Motilal Oswal recommend Coal India, CAGR of 10% expected in volume over FY15-20E

1. Sanjay Jain (SanjayJain@MotilalOswal.com);+9122 3982 5412/Nalin Bhatt (NalinBhatt@MotilalOswal.com) +9122 3982 5429
Dhruv Muchhal (Dhruv.Muchhal@MotilalOswal.com); +9122 3027 8033
25 June 2015
Update | Sector: Utilities
Coal India
CMP: INR412 TP: INR448 (+9%) Buy
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Focus shifting from coal supply to power demand
Takeaways from our meeting with Coal Secretary
We met Coal Secretary Mr. Anil Swarup. The key takeaways from the meeting
are as below:
Focus on enablers to ramp up coal supply
 Close cooperation with states: Ministry of Coal (MoC) is working closely
with state governments to facilitate availability of land, clearance and
evacuation infrastructure; the efforts are bearing fruit—as reflected by the
physical possession of 2,000 hectares of land by Coal India and clearance to
40+ projects over the past 12 months.
 Rail evacuation projects may surprise positively: On the evacuation
infrastructure front, land acquisition scenario has improved in the past one
year (for instance, land availability for Tori-Shivpuri section has increased
from nil to over ~50% now). MoC remains confident of completing
Jharsuguda-Barpalli line by June-2016, and Tori-Shivpuri and Bhupdeopur-
Baround lines by CY17-end.
 Commercial mining policy framework: MoC is also working on creating a
parallel framework for commercial mining and 72mines (from schedule I)
with total capacity of 269mtpa (fully-explored reserves of 13.46 billion ton)
have been identified for the purpose. FICCI has prepared an approach paper
and held a workshop on June 23 to present and discuss the framework.
Demand from power sector is sluggish; possibility of increased
allocation to the non-power sector
 Sluggish demand from power: Decelerating power generation growth and
high inventories are affecting coal demand. Supply to power sector by Coal
India has increased 19mt YoY to 238mt between Oct 2014 to May 2015,
while coal-based power plants’ consumption has remained unchanged YoY
at 219mt. Increased supply has largely helped restore the normative 20
days of inventories at power plants, and further absorption through
inventory build-up will be limited.
 Focus shifts to DISCOMs: The continued power sector woes despite
adequate coal supply reflect that DISCOMs’ poor financial health is the key
reason for the sector’s problems. As a result, demand growth for power
may remain muted (v/s 6.7% in FY15) for the next two years.
 Increased allocation to the non-power sector: Given that Coal India’s
volume growth may still be robust, the allocation to more remunerative
non-power sector may go up—a key positive for Coal India. We model share
of power sector in the total dispatch to inch up from 76% in FY15 to 80% by
2020. Every ton of switch in tonnage from power to non-power will bring in
a benefit of ~INR1000/t.
BSE Sensex S&P CNX
27,896 8,398
Stock Info
Bloomberg COAL IN
Equity Shares (m) 6,316.4
52-Week Range (INR) 421/332
1, 6, 12 Rel. Per (%) 11/6/-4
M.Cap. (INR b) 2527.2
M.Cap. (USD b) 39.8
AvgVal.
INR /V l‘000
1525/4116
Free float (%) 20.4
Financial Snapshot (INR b)
Y/E Mar FY15 FY16E FY17E
Sales 720 749 906
EBITDA 152 150 208
NP* 137 142 180
EPS (INR)* 22 22 28
EPS Gr. (%) -14 3 27
BV/Sh. (INR) 64 66 69
RoE (%) 34 34 41
RoCE (%) 54 54 66
Payout (%) 114 90 90
Valuations
P/E (x) 18.4 17.8 14.0
P/BV (x) 6.3 6.1 5.8
EV/EBITDA (x) 9.7 9.9 7.6
Div. Yield (%) 5.2 4.2 5.3
Shareholding pattern (%)
As on Mar-15 Dec-14 Mar-14
Promoter 79.7 89.7 89.7
DII 8.8 3.1 2.9
FII 9.0 5.5 5.3
Others 2.5 1.7 2.1
FII Includes depository receipts
Stock Performance (1-year)
300
350
400
450
500
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Coal India
Sensex - Rebased

2. Coal India
25 June 2015 2
Power sector coal supply: new policies to incentivize system efficiencies
 No respite for insane bidders: In order to be fair to every participant, MoC
remains firm on capping fixed capacity charge, thereby not allowing passing
of variable cost into fixed cost component even if it results in failure of 3-4
projects.
 Tapering linkages to end: After the de-allocation of captive coal mines,
there is no fundamental reason for extending tapering linkages. In all
likelihood, these projects with tapering linkages will have to seek either
fresh linkages or captive mines under tariff-based bidding framework.
 Focus turning to efficiencies: Apparently, low cost coal to DISCOMs is
disincentive in reforming its revenue model and operations. The focus is
now shifting to capital, transportation and operating efficiencies. Perhaps,
this will force DISCOMs to procure low-cost power from the most efficient
stations (such as those which are closer to the mines). This will also drive
demand for long-distance high-capacity power transmission lines, in our
view.
Coal India: To benefit from linkage auction and price hike for power
sector coal
 Non-power linkage auction: Final guidelines for coal linkage auction for the
non-power sector are expected by the end of June 2015. The benefit will
flow in FY17—potential gain of ~INR30b, in our view.
 Price hike for power to offset cost increase: MoC highlighted that price
revision for the power sector may be considered to offset the cost increase
on account of 5/10-yearly wage renegotiation; this allays concerns on price
hikes. We model 10% increase in FSA price for power sector in FY17.
 Volume growth at inflection; reiterate Buy: We expect Coal India to
register a CAGR of 10% in volume over FY15-20E (v/s 2% during FY10-15).
Accelerated volume growth and natural attrition will result in productivity
gains and operating leverage. We expect adjusted EBIDTA to double over
FY15-20E, while higher FCF and dividend yield will provide comfort. We
expect earnings CAGR of 14% over FY15-20E. Reiterate Buy with a DCF-
based TP of INR448/sh. The stock trades at P/E of 14.0x and EV/EBITDA of
7.6x on FY17E basis.

3. Coal India
25 June 2015 3
Exhibit 1: Coal demand from power sector is sluggish - mt
Source: MOSL, Company
Exhibit 2: Coal inventory at power plants have increased - mt
Source: MOSL, Company
Exhibit 3: Power generation growth has moderated in the last few months
Source: MOSL, Company
32.6
29.7
32.1
31.7
32.6
34.4
29.1
29.9 30.0
32.5
Jan Feb Mar April May
2015 2014
8.0
10.8
14.0
16.4
20.0
26.1
29.8 29.7 29.8
Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15
3.4
11.0
7.3
2.0
4.5
7.0
9.5
12.0
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Power generation annualized growth YoY (%)

4. Coal India
25 June 2015 4
Story in charts
Exhibit 1: Production to grow by 10% CAGR over FY15-20E
Source: MOSL, Company
Exhibit 2: Power disp. growth 11% CAGR over FY15-20E (mt)
Source: MOSL, Company
Exhibit 3: FSA price realization - INR/t
Source: MOSL, Company
Exhibit 4: Non-power price realization - INT/t
Source: MOSL, Company
Exhibit 5: Contracting % of prod. to inc. to ~71% by FY20E
Source: MOSL, Company
Exhibit 6: and is ~70% cheaper than in-house (INR/t)
Source: MOSL, Company
267
280
291
306
324
342
360
378
403
430
431
436
453
461
494
534
576
646
717
781
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Production (m ton)
299 304 312 342 347 372 413 435
516
568
626
116 120 121 122 124 117 121 140 130 149 155
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Power (FSA)
Non-power
884
958 1,233
1,294
1,314
1,327
1,324
1,450
1,450
1,450
1,450
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
FSA realization Wage
negotiation
impact
1,583
1,846
2,599 2,544
2,182
2,450
1,949
1,958
1,958
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
E-auction Linkage auction Washed coal
34
38
42
46
50 51 53
55 56
60 62 64
67 69 71
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Contracting share of production (%)
782 902
1,276 1,384 1,500 1,754 1,717
172
209 214 233 262 287 309 333 373 401 432
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Employee cost per ton of in-house prod.
Contracting per ton of contracted prod.

5. Coal India
25 June 2015 5
Story in charts
Exhibit 7: Net attrition rate (%)
Source: MOSL, Company
Exhibit 8: Cost per ton to be flattish - INR/t
Source: MOSL, Company
Exhibit 9: EBITDA to double by FY20E
Source: MOSL, Company
Exhibit 10: PAT growth of ~14% over FY15-20E
Source: MOSL, Company
Exhibit 11: Strong FCF despite higher capex
Source: MOSL, Company
Exhibit 12: Dividend yield to protect downside
Source: MOSL, Company
3.0
3.2
3.7
3.5
3.1
1.8
3.4 3.3
3.5 3.6 3.8 3.9 4.1
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
Net attritionrate (%)
727
913
809
808
1,000
1,014
1,052
1,084
1,054
1,144
1,115
1,091
1,084
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Cost per ton
88
63
148
175
207 228 209 207 204
267
305
359
393
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Adj. EBITDA - INR b
43 56
98 110
162 178
160
137 142
180
202
238
261
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
PAT - INR b
105 97
127 114
224
161 146
118
150 165
223
261
301
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
FCF - INR b
7.6
5.4
4.4
5.6
6.2
7.4
8.1
FY14 FY15 FY16E FY17E FY18E FY19E FY20E
Dividend yield (%)

6. Coal India
25 June 2015 6
Financials and valuation
Income Statement (INR Million)
Y/E March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Net Sales 466,843 502,336 624,154 683,027 688,100 720,146 748,527 905,604
Change (%) 14.4 7.6 24.3 9.4 0.7 4.7 3.9 21.0
Operating Expenses 362,112 365,872 467,476 502,191 528,469 567,847 598,693 697,374
EBITDA 104,730 136,464 156,679 180,836 159,632 152,300 149,834 208,230
% of Net Sales 22.4 27.2 25.1 26.5 23.2 21.1 20.0 23.0
adj. EBITDA/ton 360 416 482 491 445 423 381 464
Depreciation 13,138 17,654 19,692 18,130 19,964 23,198 22,194 22,889
Interest 1,560 737 540 452 580 73 273 256
Other Income 52,408 49,615 76,150 88,373 89,694 86,761 87,146 83,505
Extra Ordinary 2,786 2,162 -911 -69 -14 -50 0 0
PBT 139,654 165,525 213,508 250,697 228,795 215,839 214,513 268,589
Tax 43,425 55,959 64,845 76,227 77,679 78,573 72,913 88,608
Rate (%) 31.1 33.8 30.4 30.4 34.0 36.4 34.0 33.0
Reported PAT 96,230 109,566 148,664 174,470 151,116 137,266 141,600 179,982
Change (%) 362.7 13.9 35.7 17.4 -13.4 -9.2 3.2 27.1
Adjusted PAT 98,299 110,202 162,386 177,530 159,881 137,316 141,600 179,982
Change (%) 76.7 12.1 47.4 9.3 -9.9 -14.1 3.1 27.1
Balance Sheet (INR Million)
Y/E March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Share Capital 63,164 63,164 63,164 63,164 63,164 63,164 63,164 63,164
Reserves 194,789 269,978 341,366 421,556 360,881 340,367 354,527 372,525
Net Worth 257,952 333,142 404,530 484,720 424,045 403,531 417,691 435,689
Minority Interest 236 326 536 636 636 658 658 658
Loans 19,631 13,664 13,054 10,778 1,715 4,019 1,515 1,424
Defferd tax Liabiity -9,658 -11,941 -11,941 -22,550 -19,717 -19,596 -19,596 -19,596
Capital Employed 268,161 335,191 406,179 473,584 406,678 388,612 400,268 418,175
Gross Fixed Assets 349,453 376,253 380,964 390,107 408,971 493,788 554,081 620,403
Less: Depreciation 229,144 238,708 246,561 255,449 263,022 272,572 283,333 295,155
Net Fixed Assets 120,309 137,546 134,403 134,658 145,949 221,217 270,748 325,248
Capital Work in Progress 22,107 11,459 29,034 34,960 45,053 40,440 46,234 51,457
Investments 12,819 10,637 19,814 23,950 37,749 28,134 13,406 14,076
Inventory 42,294 55,856 60,713 56,178 55,681 61,838 64,275 77,763
Debtors 21,688 34,189 56,630 104,802 82,410 85,219 88,577 107,165
Other Current Assets 0 0 30,347 42,489 54,375 78,690 81,791 98,955
Loans and Advances 86,762 120,254 145,013 173,760 77,594 88,268 77,490 90,597
Cash 390,778 458,064 582,028 622,360 523,895 530,925 504,899 495,735
Current Liabilities 346,202 338,222 437,266 550,947 588,916 667,382 744,838 840,276
Provisions 82,396 175,737 209,894 145,567 1,912 2,103 2,314 2,545
Net Curr. Assets 112,924 175,549 222,928 280,017 177,927 147,734 69,881 27,394
Misc. Expenses 0 0 0 0 0 0 0 0
Application of Funds 268,160 335,193 406,179 473,584 406,678 437,525 400,268 418,175
E: MOSL Estimates -444,401 -568,974 303,076 -522,181

7. Coal India
25 June 2015 7
Financials and valuation
Ratios
Y/E March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
Basic (INR) 15.2 17.3 23.5 27.6 23.9 21.7 22.4 28.5
Adjusted EPS 15.6 17.4 25.7 28.1 25.3 21.7 22.4 28.5
Growth (%) 76.7 12.1 47.4 9.3 -9.9 -14.1 3.1 27.1
Cash EPS 22.5 24.4 34.7 36.0 33.7 31.5 31.6 38.3
Book Value 40.8 52.7 64.0 76.7 67.1 63.9 66.1 69.0
DPS 3.5 3.9 10.0 14.0 29.0 20.7 16.8 21.4
Payout (incl. Div. Tax.) 30.4 30.5 46.2 57.3 132.2 114.3 90.0 90.0
Interest Rates (%) 7.6
Valuation (x)
P/E 25.7 22.9 15.6 14.2 15.8 18.4 17.8 14.0
Cash P/E 17.8 16.4 11.5 11.1 11.9 12.7 12.7 10.4
EV/Adj. EBITDA 14.6 11.9 9.4 8.4 9.6 9.7 9.9 7.6
EV/Adj. Sales 4.6 4.1 3.1 2.7 2.8 2.7 2.6 2.2
EV /m ton of Reserves 99.2 95.8 90.1 88.1 92.2 92.0 93.1 93.5
Price/Book Value 9.8 7.6 6.2 5.2 6.0 6.3 6.1 5.8
Dividend Yield (%) 0.9 1.0 2.5 3.5 7.2 5.2 4.2 5.3
Profitability Ratios (%)
Reported RoE 37.3 32.9 36.7 36.0 35.6 34.0 33.9 41.3
RoCE 60.1 55.1 57.7 57.1 52.1 54.3 54.5 65.7
Adj. RoCE 61.0 55.1 61.5 57.8 54.1
Leverage Ratio
Net Debt/Equity (x) -1.4 -1.3 -1.4 -1.3 -1.2 -1.3 -1.2 -1.1
Cash Flow Statement (INR Million)
Y/E March FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E
PBT before EO Items 136,868 163,363 214,420 250,765 228,810 215,889 214,513 268,589
Add : Depreciation 13,138 17,654 19,692 18,130 19,964 23,198 22,194 22,889
Interest 1,560 737 540 452 580 73 273 256
Less : Direct Taxes Paid -43,425 -55,959 -64,845 -76,227 -77,679 -78,573 -72,913 -88,608
(Inc)/Dec in WC 38,606 4,662 76,585 -16,757 3,625 37,223 51,827 33,323
CF from Operations 146,747 130,457 246,392 176,363 175,300 197,810 215,894 236,450
(Inc)/Dec in FA -19,815 -16,153 -22,286 -15,068 -28,958 -80,205 -66,087 -71,545
Free Cash Flow 126,932 114,304 224,106 161,295 146,343 117,606 149,807 164,905
(Pur)/Sale of Investments 2,232 2,183 -9,177 -4,136 -13,799 9,615 14,729 -670
CF from Investments -17,583 -13,970 -31,463 -19,204 -42,757 -70,590 -51,358 -72,216
(Inc)/Dec in Net Worth 1,512 -766 -2,277 7,382 -364 -882 0 0
(Inc)/Dec in Debt -1,854 -5,967 -610 -2,276 -9,063 2,305 -2,504 -91
(Inc)/Dec in Differed Tax Liability -109 -2,283 0 -10,610 2,833 121 0 0
Less : Interest Paid -1,560 -737 -540 -452 -580 -73 -273 -256
Dividend Paid -29,871 -33,611 -74,999 -101,661 -211,427 -156,898 -127,440 -161,983
Others -3,455 -5,836 -12,540 -9,210 -12,406 -12,035 -11,432 -11,068
CF from Fin. Activity -35,337 -49,199 -90,966 -116,827 -231,008 -167,462 -141,650 -173,398
Inc/Dec of Cash 93,828 67,287 123,963 40,332 -98,465 -40,242 22,886 -9,164
Add: Beginning Balance 296,950 390,778 458,064 582,028 622,360 523,895 530,925 504,899
Closing Balance 390,778 458,065 582,028 622,360 523,895 483,654 553,811 495,735

8. Coal India
25 June 2015 8
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