Coal India:: Management Meet Note- , ICICI Securities,

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Steady performer…
We met the management of Coal India Ltd (CIL) to get an insight into the
business model and understand its future growth strategy. Coal India is
the largest producer and reserve holder of coal in the world with raw coal
production of 431 million tonnes (MT). CIL operates 471 mines across 21
coalfields (this includes 163 opencast mines, 273 underground mines and
35 mixed mines). The company produces coking and non coking coal and
also undertakes beneficiation of raw coal.
�� Improvement in availability of rakes
CIL transports ~47% of sales volume through railways. Hence,
availability of rake is of key importance. Historically, CIL has been
facing a lot of issues on availability of rakes, which has led to lower
offtake and higher inventory at the pit head. In FY11, during the first
half of the year availability of rakes was slightly lower (~158 rakes
per day [rpd]), whereas the full year average was ~162 rpd.
However, in order to address this issue, Railways has assured CIL of
higher availability of rakes. Rakes availability has improved in April
2011 to ~177 rpd from ~154 rpd in April 2010. For May and June
2011 rakes availability has improved to ~166 rpd and ~161 rpd,
respectively, from ~150 rpd each in May and June 2010.
�� Higher share of washed coal to lead to higher revenues
CIL plans to add 20 new coal washeries (of which 15 would be non
coking coal and five would be coking coal) with a capacity of 111
MT. It currently has 17 coal washeries with a capacity of 39.4 MT.
Washed coal commands higher realisation compared to raw coal.
Hence, going forward, higher realisation due to higher sales from
washed coal will lead to strong growth in revenues of CIL.
�� Margins to remain intact, going forward
A major cost to CIL is wage cost, which accounts for ~47% of the
total cost (FY11). The national wage agreement IX is due in July
2011, which will subsequently lead to higher wage cost. However,
CIL has been proactive and has undertaken a price hike in Feb 2011
(increase of ~12% in blended realisations as compared to Q3FY11).
Even in case of a steeper increase in wage cost, we believe the
company has enough levers & headroom to neutralise the impact.
Hence, we expect CIL’s EBITDA margin to remain intact at ~22%.
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Currently, as per Planning Commission estimates, the coal deficit in India
in FY12 is expected at ~142 MT, indicating huge demand for coal. With
the ramp up in production and liquidation of inventory, the revenues and
profitability of CIL are slated to post healthy growth, going forward