CMP: INR350 TP: INR375 Downgrade to Neutral

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1 BSE Sensex S&P CNX 19,497 5,897 Bloomberg COAL IN Equity Shares (m) 6,316.4 M.Cap. (INR b)/(usd b) 2,211/41 52-Week Range (INR) 386/301 1,6,12 Rel. Perf. (%) 1/-11/-5 Financials & Valuation (INR b) Y/E March 2013E 2014E 2015E Sales EBITDA NP* EPS (INR)* EPS Gr. (%) BV/Sh. (INR) RoE (%)** RoCE (%) Payout (%) Valuation P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) EV/ Sales (x) *Adjusted EPS, **RoE is adjusted for OB reserves accounts, as applicable under IFRS 15 February QFY13 Results Update Sector: Utilities Coal India CMP: INR350 TP: INR375 Downgrade to Neutral For 3QFY13, Coal India reported revenues of INR173b (v/s est of INR167b) led by better realization at INR1,438/ton (v/s est of INR1,402/ton) and marginally higher offtake (~1m ton). EBITDA was below estimate (13%) due to higher social expenditure on increased medical coverage of retired employees at INR3b. Also, the other expenditure included INR1b of FERV loss. Adjusted for the same, EBITDA stood at INR47b, v/s our est of INR49.5b. However, the lower depreciation charge and higher other income (at INR23.6b v/s est of INR19.2b) led to in-line PBT at INR62.4b (v/s est of INR62.6b). But lower tax/pbt ratio of 30% (v/s est 32%) led to higher PAT at INR44b, 3% above estimate. Market-linked realization for 3Q surprised positively, while COAL also revised 1Q/2Q volumes/revenue mix. Key reason for restatement was that earlier numbers reflected provisional numbers on E-auction/washed coal, as also the review of subsidiaries revealed classification error/issues. We upgrade FY13E/14E earnings by 7%/5% to factor the lower discount to international prices for market-linked volumes, but lower E-auction volumes to 46m tons (v/s earlier est of 51m tons). We now expect COAL to report net profit of INR188b in FY13E (up 17% YoY), increasing to INR195b in FY15E (CAGR of 2%). We note that market-linked revenues now account for 25% of FY13E revenues and 38-40% to PAT. We remain cautious on market-linked earnings, given muted coal prices (down 22% in YTDFY13), and INR appreciation to INR53.5 from levels of INR55/56 recently. Our estimate already factors production/ dispatch CAGR of 6% in the 12th Plan and flat market-linked realization. Given limited upside to the target price of INR375/sh, we downgrade the stock to Neutral. FSA price increase, if any, could be a positive trigger. Nalin Bhatt (NalinBhatt@MotilalOswal.com); Aditya Bahety (Aditya.Bahety@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 3QFY13 operating performance impacted by one-offs, PBT however in line due to higher other income During 3QFY13, Coal India reported revenues at INR173.3b (up 13% YoY), largely in line with our estimate (INR167b). This is driven by better realizations at INR1,438/ ton, compared to our estimate of INR1,402/ton. Also, the increased revenues were partly driven by ~1m tons of offtake being higher than our estimate. EBITDA for 3QFY13 however stood at INR42.9b (down 5.6% YoY), lower than our estimate of INR49.5b. This is given higher social overhead expenses (at INR7.4b v/s est of INR3.2b and run-rate of INR3.6b in 1H). Management indicated that the higher social expenditure is due to increased medical coverage of retired employees at INR3b. Also, the other expenditure included INR1b of FERV loss. Adjusted for the same, EBITDA stood at INR47b, v/s our est of INR49.5b. However, lower depreciation charge (at INR4.2b v/s est of INR5.9b) and higher other income (at INR23b v/s est of INR19.2b), led to PBT of INR62.4b, in line with our estimate of INR62.6b. PAT stood at INR44b (up 19% YoY), higher than our estimate of INR42.6b. This is largely due to a lower tax rate at 30%, v/s our estimate of 32%. Market-linked realization surprises positively, past volume/revenue re-cast due to classification error/issues Coal India's revenue analysis has been re-grouped/re-casted for current/past quarters. Thus, the sales volume now does not reflect the sales volume of washery/other rejects (reported earlier), while revenues from "others" category continues. The E-auction volumes have been revised (down) for 1Q/2Q, as also the FSA coal volumes. This led to change in reported realization for past 2 quarters (moved up, v/s earlier reported numbers). FSA volumes stood at 107m tons (v/s est of 102m tons), E-auction at 10.5m tons (v/s est of 12m tons) and washed coal at 4m tons (v/s est of 4.5m tons). In addition, we had assumed rejects sales of 0.5m tons. Market-linked realization for 3Q surprised positively, while COAL has also revised 1Q/2Q volumes/revenue mix. Key reason for restatement was that earlier numbers reflected provisional numbers on E-auction/washed coal as also the review of subsidiaries revealed classification error/issues. For 3QFY13, reported realization stood at INR1,232/ton for FSA coal (v/s est of INR1,260/ton), INR2,941/ton for E-auction coal (v/s est of INR2,300/ton), and INR2,491/ton for washed coal (v/s est of INR2,100/ton). E-auction/washed coal realization is up by INR480/ton and INR400/ton on QoQ basis - a contrast to falling global coal prices and appreciating INR. We understand that the improvement in realization could be driven by lower E- auction volume on offer. Also, there has been a shift in offtake in favor of low grade coal, while there are few takers for higher grade coal (Grade A/B), leading to decline in premium for such high grade coal. 15 February

3 ACQ coal realization trend down E-auction realization re-casted: marginally higher in adverse time Washed coal realization too inch up Source: Company, MOSL Operational performance improves; production slippage likely in FY13E Total production during 3QFY13 was 117.4m tons (our estimate 120.2m tons) and total sales stood at 120.5m tons (our estimate 119.3m tons). Production and dispatch have thus grown by 2.4% YoY and 8.2% YoY, respectively. Coal India's production target of 464m tons in FY13 leads to production of 155m tons, entailing a production growth of 7%, on an already high base of last year 4Q. We note that Coal India may fall short of its production target for FY13 by ~5m tons. 9MFY13 dispatches stood at 335.2m (v/s 310.3m YoY) and we estimate FY13E dispatches at 464m tons, leading to a volume of 129m tons in 4QFY13, a growth of 5% YoY. Higher dispatch would be a key positive surprise. Rake availability has also been looking up. Management shared that rake availability for 9MFY13 stands at 177rakes/day, v/s 160 rakes/day YoY, representing a growth of 11% YoY. Production shows an uptrend (m tons) as also dispatches (m tons) Rake availability improves (rakes/day) Source: Company, MOSL 15 February

4 Upgrading FY13E/14E earnings on the back of higher realization for marketlinked volumes We revise FY13E/14E earnings by 7%/5% to realign our market-linked realization close to recent trends witnessed in 3QFY13. We have thus raised our E-auction realization by 15% for FY13E to INR2,723/ton (up 5% YoY, despite a fall in internal coal price and recent INR appreciation) and washed coal by ~9% to INR2,370/ton (up 6% YoY). Our E-auction/washed coal realization for 4QFY13 are now flat QoQ. We have moderated our E-auction volume assumption to management guidance of ~46m tons (v/s 51m tons earlier). We currently estimate COAL to achieve production/dispatch of 459m tons (up 5.3% YoY) / 464m tons (up 7% YoY). Also, our market-linked realization for FY14E/15E are flat. We thus expect COAL to report net profit of INR188b in FY13E (up 17% YoY), going up to INR195b in FY15E. For the 12th Plan, we already built in production/dispatch CAGR of 6%. Revised estimates (INR b) FY13E FY14E Revenue Earlier Revised Chg (%) EBITDA Earlier Revised Chg (%) PAT Earlier Revised Chg (%) Source: MOSL Earnings revision now v/s earlier FY13E FY14E Earlier Revised Chg (%) Earlier Revised Chg (%) Volume (m tons) Production Dispatch E-auction Washed Coal Realization (INR/ton) E-auction 2,373 2, ,369 2, Washed Coal 2,155 2, ,136 2, Source: MOSL Higher contribution of market-linked earnings, a risk; Downgrade to Neutral Market-linked revenues for COAL are expected to contribute 25% in FY13E, going up to ~30% by FY17E (based on current flat realization). However, contribution at PAT level would be higher at 38-40%. We remain cautious on the same, given muted global coal prices (down 22% in YTDFY13), as also INR has appreciated to INR53.5 from the levels of INR55/56 recently. Given limited upside to our target price of INR375/sh, we downgrade the stock to Neutral. FSA price increase, if any, could be a positive trigger. 15 February

5 Coal India: an investment profile Company description Coal India Ltd (COAL) is a leading public sector undertaking engaged in coal mining in India and is working on establishing its footprint globally through MoUs/acquisition route. COAL operates through its 9 wholly-owned subsidiaries, of which 1 is engaged in exploration and feasibility study analysis. COAL 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 COAL 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. COAL's profitability and earnings growth are more linear given strong demand from power, other industries and notified price regime, which ensure 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 COAL and volume is expected to grow from 17m tons in FY12 (4% of total) to 51m tons by FY17E (8% of total). Key investment risks Large parts of India's coal reserves are located on the Eastern belt, which has seen significant increase in naxalite movement. COAL has been facing headwinds on its planned expansion, given delays in requisite environment/ forest clearances and land acquisition issues. Recent development In-principle approval for the coal price pooling, modalities yet to be decided. Valuation and view Market-linked revenues for COAL are expected to contribute 25% in FY13E, going up to ~30% by FY17E (based on current flat realization). However, contribution at PAT level would be higher at 38-40%. We remain cautious on the same, given muted global coal prices (down 22% in YTDFY13), as also INR has appreciated to INR53.5 from the levels of INR55/56 recently. Given limited upside to our target price of INR375/ sh, we downgrade the stock to Neutral. FSA price increase, if any, could be a positive trigger. 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) (%) Neutral Stock performance (1 Year) Shareholding pattern (%) Dec-12 Sep-12 Dec-11 Promoter Domestic Inst Foreign Others February

6 Financials and Valuations 15 February

7 N O T E S 15 February

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