india+ +cutting+through+the+overburden
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Please refer to the last page for disclaimer and rating explanation. Bloomberg Code ASSB
Coal India (COAL IN)Energy
Coal India Cut t ing through the overburdenIndian energy giant on the block
Largest coal company in the world
Coal India (CIL) is the worlds largest coal company, both in terms of its reserves and
production. Its JORC compliant reserves and resources are expected to last for >40 years
based on the current production rates. Coal production is expected to grow at a ~5%
CAGR till FY22.
Unmatched strategic importance
Coal is the primary source of power generation in India and CIL sits right at the pit-head
of this fuel source. It accounted for 81% of Indias coal production in FY10 and ~42% of
primary commercial energy needs.
Increasing productivity and outsourcing gains waiting to be delivered
Employee costs, which currently form ~35% of total sales, are expected to grow
modestly from current levels. Higher levels of outsourcing (targeted at 48% of coal
production in FY11E) in its large open-cut (O/C) mines can help it deliver incremental
productivity gains. (Refer page 11).
Valuations and view
We estimate the fair value of Coal India in the range of US$41- 45bn (`306-329/sh) on
our base case estimates (Refer page 5).
Risk to thesis
(In) ability to pass on increased employee costs. The company has implemented only
4 price rises in past 10 years.
Execution risks associated with a significant proportion (20-37%) of future
production (Refer page 15).
Lack of evacuation infrastructure at key coalfields (Refer page 16).
Off-take to be determined by railways ability to deliver rakes (Refer page 17).
05 October 2010
IPO NOTE
REDUCESector view: Underweight
Sector relative view:Underperform
Target Price: `453 (100%)
CMP:`2
Company data
Shares o/s (mn) 00
Market cap `-2,146,826,273bn/US$00bn
52-wk high/low `00/ 00
Avg daily trade vol -2,146,826,273(mn shrs)
Promoter FIIs DII Othersxxx xxx xxx xxx
Shareholding patt ern (%)
Click here to enter text.
Ankur Kulshrestha, +91 22 66399132
Downgrade from
Financial summary
Year-end March ( mn) FY09A FY10A FY11E FY12E FY13E
Net sales 407,466 464,129 534,457 574,463 675,741
EBITDA 67,421 152,273 187,745 173,446 244,819
EBITDA Margin (%) 15.8% 31.4% 35.1% 30.2% 36.2%
PAT 42,232 125,794 126,871 116,449 175,512
PAT (Reported) 40,628 98,294 126,871 116,449 175,512
EPS 6.7 19.9 20.1 18.4 27.8
ROE (%) 11.5 42.9 41.6 29.6 35.1
ROCE (%) 13.1 41.5 50.0 35.7 41.3
Source: Alchemy Research, Company
Six key facts about Coal India
CIL produced 431mn tonnes of coal in
FY10, which is ~81% of Indias coal
production.
CIL sells its coal at a considerable
discount to prices of international coal,
even after accounting for differences in
energy content.
It is expected to produce ~460mn
tonnes in FY11E. Of this, 48% will be
extracted by contract mining.
HEMM hiring expenses, which form
about 5% of the total cost in CILs P&L
in FY10, are expected to account for
48% of the coal production and 42%
of overburden removal in FY11E.
It employed 550,000+ employees as of
March 2001. The number has steadily
reduced since then to ~390,000 in
FY10.
20% of CILs target production in FY17
is expected to come from new projects.
For FY22, this number is ~37% .
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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 2
Coal India Energy
Table of contents
Indian energy giant on the block ............................................................ 3Valuations and view ............................................................................... 5Investment argument ............................................................................. 8Investment risks .................................................................................... 14Coal India Ltd. ...................................................................................... 19Appendix ............................................................................................. 22
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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 3
Coal India Energy
Indian energy giant on the block
The offer
Indian government proposes to sell a 10% stake (631mn shares) in CIL through a public of fer.
Of this, 10% is reserved for CIL employees. The proceeds of the sale will be utilised for
meeting governments divestment target of`400bn for FY11.
Coal India Ltd (CIL)
CIL is the holding company of seven coal producing subsidiaries, a technical and consultancy
services provider and a unit producing coal in Assam.
The coal producing subsidiaries are:
1. Eastern Coalfields Ltd (ECL)
2. Bharat Coking Coal Ltd (BCCL)
3. Central Coalfields Ltd (CCL)
4. South Eastern Coalfields Ltd (SECL)
5. Western Coalfields Ltd (WCL)
6. Northern Coalfields (NCL)
7. Mahanadi Coalfields Ltd (MCL)
Central Mine Planning and Design Institute Ltd (CMPDIL) located in Ranchi, Jharkhand carries
out exploration activities for CIL subsidiaries and provides technical and consultancy services
to CIL and other coal companies in India
North Eastern Coalfields (NEC), a coal producing unit operating in Margherita, Assam, is
under the direct operational control of CIL.
Investment arguments
Largest coal company in the world
Coal India is the worlds largest coal company, both in terms of its reserves and production.
Its JORC compliant proven + probable (2P) reserves stood at 18.8bn tonnes, and are expected
to last for >40 years based on current production rates. The company produced 431mn
tonnes of coal in FY10, which is more than the next two largest companies put together.
From this base, production is expected to grow at a ~5% CAGR for the next decade.
Unmatched strategic importance
Coal is the primary source of power generation in India and CIL sits right at the pit-head of
this fuel source. It accounted for 81% of Indias coal production in FY10 and ~42% of
primary commercial energy needs.
Increasing productivity and outsourcing gains waiting to be delivered
Employee costs, which currently form ~35% of total sales, are expected rise modestly from
current levels through reduction in manpower and despite scheduled wage increases.
Additionally, higher levels of outsourcing in its large open-cut mines can the company deliver
incremental productivity gains.
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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 4
Coal India Energy
Higher realisations from market linked prices
CIL sells some proportion of its coal at prices which are higher than notified prices. These
include E-Auctions (~10%), supplies through memorandum of understanding (MoU) route
and beneficiated coking coal (0.7%). Volume upside to the last two remains constrained due
to the nature of Indian coal reserves. E-Auctions could provide substantial gains. Premiums
over notified prices are expected to remain strong for the next few years given the constrictedsupply of coal in the country (premium of 51% over notified prices in FY10, 60% in Q1FY11).
.
Large cash position to fund future growth
CIL has cash of `390bn (~`62/sh) on its books. A look at its visible spending plans indicates
that current cash levels are sufficient to fund its capex plans and other commitments.
Investment risks
(In) ability to pass on increased employee costs
Power utilities accounted for 80% of supplied coal in FY10. Any increase in the price of coal
will increase the cost of electricity generation. It is unlikely that the buyers, particularly the
state electricity boards (SEBs), will be able to pass on the rise in costs to the end consumer.
This will further impact their financial health of SEBs/Discoms. This underlines CILs limited
ability to raise coal prices and pass on increased operating costs.
Execution risks associated with a significant proport ion of future production
Future projects (i.e. projects currently not operational or on the drawing board) form a
significant proportion (20-37%) of CILs production over the future decade. However, several
key projects have been delayed; a few by more than 2-3 years (refer to page 15). Land
acquisition and environment & forest clearances are the biggest challenges in projectexecution. This delay forms the biggest risk to volume growth in future.
Lack of evacuation infrastructure at the key coalfields
Inadequate evacuation infrastructure has resulted in additional project delays. Key evacuation
railway infrastructure projects have been delayed due to forestry and rehabilitation &
resett lement (R&R) issues (refer to page 15). Development of railway inf rastructure is crit ical
for coal evacuation, and these delays form the biggest risk to volume growth in future.
Off-take to be determined by railways ability to deliver rakes
Transport by rail (46.7%) and merry-go-round (20.8%) system accounted for ~68% of thetotal coal off-take from CIL in FY10. Insufficient rake supplies over the past 2-3 years have led
to an increase in pithead coal inventories at CIL subsidiaries to 62mn tonnes (~52 days of
production). A continued shortage of railway rakes will render ineffective any production
growth.
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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 5
Coal India Energy
Valuations and view
We estimate the fair value of CIL in the range of US$42-45bn.
We value Coal India on discounted cash flow methodology. We have also compared the
company with global peers based on financial and operational metrics. CIL is unique in itsscale, strengths, constraints and prospects. Thus, a comparative valuation of the company
would, at the best, serve limited purpose. However, we do include a comparative evaluation
to serve as validity test.
We evaluated the company on the basis of a number of scenarios which could play out:
For production (and hence off-take), we have assigned varying risk weights to
ongoing and future projects.
For E-Auction, we have assumed a range of premium over notified prices and a % of
raw coal offered in E-Auction.
For the notified prices of raw coal, we assumed a range of scenarios from full pass-through of employee costs to 50% pass-through. The below table outlines these
scenarios and the valuation implied there-in.
Scenarios Production E-Auction
As a of %raw coal
Pricepremium
Notif ied priceincrease as % ofemployee cost hike
Valuation(US$mn) Price/sh
High case 100% of ongoingprojects + 75% offuture projects
15% 75% Full pass-through, yearfollowing the hike
48,373 356
Base case 100% of ongoingprojects + 75% of
future projects
10% 70% Full pass-through,spread over 2-3 years
following the hike
43,034 317
Low case 100% of ongoingprojects + 50% offuture projects
10% 65% 50% pass-through 27,551 203
Other key inputs into our valuation case
Production and off-take
Explicit projections till FY22, as CILs production targets are known till that date
(implied exit reserve life ~17 years based on the current 2P reserves).
Off-take is assumed to be ~98% of production in each scenario.
An 8% CAGR in beneficiated coal production (25mn tonne in FY17). Although CIL
has formulated plans for ~110mn tonnes of washeries by FY17 (implying an output
of ~83mn tonnes), we assume a more conservative growth in the beneficiated coal
production.
Realisation
Raw coal prices increase driven by rise in employee cost.
Beneficiated coal prices to increase at the same rates as raw coal over the forecast
period.
Employee costs
Increases as per previous trends for National Coal Wage Agreements (24% hikes
each in 2004 and 2009).
Steady reduction in headcount due to natural attrition and VRS schemes (Reduction
at a CAGR of ~3%).
A ~4% annualised increase in total employee costs over the forecast period.
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ALCHEMY SHARE & STOCK BROKING PVT. LTD. 6
Coal India Energy
Other production costs
Assumed to increase with inflation from current levels.
DCF assumptions~13% cost of capital and 2% terminal growth rate
Sensitivity (Base case valuat ion)
Terminal growth rate (%)
1% 2% 3% 4%
WACC(%)
11% 51,006 53,515 56,650 60,68212% 45,610 47,453 49,706 52,52213% 41,614 43,034 44,740 46,83114% 37,570 38,621 39,863 41,35315% 34,516 35,328 36,274 37,392
Our key assumptions underlying the valuation are laid out in the next page.
Relative valuation
Globally, coal companies trade at about a ~11x (historical) and 7x (1-yr fwd) multiples (Please
refer Appendix - Valuation of coal companies globally). Based on CILs EBITDA (ignoring the
effects of OB removal expense), the estimated value works out to be US$46.8bn on a
historical basis (last financial year) and US$41.2bn on a forward basis (1stforward year).
US$ (except share pr ice) LFY FY1 CommentsMult iplier 11.6 7.3 This is essentially implied EV/EBITDA
CIL EBITDA/t 8.0 10.0 Based on EBITDA for CIL
Implied EV/t 93.1 73.4
Off-take(mn tonnes) 415 451 Historical and Alchemy forecasts
EV 38,634 33,027 Implied firm value for Coal India
Cash 8,220 8,220 Cash on CIL books as of March 31, 2010
MCap 46,854 41,247 Implied market capitalisation
# of shares (mn) 6,316 6,316
Share price () 334 294 Implied price/share
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Coal India
ALCHEMY SHARE & STOCK BROKING PVT. LTD.
Volume project ions (mn tonnes) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 F
CIL targets 460 486 515 543 575 609
Production 379 404 431 460 485 511 537 563 589
Off-take 375 401 415 451 475 500 526 551 577
Growth in off-take (%) 7% 7% 4% 9% 5% 5% 5% 5% 5%
Total raw coal (net of feed for washery) 354 380 395 420 442 464 487 509 531
Growth in raw coal off-take (%) 7% 8% 4% 6% 5% 5% 5% 5% 4%
Total beneficiated coal 14 15 15 16 17 18 20 21 23
Growth in beneficiated coal off-take (%) 2% 3% (2%) 6% 8% 8% 8% 8% 8%
Volume in E-Auction 29 49 46 42 44 46 49 51 53
Volume in -Auction (%) 8.1% 12.9% 11.6% 10% 10% 10% 10% 10% 10%
Pricing assumpt ion s (` /tonne) FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Price of raw coal 841 925 1,045 1,066 1,087 1,218 1,364 1,391 1,419 1
Increase in price (%) 4% 10% 13% 2% 2% 12% 12% 2% 2%
Price of beneficiated coal 1,890 2,267 2,134 2,177 2,220 2,487 2,785 2,841 2,898 2
Increase in price (%) (3%) 20% (6%) 2% 2% 12% 12% 2% 2%
Price in E-Auction 1,347 1,481 1,583 1,812 1,849 2,071 2,319 2,365 2,413 2
Premium over raw coal (%) 60% 60% 51% 70% 70% 70% 70% 70% 70%
Average sales price 871 968 1,074 1,167 1,191 1,334 1,494 1,525 1,557 1
% Increase in price 3% 11% 11% 9% 2% 12% 12% 2% 2%
Employee costs FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Number of employees 426,077 412,350 397,138 385,224 373,667 362,457 351,583 341,036 330,805 32
Employee cost/head (`) 296,547 478,770 419,388 431,970 535,643 551,712 568,263 585,311 602,871 78
Employee cost/tonne (`/tonne) 333 489 386 362 413 392 372 355 339
Increase in employee cost/head (%) 31% 61% (12%) 3% 24% 3% 3% 3% 3%Increase in number of employees (%) (4%) (3%) (4%) (3%) (3%) (3%) (3%) (3%) (3%)
Key assumptions underlying our base case valuation
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Coal India Energy
ALCHEMY SHARE & STOCK BROKING PVT. LTD. 8
Investment argument
Worlds largest coal company
CIL is the largest coal producer in the world. It is also unique as it supplies ~81% of India coal
requirement and ~42% of primary commercial energy needs. CIL holds the largest coal
reserves in the world (based on proven + probable (2P) reserves).Exhibit 1: Company-wise coal production
Source: Company, CIL RHP
Note: Production for each company taken for the last financial year (LFY)
Exhibit 2: Coal reserves and R/P rat io
Source: Company, R/P based on the current production rates
Note: Reserves not adjusted for calorific value. Marketable reserves have been taken in case they have been disclosed by
companies
431
211 210
140120 109 105 95 93
63
Coal India Peabody Shenhua Rio Tinto Arch Coal China Coal BHPBilliton
Xst rat a CloudPeak
BumiResources
Production (mn tonnes)
18.8
8.7 8.26.9
3.5 2.9 2.4 2.3
-
20
40
60
80
100
Coal India China Coal Peabody Shenhua Xstrata Bumi Massey Alpha NaturalResources
Reserves (bn tonnes) (LHS) Reserve life (years) (RHS)
CIL produced more coal in
FY10 than the next two largest
companies put together
Reserve life of ~44 years based
on the current production rates
and JORC reserves
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Coal India Energy
ALCHEMY SHARE & STOCK BROKING PVT. LTD. 9
CIL reserves and resources summary
The company has JORC compliant 2P reserves of 18.8bn tonnes and resources of 64bn
tonnes. As per Indian Standard Procedure (ISP) code, CIL has extractable reserves of 22.3bn
tonnes and total resources of 66.7bn tonnes.
Exhibit 3: CIL 2P reserves (mn tonnes)
Source: CIL RHP
Exhibit 4: CIL Resources (mn tonnes)
Source : CIL RHP
Coal reserves are predominantly of lower grade, with superior quality coal (A, B and C grades)
forming only 6% of the total thermal coal reserves. Coking coal reserves are ~9.1bn tonnes,
of which only ~900mn tonnes are qualified as reserves.
Of the 64bn tonnes of resources, 37bn tonnes have not been projectised or evaluated for
mineability. Although, this indicates a huge upside to the reserve base, there are someconcerns.
Jharia and Raniganj fields, which are amongst the oldest coalfields in India, have only 7% and
4% of the resources classified as reserves respectively. Jharia coalf ield is the only source of
prime coking coal in the country and is beset with coal mine fires.
These coalfields are also densely inhabited and extraction of the coal will require rehabilitation
& resettlement of people living there. (CIL has to contribute`3,500mn annually towards the
Jharia and Raniganj Master plans for rehabilitation of these two coalfields. The aggregate
expenditure sanctioned by government towards these master plans is`97,738mn).
10,595
8,268
Reserves
Proved Probable
51,326
9,924
2,967
Resources
Measured Indicated Inferred
JORC compliant reserves
provide additional comfort to
international investors
Low level of 2P reserves in
Jharia and Raniganj coalfields a
key concern
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Coal India Energy
ALCHEMY SHARE & STOCK BROKING PVT. LTD. 10
Employee costs Things can only get better from here!
Employee costs form the most significant cost item in CILs P&L. Large increases in employee
compensation in the past have resulted in the erosion of profitability (for e.g. National Coal
Wage Agreement VIII and Executive Pay revisions in 2008-09)
Exhibit 5: Cost breakup
Source: CIL DRHP
Note: Percentages do not total to 100 as inventory changes have not been taken
into account
Exhibit 6: Effects of revisions on profitability
Source : CIL DRHP
Majority of employee costs flows from older subsidiaries which have a large number of legacy
underground (U/G) mines in operation. However, the overall headcount has seen a decrease
at a steady rate for the past ten years (CAGR (3)%)
Exhibit 7: Employee count vs U/G product ion (FY10)
Source: Company
Exhibit 8: Number of employees
Source: Company
Natural attrition in older subsidiaries coupled with higher open cast (O/C) production in future
should result in a steady decline in headcount from here, even as production increases.
Employee pay revisions
Scheduled pay revisions for employees and executives will determine the true extent of
employee costs. The current level of non-executive pay was determined in National Coal
Wage Agreement which was finalised in May 2009 and effective from July 1, 2006. For
executive pay, the level was revised as of January 1, 2007 and is effective till 2017.
30.7% 30.9% 35.1%46.2%
34.4%
33.8% 34.4%34.5%
33.7%
31.3%
30.6% 29.5% 25.5%15.8%
31.4%
FY06 FY07 FY08 FY09 FY10
EBITDA Other expenses Employee costs
(9%)
7%
31%
61%
(12%)(12%)
3%
25%
56%
(16%)
18.4% 17.4%13.1%
4.9%
19.8%
FY06 FY07 FY08 FY09 FY10
Increase in employee cost/head Increase in total cost
Net profit Margin (%)
(5%)
0%
5%
10%
15%
20%
25%
30%
- 20 40 60 80 100
%p
roductionfrom
U/Gmines
# of employees ('000s)
552 531 511 493 477 460 446 426 412 397
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Number of employees ('000s)
Employee costs one of the key
drivers of profit ability
Majority of employees in older
subsidiaries with high U/G
production
ECL
WCL
SECL
BCCL
CCLMCLNCL
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Coal India Energy
ALCHEMY SHARE & STOCK BROKING PVT. LTD. 11
Higher outsourcing can drive incremental productivity gains
CIL subsidiaries outsource varying proportions of their production. O/C mining is easy to
outsource and hence the proportion of outsourcing is larger in subsidiaries with higher O/C
production. For example, MCL outsources its entire O/C coal production while OB removal is
done by the company, except in a few cases (Source: MCL Annual Report 2010). SECL has a
target of ~97% of coal production to be done contractually for FY11.
On an average, CIL plans to outsource 42% of OB removal and 53% of O/C coal
production for FY11. The O/C production from outsourced operations is expected to
be ~48% of the total coal production.
Exhibit 9: Outsourcing in CIL subsidiaries (FY11 targets)
Source: Company
The outsourcing cost is reflected in CILs P&L through heavy earthmoving machinery (HEMM)
hiring expenses. These expenses represent a small proportion of costs (~5% of total operating
expenses), but have grown exponentially in the past 5 years. (CAGR of ~47% versus
production CAGR of ~5% and transportation charges CAGR of ~11%)
Exhibit 10:HEMM Hiring expenses vs production and ot her costs (% grow th)
Source: CIL DRHP
Outsourcing contracts are awarded based on the quoted cost/cubic meter of material
removed (coal or overburden). Based on CILs disclosed figures for HEMM hiring, we have
calculated the cost of outsourced coal and compared it with production cost for in-house
production. In case of hired production, the figure works out to less than a third of in-house
production. This underlines huge scope of productivity improvements which could flow from
outsourced production.
97%
81%
0%
18%
32%24%
29%37%
34%
49% 46%
29%
37% 37%
SECL MCL NCL WCL CCL ECL BCCL
Outsourced O/C product ion (%) Outsourced OBR (% of t otal)
0%
200%
400%
600%
800%
FY05 FY06 FY07 FY08 FY09 FY10
Coal production Total contractual charges
HEMM Hiring expenses Transportation costs
Outsourced operations form a
significant proportion of CIL
O/C production
HEMM hiring expenses have
outpaced production growth,
implying increased levels of
outsourcing in recent years
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Coal India Energy
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Exhibit 11:Outsourced vs own production cost (`/tonne)
Source: CIL DRHP, Alchemy Research
Note: Approximate calculation. Based on the breakup of outsourced vs in-house production as per FY11 targets. Coal density
assumed at 800kg/cu.m.
Increased realisations from market linked prices
CIL sells a portion of its coal at prices which are higher than notified prices. This includes:
- E-Auction CIL targets to sell 10% of its total production through E-Auction, a spot
and forward electronic auction mechanism. Realisations through E-Auctions have
historically been 50-60% higher than the notified prices of raw coal.
- Coal sold through memorandum of understanding (MoU) This applies to A, B
and C grades, with gross calorific value >5,597kcal/kg produced in some of the
subsidiaries. The coal is sold at a 15% discount to landed price of international coal
resulting in higher realisations. For example, in FY10, ECL sold ~4.1mn tonnes
through the MoU route and earned an incremental `.8,639mn (`2,107/tonne) over
notified prices. The exact proportion of coal sold through this route in not known in
other subsidiaries.
- Beneficiated coking coal This is also sold at negotiated prices which are generally
at a discount to landed cost of imported coal. In FY10, CIL sold ~3mn tonnes of
beneficiated coking coal.
Increase in proportion of any of these categories should provide a boost to the earnings
especially through first two routes as they do not entail additional production costs. However,
the scope of volume improvement for MoU and beneficiated coking coal routes is limited.
Reasons include:
- The higher grade A, B and C coal is more likely to be found at greater depths andwould necessitate U/G production. The scalability in U/G production is not high and
costs are also higher.
- Jharia and Raniganj, the oldest coalfields of the country, also have the best quality of
deposits. Jharia accounts for 51% of Indias coking coal reserves (and 100% of
prime grade coking coal). Raniganj accounts for ~41% of countrys superior grade
thermal coal (A, B and C grades).
These coalfields are beset by a number of problems. These include coalfield fires,
population living on the top of coalfields and high level of disruptions owing to
bandhs and other naxalite activity. This is also evident in CILs low estimate of
extractable reserves from these mines (~1.8bn tonnes out of a total of 13.6bntonnes of proved reserves).
188
653
- 100 200 300 400 500 600 700
Hiredproduction
Ownproduction
Employee cost HEMM hiring Transportation Other cont.exp
Repairs Stores cons. Power and fuel Misc expenses
Outsourced coal is considerably
cheaper than in-house
production
Market linked portion of sales
provides upside
It might not be easy to
significantly upscale sales of
high grade thermal and
beneficiated coking coal
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Coal India Energy
ALCHEMY SHARE & STOCK BROKING PVT. LTD. 13
We believe that any relaxation in E-Auction volumes to the higher side will result in large
gains for CIL. E-Auction premiums over notified prices are expected to remain strong for the
next few years given the constricted supply of coal in the country.
Exhibit 12:E-auction price and premiums
Source: Alchemy Research, Company
Large cash position to fund future growth
CIL has cash of `390bn (~`62/sh) on its books. A look at its visible spending plans indicates
that the current cash levels are more than sufficient to fund its capex plans and other
commitments. Cash flows from operations are expected to generate sufficient cash to fund
the future projects, for which the visibility is low. Net aggregate cash flows in FY06-10 were
~`310bn.
`mn US$bn
FY11 & 12 expected capex 84,500 1.88
Earmarked for overseas acquisitions 60,000 1.33
Capex for washeries 23,275 0.52
Capex for 12th
plan period 25,762 0.57
Total 193,537 4.30
Net cash 369,909 8.22
Source: Company, MoCNote: CIL is required to contribute`3,500mn annually towards Jharia and Raniganj rehabilitation master plans. Current balancein the rehabilitation fund is 14,774mn. CIL also has contingent liabilities amounting to`117,776bn
1,3471,481
1,5831,748
35%
45%
55%
65%
75%
FY08 FY09 FY10 Q1FY11
E-Auction realization (LHS) Gain over notified price (RHS)
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Investment risks
(In) ability to pass on higher costs
A major proportion of CILs production is sold at notified prices which are at considerable
discount to prices of imported coal (in kcal terms).
Exhibit 13:Comparat ive prices of coal
Source: CIL DRHP
The company has implemented only four price rises in the past ten years with increases of
approximately 8.5%, 16.2%, 10.0% and 11.0 effective from January 31, 2001, June 15,
2004, December 12, 2007 and October 16, 2009 respectively. Several factors limit CILs ability
to raise coal prices and pass on increased operating costs
Power utilities accounted for 80% of supplied coal in FY10. Any increase in price of
coal increases the cost of generation of electricity. It is unlikely that the buyers,
particularly the SEBs, will be able to pass on the rise in costs to the end consumer.This will further impact their financial health. This underlines CILs limited ability to
raise coal prices and pass on increased operating costs.
NTPC, which accounted for ~27% of CILs coal off-take in FY10, will have to enter
into competitive bidding process for any capacity it installs after April 2011. Any
increase in coal prices under the FSAs may not be completely pass-through (non-
escalable component of fuel cost).
0
200
400
600
800
2005 2006 2007 2008 2009
Rs/mnkcal
Indoesian coal (6,200 kcal/kg) South African coal (6,200 kcal/kg)
Grade E coal from NCL (4,502kcal/kg)
CIL prices at considerablediscount to international coal
prices on an energy equivalent
basis
Limited ability to raise prices
due to sensitive end-use sectors
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Execution risks associated w ith a significant proportion of CILsfuture production
From the base of ~430mn tonnes, CIL aims to grow to 648mn tonnes by FY17 and 770bn
tonnes by FY22. The incremental 340mn tonnes (plus the replacement production due to
decline in existing mines) are expected to come from future projects (currently not operational
or on the drawing board) and expansion in ongoing projects.
Exhibit 14:Product ion targets
Source: Company
The company has shown a remarkable capability to grow its production by ~5% CAGR over
the past 10 years. However, the growth plan envisages a CAGR of ~6% till FY17 and 5% till
FY22, over a larger base. A quick look at the data from Ministry of Statistics and Program
Implementation (MOSPI) reveals that projects with ~55mn tonnes of capacity, which were
expected to be commissioned by FY10, have been delayed by 2-3 years.
Project CompanyCapacity(mn tpa)
Originalcompletion
date
Revisedcompletion
date
Delay(months)
Reason f or d elay
Rajmahal O/C Exp. ECL 17.0 Mar-10 Mar-14 49 Diversion of forest land and delay inEMP clearance
Kulda O/C Exp MCL 10.0 Mar-10 Mar-12 24 Land acquisit ion and rehabilitat ion ofPAPs
Gevra Expansion O/C SECL 10.0 Mar-10 Mar-12 24 N/A
Dipka Expansion O/C SECL 5.0 Mar-10 Mar-14 49 Delay in f inalisat ion of tender and workaward for construction
Lakhanpur O/C Exp MCL 5.0 Mar-07 Mar-11 49 N/A
Krishnashila NCL 4.0 Mar-10 Mar-13 37 Delay in supply of mining equipment
Jhanjhra U/G Ph III ECL 3.5 Nov-09 Mar-15 65 Delay in tender process
Total projectsdelayed
54.5
Source: MOSPI as of April 2010
Note: EMP Environment Management Program, PAP Project Affected Persons
234 226 181 156
197 252 333 334
9
134280
431487
648
770
0
200
400
600
800
2009-10 2011-12 2016-17 2021-22
mntonnes
Future Ongoing projects Existing/completed
Future projects to form a
significant proportion of CILs
production
Several key projects have been
delayed, few by more than 2-3
years
20-37% of CILs futureproduction to come from
future projects
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Key challenges faced by CIL in achieving its stated production targets include:
Land acquisition Under XIth
plan, envisaged land acquisition target was 62,000 hectares.
Against this, CIL was able to acquire only 6,000 hectares until 2010. The target for 12th
plan is
65,000 hectares.
Bulk of the land targeted for acquisition in 11th
plan is tenancy land. Acquisition of tenancy
land suffers from problems such as:
- Non availability of proper records for identification of land ownership
- Lack of support from local and state governments
- Non-uniformity in R&R process
Another key issue is the high proportion of forest land required for coal mining. Currently, the
proportion of forest land in land to be acquired is ~30%. This is expected to go up to 50% in
future years.
Environment and forest clearances Time taken for environment clearance currently
averages about seven years against a normative timeline for 2-3 years. This results in delays in
commissioning of projects.
Lack of evacuation infrastructure at key coalfields
Maximum growth potential exists in North Karanpura (CCL), Ib Valley and Talcher (MCL),
Mand-Raigarh (SECL) coalfields. Key infrastructure projects for coal evacuation have been
delayed, resulting in lack of evacuation capacity at these major coalfields. MCL, CCL and SECL
are the worst affected due to non-availability of key infrastructure.
Railway lineLength
(km)
Projectedcapacity(mn tpa)
AssociatedCoalfield
CurrentStatus Key issues for delay in progress
Tori-Shivpur-Hazaribagh
93 168 NorthKaranpura
10km FC for forest land acquisition
Angul-Kalinga 13 100 Talcher 7km so far Project stalled due to R&Rissues
NTPC dedicatedtrack
60 35 Mand-Raigarh
Master planprepared
Reserve forest
Dharamjaigargto Bhupdeopur
91 35 Mand-Raigarh
Master planprepared
Reserve forest
trans-Mand toKorba
66 36 Mand-Raigarh
Master planprepared
Reserve forest
Source: Company, Status as of March 2010
Note: FC Forest clearance, R&R Rehabilitation and resettlement
Land acquisition and
environment and forest
clearances are the biggest
challenges in project execution
Key evacuation railway projects
have been delayed due to
forest and R&R issues
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Non availability of railway rakes for coal off-take
Transport by rail accounts for ~68% of the coal off-take from CIL. This includes merry-go-
round (MGR) rail systems operated by customers near the pithead. For example NTPC
operates MGR systems for its plants located near Nigahi & Amlohri (NCL) and Lingaraj &
Lakhanpur (MCL) mines.
Exhibit 15:Modes of off-take
Source: Company
Note: Rail transport Includes movement of coal by rail to ports for coastal shipment. Others includes coal transported directly
through conveyor belts / rope ways to pit head customers
CIL dispatch volumes have historically been constrained by inadequate transportation
capacity, including non-availability of adequate railway rakes. For the past three years,
number of railway rakes provided have fallen short of targets and have resulted in lost off-
take to the tune of 13.9mn tonnes in FY10.
Exhibit 16:Availabilit y of railway rakes
Source: Company, Alchemy Research
Note: Calculations based on 3,800tonnes/rake
50% 52% 50% 48% 47%
24% 23% 22% 21% 21%
22% 22% 24% 28% 29%
4% 4% 4% 3% 3%
333 350 375 401 415
2006 2007 2008 2009 2010
mn
tonnes
Rail MGR Road Others
156
163 165
183
153156 155
120
140
160
180
200
FY08 FY09 FY10 FY11
rakes/day
Target Availablity
Availability of rakes limits off-
take
13.99.7
4.2
Shortfall (mntonnes)
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Insufficient rake supplies over the past 2-3 years have led to an increase in pithead coal
inventories at CIL subsidiaries to ~62mn tonnes (~1.5 months of production).
Exhibit 17:Pithead coal stocks at CIL subsidiaries
Source: Ministry of Coal
Availability of wagons will be one of the most critical determinants in CIL off-take in future.
Continued shortage of railway rakes will render any production growth ineffective.
-
10
20
30
40
5060
70
FY06 FY07 FY08 FY09 FY10
mntonnes
ECL WCL NEC SECL NCL CCL BCCL MCL
Pithead coal inventories have
zoomed in recent years
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Coal India Ltd.
Introduction
CIL is the single largest coal producing company in the world and the largest corporate
employer in India. It contributed 81% of Indias coal production in FY10 and meets 42% of
primary energy requirement. CIL has seven coal producing subsidiaries and one division, NorthEastern Coalfields, which mines coal in Assam. CIL is directly under the control of the Ministry
of Coal, Government of India, and is responsible for all corporate, finance, legal and
marketing issues, whereas its subsidiaries are responsible for coal production.
The producing subsidiaries are:
1. Eastern Coalfields Ltd (ECL), in Sanctoria, West Bengal
2. Bharat Coking Coal Ltd (BCCL), in Dhanbad, Jharkhand
3. Central Coalfields Ltd (CCL) in Ranchi, Jharkhand
4. South Eastern Coalfields Ltd (SECL) in Bilaspur Chhattisgarh
5. Western Coalfields Ltd (WCL) in Nagpur, Maharashtra;
6. Northern Coalfields (NCL) in Singrauli, Madhya Pradesh
7. Mahanadi Coalfields Ltd (MCL) in Sambalpur, Orissa.
Central Mine Planning and Design Institute Ltd (CMPDIL) located in Ranchi, Jharkhand carries
out exploration activities for CIL subsidiaries and provides technical and provides technical and
consultancy services to CIL and other coal companies in India
North Eastern Coalfields (NEC), a coal producing unit operating in Margherita, Assam, is
under direct operational control of CIL.
Coal India operational snapshot
No. of M ines
Company UG OC Mixed Total Reserves Resources2010
Production
2017Production
target
Reservelife
(currentreserves)
O/Cproduction
(% oftotal)
Str ippingratio
(FY10)
SECL 68 22 1 91 3,561 10,266 108 165 33 82.6% 1.13
MCL 9 16 0 25 7,574 13,616 104 180 73 97.9% 0.65
NCL 0 10 0 10 1,891 3,480 68 87 28 100.0% 2.63
CCL 24 37 2 63 3,242 11,653 47 85 69 96.9% 1.23
WCL 45 38 2 85 1,168 5,474 46 45 26 79.0% 3.69
ECL 82 19 7 108 878 12,352 30 47 29 72.6% 2.29
BCCL 40 18 23 81 499 7,024 28 35 18 85.8% 2.61
NEC 5 3 0 8 51 353 1 4 45 100.0% 6.50
CoalIndia
273 163 35 471 18,863 64,218 431 648 44 90.0% 1.69
Source: Company, All reserves and production figures in mn tonnes
Note: Raniganj field is attributed to ECL while calculating reserves. BCCL also shares a part of the field
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Coal India Grade-wise coal reserves and resources (mn tonnes)
Measured Indicated InferredTotal
Resources Proved ProbableTotal
ReservesProduction
(2010)Reserve
lifeS-I 41 0 - 42 0 0 1 0.1 6
S-II 275 9 - 285 1 2 3 1.4 2
W-I 407 17 - 424 3 2 5 0.3 16W-II 661 25 - 685 5 7 12 1.6 7
W-III 1,359 218 - 1,577 29 66 95 8.0 12
W-IV 3,238 1,213 78 4,528 316 423 740 24.6 30
Ungraded 1,119 452 12 1,583 31 16 47
Totalcoking coal
7,099 1,934 89 9,123 385 517 902 36.0 25
SC - I 61 - - 61 - 2 2 0.2 18
SC - II 36 3 - 39 - 2 2
Total Semicoking
97 3 - 100 - 3 3
A 647 144 11 802 77 6 82 4.6 136
B 2,392 325 31 2,748 289 99 389 23.7 63
C 4,244 517 48 4,808 468 163 631 44.4 90
D 6,053 834 29 6,916 1,057 430 1,487 34.7 268
E 9,814 2,166 323 12,303 2,736 1,239 3,976 95.7 22
F 15,773 3,473 1,212 20,458 4,426 4,871 9,297 191.9 0
G 5,083 465 129 5,677 1,152 941 2,093 0.0 N/M
Ungraded 125 64 1,095 1,284 4 0 4
Totalthermal
44,130 7,988 2,878 54,995 10,210 7,748 17,957 395.1 45
Source: CIL RHP
S-I & II: Steel grade coal, W-I to IV: Washery grade coal, SC I & II Semi coking coal
N/M Not meaningful
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Location of key coalfields
Company
Command
area
BCCL 1,3
CCL 4,5
ECL 1,2
MCL 7,8
NCL 6
NEC 16
SCCL 15
SECL 9,10,11
WCL 12,13,14
Source: CMPDIL, Geological Survey of India
Note: The map indicates command areas of CIL subsidiaries and Singareni Collieries Company Ltd (SCCL). It is not an accurate
representation coalfields owned by these companies
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C
A
Exh
Alch
EV/tonne
al India
LCHEMY SHARE
pendi
ibit 18:Glo
my Research, Co
-
100
200
300
400
500
-
& STOCK BROKIN
al valuatio
pany, Bloomberg
10
PVT. LTD.
Valuati
Charts bel
(Historical
(Historical
The high
EV/EBITD
between
reserve lif
reserve si
Exhibit 2
Source: Alch
0 30
EBITDA/tonn
EV/Reserves(US$/t)
on of coa
low depict th
and 1-yr for
)
correlation
is the pref
EV/Reserves a
e and value a
e and life.
0:EV/Reserv
my Research, Co
40
-
5
10
15
20
- 10
compani
correlation
ard)
Exhi
Alche
between EV
erred valuati
nd R/P ratios
scribed by in
es Vs R/P ra
pany, Bloomberg
50
EV/tonne
.0 20.0
es globall
of EV/tonne o
it 19:Glob
y Research, Com
tonne of pr
on metric fo
of these co
estors to the
io
-
100
200
300
400
500
-
30.0 40.0
R/P rat
y
f production
l valuation
any, Bloomberg
oduction an
r investors
panies indic
reserves. Thi
10 2
50.0 6
io (years)
to EBITDA/to
(Forward)
EBITDA/to
lobally. A si
tes a low co
s underlines
30
BITDA/tonne
.0 70.0
Ener
2
ne of produ
ne indicates
milar compa
rrelation bet
limited focu
40
80.0 90.0
y
tion
the
rison
een
s on
0
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EV/EBITDA P/E ROE (%)EV/
ReservesR/P
Company Market Cap FV 2011E 2012E 2011E 2012E 2011E 2012E
US$mn US$mn US$/t Years
China
China Shenhua 84,655 83,124 7.8x 6.9x 15.2x 13.5x 19.5 18.5 12.0 32.9
China Coal 22,245 18,370 6.7 5.6 14.3 12.1 15.1 15.5 2.1 80.1
Yanzhou Coal 12,808 13,375 7.2 6.3 11.7 10.2 21.6 21.6 8.4 43.6
US
Peabody 13,263 15,032 7.6 6.1 14.5 10.5 18.1 22.5 1.8 38.8
Arch Coal 4,258 6,013 7.5 5.5 17.7 9.4 9.9 14.6 2.9 17.4
Alpha Natural Resources 4,948 5,243 5.3 4.1 12.0 8.3 10.9 18.0 2.3 49.8
Massey 2,660 3,302 5.7 3.3 25.6 8.1 6.2 22.4 1.4 63.5
Australia
Coal & Allied 8,663 8,383 8.7 6.4 13.4 10.3 33.5 46.9 9.9 44.7
Macaurthur 2,789 2,550 6.6 5.3 12.7 10.0 20.4 20.3 13.9 28.6
Whitehaven 2,412 2,367 15.7 8.2 34.5 16.3 10.5 18.3 7.3 86.7
Indonesia
Bumi Resources 4,660 8,480 6.0 4.6 12.2 8.9 20.3 24.3 2.9 46.1
Adaro 7,336 7,856 6.9 5.3 16.7 11.5 18.5 24.0 8.4 24.2
Bayan 4,252 4,427 18.1 11.3 37.8 20.7 24.5 42.8 9.3 41.8
ITMG 5,284 4,911 8.8 6.6 14.2 10.3 36.9 44.0 17.4 13.2
Median 7.2 5.6 14.5 10.3 18.5 21.6 7.3
Average 8.4 6.1 18.3 11.5 17.6 23.8 6.4
Source: Alchemy Research, Company, Bloomberg
Market data as of 4 October 2010
Global comparables
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Profit and loss account
Year to (Rs mn) FY09A FY10A FY11E FY12E FY13E
Net Sales 407,466 464,129 534,457 574,463 675,741
Raw Materials (1,336) (6,672) 0 0 0
Employee Cost 197,421 166,555 171,252 205,982 211,790
Other Expenses 166,369 182,897 175,460 195,035 219,132
Total Expenditure 362,454 342,780 346,712 401,017 430,922EBITDA 67,421 152,273 187,745 173,446 244,819
Other Income 31,613 34,426 24,436 24,961 29,898
Interest 28,447 26,940 1,530 1,434 1,338
Depreciation 16,629 13,138 18,423 20,535 22,648
PBT 78,853 169,214 192,229 176,437 250,731
Total tax 36839 44332 65,358 59,989 75,219
PAT 42,232 125,794 126,871 116,449 175,512
Less: Adjustments 0 0 0
Adjusted PAT 40,628 98,294 126,871 116,449 175,512
Balance sheet
Year to (Rs mn) FY09A FY10A FY11E FY12E FY13E
Equity capital 63,164 63,164 63,164 63,164 63,164
Reserves & Surplus 126,918 195,289 287,905 372,912 501,036
Net worth 190,081 258,437 351,069 436,076 564,200
Minority interest 19 236 236 236 236
Total debt 21,485 20,869 19,128 17,929 16,730
Total 223,824 294,316 388,707 476,015 606,440
Net block 110,088 120,310 139,887 165,852 181,204
Capital WIP 18,223 20,909 20,909 20,909 20,909Total fixed assets 129,283 142,416 161,994 187,958 203,311
Investments 15,052 12,823 72,823 72,823 72,823
Net Working capital (227009) (261359) (218763) (215005) (219194)
Current Assets 469,364 543,244 539,013 603,299 750,245
Inventories 36,669 44,018 43,928 47,216 55,540
Debtors 18,475 21,686 21,964 23,608 27,770
Cash & bank 296,950 390,778 355,980 406,565 518,827
Other Current Assets 117,271 86,762 117,141 125,910 148,108Current Liabilities &Provisions 399,423 413,825 401,796 411,739 450,613
Creditors 8,663 7,725 7,725 7,725 7,725
Other liabilities 315,251 325,193 364,067
Provisions 116,733 82,396 78,821 78,821 78,821
Net Deferred Tax Assets 9,548 9,658 9,658 9,658 9,658Miscellaneous Exp - - 0 0 0
Total 223,824 294,316 381,691 461,999 585,424
Source: Alchemy Research, Company
Ratios
Year to (Rs mn) FY09A FY10A FY11E FY12E FY13E
% of net sales
Raw material costs 0 -1 0.0 0.0 0.0
Employee costs 46 34 32.0 35.9 31.3
Total expenses 34 31 64.9 69.8 63.8
EBIDTA 16 31 35.1 30.2 36.2PAT 5 20 23.7 20.3 26.0
Asset based ratios (%)
ROCE 13 41 50.0 35.7 41.3
ROE 11 43 41.6 29.6 35.1
Turnover ratios (days)
Debtor days 15 15 15 14 14
Inventory days 30 30 30 29 28
Creditors days N/M N/M N/M N/M N/M
Working capital days 54 75 91 104 133
Growth ratios (%)
Net Sales 19 13 10.2 7.5 17.6
EBITDA -27 126 23.3 (7.6) 41.1
EPS -5 142 29.1 (8.2) 50.7
CEPS -24 136 4.6 (5.7) 44.7
Per share (Rs)
EPS 6.4 15.6 20.1 18.4 27.8
CEPS 9.3 22.0 23.0 21.7 31.4
BV 30.1 40.9 55.6 69.0 89.3
DPS 2.7 3.5 4.0 3.7 5.6
Valuations (x)
P/E N/M N/M N/M N/M N/M
P/CEPS N/M N/M N/M N/M N/M
P/BV N/M N/M N/M N/M N/M
Yield (%) N/M N/M N/M N/M N/M
EV/EBITDA N/M N/M N/M N/M N/M
EV/sales
Solvency ratiosCurrent ratio 1.2 1.3 1.3 1.5 1.7
Quick ratio 0.7 0.9 0.9 1.0 1.2
D/E ratio 0.1 0.1 0.1 0.0 0.0
Interest coverage ratio 17.9 78.7 111.6 107.7 167.1
Cash f low statement
Year to (Rs mn) FY09A FY10A FY11E FY12E FY13E
PAT 20,758 96,224 126,871 116,449 175,512
Add: Depreciation 16,629 13,138 18,423 20,535 22,648
Add: Interest expense 1,565 1,365 1,530 1,434 1,338
Less: Other income (31,613) (34,426) (24,436) (24,961) (29,898)
Change in working capital 74,373 34,350 (42,596) (3,758) 4,189Others - - 0 0 0
Cash flow from operations 81,712 110,651 79,792 109,699 173,789
Change in fixed assets (25,841) (26,272) (38,000) (46,500) (38,000)
Change in investments 2,127 2,228 (60,000) 0 0
Other income 31,613 34,426 24,436 24,961 29,898
Others - - 0 0 0
Cash flow from investing activities 7,899 10,383 (73,564) (21,539) (8,102)
Change in debt 2,646 (616) (1,741) (1,199) (1,199)
Dividend & dividend tax (22,548) (29,871) (34,255) (31,441) (47,388)
Change in equity & share premium - - 0 0 0
Interest paid (1,565) (1,365) (1,530) (1,434) (1,338)
Other Adjustments (1,671) (109) 0 0 0
Cash flow from financing activities (23,138) (31,962) (37,526) (34,074) (49,926)
Change in cash & cash equivalents 69,253 91,607 (34,798) 50,585 112,262
Opening cash and cash equivalents 209,615 296,950 390,778 355,980 406,565
Source: Alchemy Research, Company
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