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Coal India (COAL)
Metals & Mining
Stumbling over environment hurdle. Coal India Ltd continues to be plagued by
environment hurdles, now manifested in the form of Comprehensive Environment
Pollution Index (CEPI) that threatens 39 mn tons out of 486 mn tons of production
targeted in FY2012E. We believe that the environmental hurdle remains a key
bottleneck for projected volume growth and have maintained a conservative 4.7%
CAGR in volumes versus the company target of 6% volume growth
Management indicates production slippages on account of CEPI
CIL management has indicated that the production for the next two years will likely fall short of
their original targets if stricter environmental norms and proposed classification of no-go mining
areas continue to inhibit the required capacity ramp-up. We, however, highlight that lower-thanguided production is factored to an extent in our estimates as we build in production of 443 mn
tons in FY2011E and 463 mn tons in FY2012E as against official company target of 460 mn tons
and 486 mn tons, respectively; though we do not entirely rule out downside risks to our numbers
if the standoff between Ministry of Coal and Ministry of Environment and Forest does not find an
early resolution.
Comprehensive Environmental Pollution Index (CEPI) – a new environment hurdle
CIL management has indicated that a continuation of CEPI norms could impact production targets
by 16 mn tons and 39 mn tons in FY2011E and FY2012E, respectively. CEPI was introduced by
Ministry of Environment and Forest (MoEF) in 2009 to assess the environmental quality of
industrial clusters in India. In January 2010, MoEF imposed a temporary moratorium on
development projects in 43 clusters which also includes seven coalfields of CIL. The moratorium
was put in place till August 2010 but was further extended by MoEF (in October 2010) till March
2011 thus further delaying the award of environmental clearance for these projects.
Maintain ADD with a target price of Rs345/share
We maintain our ADD rating with a target price of Rs345/share. Our target price is based on 12.5X
FY2012E EPS adjusted for overburden removal and interest income and implies an EV/EBITDA of
9.2X on FY2012E EBITDA (adjusted for overburden removal). CIL currently trades at 15X FY2012E
EPS (reported) and 9.7X FY2012E EBITDA (reported).
We highlight that if CIL were to achieve volumes of 435 mn tons in FY2012E, 5% lower than our
estimate of 458 mn tons, earnings would be impacted by 14% to Rs18/share from Rs21/share
currently, eroding Rs42/share from our target price of Rs345/share (see Exhibit 2). We maintain our
estimates as we remain optimistic that the debate between environment and development will
likely find a plausible solution that does not put to risk India’s energy requirements.
In our view, CIL will likely continue to command premium multiples to account for
(1) expectations of narrowing discount to global coal prices, and (2) constantly improving
employee efficiency metrics that will further propel margin expansion. Lower-than-estimated
volumes and possible imposition of mining tax could be a key risk to our earnings and
valuation estimates
CEPI – affected coal blocks and subsidiaries
CEPI has identified 43 clusters in India as critically polluted and has temporarily stalled
development projects in these clusters. These clusters include seven coalfields of CIL
including Chandrapur, Korba, Jharia, Talcher, Singrauli, Raniganj and IB Valley. The directly
affected CIL subsidiaries are ECL (Raniganj), BCCL (Jharia), SECL (Korba), NCL (Singrauli) and
MCL (Talcher and IB Valley). CIL’s coalfields, identified as critical under CEPI, contributed 295
mn tons or 68% of FY2010 production and account for ~66% of CIL’s total extractable
reserves of 21.75 bn tons (see Exhibit 4).
We also highlight that a significant portion of near-term capacity addition of CIL was
supposed to be undertaken in the Talcher and IB Valley coalfields of MCL and continuation
of CEPI norms could impact near-term ramp-up of capacity and hence production growth.
‘No Go’—another stumbling block
Pursuant to a proposal dated July 8, 2010, MoEF introduced initiatives for the identification
of environmentally sensitive areas classified as ‘No Go’ where coal mining activities would
not be permitted. ‘No Go' areas for mining have been defined as those that have over 30%
gross forest cover or over 10% weighted forest cover. Several significant coalfields where
CIL is currently carrying on mining activities have been classified as ‘No Go’ including large
mines such as North Karanpura in Jharkhand, IB Valley in Orissa and Chhattisgarh, Singrauli
Coalfield in Madhya Pradesh and Uttar Pradesh and Talcher coalfield in Orissa.
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