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Daily Markets Brief(4th Nov 2010

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COAL INDIA LTD - Strategy on listing
At 157,000 cr+ market cap (at issue price) and only
Coal India price range Action
10% float, Coal India is probably a must-have for any
India-focussed fund. Given the huge institutional (Rs/share)
interest (QIB 25x, overall 15x oversubscribed), it Below 295 BUY
makes sense to have a clear strategy on the day of
listing. We believe price discovery will be relatively Between 295-325 HOLD
quick, and will happen with large volumes since retail Between 325-360 Book 75% profit
and leveraged HNI investors would probably want to
exit, while many institutional investors would Between 360-400 EXIT
probably use this sell off as an opportunity to enter.

Investment thesis : Coal India (CIL)
* Prime beneficiary of structural deficit of coal in India
We see India ’s structural coal deficit to rise from ~53 mt currently to ~105 mt in FY13. Coal India to be the
major beneficiary.
* Margins to improve
Increase in beneficiation volumes (and possibly overall realizations) will enhance overall margins and
profitability.
* Absence of cyclicality in earnings
CIL is more of a utility play rather than a resource play due to pseudo regulated business model, assured
volume off-take and discount of ~50% to international benchmark coal prices.

Valuations Methodology:
(a) EV/EBITDA [Fair Value = Rs 295-342] :
Base case: 9x ev/eFY12E EBITDA (20% discount to mean multiple of utilities) translates into FV = Rs 295/share.
Upside case: Assuming zero discount, FV = ~Rs 342/share.

EV/EBITDA approach
Base Case Upside Case
EBITDA (Rs mn) 157,069 157,069
Applicable EV/EBITDA multiple (x) 9.0 10.9
EV (Rs mn) 1,413,619 1,712,049
Less : Net debt (previous year) (Rs mn) (448,647) (448,647)
Equity valuation (Rs mn) 1,862,266 2,160,696
Shares (mn) 6,316 6,316
Value per share (Rs) 295 342

(b) DCF approach [Fair Value Rs 316-396]:
Base Case: CIL currently has a beneficiation capacity of ~39.4 mtp with 2x the realizations of raw coal. We have
assumed % of beneficiated coal to remain same with increase in total coal vol. Base case value = Rs 316 /Sh.
Upside case: CIL proposes to significantly increase its beneficiated coal volumes (increasing capacity by 111
mtpa by FY13) as a % of total coal. Incorporating the same in our model, our fair value would rise to Rs 396/Sh

DCF Value : Effect of beneficiation FY13 FY14 FY15 FY16 FY17 Fair Value (Rs)
Beneficiated Vol (base case) mtpa 17 18 18 19 20 316
Beneficiated Vol (upside case) mtpa 30 52 74 96 118 396

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