29 April 2010

BSE Sensex: 17503

Coal India
Coal Management Speak

Coal accounts for 51% of India’s energy basket, and has assumed the proportions of a ‘burning issue’ as despite being
the backbone of the economy, reforms have largely by-passed the sector. Coal will remain the fuel of choice for key
user industries – power, steel and cement – which are executing humongous expansion plans to meet the country’s
infrastructure needs. We recently released a report on “Indian coal sector” (dated 19 April 2010) highlighting the
widening demand-supply chasm in the Indian coal industry. According to our estimates, demand is likely to grow 2.5x
by FY17 from the base of 555m tonnes in FY09 – which implies a potential coal deficit of 472m tonnes by then. This
report is another step on our part to seek clarity on the contours of the sector. We interacted with the management of
Coal India (CIL), world’s largest coal company and India’s primary source of coal supply (accounting for 82% of India’s
coal production). Our queries revolved around CIL’s preparedness to address production bottlenecks and effect
productivity improvements, coal pricing in India, progress on international acquisitions and the status of its upcoming
IPO. The management has highlighted that CIL is taking every step possible to meet supply-side expectations as also
ensure that mining is done with a ‘human face’. Even as employee productivity is on an uptrend at CIL, the company
intends to pursue an optimal mix of man and machines to maintain not only a low operating cost but also low capital
costs. Finally, CIL seems geared for international acquisitions and the upcoming IPO. Salient points of our interaction
with Coal India management are as follows.

India faces huge coal shortage. Given the pivotal role that CIL plays in India’s coal supply, what is being done to
accelerate production?
CIL’s coal production has registered a CAGR of ~6% for the last few years. The company has undertaken several measures
to ramp up production to meet the rapidly increasing demand from power generation, steel and cement sectors. Going
forward, CIL plans to invest US$7.5bn into 142 new projects having a cumulative capacity of 380m tonnes. Also, drilling
targets have been increased by 3x with the objective to accrete reserves, which will eventually translate into higher
production. CIL also plans to improve efficiency at its existing mines which has a good scope to increase production from
current levels. The company plans to invest significantly in R&D activities, training and development along with a
substantial investment into ordering of equipment which will drive productivity and augment production.

A large portion of CIL’s incremental production is likely to come from new mines, which typically face
commissioning delays. How is CIL preparing itself to address these bottlenecks?
In contrast to the 11th 5-Year Plan period (FY07-12), bulk of the targeted incremental production during the 12th Plan
period is proposed to be met through commissioning of new mines. However, commencement of these mines could be
delayed due to bureaucratic delays and other obstacles like land acquisition, forest and environmental clearances, etc.
Given that demand-supply gap has already widened to ~70m tpa and is expected to cross 80m tpa by FY12, several
initiatives have been proposed to fast-track regulatory approvals. Key among them are:
(a) The Prime Minister’s Energy Coordination Committee (ECC) – the apex policymaking body for the energy sector – is
giving shape to a proposal that envisages forestry clearance for new coal mining projects within 150 days and for renewals
in 120 days.

Chirag Shah Saumil Mehta

chirag.shah@idfc.com saumil.mehta@idfc.com
91-22-6622 2564 91-22-6622 2578

IDFC Securities Ltd.

Naman Chambers, C-32, G- Block, Bandra- Kurla Complex, Bandra (East), Mumbai 400 051 Tel: 9122-6622 2600 Fax: 91 22 6622 2501

“For Private Circulation only” and “Important disclosures appear at the back of this report”
 IDFC Securities

(b) Environment clearance for coal mining projects would be given within 60 days while the projects that have already
received forestry clearance would be eligible for automatic environmental clearance
(c) The Ministry of Environment and Forests (MoEF), in its new notification, has stated that developers that have already
bagged environment clearance for existing projects may be exempted from the stipulated public hearings for obtaining
clearances for expansion projects.

What scope does CIL see in productivity improvement in its mines? What steps are being taken for technological
upgradation?
CIL has old legacy underground (UG) mines and ~40% of the manpower is still engaged in these. Production
contribution from these mines is a meager 8%; this has had dropped consistently from 90% at the time of coal mine
nationalization. This has led to a considerable decline in manpower productivity even as Output per Manshift (OMS) in
CIL has doubled to 4 tonnes per shift from the levels 10 years ago. Over a period of time, CIL would gradually phase out
these mines and the manpower would be redeployed for future expansion. This should lead to a considerable
improvement in manpower productivity going forward.

As regards further mechanization, the management believes that in order to stay at the lower end of the cost curve, a
business needs to aim at optimum, and not necessarily highest, labour productivity. An optimum mix of man and
machine productivity leads to low cost of operations. The current cost of CIL’s opencast operations stands at US$11.5/
tonne – already one of the lowest in the world. This clearly establishes that CIL is fairly close to the optimal mix in such
operations, which account for 90% of its total coal produced.

CIL plans to acquire mines abroad. Can you please give some more colour to the same?
CIL is in the process of acquiring coal resources abroad through equity stakes in various greenfield projects. Two coal
blocks with estimated reserves of 1bn tonnes have been acquired in Mozambique and production is likely to commence
in the next 2-3 years. The board has also approved to conduct due diligence for acquisition of five coal companies in
Australia, Indonesia and the US at a total cost of ~US$2bn. Over the next 10 years, CIL plans to import about 500m
tonnes of coal from these mines.

But coal handling capacity is also perceived to be an issue for imports...

CIL is close to signing a deal with Vizag Port Trust to acquire space at the Visakhapatnam port though a few formalities
need to be completed. CIL and Vizag Port Trust would jointly expand capacities at the port on PPP model. A 6m tpa
capacity would be available to CIL at any point in time. CIL is also exploring tie-ups with other ports.

There are several problems typically associated with coal mining – including land acquisition, Rehabilitation &
Resettlement, forest cover, etc. How does CIL overcome these issues?
Land is a major input for mining of coal. CIL would require 62,000 hectares of land for future expansion. However,
unlike China or Australia, coal bearing areas in India are mostly inhabited – often by tribals and that too in forest land.
Thus, land acquisition in India involves dealing proactively with substantial social and environmental issues, if not
passionately. CIL believes in inclusive growth and pursues an effective PAP friendly Rehabilitation & Resettlement
policy aimed at making irreversible and substantial improvement in the quality of life of displaced families. The fact that
despite operating in such an environment, the company could accelerate its growth rate from less than 5.5% two years
ago to 6.8% in FY10 bears testimony to the efforts made in promoting mining with a human face. In fact, CIL has also
proposed to offer equity shares to project-affected people.

There are environment concerns and safety issues around coal mining. What is CIL’s view on this?
Mining is a highly hazardous industry and CIL has made quantum difference in the practice of safe mining. The safety
statistics have undergone marked improvement since nationalization – a case in point is that the probability of an
employee meeting with an accident today is not worse than that in the US.

Further, while conceding that coal mining is associated with environmental degradation, CIL proactively keeps a tab on
environmental parameters as the mining progresses. Technical and biological reclamation of mined-out areas is being
practiced with missionary zeal and through plantation of native species for bringing back the ecology. In this way, CIL

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has created many dense forests. CIL also introduced a satellite surveillance system for monitoring of land reclamation
and afforestation of its large opencast mines.

Average coal price increase in the last decade has lagged the rate of inflation. Do you see domestic prices being
pegged to international benchmarks in the near future?
CIL had increased coal prices in October 2009 and there are no plans to effect a further hike in FY11. The company sells
10% of its production under the e-auction route and proposes to increase the proportion to 20% in the coming years.
Even after selling coal at the notified prices, which are at a significant discount to international prices, the company has
been making 30% operating margins given its cost-competitiveness vis-à-vis the global benchmarks. However, CIL plans
to revise prices for washed coal after setting up coal washeries. It proposes to set up 20 washeries in the next few years
and increase the proportion of washed coal to 55% of total sales volumes by FY17.

CIL sells ~10% of its coal production through the e-auction route. There are indications that the same could be
increased further. What is the progress so far?
E-auction was started by CIL and its subsidiaries to sell coal in the open market with a view to provide the fossil fuel to
consumers unable to source it through the available institutional mechanisms for reasons like seasonality of coal
requirement, limited requirement of coal not warranting long-term coal linkage, etc. Under the New Distribution Policy,
CIL is allowed to sell 10% of its production under the e-auction process. The expert panel set up by the Planning
Commission has asked the coal ministry to increase the limit of 10% to 20%. This has been proposed to bridge the huge
parity between domestic and international coal prices. The proposal is yet to receive a positive response from the coal
ministry.

Coal washing and underground coal mining has to gain prominence going forward. How is CIL preparing itself
for the same?
Indian non-coking coal mostly falls in the grade between D&F, thus having very low calorific value and high ash and
moisture content. Over the medium term, coal produced is likely to be of similar, if not worse, quality – which poses
significant challenges to end users. As a result, coal washing has achieved prime importance. Post washing, ash content
in coal drops from 37-42% to ~30%. Today, coal washing accounts for <10% of CIL’s total production, which it plans to
increase to ~60% in the coming years. The company plans to set up 20 coal washeries with a total washing capacity of
111m tpa, primarily for non-coking coal, at a cost of Rs15bn. All new projects with production capacity more than 2.5m
tpa will have the beneficiation facility. CIL will also outsource coal washing to organizations with core competence on
Build-Operate-Maintain (BOM) basis for creating beneficiation facilities.

With a significant cash balance on the books, is CIL looking to diversify into other areas like power generation?
CIL has signed an agreement to form a 50:50 JV with NTPC to set up two 2,000MW coal-based power plants in
Jharkhand. The JV will set up the power projects at the Brahmini and Chichro Patsimla coal mines at a total investment
of Rs160bn. In addition, CIL plans to set up a 1,000MW power plant with NTPC near the North Karanpura coal fields.
CIL is also considering power projects with utilities such as Orissa Power Generation Corporation, Chhattisgarh State
Electricity Board and Neyveli Lignite Corporation.

Would you like to give us an update on your IPO plans?

The finance ministry has invited bids from eligible parties for appointment as lead managers for CIL’s initial public
offering. The bids would have to be submitted by 3 May 2010 and the company aims to file the draft IPO documents by
15 June. The government plans to select and appoint six merchant bankers to serve as book running lead managers
(BRLMs) and the IPO will most likely hit the market in July or August. The company is awaiting cabinet approval on the
proposal to sell 10% government equity in the company through a market offering.

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INDIAN COAL SECTOR—FACT FILE

Total coal production in India Open-cast mining accounts for ~85% of domestic production
(m tonnes) All India (m tonnes) u/g o/c
600 400
497
462
450 431 300
407
382
361
341
300 200 318 341
277 298
242 259

150 100

48.4 47.5 47.0 45.8 43.3 43.5

- -
FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY03 FY04 FY05 FY06 FY07 FY08
Source: Ministry of Coal

Indian coal reserves concentrated in eastern parts… …with majority of reserves within 300mtr of depth
Proved Indicated Inferred (Depth MT) Proved Indicated Inferred
80 180
6.3
13.8
60 135
13.8
30.9
65.8
40 4.4
31.5 90
5.7 18.1
29.2 5.1
20 39.5 2.6 10.0
11.6 45 82.8 46
10.3
19.9
10.9 11.7 15.8 6.1
8.0
0 21.4 11.7
Jharkahand Orrisa Chhatisgarh West Bengal Madhy a Others 0 1.7
Pradesh 0-300 300-600 600-1200

Source: Ministry of Coal

Distribution of coking (metallurgical) coal reserves Bulk of India’s non-coking coal reserves are low grade

(bn tonnes) (bn tonnes)

28 60
26.4
53.9

21 45

14 30

7 5.3 15 12.5
9.6
1.7 4.3
- 1.2
0
Prime coking Medium coking Semi-coking A B C D E,F&G
Source: Ministry of Coal

Increasing share of captive mining in total supplies Indian imports of coking and non-coking coal
40 Captive (m tonnes - LHS) Captive as % of total (RHS) (m tonnes) Non-coking Coking
10.0 40

8.0
7.5 11.0
30 6.8 7.5 30
8.2
% 6.0
5.1 8.2
20 27.5 32.2 36.9 5.0 20 6.7
20.8 23.0
6.9
17.4 7.0 25.9
24.0
10 2.5 10 19.3
13.9 16.3
10.4
-
0 0.0
FY03 FY04 FY05 FY06 FY07 FY08 FY03 FY04 FY05 FY06 FY07 FY08
Source: \Ministry of Coal, Crisil Research

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COAL INDIA—FACT FILE

CIL operates through its eight subsidiaries, 7 of which are in coal production while CMPDI is into mine planning and consultancy
Subsidiary Properties Primary area Production in Production % contribution Asset information
of operation 2007 (mmt) in 2012E from U/ G
mines

ECL Ra niganj, RajMahal West Bengal 30.5 46 27.10% • Total command area of 1,620 sq.kms
& Mugma Salanpur and Jharkhand • Operates 83 u/g mines, 21 o/c mines
and 6 mixed mines
• Total reserves of 40.6bn tonnes
BCCL Jharia & Ranigaunj West Bengal 24.2 30 20.20% • Total command area of 1,620 sq.kms
and Jharkhand • Operates 83 u/g mines, 21 o/c mines
and 6 mixed mines
• Total reserves of 40.6bn tonnes
CCL North & South Bihar & 41.3 78 4.70% • Total command area of 2,600 sq.kms
Karanpura, East & Jharkhand • Operates 26 u/g mines & 39 o/c mines
West Bokaro,
• Total reserves of 33.5bn tonnes
Ramgarh & Giridih
NCL Singrauli Madhya 52.2 70 - • Total command area of 2,202 sq.kms
Pradesh • Operates 10 o/c mines
WCL Wardha, Umrer, Madhya 43.2 45 22.90% • Operates 84 mines grouped into 10
Patharkhera & Pradesh & operationa l areas
Kamptee Maharashtra • Total reserves of 13.1bn tonnes

SECL Korba & Raigarh Chhattisgarh & 88.5 111 18.30% • Total command area of 974 sq.kms
Madhya • Operates 72 u/g mines, 12 o/c mines
Pradesh and 1 mixed mine
• Total reserves of 46.5bn tonnes
MCL IB Valley & Talcher Orissa 80 137 2.50% • Operates 3 o/c mines and 5 major
coalfields
• Total reserves of 63.3bn tonnes

Source: Coal Ministry, Coal India, IDFC Securities Research (ECL—Eastern Coalfields Ltd, BCCL—Bharat Coking Coal Ltd, CCL—Central Coalfields Ltd, NCL—North
Coalfields, WCL—Western coalfields Ltd, SECL—South Eastern Coalfields Ltd, MCL—Mahanadi Coalfields Ltd)

Coal India accounts for ~82% of India’s coal production

MCL SECL NCL Captive blocks SCCL
(m tonnes) CCL WCL SCCL ECL BCCL
520 8.3%
461 Captive
406 10.2%
390 360

260

130

CIL
-
81.4%
2004 2006 2008

Source: Ministry of Coal (Note:- SCCL stands for Singareni Collieries Ltd

Coal India--key operational statistics

Particulars FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Coal production--Underground mines (m tonnes) 49 48 47 47 46 43 44 44
Coal production--Open cast mines (m tonnes) 230 242 259 277 298 318 336 360
Total raw coal production (m tonnes) 280 291 306 324 343 361 379 404
Average Manpower 530,987 510,671 493,061 476,577 460,369 445,815 432,710 419,214
Productivity
Average per man per year (In tonnes) 527 569 621 679 746 810 877 963
Output per man shift (In tonnes) 2.45 2.67 2.82 3.05 3.26 3.54 3.79 4.09
Source: Coal India

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Coal India—Profit & Loss account snapshot

(Rs m) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Net Sales 193,042 203,973 219,000 258,629 287,018 296,022 326,339 387,888
Stock adjustment (798) 814 386 2,305 4,838 2,476 2,442 1,336
Boiler & domestic consumption 15,058 15,606 15,684 18,198 20,540 19,405 19,745 20,220
Others 13,054 15,476 22,581 19,740 27,691 32,152 37,641 51,197
Total 220,356 235,870 257,651 298,871 340,088 350,054 386,167 460,641
Net Employee cost 78,949 79,255 89,120 109,577 96,536 99,954 125,607 197,014
VRS payments 3,593 2,465 2,715 1,524 1,344 1,022 744 407
Social overheads 11,458 11,718 12,688 13,324 13,677 14,781 16,229 18,851
Stores & Spares 29,042 30,615 32,036 33,271 38,888 41,256 43,786 48,613
Power & Fuel (excl coal consumed) 13,784 14,354 14,802 15,021 15,513 16,004 15,937 15,951
Boiler & Colliery consumption 12,774 13,914 13,942 17,392 20,139 18,481 19,509 19,922
Contractors (Trans & Repairs) 15,811 17,940 19,274 23,461 26,247 27,583 33,430 41,259
Misc. Expenses 7,525 7,626 9,494 11,081 13,564 12,872 15,067 19,509
Overburden Removal adjustment 2,074 3,445 4,975 8,527 12,099 16,866 15,640 21,772
Provisions 5,604 4,173 174 2,023 344 1,169 2,320 1,760
Others 354 2,067 (3,835) (723) (628) (383) (6,592) (332)
Total Expenditure 180,968 187,572 195,385 234,479 237,722 249,602 281,677 384,726
Operating profit 39,389 48,298 62,266 64,392 102,365 100,452 104,490 75,915
Less: Interest 4,479 3,036 1,479 1,902 909 849 1,499 1,565
Less: Depreciation 14,510 13,934 13,976 13,550 13,574 13,578 15,607 16,909
PBT 20,400 31,328 46,811 48,941 87,883 86,025 87,385 57,441
Tax 12,139 14,108 17,977 23,764 28,969 28,937 34,952 36,654
PAT 8,260 17,220 28,834 25,177 58,913 57,087 52,433 20,787
Source: Coal India

Coal India--Balance Sheet snapshot

(Rs m) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
Gross Fixed Assets 260,548 268,121 276,229 280,576 292,233 302,574 318,569 332,561
Less: Depreciation 138,821 153,776 165,231 179,000 190,806 200,406 213,603 222,349
Net Fixed Assets 121,728 114,345 110,999 101,576 101,427 102,169 104,966 110,212
Capital Work-in-progress 11,309 12,889 11,886 13,475 12,060 13,352 16,201 19,195
Deferred Tax Asset - 1,679 1,319 5,901 6,509 6,906 9,777 9,268
Investment (Internal) 801 801 22,445 22,445 22,425 20,259 17,179 15,052
Current Assets - - - - - - - -
Inventory of coal, coke, etc 10,572 11,387 11,753 14,057 18,895 21,370 23,812 25,150
Inventory of stores & spares 10,025 9,507 9,316 9,158 9,219 9,006 9,094 10,834
Other Inventories 863 921 850 957 904 828 934 845
Sundry Debtors 45,038 42,456 24,843 20,721 18,045 15,864 16,571 18,261
Cash & Bank Balances 11,318 15,908 29,666 79,870 134,272 159,293 209,615 296,950
Loans & Advances 38,757 36,490 43,613 50,597 62,781 81,919 103,043 118,919
Total Current Assets 116,574 116,668 120,041 175,360 244,116 288,280 363,068 470,959
Less: Current Liabilities 126,026 124,642 144,790 183,414 217,413 228,210 296,952 411,532
Net Current Assets (9,452) (7,974) (24,749) (8,054) 26,704 60,070 66,116 59,427
Total Assets 124,385 121,740 121,900 135,343 169,125 202,756 214,239 213,154
Share Capital 72,205 72,205 63,164 63,160 63,164 63,164 63,164 63,164
Reserves 40,984 46,995 48,209 52,794 58,940 67,985 76,762 86,159
Profit and Loss account (51,355) (45,603) (25,938) (14,574) 19,045 47,745 53,498 42,328
Net Worth 61,834 73,597 85,434 101,380 141,148 178,893 193,424 191,651
Loans 62,551 46,167 34,042 29,157 21,508 18,789 15,530 20,811
Deferred Tax Liability - 1,976 2,424 4,806 6,468 5,073 5,286 674
Minority Interest - - - - - - - 19
Total Liabilities 124,385 121,740 121,900 135,343 169,124 202,755 214,239 213,154
Source: Coal India

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Explanation of Ratings:
1. Outperformer: More than 5% to Index
2. Neutral: Within 0-5% to Index
3. Underperformer: Less than 5% to Index
Disclosure of interest:
1. IDFC SEC and affiliates may have received compensation from the company covered herein in the past twelve months for issue management, capital structure, mergers &
acquisitions, buyback of shares and other corporate advisory services.
2. Affiliates of IDFC SEC may have received a mandate from the subject company.
3. IDFC SEC and affiliates may hold paid up capital of the subject company.
4. IDFC SEC and affiliates, their directors and employees may from time to time have positions or options in the company and buy or sell the securities of the company(ies)
mentioned herein. 7
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