Coal India CMP: INR348 TP: INR408 Buy

BSE SENSEX S&P CNX 17,633 5,348 Bloomberg COAL IN Equity Shares (m) 6,316.4 52-Week Range (INR) 404/294 1,6,12 Rel. Perf. (%) -4/4/-15 M.Cap. (INR b) 2,198.1 M.Cap. (USD b) 39.7 14 August 2012 1QFY13 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); +91 22 3982 5429 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.

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 INR130-140m). 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 2012 2

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 134.27m tons, up 5.3% YoY. Dispatch for the same period stood at 149.03m 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 2012. 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 2012 3

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 2012 4

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 (%) FY13 28.2 26.6 6.2 FY14 30.4 29.6 2.5 Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 348 408 17.2 Buy Stock performance (1 Year) Shareholding pattern (%) Jun-12 Mar-12 Jun-11 Promoter 90.0 90.0 90.0 Domestic Inst 1.7 1.8 1.5 Foreign 5.6 5.5 6.4 Others 2.7 2.8 2.1 14 August 2012 5

Financials and Valuations 14 August 2012 6

N O T E S 14 August 2012 7

Disclosures This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Coal India 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock Yes 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.K. This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to which this document relates is only available to investment professionals and will be engaged in only with such persons. For U.S. MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Any business interaction pursuant to this report will have to be executed within the provisions of this Chaperoning agreement. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com