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Q4FY13 Result Update

Coal India Ltd. (COAL IN ) - Review

Coal price hike to fully neutralize cost increases

May 29, 2013

ACCUMULATE (CMP: `327)

Mkt Cap `2065bn; US$ 38bn

Coal India Ltds (CIL) recently reported results was above expectations, due to incentives of `13 bn booked during the quarter. Coal production was marginally down by 0.9% YoY whereas sales volume was up 5.8% YoY. CIL witnessed severe cost increases mainly attributed to the diesel price hike for bulk consumers during January 2013. The recent coal price rationalization effected by CIL would lead to blended FSA realization increasing by 4.1% for FY14E. Also this coal price hike would fully neutralize the diesel price hike impact and employee cost increase for FY14E. In our previous note we had highlighted that cost inflationary pressures would be a key factor to justify a price hike by CIL. We also believe achieving the targeted 6.6% production growth for FY14E and e-auction pricing would be key to the stocks performance. Maintain ACCUMULATE rating with a Target Price of `378 (EV/EBIDTA of 7x on FY14E). Valuations are close to historical lows and dividend yield is attractive at 4.3%. Significant cost increases witnessed during the quarter CIL witnessed significant increase in operating cost during the quarter, mainly due to hike in diesel price for bulk consumers during end of January 2013. The full impact of the diesel cost increase would come in Q1FY14E. Raw material cost/MT of coal production increased by 7.2% QoQ to `141 (raw material consumption includes a significant portion of diesel purchase). Contractual expense/MT of coal production increased by 9.7% QoQ to `139 (coal transportation by external parties via trucks falls under contractual expense). We expect further cost increase during Q1FY14E as full impact of the diesel price hike would be felt. The management has indicated adverse impact of `1 bn at EBIDTA level for every `1/litre increase in diesel price. Coal price rationalization would fully neutralize cost inflationary pressures Coal India Ltd (CIL) rationalized coal prices with effect from May 28 2013. Under the scheme low/medium grade coal prices have been increased, whereas high grade coal prices have been decreased. Prices of low/medium grade coal with calorific value ranging from 2,200 to 5,800 kcal/kg have been increased in the range of 9.4% to 11.1%. Whereas prices of high grade coal with calorific value above 6,100 kcal/kg have been decreased by 12% (refer table 1). Since CILs majority production is of low grade coal, this price rationalization would effectively increase blended coal realization for FY14E by 4.1%. This effective coal price hike would fully neutralize the cost increase due to the diesel price hike and the normal YoY employee wage increase for CIL. The coal price rationalization would result in additional revenue of `21 bn for the balance period of FY14E (yearly additional revenue would be around `25 bn). We believe the next coal price hike would be effected only post April 2014 Lok Sabha elections (past data suggest that CIL has not hiked prices prior to elections) Coal production growth and e-auction pricing are key triggers
Financials (Cons) Net sales (` bn) EBIDTA (` bn) PAT (` bn) EPS (`) P/E EV/EBIDTA P/BV FY13 FY14E FY15E 683 222 174 27.5 11.9 6.5 4.4 731 231 182 28.8 11.4 5.7 3.8 753 230 186 29.5 11.1 5.2 3.3

Price 327 Target Price 378 Last call ACCUMULATE (21-02-2013, at `339) Expected share price return 15.3% Expected dividend yield 4.3% Expected total return 19.6%

Market Data
Market Cap. Share Cap. (mn) 52 Wk High/Low Avg. Vol. (Weekly) `2065bn/ US$38bn 6316 386 /291 3,234,143

(Price Performance (RIC: COAL.BO, BB: COAL IN)

Shareholding Pattern (As on March 31, 2013)

(%)

CIL has set a coal production guidance of 482mn MT for FY14E, which is a 6.6% YoY growth (this growth target is the highest over the past 3 years). E-auction prices of coal fell by 21.5% QoQ to `2,308, which was due to lower grade of coal sold rather than fall in international coal prices. E-auction prices are related to global thermal coal prices, which have been subdued over the past 1 year. We expect e-auction volumes to remain in the range of about 45-50mn MT/ year over FY14E-15E.
Eric Martins eric@systematixshares.com (+91 22 3029 8253)
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Table 1: CIL - coal pricing data (`/MT)

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Pithead Run of mine price for Non-Coking coal GCV Bands (kcal/kg) Power Utilities (including IPPs), Fertilizer & Defence sector Jan-12 Exceeding 7000 Exceeding 6700 and not exceeding 7000 Exceeding 6400 and not exceeding 6700 Exceeding 6100 and not exceeding 6400 Exceeding 5800 and not exceeding 6100 Exceeding 5500 and not exceeding 5800 Exceeding 5200 and not exceeding 5500 Exceeding 4900 and not exceeding 5200 Exceeding 4600 and not exceeding 4900 Exceeding 4300 and not exceeding 4600 Exceeding 4000 and not exceeding 4300 Exceeing 3700 and not exceeding 4000 Exceeding 3400 and not exceeding 3700 Exceeding 3100 and not exceeding 3400 Exceeding 2800 and not exceeding 3100 Exceeding 2500 and not exceeding 2800 Exceeding 2200 and not exceeding 2500
Source: Company

Power Utilities (including IPPs), Fertilizer & Defence sector May-13

Inc/Dec

4870 4420 3970 2800 1450 1270 1140 880 780 640 600 550 500 460 410 360 Table 2: History of coal price hikes Date January 31, 2001 June 15, 2004 December 12, 2007 October 16, 2009 February 27, 2011 January 1, 2012 - Shift from UHV to GCV May 28, 2013
Source: Company

4870 3890 3490 2800 1600 1400 1250 970 860 700 660 610 550 510 450 400

0.0% -12.0% -12.1% 0.0% 10.3% 10.2% 9.6% 10.2% 10.3% 9.4% 10.0% 10.9% 10.0% 10.9% 9.8% 11.1%

Increase 8.5% 16.2% 10.0% 11.0% 20.0% 8.0% 4.8%

Table 3: Comparison of coal price hike vs election dates Election dates April 2004 April 2009
Source: Company, Systematix Institutional Research

Coal price hike June 2004 October 2009

Historical data indicates that CIL has not hiked coal prices prior to Lok Sabha elections, as seen from Table above. Hence we believe the next coal price hike would be effected only post April 2014 Lok Sabha elections.

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Table 4: Q4FY13 Consolidated results (` mn)

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YoY growth 2.5% 16.9% -17.6% 8.1% -89.7% 26.6% 25.8% 9.8% 19.6% -15.0% -53.5% 14.5% -5.2% -31.2% #DIV/0! -52.8% 37.2% 42.3% 35.1% 34.9% QoQ growth 14.9% 30.8% 18.5% -16.8% -93.4% 109.3% 34.0% 12.8% 38.8% 141.3% -2.1% 11.7% -6.5% 32.5% #DIV/0! 43.6% 26.2% 33.3% 23.2% 23.2%

Q4FY12 Net Sales Expenditure Cost of material consumed Decretion/(Accretion ) of stock Employee benefit expense Power & fuel Welfare expense Repairs Contractual expenses Other expenditure EBIDTA Provisions/writeoffs Overburden removal adjustment Depreciation/amortization Other income Finance cost Interest Exceptional items (including PPA) PBT Tax PAT before extraordinary expense Extraordinary expense (net of tax) PAT
Source: Company

Q3FY13 173250 15475 2713 63050 6869 7354 1678 14858 7301 53953 2000 9070 4204 23605 96 0 151 62338 18387 43951 0 43951

Q4FY13 199046 20247 -8643 74693 5717 487 3511 19903 8236 74896 4825 8880 4698 22065 127 0 216 78647 24508 54139 0 54139

194190 17320 -12566 90688 5287 4748 2773 15822 7502 62617 5675 19086 4103 23280 185 0 458 57305 17221 40084 50 40134

Table 5: Key operational data Q4FY12 Q3FY13 Q4FY13 YoY growth -0.9% 5.8% -3.2% 13.0% QoQ growth 22.1% 7.9% 6.4% 28.6%

Production volume (mn MT) Sales volume (mn MT) Average realization/MT (`) EBIDTA/MT (`)
Source: Company, Systematix Institutional Research

145 123 1,581 510

117 120 1,438 448

143 130 1,531 576

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Table 6: Sales volume analysis

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YoY growth 7.7% 4.0% 12.0% QoQ growth 3.7% 13.9% 18.0%

Q4FY12 FSA Sales volume (mn MT) Realization/MT (`) Realization/MT - adj (`) Net sales (` mn) E-auction Sales volume (mn MT) Realization/MT (`) Net sales (` mn) Washed coal (coking) Sales volume (mn MT) Realization/MT (`) Net sales (` mn) Washed coal (non-coking) Sales volume (mn MT) Realization/MT (`) Net sales (` mn) Other by-product Sales volume (mn MT) Realization/MT (`) Net sales (` mn)
Source: Company, Systematix Institutional Research

Q3FY13

Q4FY13

101.7 1349 1251 137198

105.6 1232 130183

109.5 1403 1284 153631

14.7 2851 42023

10.5 2941 30824

14.9 2308 34387

1.1% -19.1% -18.2%

42.2% -21.5% 11.6%

1.11 6725 7465

0.71 6026 4279

0.68 5719 3889

-38.7% -15.0% -47.9%

-4.2% -5.1% -9.1%

5.0 1297 6537

3.3 1718 5584

3.0 1466 4326

-41.5% 13.1% -33.8%

-9.2% -14.7% -22.5%

0.01 2900 29

2814

Table 7: Production cost analysis Q4FY12 Cost/MT (`) Cost of material consumed Power & fuel Contractual expenses Other expenditure
Source: Company, Systematix Institutional Research

Q3FY13

Q4FY13

YoY growth 18.0% 9.1% 26.9% 10.8%

QoQ growth 7.2% -31.8% 9.7% -7.6%

120 37 109 52

132 59 127 62

141 40 139 57

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FINANCIAL DETAILS (CONSOLIDATED)

Profit & Loss Statement (` mn)
Net Sales Cost of materials consumed Purchases of stock-in-trade Change of inventories Employee benefits expense Power & fuel Welfare expense Repair Contractual expense Other expense EBIDTA Provisions/write offs Overburden removal adjustment Other income Depreciation/amortization/impairment Finance costs Exceptional items PBT Tax PAT Extraordinary items (net of tax expenses) PAT after minority interest and share of profit of associates

Balance Sheet (` mn) FY12

624154 55041 0 -3811 252536 20125 14515 6457 49010 21966 208315 14698 36939 75369 19692 540 734 212549 64790 147759 124 147882

FY12
63164 341367 0 0 404530 13333 26470 282713 322516 536 0 8290 178042 155552 341884 1069466

FY13
63164 409931 0 0 473095 11392 26805 325664 363861 536 0 9131 176187 161728 347046 1184537

FY14E
63164 486648 0 0 549812 9451 27157 369551 406158 536 0 10327 187702 172939 370968 1327474

FY15E
63164 568056 0 0 631220 7510 27526 414405 449441 536 0 11187 199329 184573 395090 1476286

FY13
683027 60621 0 4939 273208 23335 6224 8224 58020 26332 222125 9271 32017 87467 18130 452 69 249790 76227 173564 0 173564

FY14E
731365 68561 0 10220 268713 26515 20065 8635 68699 29361 230596 9735 32658 94484 18898 433 0 263356 81640 181716 0 181716

FY15E
753039 74274 0 0 282149 29001 21670 9067 74424 32114 230339 10221 33311 104544 20830 365 0 270155 83748 186407 0 186407

Cash Flow Statement (` mn)

FY12

FY13
249790 18130 32017 452 -65373 3487 238504 4950 -48122 -9059 -2078 -680 183515 -68604 114911 -51000 65373 -411 4837 18799 -1941 -452 -104999 -107392 26318 582028 608346

FY14E
263356 18898 32658 433 -71768 8276 251853 1562 44169 -9699 -2223 13063 298725 -73476 225249 -51000 71768 -431 6000 26337 -1941 -433 -104999 -107373 144213 608346 752559

FY15E
270155 20830 33311 365 -80420 8803 253045 -6087 -1558 -10014 -2378 12857 245864 -75373 170491 -51000 80420 -453 6000 34967 -1941 -365 -104999 -107305 98153 752559 850712

A. CASH FLOW FROM OPERATING ACTIVITIES NET PROFIT BEFORE TAX 212549 Adjusted for: Depreciation and amortisation 19692 Overburden removal adjustment 36939 Interest and finance charges 540 Interest earned -53457 Others/provisions adjustment 27579 Op profit before working capital changes 243842 Changes in working capital Inventories -4857 Sundry Debtors -22492 Loans and Advances -24768 Other assets -7923 Current Liabilities 49764 Cash generated from operations 233566 Income taxes paid during the year -48917 Cash generated from operating activities 184649 (B ) CASH FLOW FROM/USED IN INVESTING ACTIVITIES : Sale / (Purchase) of fixed assets -22285 Interest received 53457 (Sale) / Purchase of investments -9177 Other adjustment -7424 Net cash used in investing activities 14571 (C) CASH FLOW FROM/USED IN FINANCING ACTIVITIES : Net Proceeds from borrowings -331 Interest and finance charges paid -540 Dividend and tax thereon paid -74386 Net cash used in financing activities -75257 Net increase in cash and cash equivalents 123964 Cash at the beginning of the year 458064 Cash at the end of the year 582028

LIABILITIES Share capital Reserves & surplus Money received against share warrants Share application money pending allotment Networth Non-current liabilities Long term borrowings Other long term liabiliites Long term provisions Total Minority interest Current liabilities Short term borrowings Trade payables Other current liabilities Short term provisions Total TOTAL ASSETS Fixed assets Tangible assets - gross block Depreciation Net block Intangible assets - gross block Depreciation Net block CWIP Intangible assets under development Total Non current investment Deferred tax assets Long term loans & advances Other non-current assets Current assets Current investments Inventories Trade receivable Cash & bank balance Short term loans & advances Other current assets Total TOTAL

341810 214998 126812 39154 31563 7591 18484 10550 163437 9470 11941 10173 693 10344 60713 56679 582028 134851 29139 873754 1069466

387810 230320 157489 39154 33207 5947 23484 10550 197470 9470 11941 10872 731 10755 55763 104801 608346 143211 31179 954054 1184537

433810 247574 186235 39154 34852 4302 28484 10550 229572 9470 11941 11619 771 11186 54201 60632 752559 152162 33361 1064101 1327474

479810 266760 213049 39154 36496 2658 33484 10550 259741 9470 11941 12418 813 11639 60288 62190 850712 161377 35697 1181903 1476286

Key Ratio
Valuation Matrix Price / Earnings (x) Price / CEPS (x) Price / BV (x) EV / EBIDTA (x) EV / Sales (x) EPS (`) CEPS (`) BV per share (`) ROE (%) ROCE (%)

FY12
14.0 10.1 5.1 7.1 2.4 23.4 32 64 40% 22%

FY13
11.9 9.2 4.4 6.5 2.1 27.5 35 75 40% 22%

FY14E
11.4 8.9 3.8 5.7 1.8 28.8 37 87 36% 21%

FY15E
11.1 8.6 3.3 5.2 1.6 29.5 38 100 32% 19%

Turnover Ratio (x)

Asset Turnover Ratio Fixed Asset Turnover Ratio

FY12
0.6 4.0

FY13
0.6 3.8

FY14E
0.6 3.4

FY15E
0.5 3.1

Margin Ratio (%)

EBIDTA Margin PAT Margin

FY12
33% 24%

FY13
33% 25%

FY14E
32% 25%

FY15E
31% 25%

Growth Ratio (%)

Revenues EBIDTA Net Profit

FY12
24% 25% 36%

FY13
9% 7% 17%

FY14E
7% 4% 5%

FY15E
3% 0% 3%

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Stock Ratings
BUY (B) ACCUMULATE (A) HOLD (H) SELL (S) NOT RATED (NR) ATTRACTIVE (AT) NEUTRAL (NL) CAUTIOUS (CS) The stock's total return is expected to exceed 20% over the next 12 months. The stock's total return is expected to be within 10-20% over the next 12 months. The stock's total return is expected to be within 0-10% over the next 12 months. The stock's total return is expected to give negative returns over the next 12 months. The analyst has no recommendation on the stock under review.

Industry Views
Fundamentals/Valuations of the sector are expected to be attractive over the next 12-18 months. Fundamentals/Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months. Fundamentals/Valuations of the sector are expected to deteriorate over the next 12-18 months.

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