Coal India — MoEF lifts CEPI restriction at two key mines:: BofA Merrill Lynch,

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Coal India Limited — MoEF lifts CEPI restriction
at two key mines
Company Update
CEPI restriction removal at two key mines is a positive
Environment Ministry (MoEF) has lifted CEPI (Composite Environment Pollution
Index) related restriction on expansion at Singrauli & Ib Valley areas. The projects
in these areas will now be considered for environment clearance. The coal fields
are among CIL’s largest & faster growing coal fields & could potentially add ~9mt
of incremental output (34% of FY13e incremental output) as per our initial est.
Given the lead time for getting the clearance, we believe impact on output will
likely come thru post FY12. Logistics will however remain the key constraint to off
take in our view. We maintain our Neutral rating as 1) another price hike in FY12,
key to further outperformance appears unlikely; 2) CIL is trading at 9.3x FY12e
EBITDA. Our NPV based PO implies limited upside potential from current levels.
Singrauli and Ib Valley account for 26% of production
Singrauli and Ib Valley coal fields represent 2nd and 4th largest coal mines of CIL
accounting for ~15.7% and ~10.3% of CIL’s output. IB valley volumes have been
growing at a CAGR of 16.4% and Singrauli volumes have been growing at 7%
over FY06-10 (vs. CIL growth of 5.9%). Given limited details on mine wise
expansion plans, we assume 10% growth at these mines to estimate potential
upside from CEPI restriction removal at these mines. We currently forecast
production to grow 5%YoY in FY12e and 5.8%YoY in FY13e factoring in some
upside from CEPI restriction removal.
CIL production outlook has been affected by CEPI
MoEF had imposed a moratorium on expansion in critically polluted areas with
CEPI >70 in Jan 10. Environmental approvals in these areas were put on hold.
Around 39mn tons of CIL’s FY12 target output was affected as 8 of CIL’s coal
fields fell in these areas. CEPI restriction at Talcher (14% of output) was lifted in
4QFY11. Korba, CIL’s largest coal field (18% of production) still falls in the
cluster


Coal India Limited (XOXCF)
Our PO of Rs400 is set at our NPV estimate. Our NPV analysis assumes a
WACC of 13% and a terminal growth of 2%. At our PO Coal India would trade at
9.5x FY12E EBIDTA . We forecast coal volumes to grow at a CAGR of 5% over
next five years
Stronger volume growth, higher realisations and lower costs pose upside risks to
our valuations. Downside risks to our valuations are slower pace of environmental

approvals, prohibition of coal mining in areas where CIL reserves are located,
sharper than expected increase in wage costs and inability to raise prices to pass
thru wage cost hikes.