Coal India CMP: INR348 TP: INR408 Buy

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1 BSE SENSEX S&P CNX 17,633 5,348 Bloomberg COAL IN Equity Shares (m) 6, Week Range (INR) 404/294 1,6,12 Rel. Perf. (%) -4/4/-15 M.Cap. (INR b) 2,198.1 M.Cap. (USD b) August QFY13 Results Update Sector: Utilities Coal India CMP: INR348 TP: INR408 Buy * Consolidated; # Adjusted; $ RoE is adjusted for OB reserves a/c, as applicable under IFRS 1QFY13 PAT boosted by higher other income: Coal India reported PAT at INR44.7b (up 8% YoY) higher than our estimate of INR42.9b led by higher other income at INR20.7b v/s our est of INR19b. Revenues stood at INR165b (up 14% YoY), lower than our estimate of INR168b led by lower market linked sales. However EBITDA for the company stood at INR48b (flat YoY) in-line with our estimate of INR48.1b led by lower than estimated staff cost and OBR provisioning. The benefit was partly negated by higher cost of inventory, other expenditure. Market lined revenue lower, but FSA realization improves: During the quarter vis-à-vis our estimates market linked revenues were lower by INR9b led by lower E-Auction realization at INR2,562/ton (v/s estimate of INR3,000/ton) and lower E-Auction volume at 13.5m tons (v/s estimate of 15m tons). However FSA revenues stood at INR120.2b, v/s estimate of INR114.5b led by higher realization at INR1,261/ton v/s our estimate of INR1,206/ton. Operational performance improved in 1Q, rail dispatch up 11% YoY: During the quarter production and offtake for the company stood at 102m tons (up 6.4% YoY) and 113m tons (up 6.4% YoY). In 1QFY13, the dispatches through rail has been higher by 11% YoY, as rakes availability improved to 177 rakes/day v/s 164 rakes/day YoY. Also, the July 2012 month production/dispatch have been at 31.8 / 36.2 m tons and Coal India targets production/ dispatches of 96 / 107m tons during 2QFY13. Owing to possible delta in 2QFY13E, we thus revise our FY13E production / dispatch numbers at 468 / 470m tons (vs earlier 462/464m tons). Valuations and view, maintain estimate: We maintain our earnings estimate for Coal India, as gain from higher volumes, FSA realization and other income is negated by ~INR370/ton lower E-auction realization now. We expect Coal India to report consolidated PAT of INR178b in FY13E (up 11% YoY) and INR192b in FY14E (up 8% YoY). The stock trades at PER of 11.5x FY14E. Nalin Bhatt (NalinBhatt@MotilalOswal.com); Satyam Agarwal (AgarwalS@MotilalOswal.com) / Vishal Periwal (Vishal.Periwal@MotilalOswal.com) 1 Investors are advised to refer through disclosures made at the end of the Research Report.

2 1QFY13 operating performance in-line amidst mix trends though During 1QFY13 Coal India reported revenues of INR165b (up 14% YoY), lower than our estimate of INR168b.However, the revenue composition was significantly different vs estimate with INR9b lower market linked revenues and INR6b higher FSA revenues. Despite lower revenues, EBIDTA for the company stood at INR48b (flat YoY) in-line with our estimate of INR48.1b primarily led by lower staff cost at INR61.3b v/s our estimate of INR65b and lower OBR provisioning at INR7.3b (vs estimate of INR9.4b). The benefit was partly negated by higher cost of inventory, increase in other expenditure. Lower than expected staff cost came as a positive surprise, and current run rate would mean lower staff cost in FY13E on YoY basis. Post 4QFY12, our interaction with management indicated possible increase of INR10b to staff cost in FY13E led by wage negotiation, inflation linked DA (dearness allowance) increase, additional gratuity provision, partially negated by normal attrition. We had accordingly built in our estimate an increase in staff cost for FY13E. PAT at INR44.7b (up 8% YoY) was higher than our estimate of INR42.9b led by higher other income at INR20.7b v/s our est of INR19b. Market lined revenue lower, but FSA realization improve E-auction revenues stood at INR34.5b (v/s our estimate of INR45b), while volumes stood at 13.5m tons (v/s estimate of 15m tons), translating into average realization of INR2,562/ton (v/s estimate of INR3,000/ton). Similarly, Washed coal revenues stood at INR10.2b (vs estimate of INR9b), while volumes stood at 4.22m tons (v/s estimate of 4m tons), translating into realization of INR2,412/ton, vs est of INR2,250/ ton. Thus, market linked revenues were lower by INR9b, v/s our estimate. Against this, the FSA revenues stood at INR120.2b, v/s estimate of INR114.5b. It is important to note that the FSA volumes stood at 95.4m tons, in-line with our estimate of 95m tons and thus, entire deviation is to the account of realization. FSA realization for 1QFY13 stood at INR1,261/ton, vs INR1,188/ton in YoY. However, the numbers are in-line considering that 4QFY12 FSA realization stood at INR1,339/ ton, which had an incentive/bonus gain of INR100/ton (INR10b booked in 4Q), leading to adjusted realization of INR1,240/ton. 1QFY13 realization is partly supported by price revision under taken in Western coalfields (WCL) w.e.f 21st June 2012 (benefit of INR m). This could lead to a benefit of INR12-13/ton increase in FSA realization for full year (INR5b increase in revenues for WCL). Operational performance improved in 1Q, rail dispatch up 11% YoY During the quarter, production and offtake for the company stood at 102m tons (up 6.4% YoY) and 113m tons (up 6.4% YoY). Growth has been compared to 1% production growth and 5% dispatches growth in 1QFY12. Dispatches has been higher in the quarter led by higher dispatches through rail, as rakes availability improverd in the quarter to 177 rakes/day v/s 164 rakes/day YoY. Rail dispatches stood at 56.5m ton up 11% YoY. 14 August

3 Revise FY13 production/dispatch target upwards to 468/470m tons For 2QFY13, Coal India targets production of 96m tons and dispatch of 107m tons, representing growth of 20%/15% YoY, respectively, albeit on a low base. Coal India's cumulative production for the period till July 2012 stood at m tons, up 5.3% YoY. Dispatch for the same period stood at m tons, up 5% YoY. Thus, the production / dispatch for the month of July 2012 stood at 31.8 / 36.2 m tons. We have been highlighting that 2Q would provide sizable delta in FY13 production given slew of issues impacting production in FY12. Also, we believe that the residual target for production/dispatch in 2QFY13 would be possible as July and August months have 31 days, v/s 30 days in June. This would translate into 1HFY13 production/dispatch growth of 12.6% / 10.2% YoY, respectively. We currently factor in production / dispatch at 94 / 105m tons, v/s our earlier estimate of 90 / 101m tons. This has led to increase in our FY13 production / dispatch target to 468 / 470m each, v/s 462 / 464m tons, respectively. If Coal India achieves its targets for 1HFY13, the residual target for production growth in 2HFY13E is mere ~4%, while dispatch growth would be ~7% to achieve our revised target of production / dispatch of 468 / 470m tons. This is possible in our view. Union Minister for Coal as Mr Sriprakash Jaiswal, has recently indicated possibility of upward revision in FY13 targets (current target of 464m tons of production and 470m tons of dispatch) in the month of June Any such revision would be a key positive for the stock. Production showing an uptrend (m tons) as also dispatches (m tons) Rake availability improving (rakes/day) ACQ coal realization higher led by grade mix and GCV conversion Source: Company, MOSL 14 August

4 E-auction realization decline, after 8 quarter of increase Washed coal realization improves Source: Company, MOSL Maintain estimate, Buy We have increased our production / dispatch target for Coal India, as also the FSA realization and higher other income. However, the earnings are maintained as we lower our E-auction coal realization to INR2,689/sh in FY13E (v/s earlier est of INR3,056/ton). We expect Coal India to report consolidated PAT of INR178b in FY13E (up 11% YoY) and INR192b in FY14E (up 8% YoY). The stock trades at PER of 11.5x FY14E. 14 August

5 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 resources 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 resources, 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 FY12 (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 E-Auction realization stood lower at INR2,562/ton (v/s our est. of INR3,000/ton) however FSA realization stood higher at INR1,261/ton (v/s our est. of INR1,205/ton) On account of possible delta in production and dispatches in 2QFY13, we have increased COAL FY13 production / dispatch target to 468 / 470m, v/s 462 / 464m tons earlier. Valuation and view We have increased our production / dispatch target for Coal India, as also the FSA realization and higher other income. However, the earnings are maintained as we lower our E-auction coal realization to INR2,689/sh in FY13E (v/s earlier est of INR3,056/ton). We expect Coal India to report consolidated PAT of INR178b in FY13E (up 11% YoY) and INR192b in FY14E (up 8% YoY). The stock trades at PER of 11.5x FY14E. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Buy Stock performance (1 Year) Shareholding pattern (%) Jun-12 Mar-12 Jun-11 Promoter Domestic Inst Foreign Others August

6 Financials and Valuations 14 August

7 N O T E S 14 August

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