction in cash balance. In FY16, though CFO was at same levels as
FY15, dividend payout was >2x CFO. Cash depletion in past 2 years has been even more
pronounced due to high capex (60% of cash flow from operations).
Metals and Mining

250
200
200
150
150
100
100
50
50
(%)
(INR/mn)
Chart 5: Dividend payout consistently >1.5x of cash flow from operations

250
FY11
FY12
Operating Cashflow (OCF)
FY13
FY14
FY15
Dividend as % of OCF
FY16
Capex as a % of OCF
We estimate cumulative capex of INR173bn over the next 2 years. If dividend payout
remains at last years level, i.e., INR27.4/share, cash and equivalents are likely to deplete to
INR132mn by FY18E.
Impending strike by labour union may disrupt production
As per media reports, 5 central trade unions are contemplating industrial action due to
delay in formation of the Joint Bipartite Committee for Coal Industry (JBCCI) that would
negotiate with workers over the salary hike for implementation of the tenth National Coal
Wage Agreement (NCWA). We believe any strike by the labor union may lead to loss of
production and sales that will affect CILs earnings. Further, as per media reports, the trade
unions are believed to have demanded a 50% hike in wages in the forthcoming tenth NCWA
against 25% hike in gross wages in FY12. We have estimated a hike of 25% in wages in FY17
(25% hike in wages and 5% in other costs). As per our estimates, every 1% hike in salary cost
is likely to lead to 1.2% decline in EPS at current price levels.
Table 2: Sensitivity of EPS to wage hike

Wage hike
25%
35%
45%
50%
EPS- FY18
22.9
20.1
17.3
15.9
Source: Edelweiss research
However, we believe CIL may increase prices again post the wage negotiations to absorb
adverse impact of the more-than-expected hike in wages. For instance, if the wage hike is
35% instead of 25%, a hike of 2.8% in notified price is sufficient to restore EPS to 25% wage
hike levels.
Coal India
Average production cost may have jumped due to diesel price hike
Diesel price has jumped ~17% YTDCY16. We believe bottom line is impacted by INR1.2bn for
every INR1 hike in diesel price on annualised basis. Compared to Q4FY16, diesel price is up
INR8.1/litre. Hence, if current diesel price level sustains, the impact on bottom line is
expected to be INR9.7bn or INR1.5/share (7% of FY17E EPS).
Chart 6: Diesel price up by ~17% YTD CY16

58.5
(INR/liter)
56.0
53.5
51.0
48.5
Jul-16
Jul-16
Jul-16
Jun-16
Jun-16
May-16
May-16
Apr-16
Apr-16
Mar-16
Mar-16
Feb-16
Feb-16
Jan-16
Jan-16
Jan-16
46.0
Source: Bloomberg, Edelweiss research
RoE might erode on adoption of IND-AS

As per the accounting convention followed by CIL, in case of opencast pits of 1mt or above
capacity, the cost of overburden removal (OBR) is charged on average stripping ratio
evaluated at current working cost of OBR with due adjustment for advance stripping and
ratio variance. Net of balance of advance stripping ratio and ratio variance at the end of the
year is shown as deferred expenditure or current liabilities as the case may be.
In case of mining companies such as Rio Tinto, the entire expenditure on the OBR in a
particular year is charged in the year of operation. In case of CIL, net of balances of advance
stripping and ratio variance is shown under the head miscellaneous expenditure to the
extent not written off or adjusted or current liabilities, as the case may be. In
conventional parlance, liability is present obligation arising from past event; however,
Overburden Reserve Account being provision for future operating costs, shown as liability
in the balance sheet, fails to comply with the definition of liability.
OBR expense has the following impact:
1.
Overstates the cost in P&L and thereby reduces the tax liability.
2.
Understates net worth in the balance sheet.
3.
Being a non-cash item, it is written back in the cash flow statement similar to
depreciation.
If CIL had not created OBR liability in the balance sheet, RoE would have been considerably
lower. For instance, the company reported RoE of 38.3% for FY16; however, adjusting for
OBR removal liability, it would have been 21.5%.
Metals and Mining

Chart 7: ROE might erode pursuant to adoption of Ind-AS
65.0
55.0
(%)
45.0
35.0
25.0
15.0
FY14
FY15
FY16
FY17E
ROE- Reported
FY18E
ROE- Adjusted
Key sensitivities
EBITDA is most sensitive to FSA realisation. For every 1% movement in FSA realisation,
EBITDA moves by 3.3%. Sales volume is also a key for CILs operating performance. Every 1%
movement in sales volume results in 2.8% movement in EBITDA.
Chart 8: EBITDA sensitivity to 5% movement in key parameters

21.0
14.0
(%)
7.0
0.0
(7.0)
(14.0)
Volume
E-auction
share
FSA
realisation
E auction Employee cost

realisation
Despite low share of e-auction volumes (19% in FY17E), its impact on EBITDA is significant.
Every 1% change in volume share and realisation results in EBITDA change by 0.5% and
0.9%, respectively.
Among cost heads, employee expense is the most significant. While we have assumed 15%
and 10% hike in employee cost in FY17 and FY18, respectively, even a 1% change from our
assumptions will result in 2% change in EBITDA.
Coal India
Outlook and valuations: Positive; maintain BUY
CIL has underperformed most global peers YTD CY16 (refer table below). Interestingly, many
stocks have given >50% returns over the mentioned period, despite clocking losses in CY15
(and hence have negative EPS). Further, global peers with marginal RoE in CY15 have also
delivered much higher returns versus CIL.
Table 3: CIL underperformed peers, despite better RoE

Coal India Ltd
US Coal
Peabody Energy Corp
Alliance Resource Partners LP
CONSOL Energy Inc
Indonesia
Indo Tambangraya Megah Tbk PT
Adaro Energy Tbk PT
China
China Shenhua Energy Co Ltd
Datong Coal Industry Co Ltd
Yang Quan Coal Industry Group Co Ltd
Australia
New Hope Corp Ltd
Whitehaven Coal Ltd
China Coal Energy Co Ltd
EBITDA
CY15 CY16
2,798 2,886
CY17
3,312
CY15
0.4
EPS
CY16
0.4
(831)
695
221
273
606
647
440
511
804
(23.3)
2.4
(0.5)
246
673
170
602
171
636
0.1
0.0
0.1
0.0
10,696 9,227
(79)
45
258
368
9,363
(14)
491
0.1
(0.1)
0.0
(1)
67
203
246
1,127 1,509
109
269
1,704
0.0
0.1
0.0
CY17
0.3
(15.7) (110.0)
1.3
2.2
(0.0)
(1.6)
YTD
1.5
% change
3M
6M
14.4
7.6
CAGR
EBITDA EPS
8.8
(2.0)
ROE
38.4
(82.9)
52.4
139.0
37.9
42.4
27.1
(46.3)
95.8
118.8
N/M
(14.2)
90.6
N/M (107.7)
(5.7)
12.1
N/M
(9.5)
0.1
0.0
85.2
120.4
20.1
63.3
57.0
87.6
(16.7)
(2.8)
(11.1)
(2.3)
4.8
5.4
0.1
(0.1)
0.0
0.1
(0.2)
0.0
14.4
26.5
13.3
13.1
44.7
23.0
27.7
44.7
2.2
(6.4)
N/M
37.9
2.3
N/M
(47.0)
N/A
(17.2)
(1.1)
0.0
0.1
0.0
(0.0)
0.0
(0.0)
(17.3)
2.7
177.9 128.8
25.3
9.1
14.7
253.6
43.1
N/M
15.1
23.0
N/M
(53.2)
NM
0.2
0.7
(1.9)
We believe CIL will be able to meet its volume target for FY18 as a result of evacuation
constraints being sorted out and governments resolve to cull imports, evident in
continuous decline in coal imports. Additionally, with the possibility of better e-auction
realisation, we have increased our FY18E EPS by 6.5%. Accordingly, we revise our TP to
INR367 (earlier INR 349).
Table 4: TP revised to INR 367 (earlier INR 349)

FY18E
144,807
16.0
2,316,912
6,316
367
334
10.0
PAT (INR mn)

Applicable P/E multiple (x)
Equity valuation (INR mn)
Shares (mn)
Value per share (INR)
CMP (INR)
Upside/ (downside) (%)
Table 5: Change is estimates
Revenue (INR mn)

EBITDA (INR mn)
Net profit (INR mn)
EPS (INR)
Current
828,690
169,068
121,595
19.3
FY17E
Previous
861,246
181,896
129,904
20.6
% change
(3.8)
(7.1)
(6.4)
(6.4)
Current
954,460
231,176
144,807
22.9
FY18E
Previous
954,371
214,744
137,718
21.8
Comments
% change
0.0
7.7
5.1
5.2
Change in estimates on revised

price and volume
Metals and Mining
Appendix 1
Demand to pick up from power plants as inventory drops
We believe traction from power plants to go up as stock level in July 2016 has declined by
22% to as compared to March levels to 38.5mn tonnes. Inventory days are also down to 22
versus 27 in March. We believe re-ordering will be steady at these inventory levels.
Coal stocks
Aug-16
Jul-16
Jun-16
May-16
Apr-16
15.0
Mar-16
0
Feb-16
18.6
Jan-16
9,000
Dec-15
22.2
Nov-15
18,000
Oct-15
25.8
Sep-15
27,000
Aug-15
29.4
(Days)
33.0
36,000
Jul-15
(In tonnes)
Chart 1: Inventory levels at power plants fell progressively in Q1FY17

45,000
Inventory days
Additional headroom from governments focus to boost demand by

culling imports
Coal Secretary, Mr. Anil Swarup, has reiterated the governments endeavour to reduce
imports as domestic supply (primarily from CIL) ramps up. YTD July 16, non-coking coal
import volume fell 6% YoY to 58mn tonnes following the 9% YoY decline in import volumes
in FY16.
Chart 2: Non-coking coal imports fell 6%YoY to 58mn tonnes YTD July 2016
21.0
(mn tonnes)
18.4
15.8
13.2
10.6
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Jan-15
Feb-15
8.0
Non coking coal imports

Source: SteelMint, Edelweiss research
10
Coal India
On power front, we have seen import volume falling by ~12% YoY on an average in FY16.
The decline was 13% YoY for utilities running on blended coal.
Table 1: Coal import volumes for power sector fell by ~12% YoY in FY16
FY13
FY14
FY15
Thermal coal imported for utilities
63.3
80.0
91.2
Designed on imported coal
31.7
42.2
48.5
Blending with domestic coal
31.6
37.8
42.7
YoY change
Thermal coal imported for utilities
26.4
14.0
Designed on imported coal
33.1
14.9
Blending with domestic coal
19.6
13.0
FY16
80.6
43.5
37.1
(11.6)
(10.3)
(13.1)
Source: CERC, Edelweiss research
We believe progressive reduction in imports has the potential to create fresh market of
~30mn tonnes per year particularly driven by power plants located in the hinterland and
non-power sectors. Import substitution will come with the benefit of higher prices as CIL is
looking to push incremental volumes through the e-auction route.
Changing regulatory framework likely to bolster import substitution

We believe that new PPAs with utilities allows fuel pass through only if coal sourcing is
domestic. Further, state run utilities are being asked to use domestic coal to the maximum
extent possible. NTPC, for instance, has not imported coal until now in FY17. These
regulatory changes are expected to further accelerate the import substitution.
consequently, off-take in June was back on track

We believe as a consequence of demand traction, after a sluggish start in April and May, offtake jumped 6.6% YoY in June. As compared to the target as well, off-take was down by
mere 5% in June as compared to the shortfall of 11% and 17% in April and May, respectively.
Chart 3: Off-take picked up in June after sluggish start

60.0
(mn tonnes)
54.0
48.0
42.0
36.0
30.0
April
Actual- FY16
May
June
Target- FY17
July
Actual- FY17
Source: Company data, Edelweiss research
11
Metals and Mining
Appendix 2
Higher global thermal coal prices to benefit e-auction prices
Global thermal coal prices (del China) inched up 21% to RMB 488/t in Q2FY17 as
compared/from to June end levels.
60
460
54
420
48
380
42
340
36
300
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16
30
Del. China (5500kcal)
(USD/t)
(RMB/t)
Chart 1: Thermal coal prices have gone up 15% in Q2FY17

500
Newcastle (5500 kcal)

We believe that the current uptick in Chinese thermal coal prices is driven by supply cuts,
despite tepid demand. During Jan-May16, raw coal production declined by 10.2% YoY with
the 2 largest coal-producing provinces - Inner Mongolia and Shanxi (50% of totat market
share) - exceeding the national decline.
Supply side is expected to remain constrained with China seeking to cut 60mn tonnes in
CY16 and new mine approvals for 3 years. Shanxi, Chinas second largest coal producing
province, is expected to cap its annual output at 1bn tonnes until CY20 (CY15 production 960mn tonnes).
On inventory front, power plant coal stocks have fallen in key state owned enterprises
(SOE), though increasing for other utility providers.
12
Coal India
Chart 2: Inventory in key SOEs have fallen, though increased for others
120
(mn tonnes)
104
88
72
56
Key SOEs
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
40
Others
We believe supply side discipline in China will keep global thermal coal prices firm thereby
lending fillip to e-auction prices on one hand, while making imported coal less competitive
for consumers in the hinterland.
13
Metals and Mining

Company Description
Coal India (CIL) is the worlds largest coal reserve holder and producer and also controls
~80% of the Indian coal market. It is going to be the primary beneficiary of the structural
deficit of coal in India. Moreover, it is one of the least cost producers of coal in the world.
CIL, a Maharatna company, is one of the largest public sector companies in India in terms of
turnover. Its product portfolio consists largely of thermal coal with the balance being coking
coal. The company enjoys a near-monopoly position in the lucrative coal market and is more
of a utility player due to assured volume off-take, pseudo regulated pricing and minimal
chance of a product price cut, as prices already remain at ~50% discount to current
depressed international benchmark prices.
It currently operates ~471 mines in India and is also scouting for international mines to
increase global presence and assure its resources. It sells ~15% of its production based on
the e-Auction route and ~3.5% beneficiated coal (2x realisations of raw coal).
Investment Theme
The government focus on ramping up domestic production (to counter rising imports) will
lead to sustainable volume growth for CIL over the next five years. Low fuel costs and an
expected e-auction realisations increase in FY17 will drive margin improvement over FY1618.
Key Risks
14
Lower than expected new FSA demand
Loss of volume-linked incentive
Lower than expected volume growth
Sharp drop in international and eAuction prices
Sharp increase in costs without immediate increase in prices
Coal India
Financial Statements
Key Assumptions
Year to March
Income statement
FY15
FY16
FY17E
FY18E
Macro
GDP(Y-o-Y %)
Inflation (Avg)
7.2
5.9
7.4
4.8
7.9
5.0
8.3
5.2
Repo rate (exit rate)
7.5
6.8
6.0
6.0
61.1
65.0
67.5
67.0
USD/INR (Avg)
Sector
Year to March
FY16
FY17E
FY18E
Net revenue
Accretion to stock
741,194
(5,305)
780,101
(14,442)
828,690
-
954,460
-
Purchase of goods
103,398
110,164
122,372
136,458
Employee costs
298,741
296,598
346,542
382,582
Total SG&A expenses
147,540
179,684
166,639
177,404
23,473
25,035
24,070
26,840
Total operating expenses
567,847
597,038
659,622
723,284
173,347
183,063
169,068
231,176
23,198
24,664
28,320
34,721
150,149
158,398
140,748
196,455
65,706
57,285
43,365
22,764
207
Power and Freight
Indonesian coal (USD/t)
39.0
40.0
40.0
40.0
India coal demand (mt)
787.6
850.6
905.9
964.8
EBITDA
Coal imports (mn tonnes)
248.7
243.6
211.2
192.4
Depreciation
Company
EBIT
Production (mt)
494
539
569
625
Add: Other income
Sales volumes (MT)
490
534
565
620
Less: Interest Expense
E-auction volume (mt)
47
66
63
69
Add: Exceptional items
Beneficiation volume(mt)
12
14
17
21
Profit Before Tax
Raw Coal volume (mt)
426
449
480
524
E-auction (INR/t)
2,450
1,858
1,563
1,670
Reported Profit
Beneficiation (INR/t)
2,348
2,328
2,450
2,450
Exceptional Items
Raw coal (INR/t)
1,311
1,292
1,347
1,350
Adjusted Profit
148
156
163
171
48
42
45
49
Adjusted Basic EPS
10
Diluted shares o/s (mn)
Cost of materials(INR/t)
Power and fuel (INR)
Welfare expenses (INR/t)
(INR mn)
FY15
Less: Provision for Tax
73
207
207
(51)
(415)
215,833
215,891
183,906
219,012
78,573
73,148
62,311
74,205
137,260
142,743
121,595
144,807
(32)
(274)
137,228
142,469
121,595
144,807
6,316
6,316
6,316
6,316
21.7
22.6
19.3
22.9
6,316
6,316
6,316
6,316
Adjusted Diluted EPS
21.7
22.6
19.3
22.9
Adjusted Cash EPS
25.4
26.5
23.7
28.4
Shares o /s (mn)
Repairs per tonne (INR)
23
25
26
28
Contractual exp(INR/t)
174
190
209
234
Misc expenses (INR/t)
63
61
64
67
Dividend per share (DPS)
20.7
27.4
27.4
27.4
OBR (INR/t)
78
65
65
65
Dividend Payout Ratio(%)
113.1
144.2
169.0
141.9
Provisions (INR/t)
20
20
20
20
Staff costs (INR mn)
299
297
347
383
Common size metrics
Blended EBITDA/t (USD/t)
354
342
315
373
Year to March
FY15
FY16
FY17E
FY18E
Depreciation rate (%)
5.9
5.6
5.6
5.6
Debtor days
41
47
47
47
Operating expenses
EBITDA margins
76.6
23.4
76.5
23.5
79.6
20.4
75.8
24.2
219
263
218
225
Net Profit margins
18.5
18.3
14.7
15.2
32
36
32
32
Year to March
FY15
FY16
FY17E
FY18E
Revenues
EBITDA
4.7
(3.4)
5.2
5.6
6.2
(7.6)
15.2
36.7
PBT
(5.7)
(14.8)
19.1
Adjusted Profit
(9.2)
3.8
(14.7)
19.1
EPS
(9.2)
3.8
(14.7)
19.1
Inventory days
Payable days
Growth ratios (%)
15
Metals and Mining

Balance sheet
As on 31st March
(INR mn)
Cash flow metrics
FY15
FY16
FY17E
FY18E
Share capital
Reserves & Surplus
63,164
340,367
63,164
275,812
63,164
198,575
63,164
137,884
Operating cash flow

Investing cash flow
Shareholders' funds
403,531
338,976
261,739
201,048
Financing cash flow
658
1,048
1,048
1,048
Net cash Flow
Short term borrowings
2,001
9,290
9,290
9,290
Capex
Long term borrowings
2,018
2,631
2,631
2,631
Dividend paid
Total Borrowings
4,019
11,921
11,921
11,921
Long Term Liabilities
414,981
445,005
445,005
445,005
Profitability and efficiency ratios
Def. Tax Liability (net)
(19,596)
(20,445)
(20,445)
(20,445)
Year to March
FY15
FY16
FY17E
FY18E
Sources of funds
803,593
776,504
699,267
638,576
Gross Block
Net Block
409,520
153,460
467,520
179,265
539,520
230,475
695,118
351,352
ROAE (%)
ROACE (%)
33.1
51.7
38.3
56.7
40.3
58.8
62.3
89.7
Inventory Days
219
263
218
225
Capital work in progress
31,046
35,046
39,046
39,046
Debtors Days
41
47
47
47
Intangible Assets
28,239
28,239
28,239
28,239
Payable Days
32
36
32
32
Total Fixed Assets
212,744
242,549
297,759
418,637
Cash Conversion Cycle
228
273
233
240
Cash and Equivalents
Minority Interest
Year to March
FY15
FY16
94,723
19,113
98,432
(87,721)
FY17E
FY18E
157,919
80,614
(36,635) (132,835)
(109,715) (167,779) (205,704) (205,704)

4,121 (157,068)
(58,374)
(62,000)
(84,421) (257,925)
(76,000) (100,170)
(155,248) (205,498) (205,498) (205,498)
549,429
402,527
318,107
60,182
Current Ratio
3.0
2.4
1.9
1.3
Inventories
61,838
75,953
70,421
98,169
Gross Debt/EBITDA
2.3
6.5
7.1
5.2
Sundry Debtors
85,219
114,637
97,667
146,858
Gross Debt/Equity
1.0
3.5
4.5
5.9
Loans & Advances
88,268
82,789
82,789
82,789
Adjusted Debt/Equity
1.0
3.5
4.5
5.9
Other Current Assets
52,277
49,142
49,142
49,142
Net Debt/Equity
(134.9)
(114.9)
(116.5)
(23.9)
287,602
322,522
300,019
376,958
NA
NA
NA
NA
9,208
9,785
11,672
12,255
Other Current Liab
273,018
295,462
319,099
319,099
Operating ratios
Total Current Liab
282,225
305,247
330,771
331,354
Year to March
5,377
17,275
(30,752)
45,604
803,593
776,504
699,267
638,576
63.9
53.7
41.4
31.8
FY15
FY16
FY17E
FY18E
137,260
23,198
142,743
24,664
121,595
28,320
144,807
34,721
Current Assets (ex cash)

Trade payable
Net Curr Assets-ex cash

Uses of funds
BVPS (INR)
Free cash flow
Year to March
Reported Profit
Add: Depreciation
Interest (Net of Tax)
(INR mn)
47
137
137
137
(68,553)
(57,215)
(40,159)
(22,694)
Less: Changes in WC
(2,771)
11,898
(48,027)
76,356
Operating cash flow
94,723
98,432
157,919
80,614
Less: Capex
58,374
62,000
76,000
100,170
Free Cash Flow
36,349
36,432
81,919
(19,556)
Others
Interest Coverage Ratio
FY15
FY16
FY17E
FY18E
Total Asset Turnover

Fixed Asset Turnover
0.9
4.3
1.0
4.0
1.1
3.6
1.4
3.0
Equity Turnover
1.8
2.1
2.7
4.1
Year to March
FY15
FY16
FY17E
FY18E
Adj. Diluted EPS (INR)

Y-o-Y growth (%)
21.7
(9.2)
22.6
3.8
19.3
(14.7)
22.9
19.1
Adjusted Cash EPS (INR)
25.4
26.5
23.7
28.4
2.1
9.0
2.2
9.4
2.2
10.7
2.2
8.9
Valuation parameters
EV / Sales (x)
EV / EBITDA (x)
Peer comparison valuation

Market cap
Name
Diluted P/E (X)
EV / EBITDA (X)
ROAE (%)
(USD mn)
FY17E
FY18E
FY17E
FY18E
FY17E
FY18E
31,500
13.8
12.4
8.9
7.7
41.9
61.2
9,579
86.4
45.0
16.5
14.6
1.1
1.6
Peabody Energy Corp
NM
NM
NM
NM
(44.0)
(35.3)
Median
1.1
1.6
AVERAGE
50.1
12.7
11.2
NM
NM
Coal India
China Coal Energy Co Ltd
16
Coal India
Additional Data
Directors Data
Shri S Bhattacharya
Shri N Kumar
Shri B.K. Saxena
Smt. Sujata Prasad
Chairman-cum-Managing-Director
Technical Director
Marketing Director
Government Nominee Director
Shri Chandan Kumar Dey

Shri R Mohan Das
Dr. A. K. Dubey
Director Finance
Personnel & Industrial Relation Director
Government Nominee Director
Auditors - De Chakraborty & Sen

*as per last annual report
Holding Top 10
Perc. Holding
6.04
0.61
0.54
0.33
0.26
Life Insurance Corp Of India

Vanguard Group
Prudential Icici Asset Mgmt Co
Prudential
Benchmark Asset Management Co Lt
Perc. Holding
0.79
0.57
0.34
0.27
0.19
*as per last available data
Capital Group Companies Inc

Blackrock
FMR LLC
SBI Funds Management
HDFC Asset Management Co Ltd
Bulk Deals
Data
Acquired / Seller
B/S
Qty Traded
Price
No Data Available
*in last one year
Insider Trades
Reporting Data
Acquired / Seller
B/S
Qty Traded
No Data Available
*in last one year
17
RATING & INTERPRETATION
Company
Absolute
Relative
Relative
reco
reco
risk
Coal India
BUY
SO
Hindustan Zinc
BUY
SO
Company
Absolute
Relative
Relative
reco
reco
Risk
Hindalco Industries
HOLD
SP
Jindal Steel & Power
HOLD
SP
JSW Steel
REDUCE
SP
NMDC
Steel Authority of India
REDUCE
SU
Tata Steel
HOLD
SP
Vedanta
HOLD
SP
REDUCE
SU
ABSOLUTE RATING
Ratings
Expected absolute returns over 12 months
Buy
More than 15%
Hold
Between 15% and - 5%
Reduce
Less than -5%
RELATIVE RETURNS RATING

Ratings
Criteria
Sector Outperformer (SO)
Stock return > 1.25 x Sector return
Sector Performer (SP)
Stock return > 0.75 x Sector return

Stock return < 1.25 x Sector return
Sector Underperformer (SU)
Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING

Ratings
Criteria
Low (L)
Bottom 1/3rd percentile in the sector
Medium (M)
Middle 1/3rd percentile in the sector
High (H)
Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings
Criteria
Overweight (OW)
Sector return > 1.25 x Nifty return
Equalweight (EW)
Sector return > 0.75 x Nifty return
Underweight (UW)
Sector return < 0.75 x Nifty return
Sector return < 1.25 x Nifty return
18
Coal India
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com
Coverage group(s) of stocks by primary analyst(s): Metals and Mining

Coal India, Hindalco Industries, Hindustan Zinc, Jindal Steel & Power, JSW Steel, NMDC, Steel Authority of India, Tata Steel, Vedanta
Recent Research
Date
Company
Title
17-Aug-16
Hindalco
Industries
16-Aug-16
29-Jul-16
Price (INR)
Recos
Potential play on financial

deleveraging;
Result Update
156
Hold
NMDC
EBITDA margin improves but

price concerns persist;
Result Update
101
Hold
Vedanta
Cost reduction holds the key;

Result Update
165
Hold
Distribution of Ratings / Market Cap

Rating Interpretation
Edelweiss Research Coverage Universe
Rating Distribution*
* - stocks under review
> 50bn
Hold
158
59
Reduce
Rating
Total
12
229
Between 10bn and 50 bn
< 10bn
156
62
11
Expected to
Buy
appreciate more than 15% over a 12-month period
Hold
appreciate up to 15% over a 12-month period
Reduce
depreciate more than 5% over a 12-month period
One year price chart
400
350
300
250
200
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
150
Aug-15
(INR)
Market Cap (INR)
Buy
Coal India
19
Metals and Mining

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Coal India
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Metals and Mining

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Coal India - Edelweiss

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COMPANY UPDATE

Evacuation infrastructure will remain an interim bottleneck

Government move to cut imports structurally beneficial

Outlook and valuations: Positive; maintain BUY

Rating Relative to Sector

Risk Rating Relative to Sector

Sector Relative to Market

MARKET DATA (R: COAL.BO, B: COAL IN)

52-week range (INR)

Share in issue (mn)

M cap (INR bn/USD mn)

Avg. Daily Vol.BSE/NSE(000) : 4,224.4

MF's, FI's & BKs

* Promoters pledged shares

PRICE PERFORMANCE (%)

August 31, 2016

Metals and Mining

Chart 1: Sales volume uptick imminent

FY17 (YTD July)

Source: Company data, Edelweiss research

Chart 2: Coal inventory at power plants has declined progressively in FY17

Coal inventory at power plants

Edelweiss Securities Limited

Coal output can clock 8% CAGR through to FY18

Table 1: High likelihood of CIL achieving its FY18 volume target

Source: SteelMint, CEA, Edelweiss research

Edelweiss Securities Limited

Metals and Mining

Price hike, changing product mix to hold margin

Price hike in May surpassed our expectation

.with incremental volume growth to come via e-auction

and base price to be recaliberated with change in notified price

Recent uptick in global thermal coal prices, a shot in the arm

Edelweiss Securities Limited

but, higher green energy cess may spoil the party

However, some concerns persist

Chart 4: Cash and equivalents expected to dive at current dividend levels

Cash and equivalents

Edelweiss Securities Limited

Metals and Mining

Chart 5: Dividend payout consistently >1.5x of cash flow from operations

Operating Cashflow (OCF)

Source: Company, Edelweiss research

Table 2: Sensitivity of EPS to wage hike

Edelweiss Securities Limited

Chart 6: Diesel price up by ~17% YTD CY16

Source: Bloomberg, Edelweiss research

RoE might erode on adoption of IND-AS

Understates net worth in the balance sheet.

Edelweiss Securities Limited

Metals and Mining

Chart 8: EBITDA sensitivity to 5% movement in key parameters

E auction Employee cost

Edelweiss Securities Limited

Table 3: CIL underperformed peers, despite better RoE

Source: Bloomberg, Edelweiss research

Table 4: TP revised to INR 367 (earlier INR 349)

PAT (INR mn)

Source: Edelweiss research

Table 5: Change is estimates

Revenue (INR mn)

Change in estimates on revised

Edelweiss Securities Limited