Oct, 2010 Coal India Limited ANS Research Desk (Research Wing of ANS Pvt Ltd) ARHAM Financial Centre Harihar Chowk, RAJKOT (Guj) Speak to: 0281 6699401 Drop a line to: research@anspl.net
Issue Details Sector Mining & Minerals Issue Size ` 15475 Crores No. of Shares 631.6 Crores QIBs * 284,236,398 Non-Institutional* 85,270,919 Retail* 198,965,479 Employees 63,163,644 Face Value ` 10 Price Band `225 - ` 245 BRLMs Citigroup Global Markets India Pvt. Ltd. Deutsche Equities (India) Pvt. Ltd DSP Merrill Lynch Limited Enam Securities Pvt. Ltd. Kotak Mahindra Capital Company Ltd. Morgan Stanley India Company Private Limited Registrar Link Intime India Pvt. Ltd. Website: http://www.coalindia.com * Minimum allotment Recommendation - Subscribe Ratings CRISIL 5/5 (Above Average Fundamentals) CARE 5/5 (Above Average Fundamentals) ICRA 5/5 (Above Average Fundamentals) INDEPENDENT TECHNICAL REPORT ON THE COAL RESOURCES AND RESERVES OF CIL DONE BY SRK CONSULTING Financial Highlights Particulars Mar-10 Mar-09 Mar-08 Mar-07 Net Sales (In Cr.) 46,684.30 40,810.81 34,608.40 31,542.66 Operating Profit (In Cr.) 10,193.88 2,433.12 6,045.13 6,814.90 PAT (In Cr.) 9,622.45 2,078.69 4,715.87 5,692.51 EPS 15.23 3.29 7.46 9.02 Total Assets (In Cr.) 27,955.74 22,539.29 20,030.47 19,045.10 Cash & Bank (In Cr.) 39,077.76 29,695.01 20,961.48 15,929.27 Book Value/ Share 40.92 32.27 27.23 25.67 Particulars Mar-10 Mar-09 Mar-08 Mar-07 PBIDTM (%) 21.83 5.96 17.46 21.60 PATM (%) 20.61 5.09 13.62 18.04 ROE (%) 25.45 23.94 18.86 23.51 ROCE (%) 23.60 23.87 21.18 23.30 D/E (x) 0.11 0.12 0.12 0.15 Net Sales Growth (%) 41.58 4.89-3.13 4.87 PAT Growth (%) 14.39 17.92 9.72 2.56 EPS Growth (%) 362.9-55.89-17.29-2.69 Prepared By: Pranav Mehta
Background Coal India was incorporated in 1973 and Uptil now has been wholly owned by the Government of India. It has the distinction of being the largest coal producing company in the World (Source: CRISIL Research) based on the raw coal production of 431.26 million tons in 2010. It is also the largest coal reserve holder in the world (Source: CRISIL Research) based on their reserve base as of April 2010. The company has a total of 18862.9 million tons of Total Reserves comprising of 10595.1 million tons of proved reserves and 8267.8 million tons of probable reserves respectively. Also the company has a total of 64,218.0 million tons of Total Resources, comprising 51,326.3 million tons, 9,924.4 million tons and 2,967.3 million tons of Measured Resources, Indicated Resources and Inferred Resources respectively. As of March 31, 2010, CIL was operating 471 mines in 21 major coalfields across eight states in India, including 163 open cast mines, 273 underground mines and 35 mixed mines (which include both open cast and underground mines). The company produces non-coking coal and coking coal of various grades for diverse applications. Non-coking coal represents a substantial majority of the company s raw coal production, and represented 93.1%, 93.4%, 91.6% and 90.5% of our total coal production in fiscal 2008, 2009 and 2010 and in the three months ended June 30, 2010, respectively. Moreover most of company s coal production is from open cast mines. As of March 31, 2010, 45 projects (comprising 22 capacity expansion projects for existing mines and 23 new mine projects) had received relevant investment approval and were in various stages of mine planning and development: (i) 25 projects, with an aggregate estimated capacity of 47.51 million tons per annum were at various stages of implementation and are expected to become operational by the end of fiscal 2012; and (ii) 20 longer gestation projects, with an aggregate estimated capacity of 33.27 million tons per annum, are expected to become operational during the 12th Five Year Plan period (2013-2018). Presently some of the raw coal produced by CIL is used for the production of beneficiated coal. As of March 31, 2010, CIL operated 17 coal beneficiation facilities with an aggregate designed feedstock capacity of 39.40 million tons per annum. In
addition, it also intends to develop an additional 20 coal beneficiation facilities with an aggregate additional proposed feedstock capacity of 111.10 million tons per annum.cil contributes around 85% of coal production in India and 42% of India s primary commercial energy requirement. However, the energy consumption is expected to rise by as much as 8% to 10% annually through to 2020. As the main producer and supplier of coal, CIL has significant challenges to meet while continuing to supply affordable energy resource in the face of growing demand. In India CIL s coal production operations are primarily carried out through seven of its wholly-owned Subsidiaries. In addition, another wholly owned Subsidiary, CMPDIL, carries out exploration activities for our Subsidiaries and provides technical and consultancy services for our operations as well as to third-party clients for coal exploration, mining, processing and related activities. The company has established a wholly-owned subsidiary in Mozambique, Coal India Africana. Indian Subsidiaries 1. Bharat Coking Coal Limited(BCCL) 2. Central Coalfields Limited;(CCL) 3. Central Mine Planning & Design Institute Limited; 4. Eastern Coalfields Limited (ECL) 5. Mahanadi Coalfields Limited;(MCL) 6. Northern Coalfields Limited;(NCL) 7. South Eastern Coalfields Limited; and(secl) 8. Western Coalfields Limited.(WCL) Foreign Subsidiary 1. Coal India Africana Limited (CIAL) Indirect Subsidiaries - are held through its Subsidiary, Mahanadi Coalfields Limited: 1. MJSJ Coal Limited; and 2. MNH Shakti Limited
Industry Overview: Indian Coal Characteristics Indian thermal coal is predominantly of high ash content and has lower calorific value compared to the coal obtained from other parts of the World. This is the reason that about 15% of coal is imported in India. Most of India's coal mining is via open cast mines. According to Ministry of Coal the stripping ratio (When the operation reaches a predetermined stripping ratio (tons of overburden/tons of coal), it is not profitable to continue) for FY10 stood at 2.12x on a pan India basis with CIL's stripping ratio at 1.69x. Indonesia South Africa Australia India (Grade G) India (Grade F) India (Grade E) Calorific Value 4500-6000 5500-6000 6200-6700 1300-2400 2400-3600 3360-4200 Total Moisture ~30% 5-10% 5-10% 5% Ash + Moisture at Ash + Moisture Ash Content 5-10% 15-20% 5-10% 40% 41-47% at 34-40% Sulphur 1-3% <1% <1% 0.50% Volatile Matter 40-45% 25-30% 30-40% 25% Source: CRISIL Research and Ministry of Coal Coal India s thermal coal production is mostly of Grade E and Grade F. The Key Coal consuming segments in India are: Power Steel Cement Sponge Iron Others including Fertilizers
Sector wise coal consumption in India Power Utilites 64% Others 15% Power Captive 7% Steel 7% Cement 3% Sponge Iron 4% Source: Ministry of Coal Coal Production in India has increased by a CAGR of 6.2% over a 10 year period (FY2001-2010). Major suppliers of coal are Coal India (81% of FY10 total production), SCL (with 9% of FY10 total production) and other private parties who are producing from the coal blocks allocated. The lack of high quality coking coal in India has forced many users to import coking coal from other countries. However, since FY06, thermal coal imports have also steadily increased (due to demand supply mismatch) and it stood at 44MT in FY10 (total coal imports in FY10 stood at ~68MT). India s total coal imports (thermal + coking coal) have increased by a CAGR of 16% over a 5 year period. Major supplier countries are Australia, South Africa, and Indonesia. While Australia is a source mainly for coking coal Indonesia is the preferred supplier for thermal coal since its coal has the lowest calorific value among the 3 countries and it also has relatively high moisture content due to which actual cost of coal increases.
Logistics and Transportation Issues Indian coal is mainly located in the Central and Eastern part of the country while it has to be supplied to power plants spread all across the country. So this creates a huge logistical issue for both the producers and suppliers. Coal movement from the mine fields to the end customer mostly occurs by railways (49%) followed by roadways (27%), Merry go round systems (20%) and others (4%). Logistics issue as well as quality coal are main reasons why end userss who are located near ports prefer imported coal. Moreover with the recent increase in Naxalite movement and terror attacks it has become very difficult to plan proper logistics systems for the movement of coal. Road 27% MGR 20% Rail 49% Others 4% Source: Ministry of Coal Pricing Issues Coal prices have been deregulated in India from the year 2000. But the average price increase has been only 4.9% per year from that period onwards. So in a way the prices are still very much regulated in an indirect manner by the government. There are Fuel Supply Agreements done for the sales of Coal. However over the last few years things have taken a turn for the better and some element of market determined pricing has entered with the introductionn of e-auctioning.
Summary of Coal India s Mines Source: Company RHP
As can be seen most of India s coal reserves are located in eastern region of the country which have high Naxalite activities Source: Company RHP
Source: Indian Coal Scenario and Impact to Power Sector by KPMG
The Indian Coal Industry is not in a position to meet thermal coal demand of power generator by 2015 Source: Indian Coal Scenario and Impact to Power Sector by KPMG
Coal India s pricing Mechanism While imported coal is based on market pricing, there have been some changes on the domestic coal front which is sold in the market. CIL has introduced following changes: Selling 10% of its raw coal on e-auction Pricing its coking coal on a 15% discount to import parity prices Pricing its higher grade A, B, & C grades on 15% discount to import parity prices Pricing of Beneficiated non coking coal is based on cost of production + margin of value addition; Pricing of beneficiated coking coal is fixed at a price that is generally 15% discount to import parity prices Realizations for various products (Rs/MT) 2500 2000 1500 1000 500 0 Raw Coal Price E-Auction Price Beneficiated Coal price Avg. price
Risks associated with Indian Coal Industry There are huge and unacceptable delays in getting approvals from various ministries for coal block allocations as well permissions to start operations once a mine has been allocated to the party. The Go/No Go area classification would further hinder this already sticky issue. Ministry of Coal and Ministry of Environment have always been at logger heads regarding this issue and if this difference of opinion is not solved than it would further create problems for companies operating in this industry. Increasing Naxalite problem Majority of India s Coal reserves are located in the Eastern and Central regions. These regions are heavily infected by Naxalite activities. So the companies engaged in mining as well as those engaged in logistics are facing severe problems in carrying the mined coal through these areas. If the Naxalite problem is not solved quickly by the Government than it can become a very big problem going forward for companies to carry out their operations in a risk free manner. Infrastructure in Eastern and Central India leaves a lot to be desired. So logistics problems are going to be aplenty in future as well if the government does not succeed in providing good infrastructure facilities.
Positive points for the company Nearly a Monopolistic Business CIL commands nearly 82% market share in the total indigenous coal production. So it nearly enjoys a monopolistic position in the Indian markets. Coal is a basic requirement in Thermal Power production and since India is a power deficit country with a huge number of thermal power plants it gives a guaranteed off-take of all the coal produced by the company. CIL s major customer in this segment is NTPC which is also the largest power producer in the country. In addition the company enjoys economies of scale due to its large size and lower cost of production. It is to be noted that the company has the largest coal reserves in the world (Source: CRISIL Research) which represents 6% of the total global proven reserves. Operates in a Seller s Market Since CIL produces a commodity whose demand is much more than its supply it can charge as much as it wants to from its customers. Coal prices have been deregulated since 2000 but CIL has not hiked the prices in relation to World Coal prices in order to protect the user industry from sudden price shocks and also because the Government does not allow it to charge too much like a true monopolistic business. However in-spite of these constraints the company is able to maintain good margins due to its lower cost of production and it is able to sell coal at a very steep discount to global peers and yet maintain good profit margins. Huge scope in improving margin realizations with Coal Beneficiation and E-auctioning Indian coal has a very high ash content so its calorific value is lesser compared to coal from other regions. Uptil now Coal India has been beneficiating (washing Coal with water) a very small quantity of its total production and its beneficiated coal is comparable to imported coal. Such Coal can be sold for higher margins and it also causes lesser pollution. Realizing this opportunity Coal India is planning to increase the beneficiation infrastructure (currently 17 coal beneficiation facilities with an aggregate designed feedstock capacity of 39.40 million tons per annum as of March 2010) to 37 facilities (addition of 20 more facilities) with an aggregate feedstock capacity of 111.10 million tons per annum.
The company is also proposing to implement market driven mechanisms and is currently operating a spot electronic auction system called E-Auctioning to provide source of coal to all kinds of customers. As a % of total sales raw coal allotted under E-Auction scheme was 14.2% for the June quarter of FY11. Going forward the company expects to carry out more of its sales through the E-auctioning route. Realizations (Rs/Tonnes) CIL Avg. E-Auction Coal Beneficiated Coal 2267 2134 1944 1890 1346 1481 1583 1148 812 841 926 1045 FY 07 FY 08 FY 09 FY 10 Source: Company RHP Huge Capex plans and sufficient Cash on the Balances sheet go for local or foreign acquisitions CIL has lined up a huge capex plan for next few years. It plans to increase its capital expenditures by 42% for FY 11 and by 22% for FY 12. Moreover the company is continuously scouting for acquiring coal mines in foreign countries as well as new coal fields in India. The company has sufficient cash balance to meet any fund requirements and it can also use leverage since its debt to equity ratio is very low. The company is also talking with other companies (both Indian and Foreign) to form joint ventures in order to capitalize on the combined experience and technical know how that both of them may possess.
Loss making subsidiaries seeing a turnaround in sales and profits 2 subsidiaries of the company namely BCCL and CCL have seen a turnaround in their Net sales and profits for the quarter gone by. Though they still remain in BIFR due to their losses and negative net-worth, the management is very confident that by 2013-14 both these companies would become Net-worth positive and would contribute substantially to the company s top line and bottom line turnover. In addition CIL s other subsidiaries have increased their contribution in total production from 60% in FY 09 to 65% in FY 10 and between FY 06 and FY10 the efficient subsidiaries have contributed 86% of incremental coal production. WCL 3% CCL 7% BCCL 5% ECL 1% Subsidiary Contribution over FY06-10 in % NEC 0% NCL 18% SECL 28% MCL 38% Company is planning to increase efficiency and reduce costs Over the years CIL has succeeded in reducing the head count which formed a substantial portion of the company s production costs. It still employs a substantial number of people (majority of its employees are miners with on field jobs) mainly because it is controlled by the government. Infact CIL has largest employee size among global coal companies. However the management is quite confident that it would be able to reduce the employee costs going forward which if achieved would substantially boost the company s profit margins. Source: Company RHP and ANS Research
Concerns/Risks Naxalite Problems in Eastern and Central India Eastern and Central India has seen strong uprising of the Naxalite movement in past 10 years. Naxalites pose a serious threat to the smooth running of CIL s operations in that region. Nearly 71% of CIL s extractable reserves are located in Naxal infected areas. Though the company says that they are not facing any serious issues with Naxalites currently there is always a possibility that the things may take a turn for the worst. Overcoming the Naxalite problem while putting new mines and ramping up operations in existing mines is going to be a huge challenge for the company going forward. Getting approval and clearances from Environment Ministry and Challenges faced in Land Acquisitions CIL has been facing problems in its expansion plans due to delays in Environmental and Forest Clearances. The Go/No Go classification of mines done by the Ministry of Environment and Forest has impacted nearly 619 million tonnes of CIL s production capability and this covers about 44% of CIL total mining area. In addition to this the land acquisition problems also persist for the company since they have to relocate many people living near the mining areas which can be both a cumbersome and tiring process. The Naxalite problem in these areas also increases the problems of land acquisition. Logistical Problems Most of CIL s customers are located far away from its mining regions. Due to this the mined coal has to be carried to these customers either by Railways or Roadways. On both these (transportation) fronts India is lagging substantially compared to many of the developing nations. Poor infrastructure and lack of efficient management causes a lot of inconvenience as the timely delivery of coal becomes very difficult. This is reflected in high inventory levels in CIL s balance sheet since the company cannot transport its produce due to Infrastructure bottlenecks.
Negative Impact of Proposed New Mining Bill The Revised mining bill, which has been approved by the Group of Ministers, proposes to amend the existing Mines and Mineral Development and Regulation act 1957. It is expected that the government may introduce the Bill in the winter session of the Indian Parliament in 2010. This bill proposes that all the miners will be required to shares 26% of their profits with the people who have been originally displaced during the mine development. Though CIL has been very active in its CSR (Corporate Social Responsibilities) and uses about 5% of its retained profits for CSR activities (Rs. 5/ ton of Coal) a provision of 26% would still be very big and it could impact the company s profitability. Certain Qualifications in Auditors Report of 2009 The Company s auditors report for 2009 contained some qualifications mainly related to the fact that the company had not provided any provisions for its investments, loans and other receivables from 2 of its sick subsidiaries namely ECL and BCCL. Though these qualifications did not continue with respect to company s audited restated standalone financial statements for FY 2010 concern remains about company s investments in these subsidiaries and it may cause a major loss to the company if they fail to turn around these subsidiaries. Problems of Legacy Mines CIL currently operates 279 loss making mines i.e. 59.2% of the company s total mines and they accounted for 13% of the company s total production. These mines were vested (merged) with the company at the time of Nationalization of Coal assets in pursuant of the Coal Nationalization Act. Many of these mines have contributed to the losses in CIL s operating subsidiaries due to absence of scope of mechanization and adverse geo-mining conditions. Source: Company RHP and ANS Research
FINANCIAL HIGHLIGHTS Balance Sheet (Consolidated Results) (` In Crores) Particulars Mar 2010 Mar 2009 Mar 2008 Mar 2007 Share Capital 6,316.36 6,316.36 6,316.36 6,316.36 Total Reserves 19,528.91 14,072.55 10,884.32 9,896.76 Total Debts 2,086.85 2,148.48 2,829.79 2,831.98 Inventories 4,635.62 3,682.89 3,407.36 3,125.01 Cash & Bank Bal 39,077.76 29,695.01 20,961.48 15,929.27 Total Assets 27,955.74 22,539.29 20,030.47 19,045.10 Book Value 40.92 32.27 27.23 25.67 Source: Company RHP Profit & Loss (Consolidated Results) ( ` In Crores) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Mar 2007 Net Sales 46,684.30 40,810.81 34,608.4 31,542.66 Other Income 5,240.84 5,147.37 3,875.23 3,237.26 Total Expenditure 36,490.41 38,377.70 28,563.2 24,727.75 Depreciation 1,313.84 1,662.93 1,560.65 1,357.82 Interest and bank charges 155.95 178.88 169.29 108.11 Tax 4,342.48 3,665.41 3,474.55 2,893.73 PAT 9,622.45 2,078.69 4,715.87 5,692.51 Dividend (%) 35 27 27 23.75 Source: Company RHP
Cash Flow (Consolidated Results) ( ` In Crores) PARTICULARS Mar 2010 Mar 2009 Mar 2008 Mar 2007 Operational Cash Flow 13319.9 11719.3 8868.9 5993.2 Investment Cash Flow -1774.6 1661.8 1834.9 1534.2 Financing Cash Flow -2162.5 1323.9 2001.8 1957.0 Net Cash Inflow/Outflow 9382.7 8733.5 5032.2 2502.0 Opening Cash & Equivalents 29695.0 20961.4 15929.2 13427.2 Closing Cash & Equivalents 39077.7 29695.0 20961.4 15929.2 Source: Company RHP
RECOMMENDATIONS Valuations (Consolidated) Price Band EPS* BV# P/E P/B.V. 225 15.57 44.94 14.45 5.00 245 15.57 44.94 15.73 5.45 *- as on March 2010 Coal India can be kept in anybody s core portfolio and we think it will be a compounder going ahead. Long term investors can hold this share for 3-5 years for very good returns. The issue has created a lot of hype since it is the largest IPO ever to hit the Indian equity markets and also since it is being promoted the Indian Government. Even if one does not get the required quantity allotment in IPO than also this share can be accumulated at every dip. We believe that the Near Monopolistic position which Coal India holds as well as the amount of Coal reserves that it possesses would help the company achieve tremendous growth in the future. So we recommend a SUBSCRIBE to this issue. # - as on June 2010
Additional Information: Difference between ISP and JORC guidelines
An overview of the performance of the coal sector in India in fiscal 2008, 2009 and 2010 of the 11th Five-Year plan and the projected production for fiscal 2012 is set out below: Parameter Coal Demand assessed by Planning Commission (million tons) Fiscal 2008 (Actual) Fiscal 2009 (Actual) Fiscal 2010 (Actual) MTA Target Fiscal 2012 492.50 550.00 597.98 713.24 Indigenous Coal Supply (million tons) 454.49 490.02 514.58 629.91 Coal Production (million tons) 457.00 492.76 532.06 629.91 Coal Imports (Total) 49.80 59.00 67.74 83.33 Coking Coal 22.03 21.08 23.47 42.48 Thermal Coal 27.77 37.92 44.28 40.85 Net Gap in Demand Supply -11.79 0.98 15.66 0.00 Source: Annual Plan 2010-11, MOC, GOI Company RHP
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