Coal India. CMP: INR322 TP: INR370 Buy

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1 BSE SENSEX S&P CNX 16,439 4,990 Bloomberg COAL IN Equity Shares (m) 6, Week Range (INR) 422/294 1,6,12 Rel. Perf. (%) -4/-3/-7 M.Cap. (INR b) 2,033.9 M.Cap. (USD b) May QFY12 Results Update Sector: Utilities Coal India CMP: INR322 TP: INR370 Buy * Consolidated; # Adjusted; $ RoE is adjusted for OB reserves a/c, as applicable under IFRS 4QFY12 performance better than estimates: Coal India reported 4QFY12 PAT of INR40b (down 5% YoY), while adjusted for staff cost provision, the PAT was at INR60b, higher than our estimate of INR44b. Deviation is driven by mix change (higher e-auction volumes) leading to benefit of ~INR6b and higher realization (FSA/ washed coal) contributing ~INR8b. This along with higher than estimated other income (by INR5b) led to higher PAT. Coal India operational numbers strong: During the quarter production and offtake for the company stood at 145m tons (up 10% YoY) and 123m tons (up 9% YoY). FY12 production and offtake for the company stood at 436m tons (up 1% YoY) and 433m tons (up 2% YoY). Average rake availability for FY12 stood at 168 rakes/day v/s 162 rakes/day in FY11, up 4% YoY. Dispatch through rail has increase to 212m tons in FY12 (up 6% YoY), an important indicator of easing rail evacuation constraints. Key takeaways from analyst meet of Coal India: 1) GCV based price shift has yielded INR2-2.5b pa, 2) Production target of 464m tons possible given higher delta in 2Q; 25% increase in production from 13 selected blocks, 3) railways-related evacuation constraints easing; focusing on developing internal railway siding to enable movement of coal from mine to railway's point of loading, 4) price increase unlikely in near term, and 5) ECL/ BCCL expected to contribute positively; tax would not be payable due to past accumulated losses, lowering consolidated tax outgo. Valuations and view: We expect COAL to report consolidated PAT of INR174b in FY13E (up 8% YoY, downgrade of 2%) and INR188b in FY14E (up 9% YoY, downgrade of 5%). Cut in earnings is to factor in no compensatory price hike for wage increase (factored at ~12% on notified coal), which is partially mitigated through operating leverage, increase in dispatch estimates and lower consolidated tax. Stock trades at 11.7x FY13E. Buy. Nalin Bhatt (NalinBhatt@MotilalOswal.com); Satyam Agarwal (AgarwalS@MotilalOswal.com) / Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

2 4QFY12 ahead of estimates, driven by mix change and higher realization During 4QFY12 Coal India's revenues/ebidta growth was driven by (INR15b higher than estimate) mix change (higher delivery of Grade A/B coal under FSA and higher e-auction volumes) and better realization for washed coal. FSA revenues for the quarter stood at INR130b (realization improvement of INR107/ton QoQ), led by INR10b of bonus (vs INR6.6b in 4QFY11 and our estimate of INR4b). Management indicated that higher FSA bonus was led by benefit of improved coal realisation owing to price hike taken in Feb-11. For Grade A/B coal, the increase was 100%+. Thus, higher than committed delivery of Grade A/B coal led to higher incentives. Most importantly, management indicated that shift to GCV based prices has not led to any major increase in revenues - at INR2-2.5b pa. On the debtor increase (up from INR34b in FY11 to INR57b in FY12), the management confirmed that dues are being received from all customers in-time. Increase in debtors is largely attributable to outstanding dues from West Bengal Electricity Development Corporation (WBEDCL) and Damodar Valley Corporation (DVC) owing to cashflow crunch at ECL (Eastern Collieries Limited). NTPC's dues owing difference over pricing under UHV (Useful Heat Value) and GCV (Gross Calorific Value) is not more than INR3b. Other income for the quarter stood at INR23b (up from INR11.7b in 4QFY11) driven by higher transportation and surface charges at INR11b (booked in expenses too) and INR3b of write back of liability provided for in NEC coal (subsidiary). Tax for the company was lower at 30% of PBT, (vs 34% in FY11 and our estimate of 35% assuming that ECL/BCCL would report losses owing to wage revision) as ECL/ BCCL made positive ccontribution of ~INR20b in 4Q, where tax breaks were available due to past losses set off. E-auction realization for 4QFY12 at INR2852/ton (flat QoQ), while volume stood at 14.7m tons (up 13% YoY). On the washed coal front, volumes stood at 8.3m tons (down 6% YoY), while realization stood at INR2588/ton (vs est of INR2128/ton, up 35% YoY). E-auction volumes accounted for 12% of sales for 4QFY12/FY12, and volumes for FY12 have reached at 50.9m tons (up 7% YoY). EBIDTA for the company stood at INR38b (down 27% YoY) and net profit stood at INR40b (down 6% YoY). Reported EBIDTA/PAT however includes one-time charge on staff cost. Adjusted net profit thus stood at INR60b For FY12, COAL reported revenues of INR624b (up 19% YoY), EBIDTA of INR156b (up 16% YoY) and adjusted net profit of INR160b (up 47% YoY). FSA volumes for FY12 stood at 362m tons (1.5% YoY), while revenues were up by 20% YoY to INR447b, whereas E-auction volumes stood at 51m tons (up 7% YoY) and revenues were up by 50% YoY to INR132b. Washed coal volumes were up 2% YoY, while revenue stood up by 10% YoY. Operational performance improved in 4Q, rail dispatch up 6% YoY in FY12 During the quarter production and offtake for the company stood at 145m tons (up 10% YoY) and 123m tons (up 9% YoY). FY12 production and offtake for the company stood at 436m tons (up 1% YoY) and 433m tons (up 2% YoY). Average rake availability for FY12 stood at 168 rakes/day v/s 162 rakes/day in FY11, up 4% YoY. It is important to note that the dispatch through rail has increase to 212m tons in FY12, up from 200m tons in FY11, a growth of 6% YoY. 30 May

3 Production showing an uptrend (m tons) as also dispatches (m tons) Rake availability improving (rakes/day) ACQ coal realization higher in 4QFY12 E-auction realization stable, after 8 quarter of increase Washed coal realization/volume largely range bound Source: Company, MOSL Turnaround on operational parameters in FY13E, production/dispatch target of 464/470m tons For FY13, the management is confident of achieving production/dispatch of 464/ 470m tons, representing a growth of 6%/8.5%. Key drivers for production growth would be: 1) ~10m ton delta in 2QFY13 (as last monsoon season saw 10m tons YoY production loss in 2QFY12) given better preparedness this monsoon season, and 2) approval to increase mining production by 25% from the 13 identified blocks (to provide production of 30-40m tons). On the evacuation side too, large part of the dispatch would be through railways. Rake availability has improved "sizably" now and thus unlikely to cause any 30 May

4 disruption. Management indicated that it would require 193 rakes/day on an average for FY13 and have got rakes/day during April-May, This however calls for 200 rakes/day average for the balance 10 months. Higher availability in 4Q would mean 470m tons dispatch is possible. This would drive inventory liqidation of ~10m tons. Also, COAL has already started focusing on completing construction work on own railway sidings, which would help it streamline evacuation. This was a key bottleneck and strengthening internal evacuation infrastructure would help coal movement from mine mouth to railway siding. Over the long run, the construction of three rail lines in Orissa, Jharkhand and Chattsgarh connecting Mand Raigarh, IB Valley fileds, etc to large railway corridor is strategic. Attention is being received from highest authority and potentatial evacuation could be 300m tons pa. For 12th plan however, the contribution from these lines could be realized in last 1/2 years (FY16/FY17) only. Funding is not an issue, as COAL is prepared to fund the capex for all three lines at cost of INR45-50b. We currently model in production and dispatch of 462/465m tons for COAL in FY13, representing turnaround on operational parameters - an important trigger for stock valuations, in our view. Production and dispatch estimates factored by us are conservative Source: Company, MOSL Price increase unlikely in near term, focus on production and productivity improvement COAL had affected price hike in February 2011 in anticipation of the ensuing wage agreement. Current wage increase is thus possible to be absorbed with earlier price revision and production increase. This along with the inflationary environment would mean that price increase is unlikely in near term. At best, selective price hike in subsidiaries like ECL and WCL is being contemplated, given that shift to GCV had led to grade slippages and impacted revenues. Focus thus remains on driving profitability through increase in production and productivity. We believe the key earnings drivers for COAL are: (1) Liquidation of old cost inventory, (2) nominal staff cost increase, and (3) operating leverage. 30 May

5 Price increase for notified consumer has been limited, last revision in Oct-09 Other key takeaways from analyst meet Source: Company, MOSL COAL has signed 14 FSAs with various developers. NTPC/DVC demand would be reviewed but shift back to UHV is not tenable. Wharf loading (manual) makes sampling of coal difficult and thus, NTPC/DVC have expressed issue over GCV pricing. Dispatch to power sector is targeted at 347m tons in FY13, 35m tons higher than FY12. Entire production will not be diverted, and thus, e-auction would continue to grow. Part of dispatch would be through inventory liquidation. MMDR Act is in draft stage and cabinet committee is hearing presentations by various stakeholders. COAL has suggested that mining tax be applicable to all players in the mining industry to provide level playing field. Positive contribution from ECL/BCCL would provide tax breaks for FY13 and FY14, leading to lower tax on consolidated basis. Marginal cut in earnings to factor in no price hike; maintain Buy We cut our earnings estimate for COAL to factor in no compensatory price hike for wage increase, factored earlier at ~12% on notified price of coal. However, this has been partly offset by cost reduction, increase in dispatch estimates (still below management guidance), and lower tax. Also, our earnings estimates currently assume flat realization for notified price till FY14, while last price increase was in Oct-09. We thus believe our estimates have upside possibilities. We now expect COAL to report consolidated PAT of INR174b in FY13E (up 8% YoY) and INR188b in FY14E (up 9% YoY), representing downgrade of ~2% and ~5%, respectively. Stock trades at P/E of 11.7x FY13E. Maintain Buy with target price of INR370 (implied P/E of ~12x FY14E). 30 May

6 Coal India: an investment profile Company description Coal India Limited (CIL) is a leading public sector undertaking engaged into coal mining in India and is working on establishing its footprint globally through MoUs/acquisition route. CIL operates through its 9 wholly owned subsidiaries, of which 1 subsidiary is engaged in exploration and feasibility study analysis. CIL has total reserves of 64.3b tonnes and proved reserves of 52.4b tonnes, of which extractable reserves stand at 21.7b tonnes. Key investment positives CIL has access to 64.3b tonnes of reserves, the largest in the world. Of this, 52.4b tonnes are proven based on Indian Standard Procedure (ISP) guidelines, representing ~ 6% share of the global proven reserves. CIL's profitability and earnings growth are more linear given strong demand from power other industries and notified price regime, which ensures favorable return with upside from E-auction/ Washed coal. Washed coal capacity is being ramped up from 39.4m to over 111m tons with addition of 20 new facilities. Washed coal earns superior returns for CIL and volume is expected to grow from 17m tons in FY12E (4% of total) to 51m tons by FY17E (8% of total) Key investment risk Large parts of India's coal reserves are located on the Eastern belt, which has seen significant increase in Naxalite movement. CIL has been facing headwinds for its planned expansion, given delays in requisite environment/ forest clearances and land acquisition issues. Recent development For FY13, production/dispatch targeted at 464/470m tons, representing a growth of 6%/8.5%. Dispatch to power sector is targeted at 347m tons in FY13, 35m tons higher than FY12. Entire production will not be diverted, and thus, e-auction would continue to grow. Part of dispatch would be through inventory liquidation. Valuation and view We cut our earnings estimate for COAL to factor in no compensatory price hike for wage increase. We now expect COAL to report consolidated PAT of INR174b in FY13E (up 8% YoY) and INR188b in FY14E (up 9% YoY), representing downgrade of ~2% and ~5%, respectively. Stock trades at P/E of 11.7x FY13E. Maintain Buy with target price of INR370 (implied P/ E of ~12x FY14E). EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target orice and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Stock performance (1 Year) Shareholding pattern (%) Mar-12 Dec-11 Mar-11 Promoter Domestic Inst Foreign Others May

7 Financials and Valuations 30 May

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