COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
Coal India Ltd. Subscribe
IPO NOTE
IPO Details Coal India (CIL), a state-owned company, was established in 1973. CIL,
Face Value Rs. 10 along with its seven coal mining subsidiaries is the largest coal mining
company in the world in terms of coal reserves as well as in scale of
Price Band (Rs.)(5% discount for retailers) Rs. 225- 245 operations. In FY10, it produced 431 mn tonnes of coal which accounted
Issue Opens 18-Oct-10 for 81% of the coal production in India.
Issue Closes 21-Oct-10
CIL's has an excellent business track record. Some of the key features
Citigroup Global Markets India Pvt. are :
BRLM Ltd., Deutsche Equities India Pvt.
Ltd., DSP Merrill Lynch Ltd., Enam z Coal India is the largest producer of coal in the world. It owns 48%
Securities Pvt. Ltd., Kotak Mahindra of India’s proven reserves and contributes over 81% of the total coal
Capital Company Ltd., Morgan production in India.
Stanley India Company Pvt Ltd.
Registrar to issue Link Intime India Pvt Ltd z Under the "Eleventh Five-Year Plan", India plans to add power
generation capacity of 78 GW. Nearly 67% of this capacity is coal-
Issue Size (In mn.) 631.63 Equity Shares
based, indicating that the demand for coal would primarily come
from the power sector.
Pre issue shareholding pattern
Shareholders % Stake z The company has identified 45 coal mining projects which are under
The President of India various stages of planning and development for implementation in
100.0%
Eleventh and Twelfth five-year plans. Of these, 25 projects with
estimated production of 47.51 MTPA and capex requirement of Rs
Post issue shareholding pattern
33.9 bn are expected to become operational by end- FY12.
Shareholders Lower End
The President of India z CIL has a net worth of Rs 258bn and a net cash balance of Rs
90.0% 390bn which will more than sufficient to finance its growth plans.
Non-Promoter Group 10.0%
Valuation and Recommendation
Allocation (No. of shares) Lower End Upper End
We value the stock at Rs. 317 by using the DCF method (WACC:
QIBs 284.2 284.2
13.50% and Terminal Growth 5%), which offers an upside of 41%
Non-Institutional 85.3 85.3 over the lower end of the price band and 30% at the upper end.
Retail 199.0 199.0 Going forward, we expect CIL’s consolidated revenues and PAT are
likely to grow by 10% to 12% from FY11E to FY15E.
Employee 63.16 63.16
Year End FY10 FY11E FY12E FY13E FY14E FY15E
IPO Details Lower End Upper End
Net Sales (Rs mn) 473,515 520,469 575,298 636,220 703,919 779,154
Price Band Rs. 225 Rs. 245 PAT (Rs mn) 98,337 103,614 115,755 129,960 146,379 165,347
NPM (%) 20.77 19.91 20.12 20.43 20.79 21.22
Shares prior to issue (mn) 6,316.3 6,316.3
EPS (Rs) 15.57 16.40 18.33 20.58 23.17 26.18
Offer for sale (mn) 631.60 631.60 Debt/Equity 0.08 0.08 0.08 0.08 0.08 0.08
Total Equity Shares (mn) 6,316.3 6,316.3
P/E (x)(UB) 15.74 14.94 13.37 11.91 10.57 9.36
P/E (x)(LB) 14.45 13.72 12.28 10.94 9.71 8.60
Share Capital (mn) Rs. 63,163.1 Rs. 63,163.1 P/BV (x)(UB) 5.99 4.72 3.78 3.06 2.51 2.07
Implied market cap (mn) Rs. 1,421,169.8 Rs. 1,547,496.0 P/BV (x)(LB) 5.50 4.33 3.47 2.81 2.30 1.90
RONW (%) 38.04 31.59 28.27 25.72 23.70 22.08
Debt (mn) (30/06/10) Rs. 17,794.5 Rs. 17,794.5
ROCE (%) 35.20 29.25 26.17 23.81 21.95 20.45
Cash (mn) (30/06/10) Rs. 380,463.4 Rs. 380,463.4
EV/EBITDA (x)(UB) 8.71 8.03 6.80 5.57 4.37 3.22
Implied EV (mn) Rs. 1,058,500.9 Rs. 1,184,827.1 EV/EBITDA (x)(LB) 7.77 7.13 5.97 4.81 3.69 2.59
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
CIL’s status as the largest coal mining company in the world with access to the vast amount of coal reserves and highly
favourable industry prospects driven by huge demand supply gap, is expected to result in strong growth prospects for the
company. Further, the continuous improvement in labour productivity, use of better technology leading to a better control of
costs and thus, leading to healthy overall profitability of CIL. The deregulated coal pricing regime gives CIL the power to fix
the price for its produce which, along with the favourable demand supply position and cost competitiveness vis-à-vis
imported coal, is likely to enable the consolidated entity to sustain its healthy profitability. Thus, we recommend investors to
Subscribe to the issue.
IPO
Issue details
Coal India Limited (CIL) is coming out with an initial public offer of 631.63 mn equity shares through the issue with a price
band of Rs 225-245, which is an offer for sale by the President of India, acting through the ministry of coal, Government of
India. The offer shall constitute 10% of the post offer paid-up equity share capital of company. The issue opens on October
18, 2010 and closes on October 21, 2010.
Issue objectives
The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to
achieve the benefits of listing the Equity Shares on the Stock Exchanges. The Company will not receive any proceeds from
the Offer and all proceeds shall go to the Selling Shareholder.
Investment Rationale
Favourable industry prospects driven by huge demand supply gap
Coal is the primary source of energy, accounting for nearly 53% of the total energy consumption in India. Under the
Eleventh Five-Year Plan, India plans to add power generation capacity of 78 GW. Nearly 67% of this capacity is coal-
based, indicating that the demand for coal would primarily come from the power sector. The demand for coal in India is
likely to grow at 11.2% CAGR to 933 MT (million tonnes) in FY14. The demand for non-coking coal is expected to grow at
CAGR of11.3% whereas that for coking coal is expected to grow at 9.7% CAGR over FY09-14 (CRISIL Research
estimates). The overall domestic production is, however, estimated to grow at 7.2% CAGR over FY09-14 to 672 MT
resulting in an acute shortage of coal in the domestic market.
An overview of the performance of the coal sector in India in fiscal 2008, 2009 and 2010 of the 11th Five-Year plan and the
projected production for fiscal 2012 is set out below:
Fiscal 2008 Fiscal 2009 Fiscal 2010 MTA Target
Parameter (Actual) (Actual) (Actual) Fiscal 2012
Physical Performance
Coal Demand assessed by Planning
Commission (million tons) 492.50 550.00 597.98 713.24
Indigenous Coal Supply (million tons) 454.49 490.02 514.58 629.91
Coal Production (million tons) 457.00 492.76 532.06 629.91
Coal Imports (Total) 49.80 59.00 67.74 83.33
Coking Coal 22.03 21.08 23.47 42.48
Thermal Coal 27.77 37.92 44.28 40.85
Net Gap in Demand Supply -11.79 0.98 15.66 0.00
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
Production and Sales Segmental share in raw coal off-take in 2009-10
Largest producer of coal in the world, dominant position in India
Coal India is the largest producer of coal in the world. It owns 48% of India’s proven reserves and contributes over 81% of
the total coal production in India. Given India’s abundant coal reserves and the absence of other sustainable fuel sources,
the company plays a strategic role in meeting India’s energy requirements. CRISIL Research estimates Coal India to
contribute 80% of the Indian coal production in FY12 and, thus, maintain its dominant position. Nearly 90% of the
company’s production is from open cast mines. Moreover most of these open cast mines have low stripping ratios, which
provide the company with a significant cost advantage.
Strong balance sheet
CIL has a net worth of Rs 258bn and a cash balance of Rs 390bn which will more than suffice to finance its growth plans.
In the past, the company has incurred capex of less than Rs 20bn per annum. For FY11 and FY12, it has outlined an
expenditure of Rs 36bn and Rs 46bn respectively. Considering the cash-rich balance sheet and the fact that CIL
generates strong operating cash flows, we believe the company would comfortably finance its capex and overseas
acquisition plans without recourse to external funding.
RONW and ROCE Cash and Networth
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
Deregulated coal pricing regime gives CIL the power to fix its coal prices
Coal prices were deregulated in 2000 by GoI, following which CIL has been given the power to fix the price of its coal.
Since the price of coal has significant ramifications on thermal power generation costs and consequently on the Indian
economy, CIL attempts to absorb cost pressures through increase in efficiency and productivity. introduction of sale of
coal through the e-auction route, which fetches significant premium over the prevailing notified prices, selling of washed
coal and prime quality coal from some of its mines at significantly higher and import linked prices have also resulted in the
improvement in overall realizations and profitability of the company to an extent.
New projects to drive growth
The company has identified 45 coal mining projects which are under various stages of planning and development for
implementation in Eleventh and Twelfth five-year plans. Of these, 25 projects with estimated production of 47.51 MTPA
and capex requirement of Rs 33.9 bn are expected to become operational by end- FY12. Whereas 20 projects with
estimated production of 33.27 MTPA and capex requirement of Rs 25.8 bn would become operational during the Twelfth
Five-Year Plan. Additionally, the company intends to develop 20 coal beneficiation facilities with a capacity of 111 MTPA
at a capex of Rs 23.3 bn, which would come on stream between FY14 and FY17.
Focus on coal beneficiation
CIL currently has 17 coal beneficiation facilities with a total capacity of 39.4mt. The management expects to add 20 new
facilities in the 12th plan, raising its capacity to 111mt at a total expenditure of Rs 23bn. Further, the company intends to
equip all new open-cast mining projects with coal production capacities greater than 2.5mtpa (not linked to pithead
customers) with dedicated coal beneficiation facilities. Beneficiation increases the quality and gross calorific value (GCV) of
coal so that it is comparable with imports, thereby enabling margin improvement.
Risks and concerns
Raniganj and Jharia Coalfields face problem of Subsidence due to non-scientific mining
The mining area in the Jharia and Raniganj coalfields, operated by BCCL and ECL, respectively, are susceptible to fire and
land subsidence due to non-scientific mining carried out by the mine owners prior to nationalization of the coal industry in
India, and pose a serious environmental, health and safety risk. The total balance in the Jharia and Raniganj Master Plans
funds were Rs.9,458.78 million, Rs.12,238.43 million, Rs.14,774.27 million and Rs.15,548.70 million as of March 31, 2008,
2009, 2010 and in the three months ended June 30, 2010, respectively. If the company is unable to implement the Jharia
and Raniganj Master Plans within the stipulated time frame or within the approved amounts, it may incur additional costs,
and diversion of resources and can lead to adverse effect business, results of operations and financial condition.
Corruption and Illegal mining and pilferage of coal
Unauthorized extraction and pilferage of coal from mining areas has increased significantly in recent years primarily due to
increases in market prices for coal and increased black-market demand for coal. CIL has been unable to prevent illegal
mining carried out by others from their mines (primarily abandoned mines).
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
Inadequate transportation facilities
CIL depends primarily on a combination of rail and road transportation to deliver coal to customers. It also relies on third-
party road transportation providers, including truckers, for the movement of coal from the mine to beneficiation facilities and
further for the supply of coal to customers. Non-availability of adequate road transportation could have an adverse effect on
receipt of materials and offtake arrangements for coal produced.
Financial
With the growth in the scale of operations, CIL’s consolidated total income grew from Rs 350,054 million in 2006-07 to Rs
525,923 million in 2009-10, thus registering a compounded annual growth of 14.2% over the period. Coal India is poised to
maintain this growth rate in the coming financial years. Following the deregulation of coal prices in 2000 by GoI, CIL has
been given the power to fix the price of its coal. Also iintroduction of sale of coal through the e-auction route, has led to
significant premium over the prevailing notified prices.
The tax structure of the company is somewhat inefficient because of the holding company-subsidiary structure, since the
losses from the subsidiaries with weak financial profile, viz. ECL and BCCL, cannot be set off against the profits of the other
subsidiaries. This leads to higher effective tax rate for the overall consolidated entity.
CIL’s consolidated business returns were healthy at 38.04% in 2009-10. Earnings per share will rise from the current level
of Rs 15.56 per share to Rs. 23.17 by FY14. With the exception of FY09, EBITDA margins have inched up steadily and will
continue its upward trend. The company is current at the price of 8.71x of EV/EBITDA of FY10 and will decline to 4.37 by
FY2014E, which looks attractive. However RONW will slow down in FY 11E and FY12E as over 50% of CIL’s assets are in
the form of cash, which generate lower returns, thus impacting the overall business returns unfavorable.
CIL has a highly conservative capital structure with a gearing of 0.08 times as on March 31, 2010. The entire debt on the
books of CIL is on account of foreign currency loans drawn on Japan Bank of International Co-operation (JBIC) and IBRD
(guaranteed by GoI) on account of various rehabilitation projects implemented by various subsidiaries of CIL.
Despite higher levels of business, CIL’s overall working capital position has shown an improvement in the past because of
an efficient collection performance. This has helped CIL in terms of substantial cash being generated from operations,
which has led to a large cash balance as on March 31, 2010, providing adequate financial flexibility for future growth
opportunities. Consequently, CIL’s liquidity position has remained highly comfortable.
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
P/BV and EV/EBITA NPM and EPS
INCOME STATEMENT
Rs. in mn
Y/E MARCH FY10 FY11E FY12E FY13E FY14E FY15E
Revenue 473,514.53 520,468.95 575,297.60 636,219.85 703,918.77 779,154.35
Change (%) 15.64 9.92 10.53 10.59 10.64 10.69
Internal Consumption of
Coal 19,721.13 22,244.86 24,684.54 27,395.60 30,408.46 33,756.96
Consumption of Stores &
Spares 49,269.18 54,376.32 60,339.99 66,967.02 74,331.78 82,517.02
Employees'
Remuneration & Benefits 166,555.22 185,373.82 205,704.50 228,296.65 253,403.80 281,308.03
Power & Fuel 17,395.95 23,437.19 26,007.64 28,864.01 32,038.35 35,566.34
Social Overhead 20,174.87 23,839.78 26,454.38 29,359.82 32,588.69 36,177.28
Repairs 8,479.39 10,492.88 11,643.68 12,922.48 14,343.64 15,923.13
Contractual Expenses 37,318.37 38,552.89 42,781.14 47,479.72 52,701.35 58,504.69
Miscellaneous Expenses 19,335.99 22,502.47 24,970.41 27,712.86 30,760.61 34,147.90
EBITDA 135,264.43 139,648.74 152,711.33 167,221.70 183,342.09 201,252.98
% of Net Sales 30.32 28.25 27.84 27.47 27.13 26.83
Depreciation 15,388.22 19,790.38 22,156.59 24,353.36 26,587.32 28,863.19
Interest 1,559.54 2,100.28 2,625.29 3,242.90 3,967.63 4,816.18
Overburden removal
adjustment 30,539.18 26,855.44 29,800.78 33,073.74 36,711.06 40,753.60
Other Income 54,241.78 61,470.20 72,098.86 84,565.29 99,187.27 116,337.50
PBT 142,019.27 152,372.83 170,227.52 191,116.99 215,263.35 243,157.51
Tax 43,424.81 48,759.31 54,472.81 61,157.44 68,884.27 77,810.40
Rate (%) 30.58 32.00 32.00 32.00 32.00 32.00
Reported PAT 98,336.99 103,613.53 115,754.72 129,959.56 146,379.08 165,347.11
% of Net Sales 20.77 19.91 20.12 20.43 20.79 21.22
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
BALANCE SHEET
Rs. in mn
Y/E MARCH FY10 FY11E FY12E FY13E FY14E FY15E
Share Capital 63,164 63,164 63,164 63,164 63,164 63,164
Reserves 195,330 264,779 346,370 442,165 554,380 685,562
Net Worth 258,479 327,943 409,533 505,329 617,543 748,726
Total Debt 20,869 26,235 32,763 40,426 49,403 59,898
Capital Employed 279,347 354,178 442,296 545,755 666,947 808,624
Gross Fixed Assets 349,453 387,453 433,953 475,953 517,953 559,953
Less: Depreciation 224,911 242,347 261,875 283,293 306,600 331,798
Less:Provison for Impa 4,232 4,906 5,494 6,026 6,557 7,089
Net Fixed Assets 120,310 140,200 166,584 186,635 204,795 221,066
Capital WIP 21,082 23,247 26,037 28,557 31,077 33,597
Surveyed off assets 1,198 1,230 1,378 1,511 1,645 1,778
Investments 12,823 12,843 12,863 12,883 12,903 12,923
Deferred Tax Assets 9,658 10,334 11,057 11,831 12,659 13,545
Curr. Assets 543,134 621,108 729,038 864,425 1,025,551 1,215,857
Inventory 44,015 48,768 54,116 60,060 66,665 74,006
Debtors 21,686 24,028 26,664 29,592 32,846 36,463
Cash & Bank Balance 390,778 452,299 541,716 656,530 794,792 959,687
Loans & Advances 86,655 96,012 106,542 118,243 131,247 145,700
Current Liab. & Prov. 428,857 454,784 504,662 560,088 621,684 690,142
Net Current Assets 114,277 166,324 224,377 304,337 403,867 525,714
Net Assets 279,347 354,178 442,296 545,755 666,947 808,624
Fair Value Sensitivity Analysis
Growth (%) 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
10.5 334 351 371 268 421 453 491 538 596
11.5 304 318 333 351 371 395 422 454 492
WACC 12.5 280 291 303 317 333 351 371 395 422
13.5 260 269 279 291 303 317 333 351 252
15.0 236 243 251 260 269 280 291 304 318
15.5 229 236 95 251 260 269 280 291 304
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COAL INDIA LTD
IPO NOTE
EQUITY RESEARCH October 14, 2010
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Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular
investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the
investments and strategies discussed herein and also seek the advice of your financial adviser.
Past performance is not a guide for future performance. The value of and income from investments may vary because
of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future
performance.
This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete,
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