Investment Analysis and Portfolio Management

SUBMITTED BY:Vishal Rathor (09-F1-134)

Shipra Jain(09-F1-127)Richa Prakash(09-F1-113)

Irshan Ahuja(09-F1-107)

Project Report TD (IPO) VALUATION

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TABLE OF CONTENT

S.NO. PARICULARS PAGE NO.1 Executive Summary 32 Company Profile 4-63 Industry Profile 74 Offer Details 85 Valuation 9-186 Reasons for Investment 19-207 Conclusion 218 Other Exhibits 22-249 Bibliography 25

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Executive Summary

Coal India (CIL), a Navratna company, is the world’s largest coal producer. The company accounts for nearly 82% of India’s total coal production. It is unique and there are no comparable companies listed on the stock exchanges in India.

Coal India initial public offering (IPO) has seen a blockbuster response from qualified institutional bidders (QIB) as it got subscribed 24.7 times. The issue was opened on 18th, October, 2010 and closed on 21th, October, 2010. The shares of Coal India Ltd were listed on 4th November 2010.

Coal India has made a debut at a price of Rs 308 against the offer price of Rs 245/share and also a discount of 5% to the retail investors. The Offer Price of Rs. 245 has been determined by the Selling Shareholder and the Company in consultation with the BRLMs, on the basis of assessment of market demand from the investors for the offered Equity Shares by way of the Book Building Process. The face value of the equity shares is Rs. 10 each and the Offer Price is 24.5 times the face value.

The objects of the Offer were to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to achieve the benefits of lisitng the Equity Shares on the Stock Exchanges. The Company will not receive any proceeds from the Offer and all proceeds shall go to the Selling Shareholder.

In this whole report we have tried to find out the fair value of the shares by different methods like Net Worth per Equity Share Method, Discounted Cash Flow Method, EV/EBIDTA Method etc. We have tried state the reason why to invest in Coal India Ltd (IPO).

Different analysts value the stock using different methods, on an average the fair value of Coal India works out to around Rs 310 per share, which from the retail investors perspective (who have been allotted shares at Rs 232.75, considering 5 per cent discount) means over 33 per cent returns. The market need to treat Coal India (CIL) as a utility play. Investment in this IPO was a value for money.

Company Profile

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In order to provide for a higher growth in coal sector to meet the growing energy needs of the country, the Government in 1973, nationalized the coal mines by enacting the Coal Nationalization Act. Pursuant to the nationalization of coal mines, the Company was incorporated as a private limited company with the name of 'Coal Mines Authority Limited', under the Companies Act on June 14, 1973, and in terms of notification no. G.S.R. 345(F) dated July 9, 1973, issued pursuant to the provisions of Section 5 of the Coal Nationalization Act certain nationalized coal mines were vested in our Company by the Central Government. Thereafter in 1975, Department of Coal, Ministry of Energy, GoI, with a view to integrate and streamline the structural set up in a manner which could be conducive to a more efficient administration, issued letter no. 38011/1/1/74-CAF dated September 27, 1975, providing for the re-organisation of 'Coal Mines Authority Limited' as 'Coal India Limited', which was to be responsible for the entire coal mining sector owned and controlled by the Central Government.

Pursuant to the nationalization of coal mines and during the period upto 1991, the Company was able to enhance the growth rate of coal production from a CAGR of 2.18% at the time of nationalisation in Fiscal 1974 to a CAGR of 5.63% by Fiscal 1991. However during this period, due to certain macro-economic and socio economic factors, the Company continued to operate certain legacy mines inherited pursuant to the nationalization and to operate certain new projects irrespective of financial viability. Further, on account of certain internal reasons and policy issues, the Company's accumulated losses in Fiscal 1991 and overdue liabilities to the Government in Fiscal 1993, reached Rs. 24,989.80 million and Rs. 23,113.10 million respectively. Thereafter, post 1991 upon the Company achieving certain milestones and certain policy changes initiated by the Government the Company endeavoured to consolidate its financial position.

Coal India Limited (CIL) has its Headquarters in Kolkata, West Bengal. The company produces non-coking coal and coking coal of various grades for diverse applications.

As of March 31, 2010, the company operated 471 mines in 21 major coalfields across eight states in India, including 163 open cast mines, 273 underground mines and 35 mixed mines (includes both open cast and underground mines). The company also operated 17 coal beneficiation facilities with an aggregate designed feedstock capacity of 39.40 million tons per annum. They intend to develop an additional 20 coal beneficiation facilities with an aggregate additional proposed feedstock capacity of 111.10 million tons per annum. Besides this, we provided 85 hospitals and 424 dispensaries.

The Indian Institute of Coal Management (IICM) operates under CIL and imparts multi disciplinary management development programs executives.

Coal India's major consumers are the power and steel sectors. Others include cement, fertiliser, brick kilns etc.

Mission of Coal India Limited

The Mission of Coal India Limited is to produce the planned quantity of coal, efficiently and economically with due regard to safety, conservation and quality.

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Corporate structure

Our Company has nine direct Subsidiaries and two indirect Subsidiaries as listed below:

1. Direct Subsidiaries: Indian

a. Bharat Coking Coal Limited;

b. Central Coalfields Limited;

c. Central Mine Planning and Design Institute Limited;

d. Eastern Coalfields Limited;

e. Mahanadi Coalfields Limtied;

f. Northern Coalfields Limited;

g. South Eastern Coalfields Limited;

h. Western Coalfields Limited.

2. Direct Subsidiaries: International

a. Coal India Africana Limitada.

3. Indirect Subsidiaries (held through our subsidiary, Mahanadi Coalfields Limited)

a. MJSJ Coal Limited; and

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b. MNH Shakti Limited.

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Industrial ProfileThe Indian coal industry is the world’s third largest in terms of production and fourth largest in terms of reserves. Around 70% of the total production is used for electricity generation and the remaining by the steel, cement and other heavy industries. Coal is also used as fuel for domestic purposes.

The first coal mining operation commenced in 1774 in the Raniganj coalfield on the banks of River Damodar. The introduction of steam locomotives and WW-I stimulated demand for coal, and production peaked at 18 million tons (mts) during the 1920s.

Till independence, the Indian coal industry witnessed sporadic phases of growth. Since the private sector followed unscientific methods, productivity was low. The Indian government took steps to correct this and improve the working conditions in the nation’s coal industry. National Coal Development Corporation (NCDC), comprising of railway owned collieries, was established. In the early 1970s, all privately owned coal producing companies were nationalized under the Coal Mines (Nationalisation) Act.

India Coal Industry: Major Players

The leading players of the Indian coal industry include:

1. Coal India Limited: A public sector undertaking with 390 mines, it controls 88% of the domestic coal production.

2. Singerani Collieries Company: It operates through a network of 50 mines.3. Minerals and Metals Trading Corp: It is responsible for the conversion of imported coal into coke

for metallurgical and industrial purposes.

India Coal Industry: Issues

Despite having one of the largest reserves, the Indian coal industry does not hold a position in the league of global energy suppliers. This can be attributed to the soaring domestic demand. A study conducted by the Indian Planning Commission and the Coal Ministry revealed that India’s total coal consumption was expected to increase from 510 mts in 2007-08 to 550 mts by 2008-09. To meet this requirement, substantial public investment is needed. Even the private players would need to deploy advanced mechanisms to increase production levels.

Coal washeries are also under pressure. The onus of producing quality coal lies with this segment. It is required to sustain high quality levels within stringent environment regulations.

Excessive government regulation continues to be a major concern for the Indian coal industry. The existing legislative framework restricts the private sector in the establishment of coal washeries and regulated mining for specific industries, such as power and fertilizer units.

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Issue DetailsThe issue was opened on 18th, October, 2010 and closed on 21th, October, 2010. The shares of Coal India Ltd were listed on 4th November 2010. The Offer Price of Rs. 245 has been determined by the Selling Shareholder and the Company in consultation with the BRLMs, on the basis of assessment of market demand from the investors for the offered Equity Shares by way of the Book Building Process. The face value of the equity shares is Rs. 10 each and the Offer Price is 24.5 times the face value.

Object of the Offer

The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to achieve the benefits of lisitng the Equity Shares on the Stock Exchanges. The Company will not receive any proceeds from the Offer and all proceeds shall go to the Selling Shareholder.

The Offer was made through the Book Building Process.

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ValuationStrong fundamentals, high investor interest and valuation estimates indicate good listing gains for the Coal India stock, say experts. The country’s largest IPO ever has generated high investor interest, particularly in institutional investors, which is reflected in the over Rs 2,35,000-crore the IPO has garnered in subscriptions.

Coal India Ltd is a coal mining company and there is no other listed peer in India with which it can be compared with. Since the Offer is being made through the Book Building Process, the Offer Price will be determined on the basis of investor demand.

The face value of our Equity Shares is Rs. 10 each and the Offer Price is 24.5 times of the face value of our Equity Shares. The Offer Price of Rs. 245 has been determined by the Selling Shareholder and our Company in consultation with the BRLMs on the basis of the demand from investors for the Equity Shares through the Book Building Process and is justified based on the accounting ratio given below

NET ASSET VALUE PER EQUITY SHARE:

1. As of June 30, 2010 (Consolidated) : Rs. 44.942. As of June 30, 2010 (Standalone) : Rs. 29.693. Offer Price: Rs. 2454. As of June 30, 2010 (Consolidated) after the Offer1 : Rs. 44.945. As of June 30, 2010 (Standalone) after the Offer1 : Rs. 29.69

1There will be no change in the net worth post-Offer as the Offer is by way of offer for sale by the Selling Shareholder.

Note:

Net asset value per Equity Share represents net worth (excluding miscellaneous expenditures, if any) as restated, divided by the number of Equity Shares outstanding at the end of the period.

The above information has been adjusted for all periods, based on new number of shares after sub division of each equity share of face value of Rs. 1,000 each into 100 equity shares face value of Rs. 10 each.

Now, according to us to calculate the fair value of CIL’s share we used formula of “NET WORTH PER EQUITY SHARE”, and the value comes out to be Rs 297 as on 30 th, June, 2010. This is calculated as fallows

NET WORTH PER EQUITY SHARE = NET WORTH/No. Of EQUITY SHARES

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NET WORTH PER EQUITY SHARE = RS 187525.92 (Rs in millions)/631.64 (in millions)

So, the price at which the shares was quoted is Rs 245 which less than Rs 297, it means that they offered at discount and has prospect of increase in price in future.

One has to look at the business model to arrive at the right number of valuation. Coal India business model is not like a commodity company at all. If you see coal prices have virtually never declined in India over the last ten years. Even going forward, we do not expect any price cut.

On the volume front, volumes will be constrained by Coal India’s production challenges rather than demand. We have a demand deficit in India of thermal coal of around 50 million tonne or so currently. Therefore the cyclicality in earnings that commodities stocks have is virtually absent in the case of Coal India.

If you look at the multiples, it is closer to a utility company rather than a commodity company. Coal commodity companies globally are trading between 6-7 times one year forward EV/EBITDA. If you take utility companies in India, they are around 11 times one year forward EV/EBITDA. We think 9 times multiple is fair enough for Coal India. It is still at a discount to the utility multiple but it has to be at a significant premium to the coal companies globally.

On the discounted cash flow method, too, which most analysts are using to value Coal India stock, its value per share works out to Rs 300-310, which is encouraging.

According to Angel Broking Firm, the value per share works out to be Rs 294 according to DCF Method. This fair value calculated by Angel Broking Firm is justified on the following calculation bases:

1) Raw coal production to grow at 6% CAGR over FY2010 – 12E Historically, CIL’s raw coal production has grown by 5.4% over FY2001-10; it stood at 431mn tonnes in FY2010

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2) Sales volume to witness a 5.4% CAGR over FY2010–15E

a. Beneficiated coal sales to treble by FY2015E

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b. Sales mix improving

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c. E-auction volumes stands to increase

3) Belended realization on an upfront They expected CIL’s average blended realisation to register a 6.1% CAGR over FY2010–15E on account of a) a 5.1% CAGR increase in raw coal’s notified price over FY2010–15E, b) increased proportion of beneficiated coal sales, which commands a ~120% premium over the notified coal price and c) gradual increase in e-auction sales volumes.

1) Blended realization to gain

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2) Raw coal prices to report a 5.1% CAGR

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3) Net revenue to grow at 10.7% CAGR

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4) Manpower reduction to keep cost under check CIL’s employee cost, which is a major cost for the company, witnessed large variations on account of the National Coal Wage Agreement-VIII and Executive Pay Revision. Hence, CIL’s employee cost as a percentage of total cost increased to 51.5% in FY2009 and 45.7% in FY2010 as compared to 40.8% in FY2007. The provision on account of the wage agreement was at 1,756cr in FY2008 and 8,115cr in FY2009. However, there was a small write-back of `264cr in FY2010. This resulted in depressed EBITDA margins, given that there were no hike in coal prices in FY2007 and FY2008. EBITDA margins declined from 21.6% in FY2007 to 17.5% in FY2008 and further to 6% in FY2009 before increasing to 22% in FY2010 on account of an 11% price hike in October 2009. The next round of wage revision is due in July 2011.However, on the positive side, CIL’s employee strength, which stood at 439,343 employees in FY2007, has seen a steady decline to 397,138 employees in FY2010. Thus, we expect staff cost per tonne to be at `405 in FY2012E.

a. Staff cost as a % of total cost

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b. EBIDTA margins expected to be expand

c. Net profit grew at 13.7% over FY2010 – FY12E

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Fair value at Rs 294

The Angel Broking Firm arrived at a fair value using the discounted cash flow (DCF) methodology and assumed a discounting rate of 13.9% and perpetual growth of 3%.

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Discounted Cash Flows

Sensitivity of discount rate and terminal growth

6. Peer comparison At the lower price band, CIL will trade at 8.2x and 5.8x FY2011E and FY2012E EV/EBITDA, while at the upper band it will trade at 9.3x and 6.7x its FY2011E and FY2012E EV/EBITDA,

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respectively. On the P/E basis, the company will trade at 13.5x and 11.2x FY2011E and FY2012E earnings; while at the upper band, it will trade at 14.7x and 12.2x its FY2011E and FY2012E earnings, respectively, in line with its global peers.

RATIO

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Rational For InvestmentCoal India (CIL), a Navratna company, is the world’s largest coal producer. The company accounts for nearly 82% of India’s total coal production.

Coal India is the largest coal producer in the world and it is unique and there are no comparable companies listed on the stock exchanges in India.

Coal will continue to be the prime source of energy in India over the next 50 years. So, Coal India has good prospects of increasing its profitability in the coming years because coal is limited resource and the prices of coal can only go up. Coal Prices peaked in 2008 before cooling off substantially, but are slowly rising again.

1. Largest producer and supplier of coal Being the largest producer of coal, CIL contributes 80% of the country’s total coal output. Open cast mines contribute 90% to CIL’s total coal production. Though CIL virtually supplies its coal to all relevant industries, 80% of the coal requirement by the country’s power sector is met by CIL. At present (FY10), ~96.5% of the company’s revenue is contributed by raw coal.

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Share of coal production in India

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2. Growing demand for coal to provide support With the rising demand for coal in India the company is very well positioned as the sole supplier of coal to industries like power, steel, cement, etc. In India, coal is the primary source of fuel for thermal power plants, which consumed 77% of the total coal produced in India during 2009.

3. Significant leeway to increase prices: CIL sells raw coal at a ~63% discount to global prices. We expect blended realisations to increase at a 6.1% CAGR over FY2010–15E on account of a) a 5.1% CAGR increase in raw coal’s notified price over FY2010–15E, b) increased proportion of beneficiated coal sales, which commands a ~120% premium over the notified coal price and c) gradual increase in e-auction sales volumes from 11.6% of raw coal sales in FY2010 to 12.5% in FY2012E, where realised price is ~60% higher than the notified price.

4. Competitive cost structure: CIL is one of the lowest-cost coal producers in the world, with an average cost of US $16/tonne. This is because CIL’s production from open cast mines, which have significantly lower production cost (US $11/tonne), accounts for 90% of its total production as compared to underground mines, which have a higher production cost of US $59/tonne.

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ConclusionCoal India (CIL) is the world's largest coal company both in terms of production (431mt in FY10 - 82% of India's total production) and reserves. CIL operates 471 mines in 21 major coalfields (five coal fields accounted for ~65% production over the last three years) across 8 states in India. It enjoys higher margin as compared to its global peers due to low cost of production which gives the further room to the company to increase its domestic price. Its initial public offering (IPO) has seen a blockbuster response from qualified institutional bidders (QIB) as it got subscribed 24.7 times. As retail and high networth individuals (HNIs) bidding closes today, experts say the CIL IPO will see a strong demand from that side too.

According to Edelweiss Securities valuation, CIL’s fair value is at Rs 316 per share as coal prices are unlikely to come down in India. According to Angel Broking Firm, the value per share works out to be Rs 294 according to DCF Method, and according to us the fair value of CIL’s share comes out to be Rs 297 through “NET WORTH PER EQUITY SHARE” method.

Though analysts value the stock using different methods, on average the fair value of Coal India works out to around Rs 310 per share, which from the retail investors perspective (who have been allotted shares at Rs 232.75, considering 5 per cent discount) means over 33 per cent returns.

The market need to treat Coal India (CIL) as a utility play. Investment in this IPO was a value for money. There is not even a single broker or research house we came across that did not have a buy rating on the company. Whatever may be the fair price of Coal India, retail investors should have no reasons to worry. In fact, considering Coal India solid business model and prospects in the industry, experts advise to hold on to the stock for the long term.

The company is well positioned to capitalize on significant demand – supply gap in India and hence the price at which the share was quoted was Rs 245 which less than Rs 297, it means that they offered at discount and has prospect of increase in price in future.

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Other Exhibits

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Bibliography1. Company History: Coal India Ltd website2. Industry History: http://www.economywatch.com/business-and-economy/india-coal-industry.html3. Coal India Ltd Initial Public Offer Prospectus4. www.energetica-india.com/download.php?...coal...coal-india-ipo-34--per- cent-

subscription...day-1.pdf5. www.icicidirect.com/ULFiles/UploadFile_20101015125852.pdf

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