Equity Research INDIA September 22, 2020 BSE Sensex: 38034 Coal India BUY ICICI Securities Limited Maintained is the author and Potential 15% dividend yield, ESG compliance, distributor of this report demand recovery and attractive valuations! Rs122 Company update We hosted Mr. Pramod Agrawal, CMD, Coal India (CIL) for a session where the management highlighted CIL’s achievements in the past 45 years and its strategic Utilities/mining value for the nation’s energy security, while also addressing several issues raised by the investors. Out of these, five key areas which were addressed included: 1) future of coal in India and mutual co-existence with increasing RE capacity; 2) CIL’s

production capability with a determination to reach 1bnte by FY24; 3) capex required Target price Rs258 to reach the target while simultaneously deploying several measures to control costs

and improve efficiency; 4) firm and transparent capital allocation and dividend policy; Shareholding pattern 5) endeavour to improve on the ESG front, with compliance and disclosures as per Dec Mar Jun global standards. MTD Sep’20 has seen excellent numbers with production/offtake up ’19 ’20 ’20 23%/21% YoY, while OBR up 60% YoY. Management is confident of 660mnte Promoters 69.1 66.1 66.1 Institutional production target for the year helped by import substitution of 100mnte, and Sep’20 th investors 28.1 30.2 30.1 performance (till 15 ), where production/offtake/OBR are up 21%/22%/60% YoY, MFs and other 6.8 9.4 9.6 indicates the same. Maintain BUY rating and target price of Rs258. Insurance/FIs 12.7 12.6 12.6 FIIs 8.6 8.2 7.9  On future of coal in India and mutual co-existence with increasing RE capacity:

Others 2.8 3.7 3.8 CIL continues to be the lowest cost coal producer globally, and with several measures Source: NSE being taken to further rationalise cost and infrastructure development (resulting in improved quality), cost per ton is expected to further decline. India’s per capita power consumption at 1,181 units is still much below the global average (2,674 units). Even Price chart considering the highly ambitious target of 450GW of RE in FY30E (from 123GW in 350 FY19), power demand growth taken conservatively at 6% and 8% (from FY22E 300 onwards) results in all-India total coal demand reaching 1,250mnte/1,500mnte by FY30. 250 Additionally, solar power sans financially viable and scalable battery storage will not be

(Rs) 200 able to cater to the peak daily demand even at current levels of 170-180GW. Compared with the effective cost of solar power at Rs4-4.5/kWh, the variable cost of thermal power 150 currently stands at Rs2-3/kWh, which makes coal the cheapest source of power in the 100 country currently, despite solar tariff bids plunging to record lows. Further, with increasing cost of land acquisition and expected levy of transmission charges after 2-3 Mar-18 Mar-19 Mar-20 Sep-17 Sep-18 Sep-19 Sep-20 years, replacement of thermal power by solar power on such a scale does not look feasible in the medium-to-long-term. Thus, we believe that coal will remain the vital fuel for India’s energy security for the next 1-1.5 decades.  On CIL’s production capability with a determination to reach 1bnte by FY24: CIL targets to reach 1btpa production by FY24, which translates into a CAGR of 13.5% from FY20 (602mnte). CIL is investing in several infrastructure projects to improve evacuation and mechanise production in order to reach this target. CIL also targets to substitute 100mnte/150mnte imported thermal coal by FY21E/FY22E. On GCV terms, substitution of 150mnte of imported coal will be equivalent to ~200mnte of domestic coal. In YTDFY21, the increase in e-auction to 39mnte, despite the tepid offtake environment, points to the fact that many coal importers have participated in CIL auctions and there has been substantial import substitution. FY21 production target is 660mnte while e- auction target is 20% of the total production.

Research Analysts: Market Cap Rs752bn/US$10.2bn Year to Mar FY19 FY20 FY21E FY22E Reuters/Bloomberg COAL.BO/ COAL IN Revenue (Rs mn) 995,469 960,803 939,410 1,031,607 Rahul Modi [email protected] Shares Outstanding (mn) 6,162.7 Net Income (Rs mn) 174,622 167,003 153,436 189,905 +91 22 6637 7373 52-week Range (Rs) 218/119 DEPS (Rs) 28.3 27.1 24.9 30.8 Abhijit Mitra Free Float (%) 30.9 % Chg YoY 150.6 (4.4) (8.1) 23.8 [email protected] FII (%) 7.9 P/E (x) 4.3 4.5 5.5 4.4 +91 22 6637 7289 Anshuman Ashit Daily Volume (US$/'000) 21,788 CEPS (Rs) 42.2 41.7 39.6 46.4 [email protected] Absolute Return 3m (%) (11.4) EV/E (x) 1.5 2.4 3.6 2.2 +91 22 6637 7419 Absolute Return 12m (%) (39.2) Dividend Yield (%) 10.8 9.9 16.4 16.4 Sensex Return 3m (%) 10.1 RoCE (%) 60.7 43.7 36.9 39.3 Sensex Return 12m (%) 1.2 RoE (%) 65.0 51.3 43.1 45.0 Please refer to important disclosures at the end of this report

Coal India, September 22, 2020 ICICI Securities

 On capex required to reach the target, while simultaneously deploying several measures to control costs and improve efficiency: CIL is currently implementing 110 projects, with peak capacity of 750mnte. Further, 18 mining projects, with cumulative rated capacity of 132.04mtpa, has been cleared in FY20 with total sanctioned capital of Rs212.5bn. CIL is also implementing First Mile Connectivity projects, wherein, in phase-I, 33 projects have already been tendered out and the remaining two projects are expected to be tendered out by Sep’20-end (two projects of 26mtpa capacity already commissioned). The total capacity of these projects will be 406mtpa and this will require an investment of Rs125bn. In phase-II, 14 projects with total capacity 100mtpa, which will require an investment of Rs35bn, will be implemented. These projects are expected to help increase mechanized evacuation from 150mnte currently to 650mnte. Target completion of all the projects is by FY25. CIL expects >12% IRR from all the projects. Improvement in coal quality, savings in under-loading charges (Rs10bn p.a.) and a positive impact on the environment will be additional outcomes from these projects. In addition, currently CIL incurs Rs34bn on transportation charges on coal annually, which is expected to decline substantially. For evacuation, CIL is developing 12 railway lines (estimated investment Rs198bn), 21 railway sidings (estimated investment Rs35bn) and 33 coal trunk roads, operationalisation of which are expected by FY24 (two lines already operationalised). CIL has identified and already closed 82 mines in the past 2-3 years and will either close or turnaround 23 more mines in FY21. Further, it will identify more mines for closure/turnaround in FY22. Closure of these mines is expected to save the company over Rs5bn p.a. even after considering all the closure cost (including labour costs). Further, output per man shift will see a significant boost. The company is also looking to implement Voluntary Retirement Scheme (VRS) at most of its subsidiaries and is at advanced stages in WCL, although taking into consideration the current environment, the implementation in other subsidiaries may be delayed.  On a firm and transparent capital allocation policy and predictable dividend: CIL estimates a cumulative capex of ~Rs700bn-Rs800bn over the next 6-7 years on various projects in order to reach its 1btpa target. Translating to over Rs100bn p.a., the capex is contingent on power/coal demand growth. In case such capex is incurred in totality, we expect CIL’s profits to increase by 50-70% over FY20 profit levels of Rs167bn. In FY22, CIL will endeavour to clock more than 700mnte volumes and with operating leverage benefit, we expect it to surpassing its past peak profit of Rs170bn. The company has indicated that majority of the cash that is available after capex requirement will be given out to the investors through dividends.  On CIL’s endeavour to improve on the ESG front, with compliance and disclosures as per global standards: CIL is preparing a third party ESG report, which is expected to be released by FY21-end, which will help align its compliance and disclosures as per global standards. It is already working on improving on the environment front through the various projects, is one of the foremost company’s on the social front, with CSR spends of over Rs30bn since FY16, and has the highest governance standards being a GoI entity and audited

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Coal India, September 22, 2020 ICICI Securities

by the CAG. It is also implementing SAP ERP system starting with HQ, WCL and MCL (expected to go live by FY21-end) and will implement the same at other subsidiaries in the next phase.  On current month’s performance: For MTD till 15th Sept’20, production was up 21% YoY at 19.6mnte, while offtake was up 22% YoY at 23mnte. This performance was on the back of high growth at MCL (+60% YoY), CCL (+30% YoY), WCL (+70% YoY) during the same period. In addition, OBR for the same period is up 60%YoY. At the current rate, CIL is expected to achieve 40mnte of production in Sep’20 (+30% YoY) and 45mnte of offtake (+28% YoY). This will be on the back of 9.2% growth in coal generation till 15th Sep’20. Average coal stocks at power plants have declined to 19 days from vs 22 days in July-end and thermal PLFs have improved, leading to such a performance for CIL. YTD (up to 15th Sep’20) – production is at 215mnte, down 4.9% YoY, while offtake is 231.3mnte, down 10.8% YoY.  On pricing freedom and receivables: In YTDFY21, company has sold 39mnte through e-auctions, with nominal premiums, since currently CIL is providing concessions to the non-regulated sector (NRS). With demand becoming strong in the past 45 days, CIL is now looking at revising/removing these concessions, which will give pricing power to the subsidiaries in the coming months and increase e-auction premiums. This will also help further improve the receivables position of the company, which the management expects to turnaround significantly from Oct’20 onwards. With the several ongoing and upcoming projects aimed at improving evacuation and first mile connectivity, we believe that there will be a substantial positive impact on the quality of coal mined which will provide CIL with flexibility to increase prices on GCV basis in the near future.  On other areas: ‘Clean coal’ is an area where the company intends to diversify. It has identified several projects totaling Rs333bn in the coal gasification and coal- bed methane space, which it is in the process of tendering out. In addition, it is setting up 12 washeries with an estimated investment of Rs48.5bn. Company will also be setting up solar projects through JV mode to generate 3 GW of solar energy.  Valuation: We maintain our BUY rating and target price of Rs258 valuing CIL on DCF basis with a peak production of 850mnte from FY29E onwards. Although our volume estimate for FY21E remains at 580mnte, CIL is confident of exceeding it, which we are positive upon if the Sep’20 performance continues till Nov’20.

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Coal India, September 22, 2020 ICICI Securities

CIL – a successful past, a brighter future

CIL is a strategic national asset. Having started its journey in its present form in 1975 post nationalisation of coal mines under the Coal Mines Authority Ltd., CIL has grown to become the largest pure play coal producer in the world. Although hampered by Covid related disruptions, CIL aims to beat its FY20 production of 602mnte with a production/offtake target of 660mnte for FY21E and a long-term target of 1bnte by FY24. In its journey to become a 1bnte coal producing company, it strives to:

 Improve manpower productivity significantly.  Mechanise loss making mines which can be turned around but close unviable mines to lower costs  Improve its ESG compliance and disclosures  Make its capital allocation more predictable, so that dividend also becomes more predictable. Key notable highlights of the company:  World’s largest pure play coal producer o YTDFY21 (till Aug’20) production has been 196mnte across 364 working mines, with ongoing projects aimed at further ramp-up. o For MTD till 15th Sept’20, production was up 21% YoY at 19.6mnte, while offtake was up 22% YoY at 23mnte. This performance was on the back of high growth at MCL (+60% YoY), CCL (+30% YoY), WCL (+70% YoY) during the same period. In addition, OBR for the same period is up 60%YoY. At the current rate, CIL is expected to achieve 40mnte of production in Sep’20 (+30% YoY) and 45mnte of offtake (+28% YoY). This will be on the back of 9.2% growth in coal generation till 15th Sep’20. Average coal stocks at power plants have declined to 19 days from vs 22 days in July-end and thermal PLFs have improved, leading to such a performance for CIL. YTD (up to 15th Sep’20) – production is at 215mnte, down 4.9% YoY, while offtake is 231.3mnte, down 10.8% YoY. o CIL has 77.5bnte of coal resources and 22.3bnte of coal reserves  Extensive mining capabilities o CIL possesses advanced technology in open cast mining o Focus is to meet commitments to the power sector  Growth drivers o Coal accounts for more than 55% of the total commercial energy production in India and with growth in power demand conservatively expected to be in mid-single digits, coal is expected to retain its key energy source tag in the next 1-1.5 decades. o CIL expects favourable demand from key sectors such as power and steel to continue

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Coal India, September 22, 2020 ICICI Securities

 Cost leadership with stable realizations o Company is working towards higher proportion of open cast mining operations and increasing labour productivity o It is simultaneously striving to improve productivity & efficiency through use of higher capacity equipment for higher output.  Positive margins & returns o FY20 EBITDA margin was 24.5% while for Q1FY21, it was 16.5% (includes other income) o FY20 RoAE was 51% o FY20 dividend pay-out ratio was 44.3%.  Organizational commitment to sustainable development o CIL continues its high focus on social, environmental and health & safety initiatives o The company has a documented CSR policy. CSR spends have been over Rs30bn since FY16.

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Coal India, September 22, 2020 ICICI Securities

Coal to remain the key for India’s energy security in the next decade

India’s per capita power consumption currently stands at 1,181 units vs global average of ~2,674 units. If we consider two scenarios for India, viz. power demand growth at 6% and 8% (from FY22 onwards), it results in estimated all-India total coal demand reaching 1,250mnte/1,500mnte by FY30. This conservative calculation holds even after considering the highly ambitious growth in RE capacity from 123GW in FY19 to 450GW in FY30E.

Chart 1: Estimated coal demand at power demand Chart 2: Estimated coal demand at power demand growth of 6% growth of 8%

All-India power demand (BU) All India coal demand (mnte) All-India power demand (BU) All India coal demand (mnte)

1,500 2,500 1,250 1,400 3,000 1,600 1,200 1,400 2,000 1,013 2,500 1,000 1,013 1,200 2,000 1,500 800 1,000 1,500 800 1,000 600 600 400 1,000 500 400 500 200 200 1,274 2,114 1,274 2,502 0 0 0 0 FY19 FY30 FY19 FY30

Thermal Thermal 123GW Thermal 450GW Thermal 123GW RE 450GW RE PLF: 61% PLF: 72% RE PLF: 61% RE PLF: 80%

Source: Company, I-Sec research

Solar power cannot currently support the peak load, unless battery storage becomes cheaper and more financially attractive than coal on a major scale, which may take several years

As it can be seen from a typical load curve in India, daily peak demand is attained post 5pm. This supports the argument that coal based power is integral to cater to base load until affordable storage comes on a major scale. Additionally, in order to compete with coal, huge land areas will be required to set up the collar plants and storage, which is becoming increasingly challenging.

Chart 3: Typical all-India daily load curve

Source: Posoco, Company data

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Coal India, September 22, 2020 ICICI Securities

Coal continues to be the cheapest power source in India The effective cost of renewables is still high due to its intermittency vs variable cost of thermal power (comparison with variable cost of coal is better since fixed cost is already incurred and is sunk).

Even considering the current low bid scenario for solar power in order to calculate its cost, coal continues to be the cheapest power source currently.

 Cost of solar as per lowest tariff (including BCD+ trading margin) = Rs2.5-2.6/kWh  Interstate transmission charge (which is exempt for solar power transmission for 1- 2 more years)= ~Rs1/kWh  Thermal plant backing down cost = 0.5-1/kWh  Thus, current effective cost of solar power Rs4-4.5/kWh Compared with the effective cost of solar power at Rs4-4.5/kWh, the variable cost of thermal power currently stands at Rs2-3/kWh, which makes it the cheapest source of power in the country currently, despite solar tariff bids plunging to record lows.

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Coal India, September 22, 2020 ICICI Securities

Import substitution to lead way as company targets 1btpa production by FY24 CIL targets to reach 1btpa production by FY24. If reached, this will mean a CAGR of 11% from FY20 production level of 602mnte. CIL also targets to substitute 100mnte / 150mnte imported thermal coal by FY21E/FY22E. On GCV terms, substitution of 150mnte of imported coal will be equivalent to ~200mnte of domestic coal. India imported ~250mnte coal (including coking coal) in FY20. CIL is working to ease its payment terms and fix particular mines for customers to match their imported coal GCVs. In FY20, CIL offered 10.21mnte coal to power plants under the import substitution mechanism, while in YTDFY21, the increase in e-auction to 39mnte, despite the tepid offtake environment, points to the fact that many coal importers have participated in CIL auctions and there has been substantial import substitution. CIL is well prepared to reach its target with current mines capable of delivering ~700mnte production and new mines on which work has started will deliver another 150mnte of peak production. Chart 4: CIL targets 100mnte/150mnte imported coal substitution by FY21E/FY22E

India’s coal demand (FY20) – 1 Bnte

Imports (FY20) – 250 mnte

Hinterland import substitution estimate – 160 mnte

CIL imported coal substitution target (FY22) – 150 mnte (200 mnte Indian coal equivalent)

Source: Company data, I-Sec research

Chart 5: Production trend

Non-coking Coking

700 650 * 607 602 600 567 554 34 539 46 550 33 55 494 54 500 462 452 50 450 435 44 49 400 43 350 392 408 413 444 485 499 534 573 556 300 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company data, I-Sec research * Flat volumes in FY20 due to Covid disruptions

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Coal India, September 22, 2020 ICICI Securities

Infrastructure development and cost control to improve efficiency; key to reach the 1btpa target

Overview CIL is currently implementing 110 projects which will have peak capacity of 750mnte. This includes few large projects being developed, including – Kusmunda open cast (50mtpa), Gevra expansion project (70mtpa), Dipka open cast (25mtpa), Bhubaneswari open cast (25mtpa), Jayant (20mtpa) and Dhadhichua (20mtpa).

Further, 18 mining projects have been cleared in FY20, which will have rated capacity of 132.04mtpa. The total sanctioned capital for these projects are Rs212.5bn.

First mile connectivity projects CIL has taken steps to upgrade the mechanized coal transportation and loading system under 'First Mile Connectivity' projects. In phase-I, 33 projects have already been tendered out and the remaining two projects are expected to be tendered out by Sep’20-end. Two projects of 26mtpa capacity have already been commissioned. The total capacity of these projects will be 406mtpa and this will require an investment of Rs125bn. In phase-II, 14 projects with total capacity 100mtpa, which will require an investment of Rs35bn, will be implemented. Target completion of all the projects is by FY25.

These projects are expected to help increase mechanized evacuation from 150mnte currently to 650mnte. CIL expects >12% IRR from all the projects. Further, improvement in coal quality, savings in under-loading charges (Rs10bn p.a. expense) and a positive impact on the environment will be additional outcomes from these projects. In addition, currently CIL incurs Rs34bn on transportation charges on coal annually, which is expected to decline substantially with improvement of first mile connectivity through the abovementioned mechanisation projects.

Railway and other coal evacuation infra projects CIL is developing 12 railway lines with an estimated investment of Rs198bn, 21 railway sidings with estimated investment of Rs35bn and 33 coal trunk roads. Operationalisation of all the projects is planned by FY24.

CIL has adopted an approach for eliminating road transportation of coal from mines which have capacity of >4mtpa. These have entailed capacity creation of mechanized conveyor system and computerized loading system (SILOs). Additionally, CIL’sboard has approved the procurement of 40 rakes of BOXN-S railway wagons under the Railways’ General Purpose Wagon Investment Scheme (GPWIS), at a cost of Rs6.8bn.

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Coal India, September 22, 2020 ICICI Securities

Overview of railway lines recently commissioned/under construction: Commissioned so far:  Tori-Shivpur new BG single line (43.70km) to evacuate 32mtpa is funded by CIL.  Jharsuguda – Barpali – Sardega new BG line (52.41km) to evacuate 34mtpa is also funded by CIL. Under construction:

 Rail connectivity of Lingaraj SILO with Deulbeda siding at Talcher coal fields of MCL. Work is currently in progress (72% completed) and the project is likely to be commissioned in Mar’21 (CIL funded).  Chhattisgarh East Rail Ltd (CERL): East rail corridor in Chhattisgarh. Phase–I from Kharsia to Karichhapar commissioned in Oct’19. Balance work is in progress. Chhattisgarh East West Rail Ltd (CEWRL), which will be the east- west rail corridor in Chhattisgarh, is also under progress. Both projects will help evacuate 100mtpa once commissioned.  Mahanadi Coal Rail Ltd (MCRL): Angul-Balram rail link in Talcher coalfield of Odisha is in progress on railway land (total distance 69.1km); Tentuloi- Budhapank (136km) will help evacuate 100mtpa.  The Shivpur-Kathautia rail connectivity in Jharkhand will be executed by Rail JV, JCRL (Jharkhand Coal Railway Limited) formed between CCL, Govt. of Jharkhand and IRCON. About 30mtpa coal from CCL mines is planned to be evacuated through this line. Closure of unviable mines to save costs 158 underground mines employ 45% of the workforce but contribute only 5% of total production, with heavy negative contribution making them highly unviable. CIL has identified and already closed 82 mines in the past 2-3years and will either close or turnaround 23 more mines in FY21. Further, it will identify more mines for closure/turnaround in FY22. Closure of these mines is expected to save the company over Rs5bn p.a. even after considering all the closure cost (including labour costs). Further, output per man shift will see a significant boost.

In case of ECL and WCL, CIL expects them to become more sustainable in financial terms going forward with substantial increase in production since they possess high grade coal. These may also be offered for import substitution which will help the profitability due to operating leverage as there is substantial fixed cost in these subsidiaries. BCCL, having India’s largest coking coal reserves, is going through a tough phase currently, but CIL is working on it.

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Coal India, September 22, 2020 ICICI Securities

Chart 6: Overview of CIL mines (as at FY19-end)

UG OC Mixed

100 90 81 79 80 73 9 2 70 60 22 54 23 42 50 38 40 7 30 43 25 50 50 20 20 10 35 17 10 4 11 11 10 0 8 13 ECL BCCL CCL NCL WCL SECL MCL NEC No of 14 12 13 10 10 13 10 areas 1

Source: Company data, I-Sec research

Manpower reduction of 13,000-14,000 employees p.a. over the next 5- 10 years will aid in addressing the key expense head Net 5% reduction in manpower (annual retirements of 16,000-17,000 employees minus annual intake of 3,000-4,000 new employees) over FY20 base of 272,445 employees will result in an annual reduction of 13,000-14,000 employees annually for the next 5-10 years. CIL is considering adding manpower only for statutory requirements or mandated under compassionate grounds. Further, with the new mines being developed mainly through the MDO route, manpower requirement is expected to be in consonance with the reduction envisaged.

The above rationalisation in manpower combined with increase in production (including OB removal, which is substantially higher this year) will increase productivity per manpower significantly.

The company is also looking to implement Voluntary Retirement Scheme (VRS) at most of its subsidiaries and is at advanced stages in WCL, although taking into consideration the current environment, the implementation in other subsidiaries may be delayed.

The management indicated that ideally it envisages an ideal manpower base of 150,000 for CIL in the longer term.

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Coal India, September 22, 2020 ICICI Securities

Chart 7: Output per man-shift: significant difference between underground and open cast

Output per manshift - UG (te) Output per manshift - OC (te) 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.79 0.80 0.80 0.86 0.95 0.99 13.13 14.35 15.26 14.10 14.68 14.25 0.0 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company data, I-Sec research

Table 1: Subsidiary-wise production and manpower as at FY20-end Subsidiary FY20 Production – UG FY20Production – OC Total manpower ECL 9.2 41.1 57,153 BCCL 1.0 26.7 43,425 CCL 0.7 66.2 38,168 NCL 0.0 108.1 40,401 WCL 4.2 53.5 51,426 SECL 14.1 136.5 21,991 MCL 0.8 139.5 14,382 NEC 0.0 0.5 1,213 DCC+HQ+CMPDIL - - 4,286 Total 30.5 572.1 272,445 Source: Company data, I-Sec research

Table 2: Trend of manpower productivity FY14 FY15 FY16 FY17 FY18 FY19 FY20 Coal production OC (mnte) 426 459 505 523 537 576 572 UG (mnte) 36 35 34 31 31 30 30 No of employees OC (‘000) 147 147 147 144 155 157 155 UG(‘000) 200 186 176 166 144 128 117 Manpower productivity OC (te/employee) 2,899 3,127 3,446 3,623 3,473 3,669 3,690 UG (te/employee) 181 188 192 190 212 237 257 Source: Company data, I-Sec research

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Coal India, September 22, 2020 ICICI Securities

Expect pricing freedom on the back of quality improvement

CIL currently has long-term FSA of 565mtpa with the power sector and 100mnte with the non-regulated sector as at FY20-end. In YTDFY21, company has sold 39mnte through e-auctions.

Currently, CIL is providing concessions to the NRS due to which the premium is low. With improvement in demand, CIL is now looking at revising/removing these concessions, which will give pricing power to the subsidiaries in the coming months and increase the e-auction premiums. This will also help further improve the receivables position of the company, which the management expects to improve significantly from Oct’20 onwards.

To further improve quality, infrastructure facilities at loading point for sample preparation has been installed by subsidiaries, and third party sampling for all consumers are being conducted. This will address grade slippage.

With the several ongoing and upcoming projects aimed at improving evacuation and first mile connectivity, we believe that there will be a substantial positive impact on the quality of coal mined which will provide CIL with flexibility to increase prices on GCV basis in the near future..

Chart 8: Production and FSA realization trend

Production (mnte) FSA Sales Realizations (Rs/te)

700 1,416 1,450

600 1,357 1,400 1,327 500 1,311 1,350 1,294 400 1,300 1,229 300 1,250

200 1,200

100 1,150 494 539 554 567 607 602 0 1,100 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company data, I-Sec research

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Coal India, September 22, 2020 ICICI Securities

Clear capital allocation policy to result in more predictable dividend

CIL estimates a capex of ~Rs700bn-Rs800bn over the next 6-7 years on various projects in order to reach the 1btpa target. This significant capex, translating to over Rs100bn p.a., is contingent on power demand growth and in case demand growth is not as per expectation, proportionate part of the capex is expected to be shelved. But in case such an amount of capex is incurred in totality, we expect CIL’s profits to increase by 50-70% over FY20 profit levels of Rs167bn. In FY22, CIL will endeavour to clock more than 700mnte volumes and with operating leverage benefit, we expect it to surpassing its past peak profit of Rs170bn.

Company has indicated that majority of the cash that is available after the capex requirement will be given out to the investors through dividends.

Chart 9: Dividend and payout trend Chart 10: Profit plus non-cash expenditure has increased significantly and trending upwards

Capex (Rs bn) Profit + Non-cash exp (Rs bn) Dividend (Rs) Payout ratio (%) Dividend (Rs)

30 146% 160% 300 27.4 30 133% 140% 25 121% 250 25 120% 20.7 19.9 20 95% 200 20 100% 16.5 13.1 15 80% 150 12.0 15 46% 44% 60% 10 100 10 40% 5 50 5 20% 20.7 27.4 19.9 16.5 13.1 12.0 199 199 149 135 260 257 52 77 77 93 73 63 0 0% 0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, I-Sec research

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Coal India, September 22, 2020 ICICI Securities

Focus on ESG compliance and disclosures as per global standards

CIL is preparing a third party ESG report which is expected to be released by FY21- end. In the report, thrust will be to address concerns on all the fronts related to the company:  Environmental issues will include company's commitment on reducing energy use, waste, pollution and conservation of natural resources especially land, forests etc.  Social issues will include company's business relationships with suppliers, customers, stakeholders, local community and working conditions for its employees - their health & safety.  Governance issues will include whether company uses accurate and transparent accounting methods, are stockholder's opinions heard, refrains from contribution for undue favourable treatment and abhorrence of illegal practices. CIL’s efforts on environment related matters  Coal evacuation and FMC projects will help reduce air pollution and environmental impact.  ~100mn trees planted since inception over 39,840ha. Planted 1.98mn saplings in FY20.  Mine closure plan is an integral part of the project report for Coal mines, which also forms a part of the EIA/EMP.  All opencast mines as per their EC Conditions have commissioned effluent treatment plants.  CIL's efforts to make water available to communities around its mining areas benefited 7.48 Lakh people during FY20.  In order to become Net Zero Energy company CIL proposes to execute Solar Projects to generate 3 GW of solar energy.

CIL’s efforts on social related matters  Lowered fatalities substantially to 19 in YTDFY21 vs from 29 YoY.  Over Rs3000cr cumulative spend on CSR since FY16 (Rs587.84cr in FY20).  Distributed 2,81,815 cooked food packets and 1,36,168 packed rations during lockdown period. Also distributed 15,42,982 masks and 63,256 litres of hand sanitizers.  CIL’s 35 hospitals and health facilities created outside hospitals across eight states have set aside 1,234 beds for corona suspected cases. CIL is setting up 3 more hospitals with an estimated investment of Rs110cr  At the forefront in supporting local community development. CIL’s efforts on governance related matters  CIL is implementing SAP at CIL HQ, MCL and WCL and the ERP system is expected to go live by FY21-end.  CIL adheres to all regulatory norms and meets the necessary compliances.

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Coal India, September 22, 2020 ICICI Securities

‘Clean coal’

CIL currently has long-term FSA of 565mtpa with the power sector and 100mnte with the non-regulated sector as at FY20-end. Through auctions conducted between FY17 and FY20, CIL has offered total linkage of 80.53mtpa at a premium of 20.2% over the notified price. These auctions were conducted through four tranches. Linkage auction for Tranche-V

Coal gasification Four surface coal gasification projects have been identified at Shilpanjal Pariyojana (West Bengal), Project Utkarsh (Maharashtra), Dankuni (West Bengal), Ashoka (Jharkhand). These projects will have a total capacity of 6mtpa. CIL is tying up with gas companies for offtake of this capacity. The total investment envisaged is Rs231bn (implementation will be through the BOO route).

Also, work orders worth over Rs78bn have been awarded to Talcher Fertilizers Ltd in Sep’19 for setting up of coal gasification plant and ammonia-urea plant on lump sum turnkey basis.

Coal bed methane Two projects were tendered through BOO mode at Raniganj and Jharia with capacity totaling 1.3mmscmd, but since there was no participation, it is being re-tendered. Further, another project at Sohagpur CF likely to be tendered within FY21. The total investment envisaged is Rs24bn.

Washeries CIL currently operates 12 coal washeries, (10 coking coal and 2 non-coking coal) with total capacity of 31.23mtpa and is setting up further 5 new coking coal washeries in BCCL, totalling 17mtpa and 3 non-coking coal washeries in MCL. Estimated investment is Rs48.5bn.

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Coal India, September 22, 2020 ICICI Securities

Valuation methodology and risks

We maintain our BUY rating on CIL and our target price of Rs258. We remain structurally positive on the stock, valuing it on DCF basis with a peak production of 850mnte from FY29E onwards. The stock is currently trading at 4.4x P/E and 2.2x EV/EBITDA on FY22E basis with 45% RoE.

Key downside risks: 1) Weakness in power sector leading to lower volumes, 2) weakness in international coal prices (impacting the sentiment and making imported coal more competitive vs domestic coal), and 3) natural disasters impacting volumes.

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Coal India, September 22, 2020 ICICI Securities

Financial summary (consolidated)

Table 3: Profit & loss statement (Rs mn, year ending March 31) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Operating Income (Sales) 741,201 780,076 782,206 858,624 995,469 960,803 939,410 1,031,607 Operating Expenses 567,847 592,964 659,807 762,962 745,698 741,595 748,778 788,888 EBITDA 173,354 187,113 122,399 95,663 249,771 219,208 190,632 242,719 Margins 23.4% 24.0% 15.6% 11.1% 25.1% 22.8% 20.3% 23.5% Depreciation & Amortisation 23,198 28,259 29,101 30,664 34,504 34,508 40,442 46,314 Gross Interest 73 3,862 4,117 4,318 2,750 5,029 2,000 2,000 Other Income 86,761 84,299 82,696 88,208 125,245 128,112 123,754 133,224 Recurring PBT 215,789 214,398 144,337 107,264 271,255 240,713 205,129 253,883 Add: Extraordinaries 51 - - - (8) - - - Less: Taxes (78,573) (71,719) (51,660) (37,067) (96,625) (73,710) (51,692) (63,979) Net Income (Reported) 137,267 142,679 92,678 70,198 174,622 167,003 153,436 189,905 Recurring Net Income 137,267 142,679 92,678 70,198 174,622 167,003 153,436 189,905 Source: Company data, I-Sec research

Table 4: Balance sheet (Rs mn, year ending March 31) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Assets Total Current Assets 835,410 704,672 694,297 696,288 687,114 840,511 734,825 798,747 of which cash & cash eqv. 530,925 380,149 311,492 314,751 311,242 284,468 225,841 310,518 Total Current Liabilities & Provisions 657,212 719,678 850,810 1,002,216 975,013 1,042,577 956,268 997,225 Net Current Assets 178,198 (15,007) (156,512) (305,929) (287,898) (202,066) (221,443) (198,478) Investments 28,134 29,061 14,829 15,086 31,710 19,729 19,729 19,729 of which Other Marketable 28,134 29,061 14,829 15,086 31,710 19,729 19,729 19,729 Net Fixed Assets 212,744 103,203 323,966 378,638 422,726 451,119 500,676 544,362 of which Capital Work-in-Progress 31,046 45,532 85,852 102,864 96,616 83,283 92,283 101,283 Total Assets 448,203 245,450 327,343 272,701 352,176 457,639 487,820 554,470

Liabilities Borrowings 4,019 11,921 30,078 15,309 22,027 64,260 64,260 64,260 Deferred Tax Liability/(Asset) ------Equity Share Capital 63,164 63,164 62,074 62,074 61,627 61,627 61,627 61,627 Face Value per share (Rs) 10 10 10 10 10 10 10 10 Reserves & Surplus 340,367 286,216 186,566 140,016 206,980 263,883 294,064 360,714 Net Worth 403,531 349,379 248,640 202,090 268,607 325,510 355,691 422,342 Total Liabilities 448,203 408,604 327,343 272,701 352,176 457,639 487,820 554,470 Source: Company data, I-Sec research

Table 5: Quarterly trend (Rs mn, year ending March 31) Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Net sales 242,609 218,840 250,458 285,463 249,390 203,826 231,905 275,682 184,868 Growth (YoY) 26.6 22.3 15.4 6.1 2.8 (6.9) (7.4) (3.4) (25.9) EBITDA 57,325 43,171 67,878 82,122 66,124 36,112 49,684 67,289 30.517 Margin (%) 23.6 20.0 27.1 28.8 26.5 17.7 21.4 24.4 16.5 Other income 12.120 16,084 11,633 18,196 11,495 16,290 14,128 19,131 7,851 Add: Extra-ordinaries ------Net profit(reported) 37,863 30,861 45,657 60,268 46,299 35,229 39,218 46,258 20,775 Source: Company data, I-Sec research

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Coal India, September 22, 2020 ICICI Securities

Table 6: Cashflow statement (Rs mn, year ending March 31) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Operating Cashflow 160,465 170,938 121,778 100,862 209,134 201,512 193,878 236,219 Working Capital Changes 39,950 98,571 104,362 197,054 7,611 (28,767) (39,251) 61,712 Capital Commitments (41,790) 74,246 (83,837) (65,454) (73,070) (51,141) (90,000) (90,000) Free Cashflow 158,625 343,755 142,304 232,461 143,675 121,604 64,627 207,931 Cashflow from Investing Activities ------Issue of Share Capital (2,480) (66,398) (1,090) - (447) - - - Buyback of shares ------Inc (Dec) in Borrowings 3,860 (60,759) (65,344) (109,368) (52,280) (51,938) - - Dividend paid -including tax (152,976) (204,221) (144,527) (119,834) (94,456) (88,743) (123,255) (123,255) Extraordinary Items ------Chg. in Cash & Bank balances 7,029 12,378 (68,657) 3,259 (3,509) (19,078) (58,627) 84,677 Source: Company data, I-Sec research

Table 7: Key ratios (Year ending March 31) FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E Per Share Data (Rs) EPS(Basic Recurring) 21.7 22.6 14.9 11.3 28.3 27.1 24.9 30.8 Diluted Recurring EPS 21.7 22.6 14.9 11.3 28.3 27.1 24.9 30.8 Recurring Cash EPS 31.5 31.5 23.9 21.7 42.2 41.7 39.6 46.4 Dividend per share (DPS) 20.7 27.4 19.9 16.5 13.1 12.0 20.0 20.0 Book Value per share (BV) 63.9 55.3 40.1 32.6 43.6 52.8 57.7 68.5

Growth Ratios (%) Operating Income 5.0 5.2 0.3 9.8 15.9 (3.5) (2.2) 9.8 EBITDA (2.4) 7.9 (34.6) (21.8) 161.1 (12.2) (13.0) 27.3 Recurring Net Income (9.2) 3.9 (35.0) (24.3) 148.8 (4.4) (8.1) 23.8 Diluted Recurring EPS (9.2) 3.9 (33.9) (24.3) 150.6 (4.4) (8.1) 23.8 Diluted Recurring CEPS (2.6) 0.2 (24.1) (9.5) 94.7 (1.1) (5.1) 17.4

Valuation Ratios (x) P/E 5.6 5.4 8.2 10.8 4.3 4.5 5.5 4.4 P/CEPS 3.9 3.9 5.1 5.6 2.9 2.9 3.4 2.9 P/BV 1.9 2.2 3.0 3.7 2.8 2.3 2.4 2.0 EV / EBITDA 1.1 1.7 3.0 3.1 1.5 2.4 3.6 2.2 EV / Operating Income 0.3 0.5 0.6 0.5 0.4 0.6 0.7 0.6 EV / Operating FCF 1.3 1.3 3.3 2.0 3.1 4.3 10.5 2.9

Operating Ratios Employee cost / Revenue (%) 40.3 38.6 42.8 49.7 38.9 41.0 41.9 38.3 Operating exp / Revenue (%) 76.6 76.0 84.4 88.9 74.9 77.2 79.7 76.5 Other Income / PBT (%) 40.2 39.3 57.3 82.2 46.2 53.2 60.3 52.5 Effective Tax Rate (%) 36.4 33.5 35.8 34.6 35.6 30.6 25.2 25.2 WC / Total Assets (%) 39.8 (6.1) (47.8) (112.2) (81.7) (44.2) (45.4) (35.8) Inventory Turnover 12.6 11.3 9.5 11.2 16.6 15.7 14.0 15.7 Receivables (days) 42.0 53.6 58.2 36.9 20.2 54.7 37.2 27.9 Payables (days) ------Net D/E Ratio (%) (130.6) (105.4) (113.2) (148.2) (107.7) (67.7) (45.4) (58.3)

Profitability Ratios (%) Recurring Net Income Margins 18.5 18.3 11.8 8.2 17.5 17.4 16.3 18.4 RoCE 33.7 40.2 34.2 33.6 60.7 43.7 36.9 39.3 RoNW 34.0 40.8 37.3 34.7 65.0 51.3 43.1 45.0 Dividend Pay-out Ratio 95.3 121.3 135.6 145.9 46.6 44.3 80.3 64.9 Dividend Yield 17.0 22.5 16.4 13.6 10.8 9.9 16.4 16.4 EBITDA Margins 23.4 24.0 15.6 11.1 25.1 22.8 20.3 23.5 Source: Company data, I-Sec research

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Coal India, September 22, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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