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Coal India Limited
Unique coal utility in a deficit market
„Unique coal utility, but limited upside to PO, New Neutral
Coal India Limited (CIL), the largest global coal producer (output 431mtpa) looks
well positioned to gain from acceleration of domestic coal demand. We believe
5.5% volume CAGR, mix gains thru beneficiation & productivity gains should drive
15% EPS CAGR over FY10-13e. Discount to global prices offer pricing flexibility &
limits downside. Logistics and environment approvals may constrain vol. growth.
CIL (up 31% since IPO) trades at 8.3x FY12e OBR adj. EBITDA at a premium to
coal peers (9% discount to utility peer NTPC), limiting upside potential. Our PO
set at NPV is Rs350 (9.4x FY12e OBR adj. EBITDA inline with NTPC).
World largest coal reserves, low grade but low cost assets
CIL (reserves 18.8bn tons, 82% of India’s output) should gain from 1.8x rise in
power capacity over FY10-15E as it sells 80% of its volume to power utilities. Its
lower reserves are low kcal (67% are E & F grades). However this is offset by its
lower strip ratio (1.7x) and 90% of output from open-cast mines. Its cost of
production (US$16/t) is one of the lowest among peers.
CIL base prices, US$22/t (83% of volumes) are at 60% discount to imports
offering pricing flexibility. We expect base price hikes to be cost led but it should
benefit from proposed 4x beneficiation expansion as washed coal which is priced
closer to the market (~2x base prices) increases from 3% to 18% of volumes by
FY16-17E. Pricing of high grade coal closer to the market offers upsides.
Catalysts: volumes & proposed mining tax
Stronger volumes could drive upsides to earnings given high fixed cost base
(wage costs are 45% of costs). Better logistics and easing of logistic constraints to
ease mismatch between rake availability and production spike in 4Q could boost
shipments. Key risks are 1) proposed 26% mining tax; 2) delays in mine approval
permit issues; 3) deployment of excess cash in potential value dilutive M&A.
Investment thesis
We initiate coverage on Coal India Limited (CIL) with a Neutral rating and a PO of
Rs350. CIL, the largest coal producer globally (output 431mtpa) looks well
positioned to gain from increasing coal deficits in India. Realizations are at a large
discount to global prices offering pricing flexibility & underpinning downside risks
to realisations. We expect base price increases to be mainly led by costs, but
5.6% volume CAGR, steady increases in base prices, mix gains thru beneficiation
and productivity gains should drive 15.4% EPS growth over FY10-13e. Logistics
and mine approvals should constrain volume growth in our view. CIL (up 31%
since IPO) trades at 8.3x FY12e OBR adjusted EBITDA at a premium to coal
peers and at 9% discount to utility peer NTPC limiting upside potential. Our NPV
set at PO of Rs350 implies 9.4x FY12e EBITDA (OBR adj.) inline with NTPC.
Well established coal utility; low-grade but low-cost assets
CIL accounts for 81.9% of India’s coal production and delivers 80% of its output
to power utilities. Its reserves are 18.8bn tons, 1.7x its closest peer China
Shenua. While its reserves are lower grade (E & F grades account for 67% of
output), this is largely offset by low strip ratio of 1.7x and 90% of production from
open cost mines. Hence, cost of production, US$16/t (ex royalty) is among lowest
among peers. Also strip ratio is falling due to faster growth at its low cost mines.
Volumes to grow at a CAGR of 5.5% over FY10-13E
We believe CIL is well positioned to gain from a 9.5% CAGR in coal demand over
FY10-15E given its virtual monopoly in the domestic coal markets. However, we
expect volume growth to be constrained by logistics bottlenecks & environment
approval-related hurdles. Production was muted at 0.6% YoY in 1HFY11E due to
extended monsoons, but should pick up in 2HFY11. However, we expect rake
availability to be the main constraint to shipments especially in seasonally strong
4Q. We forecast volumes of 426mn tons (net) in FY11 & 452mn tons in FY12.
Realizations underpinned; upside leverage from mix gains
CIL base prices, US$22/t (83% of volumes) are at 60% discount to imports. This
underpins downside to realizations and allows the flexibility to hike prices led by
cost hikes. We expect base prices hikes to be driven by costs. However, a steady
increase in base prices, higher mix of premium priced washed coal led by 4x
beneficiation should drive stable realization growth of 7.5% CAGR (FY10-13E) in
our view. Also pricing of higher grade coal closer to market prices pose upsides.
EPS to grow at 15.4% CAGR over FY10-13E
We forecast EPS to grow 14.7% in FY11 and 16.3% in FY12. We note CIL’s
EBITDA is understated due to inclusion of non cash overburden provisions within
its EBITDA. According to CIL, this will be disallowed under IFRS. A potential
reversal, once IFRS is implemented could increase FY12e EBITDA by 13%.
Positive Triggers: Stronger volumes & better logistics
Stronger volumes could drive upsides given high fixed cost base (wages are 45%
of costs). Better logistics and optimizing logistics to ease mismatch between rake
availability and output spike in 4Q could boost shipments.
Negative Triggers: Mining tax, mine approval delays & M&A
Proposed 26% mining tax under MMDR Act could lead to downside to our
estimates (7-19%). Delays in new mine approvals could pose risks to volume
growth. CIL has net cash of US$8.7bn and is also considering acquisition of coal
assets globally. We believe any value dilutive deal could be negative for CIL.
Valuations imply only 10% upside potential
Our PO of Rs350 is set at NPV and is based on WACC of 13% and terminal
growth rate of 3% (post FY25e). This factors in a 9 year residual mine life for CIL
(in the terminal year) and a significant pick-up in captive coal mine production on
potential opening-up of the coal sector through competitive bidding of coal blocks.
At our PO, Coal India will trade at 9.4x FY12e EBITDA (adjusted for OBR) at a
premium to global coal peers and in line with NTPC’s multiple, its closest
domestic utility peers in our view.
„ CIL (up 31% since IPO) is trading at 9.8x FY12 EBITDA at a premium to
global peers.
„ We believe CIL should trade at a premium to its global coal peers and closer
to Indian power utilities due to its ‘utility like’ characteristics and limited
linkage to coal demand supply.
„ CIL’s EBITDA includes non cash overburden provisions which may not be
allowed after potential implementation of IFRS. Adjusting for OBR provisions,
CIL trades at 8.3x at a 9% discount to its utility peer NTPC.
We believe NPV based valuation is more appropriate for Coal India relative to
reserve based valuations like EV/ton as it reflects time value of monetization of
the reserves and profitability of earnings generated from these reserves. Also
reserve based valuation metrics are distorted by differences in grades, time to
bring production online, ASP and cost of production.
Why utilities valuation and premium to global coal peers?
We expect Coal India should trade at a premium to large global peers and closer
to power utilities like NTPC, due to the following reasons.
„ Coal India represents a unique coal utility given its well-established status as
the key coal supplier to the structurally strong Indian power market.
„ Coal India has limited downside risks due to its large discount to import
parity. Base prices are driven by costs rather than global spot prices. Hence
margins are not vulnerable to volatility in global thermal coal prices.
„ CIL’s reserves are significantly higher than its peers. Reserve to production
ratio is 44 years based on current production.
„ CIL provides for non cash overburden charges within its EBITDA as its actual
stripping expenses are lower than stripping expenses based on average strip
ratio over mine life. Hence costs are higher than actual stripping costs
incurred by the company. A possible reversal of this methodology post IFRS
implementation (potentially in FY12) could increase EBITDA by 13%.
„ NTPC appears to be a closer benchmark for Coal India given its comparable
market cap, largest power utility status in India’s power sector (80% of Coal
India’s volumes), regulated pricing structure and its dependence on Coal
India for generation growth. However, we highlight that Coal India has lower
capital intensity and higher RoEs compared to NTPC.
Largest coal producer by reserves & volumes
Coal India (CIL) is the world’s largest coal company, with reserves of 18.8bn tons
(as per JORC) and raw coal production of 431.5mn tons (FY10), almost twice that
of the next two largest peers, China Shenua and Peabody USA.
„ As of 1 April 2010, CIL had total coal resources of 64.3bn tons and total
reserves of 18.86bn tons. Its total reserves comprised proved reserves of
10.59bn tons and 8.3bn tons of probable reserves.
„ CIL reserve base implies an average mine life of 44 years assuming current
levels of production.
„ While its reserves are low grade (E and F grades account for 67%), its low
strip ratio of 1.69x and 90% of production from open cast mines makes it one
of the lowest cost producers. We highlight Indian coal has low moisture and
low sulphur content, which are positive characterstics.
Virtual monopoly in a deficit market
We believe CIL presents a unique coal utility given its virtual monopoly in
domestic coal markets and high RoE (33% in FY11E). This is despite CIL pricing
its coal at a significant discount to imports even after adjusting for grades to
support development of user sectors. India’s planned doubling of power
generation capacity by FY17E represents a key growth opportunity as CIL
accounts for 81% of India’s coal production and 80% of its coal is sold to power
utilities.
Coal demand to gain momentum over FY10-17E
Power sector accounts for 76% of India’s non-coking coal demand and 80% of
Coal India’s dispatches in FY10. Domestic power generation has grown at a
CAGR of 5% over FY01-10 and has been largely correlated to India’s GDP
growth. Historically, capacity additions have lagged demand growth leading to
burgeoning power deficit. However, projects under execution provide strong
visibility that power capacity additions should accelerate over the next few years,
especially led by additions in thermal power capacity (67% of generation).
„ Non-coking coal demand to grow at a CAGR of 9.5% over FY10-15E: Our
power analyst Bharat Parekh estimates thermal coal capacity to rise by 1.8x
to 145GW by FY15. We, therefore, expect non-coking coal demand to
increase 1.54x to 850mn tons by FY15.
„ Steel expansions to drive coking coal demand growth: Coking coal
demand (8% of CIL’s volumes) is mainly driven by blast furnace-based steel
manufacturing process (45% of domestic steel production) as steel is used
as a reducing agent in blast furnace. Crude steel production has grown at a
CAGR of 8.5% over the last five years and should increase to 9.4% in the
next five years, driving strong coking coal demand growth.
Accelerating demand + lagged supply = widening deficit
We believe supply will continue to struggle to keep pace with demand growth,
resulting in widening coal deficits and rising imports.
„ We forecast domestic non-coking coal demand to grow at a 9.5% CAGR
over the next five years,
„ We expect Coal India’s volume growth to be constrained at 5.5% led by slow
pace of approvals and logistics constraints. Hence the deficit would have to
be bridged by captive mines and imports (including captive mines outside
India).
„ We expect power utility related coal imports to increase to 102 mn tons
(19.4mn tons in FY10) by FY17E.
Coal volumes to grow at 5.5% CAGR over FY10-13E
CIL’s production growth has gathered pace over the past few years with output
growing at a CAGR of 6.2% over FY08-10 to 431.2mn tons in FY10 vs 5.5%
volume CAGR over FY03-08. Despite robust thermal coal demand, we expect
CIL’s coal volumes to grow at 5.5% CAGR over the next five years as production
and offtake likely will continue to be constrained by slow pace of mining
approvals, logistic and railway bottlenecks. Also potential disruption due to Maoist
activities is a risk.
Expanding capacity of existing mines and developing new projects
CIL aims to increase its production at a CAGR of 6% to 486mt over FY10-12E
(431mt in FY10). It intends to spend Rs85bn over FY11-12E towards brownfield
and greenfield expansions. Around 45 expansions and new mine projects have
received investment approval and are in various stages of mine planning and
development:
„ 25 projects of 47.5mtpa capacity involving capex of Rs33.9bn under various
stage of implementation are expected to become operational by FY12.
„ 20 projects of 33.3mtpa involving capex of Rs25.8bn of longer gestation
periods are expected to become operational during the 12th Five Year Plan
(FY13-17).
„ Coal India has produced 186mn tons in 1H FY11 (up 0.7%), but should ramp
up in 2HFY11.
CIL plans to increase production from its underground mines and also revive 18
mines abandoned earlier. However, 1H FY11 capex of Rs11.4bn suggests capex
is running behind schedule. Also, production growth and shipments in 1HFY11
has been muted due to extended monsoons. In addition it is facing temperory
environmental approval issues at some of its existing mine/ mine expansions as
environmental pollution at the vicinity of the mines are elevated due to industrial
activity in the area. Hence we model a more conservative raw coal production
ramp up to 459mn tons in FY12E. Also there is lack of clarity regarding mine
blocks in the thickly forested area which the Ministry of Environment (MoEF)
proposed to classify as “No Go”.
Shipments to be constrained by railway bottlenecks
We expect transportation of coal through railways to be a key bottleneck
constraining volume growth at CIL. In FY10, CIL’s production grew at 7%, but
shipments grew only 4% due to unavailability of rakes. Average available rakes
per day were around 155 vs. the requirement of 175. Rail capacity to transport
coal has been growing at a slow pace. Consequently, the share of railways in
CIL’s coal transportation has decreased to 46.7% in FY10 vs 50% in FY06.
Railway availability inadequate to meet 4Q spike in production:
A key issue in our view is the strong seasonality of coal production and relative
uniform availability of railway transport. 4Q accounts for almost 34% of FY10
production (up ~ 47%QoQ) and the rake availability fell short of the seasonal
spike in 4Q production leading to large build up in inventories. Optimizing logistics
to ease mismatch between strong 4Q and rake availability is important, in our
view.
Slow pace of approvals & uncertainty around “Go/ No Go” issues
CIL has faced delays in starting new mines due to slow pace of regulatory
approvals, land acquisition issues and difficulty in obtaining forest clearances.
Hence, starting of new mines could take 5-7 years. A large proportion of India’s
coal-bearing area is located in the Eastern region and this overlaps with forest
cover. In addition, there has been uncertainty around recent Government of India
proposal to classify ~ 48% of coal-bearing area as “no go area” i.e., area
prohibited for mining purpose. If implemented, this could adversely impact CIL’s
production growth. However, government is keen to balance growth and
environmental considerations and may direct MoEF to dilute its stand.
Coal Ministry has recently proposed 90% of the “no go” area should be
considered for forest clearance/ mining unless there are very strong biodiversity,
wildlife and forest related concerns in those areas.
Disruptions from Maoist intervention
Most of the India’s coal-bearing area overlaps with areas vulnerable to Maoist
insurgency. Disruptions from Maoist activity could also adversely impact
production growth at Coal India.
Pricing underpinned, upside levers exist
Domestic coal prices are at big discount to import parity
Coal pricing in India has been deregulated since Jan 2000 under Colliery Control
Order, 2000, allowing CIL to set its coal prices independently. Despite pricing
freedom, CIL generally sets its coal pricing for fuel supply agreements (~83% of
FY10 volumes) in consultation with government and the power utilities in order to
maintain stable power costs and prevent inflation shocks. We expect CIL base
prices to increase gradually mainly by cost factors and do not expect a
significant narrowing of gap to import parity in the medium term.
„ Coal India pricing has been mainly influenced by costs and inflation rather
than demand supply dynamics. As a result, there have been only four major
revisions to notified coal prices over FY00-FY10. Coal prices have increased
at a CAGR of 4.9% over this period.
„ Domestic coal prices are at a significant discount to international coal prices
even after adjusting for calorific value, as a result. Coal India’s Grade E raw
coal price (pit head) is ~Rs305/mn kcal (excluding freight & taxes), which is
at a 61-65% discount to landed cost of imported coal.
„ We recognize that price discount is generally steeper than grade differential.
Also, inconsistent supply and grade warrants some discount. However, even
assuming comparable grade of Indonesian coal, we estimate landed cost of
comparable calorific value is Rs3585/ton. This compares to base price of
Rs1095/ton (excluding taxes & freight) at the pit head.
„ We believe pricing of domestic coal under the notified pricing category will
continue to be influenced by government and inflationary implication of
higher coal prices.
„ Cost push factors are likely to largely influence domestic coal pricing rather
than gap to import parity, in our view. Hence, we do not expect a significant
narrowing of discount to import parity in the medium term. A large discount to
import parity implies that downside risks to domestic coal prices are limited.
„ We do not forecast any further increase in base prices in FY11. In FY12, we
forecast notified prices to increase by 9% to offset proposed wage revision in
June 2011. We forecast base rates to increase at a CAGR of 5.4% over
FY10-13E.
Mix shift to boost realizations going forward
We believe increased sales of beneficiated and higher-grade coal, which are
allowed to be sold at market-driven prices, should drive higher realizations and
margin expansions going forward.
e-auction coal (11% of vols.) pricing is market linked
CIL sells around 11% of its volumes under the e-auction scheme. The e-auction
prices are influenced by market conditions and are at a significant premium (76%
premium in FY10) to the notified coal prices.This boosts average realizations.
While there are talks that the government may allow higher proportion of coal to
be sold through the e-auction route going forward, we believe this is unlikely as
most of the incremental volumes have already been tied up for delivery under the
Fuel Supply Agreement. Our base case forecast assumes e-auction mix remains
flat at current levels.
„ We believe pricing of domestic coal under the notified pricing category will
continue to be influenced by government and inflationary implication of
higher coal prices.
„ Cost push factors are likely to largely influence domestic coal pricing rather
than gap to import parity, in our view. Hence, we do not expect a significant
narrowing of discount to import parity in the medium term. A large discount to
import parity implies that downside risks to domestic coal prices are limited.
„ We do not forecast any further increase in base prices in FY11. In FY12, we
forecast notified prices to increase by 9% to offset proposed wage revision in
June 2011. We forecast base rates to increase at a CAGR of 5.4% over
FY10-13E.
Mix shift to boost realizations going forward
We believe increased sales of beneficiated and higher-grade coal, which are
allowed to be sold at market-driven prices, should drive higher realizations and
margin expansions going forward.
e-auction coal (11% of vols.) pricing is market linked
CIL sells around 11% of its volumes under the e-auction scheme. The e-auction
prices are influenced by market conditions and are at a significant premium (76%
premium in FY10) to the notified coal prices.This boosts average realizations.
While there are talks that the government may allow higher proportion of coal to
be sold through the e-auction route going forward, we believe this is unlikely as
most of the incremental volumes have already been tied up for delivery under the
Fuel Supply Agreement. Our base case forecast assumes e-auction mix remains
flat at current levels.
Washed coal mix to increase to 15% by FY16E
CIL is focusing on increasing the proportion of washed coal (~3% of FY10
volumes) over the next few years in order to improve grade consistency, reduce
ash content to ~30% (40% currently), and hence price the coal at a significant
premium to notified prices and closer to import parity prices.
„ Expanding washed coal capacity by 3.7x to 150mn tons: CIL is setting up
20 coal beneficiation facilities with capacity of 111.1mtpa (39mtpa at present)
over FY13-17E. It also plans to set up dedicated coal beneficiation facilities
at all new OC mines of 2.5mtpa capacity which are not linked to pit-head
customers. The proposed capex for the beneficiation expansion is Rs23bn.
We forecast washed coal mix to account for 3% of volumes over FY11-12E.
This should increase to 17% of CIL’s coal volumes to be washed in FY15E
once the beneficiation expansion starts kicking in.
„ Washed coal realizations are at significant premium to base price:
Average realizations on washed coal were around Rs2134/t in FY10, almost
2x raw coal sales realizations. Washed non-coking coal is currently priced on
a cost plus basis, while washed coking coal is priced at a 15% discount to
import parity on a grade adjusted basis. We forecast the proposed 111mtpa
beneficiation expansion could add around 14-15% to consolidated EPS.
Pricing higher grade coal at closer to import parity prices
CIL currently sells a small quantity of high-grade non-coking coal (Grade A, B & C
with GCV of >5597kCal/kg) on a negotiated basis. The pricing is generally set at
a 15% discount to import parity prices of comparable grade. In FY10, realizations
from negotiated sales were almost at a 2x premium to base prices. High-grade
coal accounts for ~ 17% of CIL’s volumes (Grade A and B account for 7%). It
plans to sell higher proportion of high-grade coal under this pricing mechanism.
We do not factor any benefits from negotiated coal sales in our model. Hence,
higher mix of negotiated coal sales presents an upside to our forecasts.
Low-cost assets with further cost levers
Favorable strip ratio drives low-cost position
Among global low-cost producers, CIL’s average production cost is US$16/ton, as
90% of its output comes from low-cost open cast mines.
Output from low-cost open cast mines growing faster….
The company’s average production cost (COP) at its low-cost open cast mines
was Rs520/ton (US$12/t), among the lowest globally. This is led by its low strip
ratio of 1.69x. COP at its underground mines are significantly higher at ~US$62/t
due to excess manpower.
….driving a reduction in strip ratio
CIL’s strip ratio has declined from 1.82x in FY08 to 1.69x in FY10 due to higher
proportion of production from MCL and SECL, which have among the lowest strip
ratio. We expect these subsidiaries to remain the key drivers of volume growth
over the next few years. Hence current low strip ratio should sustain, in our view.
Declining employee base offers scope for productivity gains
Employee costs is the key cost driver for CIL
Employee cost is the key cost driver for CIL, in our view, accounting for 45% of its
cost base. Excess legacy manpower concentrated in a few subsidiaries has
contributed to higher costs at these subsidiaries. To put this in perspective,
„ Loss-making subsidiaries like ECL and BCCL account for 39% of employees,
but only 13.4% of production.
„ On the contrary, profitable subsidiaries, MCL and SECL, account for 26% of
employee base but a relatively high 49.1% of the production.
„ CIL plans to increase operational efficiency by reopening underground mines
and redeploying excess manpower in these new projects.
Headcount reduction to partially cushion impact of wage inflation
However, a steady 4-5% decline in employee headcount per annum over the next
few years led by natural attrition coupled with higher volume growth should lead
to productivity gains over FY11-14E, in our view. We expect this to cushion the
impact of wage price hikes over the medium term.
We forecast wage cost/employee to increase at a 15% CAGR over FY10-13E
due to expected wage revision in June 2011. However, we expect employee
costs to increase only by 9% due to reduction in headcount from 398,000 (FY10)
to 350,000 by FY13 led by natural attrition.
Earnings outlook
Earnings to grow at a CAGR of 15.4% over FY10-13E
We forecast net profit of Rs110bn in FY11E and Rs128.3bn in FY12E. We also
forecast group EPS of Rs17.5 and Rs20.3 in FY11E and FY12E, respectively.
„ We expect EBITDA/t to increase from Rs293/t in FY10 to Rs341/t in FY11E
and Rs368/t in FY12E led by higher realizations and stable costs.
„ We forecast net shipments (net of beneficiation) of Rs426mn tons in FY11E
and Rs452mn tons in FY12E (410mn tons in FY10).
„ We also estimate average realizations of Rs1154/t in FY11 and Rs1251/t in
FY12. We do not forecast any hike in notified prices in 2HFY11. However we
forecast notified prices to grow 6% in FY11E mainly due to full impact of
price hikes announced in 2HFY10. In FY12E, we assume a 9% hike in FSA
prices mainly to pass through cost hikes owing to scheduled wage revision in
July 2011.
„ In the medium term (FY13-17E), we forecast FSA prices to increase at a
CAGR of 5%. Mismatch between timing of price hikes and wage increase
could lead to volatility in earnings in FY12.
Employee costs to grow at 9% CAGR over FY10-13E
Employee cost is the key cost driver for CIL, and has accounted for 45% of CIL’s
cost base (ex royalty) in FY10.
„ Last wage settlement for workers under NCWA VIII was signed on 24
January 2009 and is effective for a period of five years from 1 June 2006.
Hence next wage revisions for workers are due in July 2011, though final
settlement could take longer. We forecast 18% increase in wage cost per
employee in FY11 and 11% increase in FY12. Our forecasts factor in 9
months impact of wage hike in FY12 and a full-year impact in FY13.
„ CIL employee base was 397,138 in FY10. We forecast employee base to
decline 4.3% in FY11, 3.9% in FY12 and 4.4% in FY13. Hence, we forecast
employee costs to increase at a CAGR of 9% over FY10-13E despite a 14%
CAGR in wage cost/employee.
Contractual expenses account for 10% of cost base
CIL uses third-party contractors for its mining activities, overburden removal
operations and transportation of coal from pit heads to loading points. The
contractors generally provide most of the equipment, machinery and labor for
these operations. Contractor expenses have increased over the past few years
due to higher machinery, equipment and fuel costs incurred by the contractors. In
1HFY11, contractual expenses jumped 30% YoY led by higher overburden
removal during this period. We expect contractual expenses to trend higher and
forecast contract expenses to grow 25% in FY11E and 14% in FY12E.
Overburden removal provisioning understates EBITDA
In case of mines with capacity of 1mn tons or above, CIL provides for the cost of
overburden removal (OBR) based on average strip ratio at each mine. It provides
for non-cash OBR provisions when the actual strip ratio is lower than average
strip ratio over mine life. These provisions are reversed when actual strip ratio
exceeds average strip ratio. This accounting system of spreading cost of
overburden over the life of the mine smoothes earnings as various parts of the
mines are developed.
CIL provided Rs30.5bn of non cash overburden provision in FY10 as its actual
stripping ratio was lower than average strip ratio over mine life. Hence reported
expenditure was higher than actual expenses. According to Coal India, the OBR
accounting methodology currently used will not be allowed post transition to IFRS
(potentially in FY12). In the absence of OBR provisioning, we estimate CIL’s
EBITDA would be higher by 13% in FY12 and ROE would be lower at 29% (vs
35% base case).
Proposed 26% mining tax a key risk: Assessing potential
impact
Government is considering a proposal to implement a 26% profit sharing
provision in its new Mines and Minerals (Development & Regulation) Act. The
Group of Ministers (GoM) has approved the proposal for profit sharing with the
locals. However, the draft proposal will be presented to the Cabinet and
subsequently to parliament. The proposal is likely to be debated in parliament and
and the final policy measures are likely to be crystallized. This could be time
consuming and the draft bill may undergo several changes.
There is lack of clarity around the details of the mining tax and its implementation
at this stage. However, implementation of such mining tax is a negative for Coal
India and poses downside risks to our earnings forecasts. Coal India is hopeful
that it may be able to offset mining tax against the social costs incurred by the
company.
We assess the potential impact to Coal India’s earnings in case the 26% profit
sharing clause is implemented.
„ Scenario I – Offset against social costs is not allowed: We estimate the
potential hit to Coal India’s EPS could be 18-19%%.
„ Scenario II- Offset against social costs is allowed: We estimate the hit to
Coal India’s EPS will be much lower at 5-7%.
As mentioned above, there is lack of clarity about the implementation and rules
regarding mining tax computation. However, in our analysis, we look at two cases
1) we assume mining tax is applied on mining EBIT of the preceding year; 2) we
assume mining tax is applied on mining profits post tax (NOPAT) of the preceding
year. Also, we assume mining tax is treated as an expense for the purpose of
income tax calculation.
Balance sheet and cash flows
„ Capex of Rs25bn in FY11E and Rs46.5bn in FY12E: CIL plans to invest
around Rs84bn over the next 2-3 years for expanding mining capacities,
improving coal handling infrastructure and upgrading & expanding coal
beneficiation capacities. Capex in 1HFY11 was only Rs11bn. We forecast
capex of Rs25bn in FY11 and Rs46.5bn in FY12 factoring some delays in
implementation of these projects.
„ Net cash of US$8.7bn as on Sept 2010: CIL has a strong balance sheet
with a net cash of Rs391.7bn (US$8.7bn). Gross debt was Rs18.2bn
(US$405mn) and gross cash was Rs409.9bn (US$9.1bn) as on Sep 2010.
„ Free cash flows to remain robust: CIL’s free cash flow (FCF) has been
strong and has grown at a CAGR of 28% since FY07. We expect FCF
generation to remain strong despite the increase in capex.
„ RoE one of the highest among peers despite pricing at a discount: CIL’s
return on equity has been strong (excluding FY09) over the past few years. It
reported strong ROE of 37% in FY10. We forecast ROE to remain high at
33% in FY11E and 31% in FY12E.
Asset overview
As of 1 April 2010, CIL had total coal resources of 64.2bn tons and total reserves
of 18.86bn tons. Its total reserves comprised proved reserves of 10.59bn tons
and 8.3bn tons of probable reserves based on JORC standards.
CIL operated 471 mines, comprising 163 OC mines, 273 UG mines and 35 mixed
mines (which include OC and UG mines) in 21 major coalfields across eight
states in India: Chhattisgarh, West Bengal, Jharkhand, Maharashtra, Madhya
Pradesh, Assam, Orissa and Uttar Pradesh.
A significant majority of the company’s non-coking coal is produced from mines
located in Korba, Singrauli, Talcher, IB Valley and Wardha Valley coalfields, all of
which accounted for 70.7% of its FY10 total non-coking coal production. Most of
these mines are open-cast and are endowed with thick seams and very favorable
strip ratio with company average of 1.7x, which more than compensates for its
inferior grade reserves and delivers superior profitability – RoE of 37%.
Most of CIL’s coking (metallurgical) coal is produced at the Jharia coalfield. The
firm has also acquired prospecting licenses in two coal blocks in Mozambique.
Major coalfields and mines
1. Korba – Reserves 2.3bn T (13%) & Prod 78.46mn T (18%)
Korba is CIL’s most productive coalfield with aggregate rated production capacity
of 75.2mtpa as of 31 March 2010. It is located in Chhattisgarh and is operated by
SECL. It produces primarily non-coking coal of grades B, C, E and F. Gevra,
Dipka Expansion and Kusmunda mines are the most significant mines in Korba
coalfield, accounting for 16.3% of CIL’s total raw coal production in FY10.
Singrauli – Reserves 1.9bn T (10%) & Prod 68mn T (16%)
Singrauli is CIL’s second most productive coalfield with aggregate rated
production capacity of 77.4mtpa in FY10. It is located in Madhya Pradesh and
Uttar Pradesh and is operated by NCL. Currently, it operates 10 OC mines which
produce primarily non-coking coal of grades C, D and E. In FY10, it produced
67.7mn T of raw coal. Jayant, Nigahi, Dudhichua and Amlohri mines are the most
significant mines in Singrauli coalfield, accounting for 10.5% of CIL’s total raw
coal production in FY10.
Talcher – Reserves 5.9bn T (27%) & Prod 60mn T (14%)
Talcher is CIL’s third most productive coalfield with aggregate rated production
capacity of 69.3mtpa as on 31 March 2010. It is located in Orissa and is operated
by MCL. Currently, Talcher coalfield has nine OC mines and four UG mines under
operation which produce primarily non-coking coal of grades B, C, E and F.
In FY10, the mine has produced 59.7mn T of raw coal. Lingaraj, Ananta and
Bharatpur mines are the most significant mines in the Talcher coalfield,
accounting for 8.5% of CIL’s FY10 total raw coal production.
IB Valley – Reserves 2.4bn T (5%) & Prod 44mn T (10%)
IB Valley is one of the significant coalfields of CIL with an aggregate rated
production capacity of 45.3mtpa as on 31 March 2010. It is located in Orissa and
is operated by MCL. Currently, the coalfield has seven OC mines and five UG
mines in operation which produce primarily non-coking coal of grades C, D, E and
F. In FY10, the mine has produced 44.3mn T of coal. CIL has a plan to develop
two 10mtpa non-coking coal beneficiation facilities on a BOM scheme in the IB
Valley coalfield. Lakhanpur and Samleshwari Expansion mines are the most
significant mines in the IB Valley coalfield, accounting for 5.5% of CIL’s total coal
production in FY10.
Wardha Valley – Reserves 0.7bn T (4%) & Prod 29mn T (7%)
It is one of the large coalfields of CIL with an aggregate rated production capacity
of 29.3mtpa as on 31 March 2010. It is located in Maharashtra and is operated by
WCL. Currently, the coalfield has 26 OC mines and 12 UG mines in operation
which produce primarily non-coking coal of grades B, C, D, and E. In FY10, it has
produced 29.3mn T of coal. Padampur and Niljai mines are the most significant
mines in Wardha Valley coalfield, accounting for 1.3% of CIL total raw coal
production in FY10.
Jharia – Reserves 0.5bn T (5%) & Prod 27mn T (6%)
Jharia is one of the major coalfields of CIL with an aggregate rated production
capacity of 32.7mtpa as on 31 March 2010. It is located in Jharkhand and is
operated by BCCL. The mines at Jharia coalfield primarily produce high-value
coking coal of grades Steel-I and II, direct feed metallurgical grades of steel coal,
Washery-I, II, III and IV grades of coking coal and B, C and D grades of noncoking coal.
Currently, the coalfield has 17 OC mines, 38 UG mines and 23 mixed mines in
operation. In FY10, it has produced 27.5mn T of raw coal. CIL has planned to
develop a non-coking coal beneficiation facility of 2mtpa and four coking coal
beneficiation facilities having aggregate capacity of 15mtpa. Muraidih, Block-II
and Moonidih are the most significant mines in the Jharia coalfield which
accounted for 1.2% of CIL’s total raw coal production in FY10.
North Karanpura – Reserves 2.0bn T (7%) & Prod 24mn T (6%)
CIL also has significant mining operation at North Karanpura with an aggregate
rated production capacity of 23.7TPA as on 31 March 2010. The coalfield is
located in Jharkhand and is operated by CCL. Currently, it has nine OC mines
and two UG mines in operation which produce primarily non-coking coal of
grades B, E and F.
The coalfield has produced 23.6mn T of coal in FY10. Piparwar, Ashoka and K.D.
Hesalong are the significant mines in the North Karanpura coalfield accounting for
4.8% of CIL’s total raw coal production in FY10.
Central India – Reserves 0.5bn T (4%) & Prod 25mn T (6%)
This is one of CIL’s notable coalfields with an aggregate rated production capacity
of 28.6mtpa as on 31 March 2010. It is located in Madhya Pradesh and
Chhattisgarh and is operated by SECL. Currently, the coalfield has 15 OC mines,
56 UG mines and one mixed mine in operation which produce primarily noncoking coal of grades SC II, A, B, C, D and F. It has produced 24.7mn T of coal in
FY10.
The coalfield comprises of Jhilimili, Bisrampur, Lakhanpur, Sindurgarh, Umaria,
Johilla, Sohagpur, Sonhat and Chirmiri mines. Churcha RO, Chirimiri and
Dhanpuri mines are the most significant mines in the Central India coalfield,
accounting for 0.9% of CIL’s total raw coal production in FY10.
Raniganj – Reserve 0.3bn T (3%) & Prod 17mn T (4%)
Raniganj coalfield is located in West Bengal and is primarily operated by ECL,
while a smaller portion of this coalfield is operated by BCCL. The coalfield
operated by ECL has an aggregate rated production capacity of ~21mtpa as on
31 March 2010 and has produced 17mn T of coal in FY10. BCCL operates 16
OC mines, 84 UG mines and seven mixed mines in the Raniganj area. The
coalfield produces primarily non-coking coal of grades SC I, A, B, C and D.
Sonepur Bazari is the most significant mine in the Raniganj coalfield, accounting
for 1.0% of CIL’s total raw coal production in FY10.
Rajmahal/Deogarh- Reserve 0.54bn T (3%) & Prod 13mn T (3%)
Rajmahal/Deogarh coalfield has an aggregate rated production capacity of
11.1mtpa as on 31 March 2010. This coalfield is located in Jharkhand and is
operated by ECL. Currently, it has four OC mines in operation which produce
primarily non-coking coal of grades D and F. The coal produced is primarily sold
to the power sector. The coalfield has produced 13.1mn T of coal in FY10.
Rajmahal is the most significant mine in the Rajmahal / Deogarh coalfield,
accounting for 2.6% of CIL’s total raw coal production in FY10.
East Bokaro – Reserve 0.55bn T (3%) & Prod 13mn T (3%)
East Bokaro coalfield has an aggregate rated production capacity of 10.5mtpa as
on 31 March 2010. It is located in Jharkhand and is operated by CCL. Currently,
the coalfield has 12 OC mines, eight UG mines and one mixed mine in operation,
which produce primarily non-coking coal of grades W III and W IV, E and F. The
coal produced is primarily sold to the thermal power sector. The coalfield has
produced 12.7mn T of coal in FY10. The Amlo mine is the most significant mine
in the East Bokaro coalfield, accounting for 0.7% of CIL’s total raw coal
production in FY10
Background
Coal India Ltd (CIL) was established in 1973 as a wholly-owned enterprise of the
Government of India (GoI). It has 11 direct and indirect subsidiaries.
„ Eight of its subsidiaries are involved in coal production in India.
„ Its subsidiary, CMPDI, provides technical and consultancy services for its
operations as well as third-party clients for coal exploration, mining,
processing and related activities.
„ The company has established CIAL to pursue coal mining opportunities in
Mozambique. It has established a JV (holding 28.7% equity stake), ICVL,
with SAIL, NTPC, NMDC and RINL for the acquisition of coal mines and
blocks outside India.It has also entered into a 50:50 JV with NTPC to
establish CIL NTPC Urja Pvt Ltd primarily to jointly undertake development,
operation and maintenance of certain coal mine blocks in Jharkhand and
integrated coal-based power plants.
„ CIL has been conferred the Navratna status by the GoI, which provides it
certain operational and financial autonomy, including for the approval of
capital investment without any ceiling for projects in India and the formation
of JV or wholly owned subsidiaries in and outside India up to 30% of its net
worth.
„ Coal India management has a strong track record in coal mining and
executing coal expansion projects. The Chairman of the Coal India is Mr.
Partha S Bhattacharya. He has been in CIL since 1977 and has been
responsible for turn around of loss making BCCL. He has also driven key
strategic initiatives including e marketing of coal and coal beneficiation. He is
scheduled for retirement in Feb 2011.
Loss-making subsidiaries report profits in FY10
CIL is structured into 9 direct subsidiaries with Northern Coalfields Limited (NCL)
and Mahanadi Coalfields Limited (MCL) being the most profitable subsidiaries
with PAT margin of 29% and 27%, respectively, in FY10. However, two of its
subsidiaries BCCL and ECL have been largely loss making. This has been due to
tough mining conditions, high cost of underground mines, limited scope of open
cast mining and excess manpower. ECL and BCCL accounted for 36.4% of
employee costs in FY10, but only 13.4% of production volumes. These
companies have been declared sick in the late 1990s. However, they have
implemented revival plans.
BCCL reported profits of Rs8.35bn in FY10 vs a loss of Rs.9.3bn in FY09 and a
loss of Rs6.8bn in FY08. Also, ECL reported profits of Rs3.9bn in FY10 vs a loss
of Rs16bn in FY09 and a loss of Rs11.9bn in FY08. This was led by higher
production, better realizations and reduction in costs.
very nice info thank you
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