morning note 141010

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Morning NotOctober 14, 20

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Contents

Coal India Ltd. Company Note

Headlines

NTPC plans to set up a merchant power capacity of around 6000MW by 2

(Mint)

The Government has asked Cairn Energy to resolve cess, royalty and oil

management issues before its stake sale. (ET)

The holders ofStandard Chartered Banks IDRs will not be able to subscrib

its$5.3bn rights issue but will be distributed the gains arising out of the sa

their entitled shares post the rights issue. (BL)

Mahindra Satyam has secured a contract to provide IT services to the sta

Kentucky,US over a period of 20 months . (Mint)

The DoT is considering merging 22 telecom circles to a single license with

India coverage or to four regional zones. (BL)

The Government reportedly plans to propose new SIM card delivery model w

involves mailing SIM cards and personal ID numbers separately to customers.

Shipping Corp. of India Ltd is planning to pick up a stake in a deepw

seaport at Vizhinjam and is in the process of raising Rs13bn via a FPO. (Mint)

The Union Government plans to sell 10% in IOC and 5% in ONGC next

(Mint)

JSW Steel Ltd is considering spinning off its overseas ore and coal assets to

expansion. (Mint)

Adani Group is reportedly in talks with CIL to develop the recently bo

Australian mines. (Mint)

Bajaj Holdings and Investment Ltd has acquired a 12.82% stake in NMC

Rs250m. (Mint)

Kumar Mangalam Birla plans to raise his stake in Aditya Birla Nuvo Ltd to

from the current 46% by December. (Mint)

The Government has decided to set up an Rs8bn fund to encourage banks to r

out to the financially excluded population. (ET)

Yes Bank increases deposit rates by 25bps to 7.5% from 7.25%. (BL)

Tata Motors Ltd plans to launch new light commercial vehicles by the first ha

FY12. (Mint)

HSIL plans to invest Rs3.5bn in the next 30 months for capacity expansion. (B

Gayatri Infra plans to raise around Rs15bn debt to fund a road project in An

Pradesh. (ET)

MagmaFincorps net profit up by 28% at Rs11.4bn for 2QFY11. (BL)

Castro l Indias net profit up y 22.3% at Rs1.16bn for the 2QFY11 against Rs9

a year ago. (ET)

IGates net profit up by 61% in its 3QCY10 results at $143m. (Mint)

Sensex

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Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

BSE Volumes (Rs. bn) Sensex

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Morning NInstitutional Research

Page

From the Blogosphere

Foreign Policy: Think Again : Global Aging(Source)

A gray tsunami is sweeping the planet -- and not just in the places you expect. H

did the world get so old, so fast?

"The World Faces a Population Bomb."

Yes, but of old people. Not so long ago, we were warned that rising global populat

would inevitably bring world famine. As Paul Ehrlich wrote apocalyptically in his 1

worldwide bestseller, The Population Bomb, "In the 1970s and 1980s hundreds

millions of people will starve to death in spite of any crash programs embarked u

now. At this late date, nothing can prevent a substantial increase in the world de

rate." Obviously, Ehrlich's predicted holocaust, which assumed that the 1960s glo

baby boom would continue until the world faced mass famine, didn't happen. Inste

the global growth rate dropped from 2 percent in the mid-1960s to roughly half t

today, with many countries no longer producing enough babies to avoid fal

populations. Having too many people on the planet is no longer demographers' c

worry; now, having too few is.

It's true that the world's population overall will increase by roughly one-third over

next 40 years, from 6.9 to 9.1 billion, according to the U.N. Population Division.

this will be a very different kind of population growth than ever before -- driven

by birth rates, which have plummeted around the world, but primarily by an incre

in the number of elderly people. Indeed, the global population of children under

expected to fall by 49 million as of midcentury, while the number of people over

will grow by 1.2 billion. How did the world grow so gray, so quickly?

Salmon: The enormous mortgage-bond scandal(Source)

You thought the foreclosure mess was bad? Youre right about that. But it gets

much worse once you start adding in a whole bunch of parallel messes in the worl

mortgage bonds.

The key firm here is Clayton Holdings, a company which was hired by var

investment banks Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehm

Brothers, Morgan Stanley, Deutsche Bank, everyone to taste-test the mortg

pools they were buying from originators.

Heres how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with

intention of slicing it up into mortgage bonds and selling those bonds off to invest

at a profit.

After submitting the winning bid, the bank would commission Clayton to take a clo

look at a representative sample of loans in the pool. Clayton controlled as much

70% of the market for this service, which is known as third-party due diligence.

Claytons not at fault here, and the problem is likely to apply no matter w

performed this service.

The size of the representative sample would vary according to the size of the l

pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentia

Clayton would go back to the loans, one by one, and re-underwrite them after

fact, checking that the originators underwriting standards were in fact being uphel
http://www.foreignpolicy.com/articles/2010/10/11/think_again_global_aginghttp://www.foreignpolicy.com/articles/2010/10/11/think_again_global_aginghttp://www.foreignpolicy.com/articles/2010/10/11/think_again_global_aginghttp://www.foreignpolicy.com/articles/2010/10/11/think_again_global_aginghttp://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/http://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/http://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/http://blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/http://www.foreignpolicy.com/articles/2010/10/11/think_again_global_aging

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Materials & Minin

Coal India LtdCompa ny Not

HDFC Securities Research is also available on Bloomberg HSLB

October 14, 2010

Issue Snapshot

Size (mn shares) 631.6

Price Band (INR) 225-245

Issue opens 18-Oct-10

Issue closes 21-Oct-10

Market cap (in INR bn) 1547.42**

** - At higher of the price band

Ownership (% )

Pre issue

Government of India 100

Post issue

Government of India 90

Public 10

Dicksey Mathew

[email protected]

91-22-6171 7320

Indian Coal Coal shortage expected, logistics another concern

India experienced a shortage of coal in the past with a deficit of 47mt in FY200

56mt in FY2009 and 50mt in FY2010. We forecast this deficit to rise to 220mt b

FY14, with supply lagging demand. Overall, we forecast Coal demand to reac987mtpa by 2014, which is an additional 404mtpa from todays demand. W

believe, Coal India Limited (CIL), the worlds largest producer, to bring in 119mtp

of additional capacity, which still leaves a gap of 285mtpa of unfulfilled deman

This gap can be met either through captive mining or through imports.

Due to regulatory and logistic issues, we would expect captive players to increa

their production by 64.6mtpa leaving a deficit of 220mtpa. Import seems the on

solution. However lack of sufficient port capacities could lead to stiff hurdles to th

import route. The Indian Ports Association has started work on increasing t

capacity of Coal terminals by 17.3mtpa. This, as per our forecast can cater to on

50% of the additional current fiscal import requirement of 34mt. We do not see po

capacity gearing up soon enough to meet the incremental import requirement. Th

we expect the severe shortage of coal in the Indian subcontinent to persist.

Coal India w orlds largest coal producer

Coal India is the largest coal producer in the world with a production of 431Mt

FY2010. It has an average of 30mtpa of incremental annual capacity coming onlin

for next four years. It is one of the lowest cost producers in the world with USD16

(INR745) which is half the global average. The company has INR390bn cash a

insignificant debt. We believe that CIL is slated to benefit the most from the India

coal scenario.

Play on I ndias coal shortage

We believe Coal India will be a compelling play on the Indian commodity sect

given its significant size (Post issue market cap of US$35bn). Commodities hav

experienced a very good run in the recent months; a large part of which we belieis due to passive investments. Investors could use coal as a safe sector play, give

the fundamentally strong Indian demand. Global coal players see the mark

tightening due to the Asian coal demand. Coal Indias distinct geographic

advantage of being the largest player globally and in India, we believe would be

distinct interest to global investors.

IPO valuations remain attractive - SUBSCRIBE

We estimate CILs fair value at Rs324 implying an attractive 32% upside to th

higher-end of the IPO price band. We have considered EV/ (ton of production) f

leading global thermal coal producers and applied a 67% discount factor to accou

for the low calorific value of Indian Coal and inefficient pricing.

Key risks: inefficient pri cing, production losses, capacity expansionsCILs pricing based on Fuel Supply Agreement is not determined by market forc

thus making it inefficient. Over the last decade, CIL announced four price increas

resulting in a net 54% increase. In the same timeframe global thermal co

experienced over 200% increase in price. We believe that this pricing mechanis

could therefore fail to reflect the true value of the company.

Secondly, we have concerns regarding its production and capacity expansion

Some of CILs subsidiaries operate in politically troubled areas, which have an

could lead to production losses. The capacity expansion plans depend on politic

and regulatory approvals. Any delay could hamper the timelines set for addin

capacity.

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Coal India Ltd. Company NotInstitutional Research

Page |

Indian Coal Widening deficit

Demand : 70% increase over the next 4 years

Planning Commission Coal to

account for 50% of energy needs by

2032, currently at 55%.

Coal accounts for 55% of Indias energy needs and we expect that it will continue

contribute significantly, given the rich resource base and lack of competin

resources. The Planning Commission forecasts coal to account for 50% of thprimary commercial energy consumption by 2032.

The figure below provides the share of coal consumed by different sectors.

Chart 1: Coal consumption by diff erent sectors

Source: Coal RHP

All these sectors are undergoing high capacity additions, owing to the boomin

Indian economy.

52 GW of Coal based power

translating into 658mn tonnes by FY

2014

Power sector would see an addition of 66GW FY2014, of which Coal based pow

addition, is forecast to be 52GW. This converts to a coal demand of 658mtpa b

FY2014 as against the FY2010 figure of 411mtpa.

Chart 2: Capacity additions in Pow er Sector in GWs by 2014

86

17

1

37

516

162

138

24

3

44

516

231

0

50

100

150

200

250

Coal Gas Diesel Hydro Nuclear RES Total

Jun-10 FY2014E

(GW)

Source: CEA, June 2010 Power Scenario, CIL DRHP

Coking coal7%

Non Coking -Power64%

Non Coking -Captive

7%

Non Coking -Cement

3%

Non Coking -Steel4%

Non coking -Others15%

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Page |

The table below provides the estimated additional demand requirement by th

different sectors.

404 mn tonnes of additional coalrequirement by 2014

Table 1: Additional coal requirement by FY2014

Mn tonnes Additional units FY2010 FY2014E Additional Coal demand by FY201

Power (Coal) GW 86 138 220

Steel mn tonnes 74 139 74

Cement mn tonnes 224 447 21

Others (Incl captives) 88

Source: Cement Manufacturers association, CEA, HDFC Sec. Institutional Research

Chart 3: Coal demand from FY2008 till FY2014E (in mn tonnes)

Source: CIL DRHP, HDFC Institutional Research

Supply beset w ith problems

India is the third largest producer of Coal in the world with a production of 492.8m

tonnes in FY2009 and a projected production of 532.06Mt in CY2010. This is ne

to China at 3050mn tonnes and US at 973mn tonnes.

As on April 1 2010, the geological survey recorded that India has 276.81bn tonne

of coal resource. IEO in its 2010 report states that India has around 7.1% (64.6 b

ST as against 909.4bn ST) of the world's total recoverable reserves. Of India

proven reserves, 84% is non coking coal, 12% is medium coking coal, 4% prim

coking and 1% semi coking coal.

Demand to grow by 70% and supplylagging at 30%

However the supply side would find it hard to match the soaring demand. While w

forecast 70% demand increase by FY2014, we expect supply to increase by

modest 30% creating a wide gap.

0

200

400

600

800

1,000

1,200

FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Non coking -Others Non Coking -Steel Non Coking -Cement

Non Coking -Captive Non Coking -Power Coking coal

(Mn tn)

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Chart 4: Capacity Forecast by CIL and others till FY2014

Source: CRISIL Coal Outlook, CIL DRHP, HDFC Institutional Research

While Coal India Limited is expected to increase its production by an average

30mnt tpa for the next four years, there arises a need for an average of 101m

tpa. This creates the real gap.

While the captive players would step in, we believe the gap too large to fill in. W

would expect captive capacity addition of an average of 16mtpa on an optimist

note and an average of 10-11mtpa on a conservative note.

Hurdles for timely capacity addition

Coal capacity addition is rife with problems, which are regulatory, logistics relate

and access related.

The regulatory hurdles would be related to land and surface access clearances

actually start using coal reserves. This coupled with delays in allocation of co

blocks would hamper capacity expansions.

Of the allotted mines, only few have commenced operation. According to th

Ministry of Coal, only 15% of the allotted mines are currently operational. Po

allocation it takes an average of 4-5 years to commence commercial operations.

Assuming that the regulatory and governmental sanctions are in place, logisti

assumes a huge hindrance. According to CIL, there have been delays in dispat

due to shortage of rail capacity. Therefore it would seem further difficult to mana

the transport logistics with captive capacity additions.

Annual plan revised productionforecast downward twice

The 2010-11 Annual Plan has revised its targets for the production, downward tw

in the recent past. As against the original production target of 680mn tpa and th

first revision of 630mn tpa, the latest assessment target stands at 592mn tpa.

We expect Coal India to add 119mtpa by FY2014.

379 404431 461

487 534551

41 45 50

4647

50 50

3744

5066

9698

115

0

100

200

300

400

500

600

700

800

FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Others SCCL CIL

(Mt)

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Chart 5: Year w ise capacity addition by CIL

Source: Annual Plan 2010-11, HDFC Institutional Research

We expect SCCL to operate at current capacity. The captives are forecast to grow

16% adding another 41.6mtpa. This leads us to our estimate of a realistic capaci

addition of 161mtpa.

Demand Supply Gap

We forecast the demand supply gap which was at 50.2mtpa last fiscal to gro

almost six folds to 293mtpa. We expect a surge in the imports in the years

come. Global coal players are extremely bullish on the Indian Coal demand an

expect that it would hold a significant role in spot and contractual pricing of coal.

Chart 6:Realistic capacity addition vs. Estimated and Deficit (in mtpa)

294mn tonnes of deficit pa byFY2014

Sources: Annual Plan 2010-11, CIL, HDFC Institutional Research

29

26

47.5

16.8

0

20

40

60

80

100

120

140

FY11E FY12E FY13E FY14

(Mt)

572630

682 716

572 592644

693

83.9 121.5213.0

293.9

0

200

400

600

800

1,000

1,200

FY11E FY12E FY13E FY14E

Supply planned Realistic Supply Demand Def ici t

(mtpa)

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Coal India Limited

Company Background

Largest producer of Coal with a

production of 431.2mn tonnes in

FY2010

Proven reserve base of 52.5bn

tonnes

Coal India is the largest producer of Coal in the world with a raw coal production

431.26mn tonnes in FY2010, accounting for 81.9% of Indias coal output. Of t

production, 90.6% was non coking coal and the rest metallurgical coal. Coal Ind

operates 471 mines across 21 major coalfields and eight states in India. It is

government owned enterprise. It does not have any significant competiti

domestically.

The company has a proven reserve base of 52.5bn tonnes, with a reserve life

114 years, the highest globally.

Table 2: Production and reserve base for global players

Production volume(mn tonnes)

Reserve (mntonnes)

Number of yearof life

Coal India Limited 460.5 52546 11

China Shenhua 210.3 11306 5

China Coal 77.46 8700 11

Xstrata 82.6 4487 5

Peabody 210.8 4159 2

BHP Billiton 66.1 2947 4

Anglo American 69.3 1783 2

Coal and Allied 18.9 1479 7

Yanzhou Coal 3.18 98.3 3

Source: Company data, HDFC Institutional Research

Production CAGR 5.9% over the

last commodity cycle.

Coal India Limited has a history of methodically increasing the production b

growing 6.4% even during the last commodity cycle downturn, starting in 2008 a

ending mid 2009.

Chart 7: Coal Production i n mn tonnes(FY2006-FY2014E)

Source: Coal India RHP, HDFC Institutional Research

343361

379404

431461

487

534 551

0

100

200

300

400

500

600

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E

(Mn tn)

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In FY2010 The company sold 415mn tonnes of coal, of which 92% was non cokin

coal.

Table 3: Sales of Coal India from FY2007 to FY2010

Sales in mn tonnes Mar-07 Mar-08 Mar-09 Mar-1

Total Non-coking coal 326.2 349.32 373.24 381.0Total Coking Coal 24.1 25.25 27.51 34.1

Beneficiated Non-coking Coal 10.25 10.58 11.21 11.6

Beneficiated Coking Coal 3.90 3.88 3.70 2.9

TOTAL 350.3 374.57 400.75 415.2

Source: Coal India DRHP

Coal India P ricing

Pricing of two kind FSAs and E-

auctions

CILs pricing depends on two factors grade of coal and mode of pricing.

The company prices its coal based on either fuel supply agreements (FSA),

auctions or any specific MoUs with customers. The pricing accounts for the differe

grades of coal.

FSA Pricing

FSA Significantly less than market

price

The company enters into FSAs with large customers by basing it on a number

factors like inflation, production cost increases that cannot be offset throug

efficiency measures, project viability and to a small extent on the price of th

imported coal. The prices are notified from time to time.

Coal India Linkages

Coal Linkages are decided by two linkage committees the Standing Linka

committee (Long term) and Standing Linkage Committee (Short Term). The lon

term coal linkage committee decides on the coal allocation to the customers base

on the initial capacity plans of the customers. The short term coal linkag

committee decides on quarter to quarter allocation to the customers based on co

production and logistics involved around the time.

Coal linkages are allocated to CILs customers as follows:

Defense and railways: To receive their full normative coal requirement

accordance with the prevailing system at the price notified by CIL.

Other consumers: Classified based upon their entitlement through the FSAs

Power utilities, (including independent power producers and captive pow

plants) and fertilizer sector are entitled to receive their full normative co

requirement through FSAs;

All other customers are entitled to receive 75.0% of their normative co

requirements through FSAs, while they can meet their remaining 25.0

requirement at their option, through CILs e-Auction scheme or throu

import of coal.

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Penalty for falling short of annual contracted quantity (ACQ)

ACQ shortfalls would mean

importing coal or paying penalty

Currently CIL receives incentives for

delivering 96% of ACQs

According to FSAs entered into, CIL is expected to compensate for falling short o

delivering the ACQ. We believe that Coal India would have to import coal at glob

prices on two conditions:

More customers being allotted to CIL (power sector is gearing up, so is steand cement) and CIL not being able to ramp up production as planned to me

the timely delivery

CIL not being able to deliver due to logistic concerns.

Currently, CIL has an ACQ delivery of 96%, and received incentives for deliverin

more than 90%.

CIL increased price by 54% over the

last decade while global thermal coal

increased by over 200%

Overall, we believe that the FSA pricing mechanism brings in inefficiencies. CIL h

raised the coal pricing four times post the coal deregulations resulting in a n

increase of 53.9% while global coal price experienced an increase of over 200%

the same time frame.

E-auction pricing

E-auction pricing reflects market

realities

E-auction prices are significantly higher than the FSA pricing, since this is pegged

the market price of imported coal. E-auction however accounts for only 11-13%

the coal sold but accounts for more than 16% of the sales revenue, due to the hi

price received. Though increasing the share of E-auctions would work to CIL

advantage, it has a mandate to sell only 10-12% of its coal through E-auctions. T

remaining quantity falls under FSAs.

Table 4: FSA pricing vs. E-auction

FY10 FY09 FY0

Volume sold under E-auction (mn ton) 45.73 48.87 28.7

Volume share under E-auction 11.6% 12.9% 8.9%Sales revenue thru E-auction (in INR mn) 72,385 72,371 38,77

Sales share through E-auction 16.2% 18.7% 11.9%

Pricing (in INR per ton)

Average Sales price of raw coal 1,045.26 925.73 841.1

Average sales price : E-auction 1582.9 1,481 1,34

Average sales price of beneficiated coal 2,134.21 2,267.49 1,890.2

Source: Coal India RHP

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Coal India Logistics

Rail accounts for 48% of transport The Companys main mode of transport for coal is the Rail network, which accoun

for 47.6% of transport. It transports 20.8% of coal through rails owned an

operated by customers (MGR). Road accounts for 30%.

Chart 8: Mode of Coal Transportation (FY2006-FY2010)


Financial Performance

EBITDA Margin at 29.3%

competitively placed on a global

scale.

The company recorded revenue of INR525.9bn and an EBITDA of INR154.2bn.

Coal India has a lower EBITDA margin mainly due to the low pricing as compared

global peers. We expect the margin to increase on two conditions

By increasing the quantity of washed and beneficiated coal, thereby increasi

the average pricing

By increasing the price of raw coal produced, more frequently than the curre

trend. CIL has raised its coal prices only 4 times in the last decade.

EBITDA margins for global peers for last fiscal are provided below.

Table 5: EBITDA Margins and Production volumes of Global peers

Thermal Coal EBITDA Margin Production volume (mn tonnes

Xstrata 42.6% 82

Coal and Allied 37.8% 18.95

China Shenhua 36.5% 210

Anglo American 35.1% 69

Yanzhou Coal 34.6% 3.1

Coal India Limited 29.3% 460

Peabody 24.9% 210

China Coal 24.7% 77.4

BHP Billiton 20.7% 66

Source: Company Data, HDFC Institutional Research

49.8 51.6 50.5 47.9 46.7

24.2 22.5 21.6 20.6 20.8

22.1 22.2 24.4 28.2 29.5

3.9 3.7 3.5 3.3 3.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY06 FY07 FY08 FY09 FY10

Others Road MGR Rail

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Table 6: Financial Summary

Financial Summary FY10 FY09 FY0

Revenue (in mn INR) 525,923 460,641 386,16

Change YoY 14.2% 19.3%

EBITDA 154152 75581 9870

EBIT 141014 58952 8340

Net Income 96224 20787 5243

EBITDA Margin 29.3% 16.4% 25.6%

EBIT Margin 26.8% 12.8% 21.6%

Net Margin 18.3% 4.5% 13.6%

Capex

Capital expenditure (in mn INR) 26,750 26,678 22,33

Capex as % of sales 5.1% 5.8% 5.8%

Ratios

Basic EPS 15.56 6.43 6.7

Return on net worth 38.03% 21.37% 24.91%

Net asset value per share 40.92 30.09 27.2


Investment Rationale

Indian coal demand to increase more than supply

Indian coal industry is well poised for growth and Coal India being the domina

player is in an excellent position to benefit. An upbeat economy, coupled wi

staggered capacity expansion plans and lack of competition, we believe wou

propel the companys value northward.

Good pipeline of Capacity expansion and Greenfield projects

INR 101bn of capex approved Coal India has 77 capacity expansion projects with a capex of INR 110

approved, which would eventually increase the capacity by 184.7mn tonnes. Of t

77 projects, 45 are in different phases of implementation.

The Company also has plans for building seventeen beneficiation plants, 12 fcoking coal and 5 for non coking coal.

Table 7: Capacity addition and Approved Capex

FY11E FY12E FY13E FY14-1

Capex (INR bn) 38 46.5 25.6 N

Capacity addition (mn tonnes) 29 26 47.5 81

Source: CIL RHP

Low cost producer, to further increase margins

Cash cost lowest among global peers Coal India is one of the lowest cost producers of thermal coal globally. Based on t

2010 fiscal data, Coal India had cash cost of 745 INR per ton. Using an Fx rate

47.4, it translates into USD 15.7. CIL produces 90% of its coal from surface min

and the rest from underground mines. Cost of surface mining is only 18-19%

cost of underground mining.

Table 8: CILs average cost of Surface and Underground mining

Cash cost per ton of raw coal (INR) FY10 FY09 FY08 FY0

Surface 520 507 476 44

Underground 2796 2660 2584 225

Average cost per ton 745 738 715 66

Source: CIL RHP

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Employee cost accounted for 41% of the total cost in FY2010. CIL has t

advantage of low cost labour in India as compared to other global producers.

We further expect a significant increase in margins from FY2013-14, due to thre

reasons:

The company has plans to increase the percentage of washery grade coal. T

management plans to increase the percentage of washed coal to 40% from tcurrent 8.4% by FY2017, which as per the company guidance would be 300m

This will help the company to improve its average selling price, since washe

coal fetches high price. It guided to a capex of USD800mn over the next fi

years to build 20 washeries. The company however expects to price t

washed coal at a 10-15% discount to imported coal, as a customer retentio

tool. The washed coal will start flowing in from 2013-14.

We expect the E-auction price to increase significantly, since the en

customers would bid aggressively, due to the rising demand.

The company expects to reduce their manpower, as they marginalize some

their high cost underground mines. CIL has a proven record of doing so,

they registered a 10% reduction in manpower from 2007-2010.

Strong cash position, possibilities for overseas exploration

Cash balance of INR 390.8bn, with

negligible debt

As on 31 March 2010, the Company had INR 390.8bn as cash balance. The debt

a meager INR 20.8bn. This will allow it finance new expansions and explorations

acquisitions without leveraging the books. It has a joint venture ICVL, with SAI

NTPC, NMDC and RINL to explore coal assets outside India. Coal India has al

established a division called Coal Videsh, which would cater to sourcing of coal fro

International markets to meet the demand supply gap.

Valuation

We believe that the price band of INR 225-245 has a significant upside. We ha

considered leading global thermal coal producers and arrived at a weighted avera

EV/ (ton produced). Based on this methodology, we have a global average of US

268.

Table 9: EV / ton produced of global peers

Production (mn tonnes) EV (in USD bn) EV/ to

Peabody 210.8 15.31 72

China Coal 77.5 22.20 286

Consol Energy 59.5 12.64 212

Coal and Allied 19.0 9.23 487

Yanzhou Coal 36.3 18.69 514

Shenhua 210.3 86.42 410

Source: Company data, Bloomberg, HDFC Institutional Research

However, since Indian coal has a low calorific value (3650units vs. global pe

average of 5600units), we have applied a discount of 0.35. This gives us a factor

0.65. Further, since CIL sells its coal at a discount to global prices, we app

another discount of 0.5, thus arriving at an EV/ton multiple factor of 0.33. W

arrive at a price target of INR 324 per share.

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Table 10: Valuation methodology using EV/ ton of production

Valuation based on EV/ ton produced

Peer Average - EV / Ton produced (USD) 268

Coal India

Production (FY2010) in mn tonnes 43

Factor for low calorific value 0.65

Factor for price discount vs. global price 0

Multiple applied to EV/ton produced 0.3

USD - INR Fx assumed 44

Number of Shares (in mn) 6316

EV based on tonnes produced ( bn USD) 37

Coal India EV in INR bn 167

Minus Net debt and Minorities (INR bn) -37

Value to equity Shareholders (100% basis) INR bn 2049

Value per share (in INR) 32

Source: HDFC Institutional Research, Bloomberg

Risks

We see the three eminent risks as meeting production targets, setting logistics

place and probability of a dwindling coal market.

Margin maintenance to be main focus

Production targets

As stated in the Investment rationale, Coal India has an ambitious and w

staggered pipeline of projects at different phases. The main challenge would be

implement the same as planned, given the regulatory approvals and various lan

clearances required. While implementing the production, focus needs to be on t

cost control aspect. Given that the five largest customers of Coal India are pub

sector companies, we would expect fair amount of check on price increase.

Rail network critical for timely

delivery and historically a constraint

Logistics Transportation and coal handling and loading infra critic

factors

Historically there has been a constraint in transportation and mine infrastructur

hindering the quantity of dispatch as mentioned in the RHP, Our dispatch

dependent on the availability of adequate coal transportation capacities and th

efficiency of coal handling and loading infrastructure at our mines. The success

our expansion projects will also depend on our ability to access or develop adequa

additional coal transportation and coal handling and loading infrastructure.

Clean energy and global recovery

trigger points for depressing import

prices

Global coal trend cleaner energy alternatives and slow recovery

Global economic recovery has very high sensitivity to coal demand. During 200

2009, thermal coal has seen highs of USD 200 and above in mid 2008 versus low

of USD 68 in early 2009. A significant contributor of the high prices was freig

charges. The trend could repeat in the event of a faster than expected recovery

global economies. The reverse could make imports significantly cheaper than Co

Indias prices.

Clean energy initiatives are becoming of increasing significance. Many of t

European countries have set targets to move to cleaner energy and oth

alternatives (like nuclear energy). Any regional policy accelerating this could affe

coal demand worldwide. This coupled with a slow recovery would depress therm

coal prices globally, thus trickling into the Indian market through a low impo

price.

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Institutional Research

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