COAL INDIA IPO

A GAME CHANGER FOR INDIA?

INTRODUCTION TO COAL INDIA

Following are some details on Coal India's operations:

FACTS AND FIGURES

• Coal India was founded in 1973 when the government nationalised many coal mines
to boost output under its own supervision.
• The company made a net profit of 98.337 billion rupees ($2.21 billion) in 2009/10
(April-March) on revenues of 525.922 billion rupees.
• A 10 percent sale for $3.5 billion would imply a total value for the company of $35
billion with total share capital of 63.16 billion rupees.
• The company produced 431.26 million tonnes of coal in the year ending March 2010,
up 6.82 percent year-on-year.
• CIL is responsible for ~82% of India’s Coal Production from its 471 Mines in 8
states. The Company has been growing production at 8-9% in the last 2 years though
most of it is lower grade non-coking coal.
• India is the 3rd largest producer and consumer of Coal in the World with 77% of
India’s power generation dependent on Coal.
• The monopoly producer accounts for over 80 percent of India's total coal output and is
targeting production of 461.5 million tonnes in the current year which started in April.
• Coal India is the Largest Coal Producer in the World with 400,000 employees. It
is a Holding Company with 7 subsidiaries one of which mines coal in Mozambique.
The company is increasing benefaction of Coal which will lead to more value add and
higher prices. The company is expanding capacity to meet the 11.3% CAGR for coal
demand in India for the next 5 years.

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 • It wants to expand overseas to bridge the yawning gap between India's demand and
supply, and is in talks for buying mining stakes in Australia, Indonesia and the United
States.
• Coal India has been importing small amounts of coal and plans to issue a tender for
importing 6 million tonnes of coal this year mostly for power-maker NTPC Ltd.
• The company has a total of 18,862.9 million tons of total reserves of which 10,595.1
million tons are proven.
• Coal powers 75 percent of India's electricity output, and annual demand is expected to
swell at 11 percent on rising power generation. The country, which faces a peak-hour
power deficit of nearly 14 percent, plans to triple its generation capacity over the next
decade.

CHALLENGES
• Social problems are an obstacle to mine expansion with resistance from locals who are
concerned about displacement.
• Maoists, who say they are opposed to capitalism and have attacked some other state-
run firms in east India, are another hindrance to expansion.
• Bloated stocks of coal because of slow transportation have prompted top officials to
consider moving into power generation to use the inventories.
• Coal India will face competition from foreign miners as the government moves to
reform the coal sector and allow non-domestic players to bid for blocks in joint
ventures.
• After selling shares, it will have to review its policy of discounting coal in order to
strike a balance between its social obligations -- to keep power cheap -- and keeping
investors happy with profits and dividends. ($1=44.55 rupees)

ADVANTAGES
• India’s Fast Growing Economy is Dependent on Coal Energy – This guarantees a
stable growing Demand for its Products which is unlikely to change in the Future.
Due to its low costs, CIL is capable of exporting its products if in the case that
Domestic Demand Declines.

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 • Coal Based Power Generation to increase by 60% in the next 4 years with
Demand Outpacing Supply driven by Private Sector Capacity Additions from 86
GW of Coal based Energy Generation at Present. Besides the other coal consumption
sectors like Steel and Cement are also growing at an equally fast pace. India is
already importing around 66 million tons of coal which is going to increase rapidly.
• Largest Reserves in the World implying 138 years at Current Production Rate -
The company has identified around 64 Billion Tons of Coal Reserves which would
imply 138 Years of Reserves at a Production Rate of 500 million tons a Year. Note
India is supposed to have 6.7% of the World’s Coal Reserves with geological
resource of 277 Billion Tons. There is huge scope of growth since China at 3 Billion
Tons produces almost 6 times as much coal as India does. However the Reserves
would run out much faster that is in less than 50 years at growth rates of around 8-
10% per annum.
• Huge Difference in International Price and CIL’s Coal Cost – The International
Price of the cheapest grade of Coal was $72/ton declining about 40-50% from 2008
highs. The cost of production for CIL average just about $16/ton. This means that if
CIL sold Coal in the International Market it would earn a Gross Margin of
almost 80%.

COAL INDIA IPO --INTRODUCTION

Coal India Ltd. may sell as much as 151.5 billion rupees ($3.4 billion) of stock in the nation’s
biggest initial share sale as investors bet surging energy demand will override environmental
delays for new mines.

Fifteen of 18 investors surveyed by Bloomberg News said they plan to bid for shares in the
world’s largest coal producer. The stock of the state-owned company will be sold in a range
of 225 rupees to 245 rupees each, starting Oct. 18, with the proceeds helping the government
narrow its budget deficit.

India’s coal imports surged 16 percent in the year ended March 31 as power plants burned
more of the fuel to meet demand in Asia’s second-fastest growing major economy. Coal India

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will seek environmental clearances from the government to mine in densely forested areas in
states including Jharkhand and Chhattisgarh estimated to hold half of its future output.

RAISING FUNDS
Prime Minister Manmohan Singh’s government plans to sell shares in state-run companies to
raise 400 billion rupees this year to trim a budget deficit. The sale of a 10 percent stake in
Coal India could help the government meet about 38 percent of the asset-sale target and may
top the 116 billion rupees raised by billionaire Anil Ambani’s Reliance Power Ltd. in January
2008.

Indian companies have raised a record 806 billion rupees in equity and rights sales this year,
data compiled by Bloomberg show. The country’s benchmark Sensitive Index has gained 15
percent so far in 2010, making it the best performing gauge among the world’s 10 largest
stock markets.

Citigroup Inc., Deutsche Bank AG, Bank of America Corp., Enam Securities Pvt., Kotak
Mahindra Capital Co. and Morgan Stanley will manage Coal India’s offering.

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 VALUATION AND ADVANTAGES

The Overwhelming Opinion is that the Coal India IPO is cheaply valued and should lead to
immediate listing gains for investors. The P/E for CIL will be around 16 times. Trailing P/E
compared to 18-25x for comparable peers. Here is some of the opinoin about the valuation.

Global mining firms typically trade between 12 to 16 times historical earnings but given their
relative scarcity, pure-play coal miners command a valuation premium. China's Shenhua
Energy, the Indian miner's closest rival, trades at 16 times earnings, while smaller Indonesian
peer Adaro Energy has a price-to-earnings ratio of 20 times. U.S. miner Peabody Energy
trades at 25 times earnings. Coal India reported earnings per share 15.60 rupees for the fiscal
ended March 2010.

A. Coal India IPO Set To Ride Bull Market

Coal India IPO set to ride bull market
By Agencies
* A poll sees IPO price range of 220-280 rupees a share
* Deal seen priced near lower end of global peer range
* Gov't may set IPO price range Tuesday; final pricing Oct 23
* Coal India accounts for about 80 pct of India's coal output
* IPO set to revive momentum for govt's share sale plan

The initial public offering (IPO) of the world's largest coal miner, Coal India, is likely to
fetch $3.5 billion, more than initially estimated.

The reason behind it is the stock market rally and strong interest in the company.

According to a poll, potential investors in state-run Coal India's IPO expect the issue to be
priced around 250 Indian rupees ($5.63) a share, or 16 times trailing earnings, valuing it at
$35 billion and placing it among the top Indian firms by market value.

The valuation, based on a poll of 11 fund managers in India, Hong Kong and Singapore, is
seen as attractive relative to listed global peers, with most of those surveyed keen to invest in

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the Indian miner. The poll drew a price range expectation of 220 rupees per share to 280
rupees.

If the pricing is attractive, most global players would want to invest into the stock, said Binay
Chandgothia, Chief Investment Officer at Principal AMC in Hong Kong.

There are other companies in China, Australia, Indonesia that offer upstream coal exposure,
but the kind of dominant share Coal India holds in its market is unique.

The government is selling roughly 631.6 million shares, or 10 percent of the company, in
what is on track to be the largest IPO in Indian corporate history.

A government panel is likely to set a price band for the IPO late on Tuesday before order
books are opened on Oct. 18 and the final price is set on or around Oct. 23.

On Tuesday, Coal India denied a report in the Economic Times newspaper which said the
government panel is likely to recommend a price band of 220-240 rupees a share for the offer.

Retail investors and staff will get a further five percent discount on the final price. Previous
share sales in state firms this year had discounts of between five and eight percent.

HUGE MARKET
Coal powers 75 percent of India's electricity output, and annual demand is expected to swell
at 11 percent on rising power generation. The country, which faces a peak-hour power deficit
of nearly 14 percent, plans to triple its generation capacity over the next decade.

Coal India, based in the eastern city of Kolkata, holds a dominant position in this fast-
growing market. The state monopoly produced 431 million tonnes in 2009/10 and accounts
for nearly 80 percent of coal output in Asia's third-largest economy.

This is basically a play on India's growth story. Their business model and costs are different
from other global peers, and I think the risk factors are lower, said Rakesh Arora, a Mumbai-
based sector analyst at Macquarie Research.

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Coal India sells two-thirds of its total output to power companies and utilities account for its
top five customers.

B. Coal India IPO: Expect 30% Returns On Listing Day:

In general, the market mood is expecting the returns on Coal India IPO to be around
30% that too on the upper side of the price band on the listing day
Many experts and analysts believe that the offered price band of Coal India IPO which is set
at 225 to 245 Rs. per share is lower. Actual valuation might take it to Rs. 265 to Rs. 330
levels and that is what the various market analysts are expecting to be the traded price on the
day of listing for Coal India IPO.

Majority of the brokerage houses in India and abroad are recommending that investors should
subscribe to the Coal India IPO at the higher price band of Rs. 245 and can expect to see a
listing price anywhere from Rs. 265 to Rs. 330. This might look a bit wide range, but that is
what the various market opinions are. However, all of them are claiming that this will surely
be a premium listing. So short term IPO traders who want to make a quick buck in the market
can expect some profits on the listing days.

For the long term investors also, the situation is expected to be good. India is a fast growing
market and Coal India holds the monopoly in Indian coal market. Analysts believe that more
technological advances will help Coal India to get more profits in long term, so it is
recommended even for a long term hold.

There are many good points about this Coal India IPO:
 This is the first IPO in India which has received 5 out of 5 ratings from all three rating
agencies - CARE, ICRA and other

 This is the first IPO in India which will have the listed company direct entry into Nifty
50 and Sensex 30 indices

 This is the first IPO for which there will be a direct entry into the derivatives (futures
& options) segment Investors should take the call as per their risk appetite. These are
expert opinions which are subject to market risks

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 C. Street Divided On Coal India’s IPO Pricing
The wait for Coal India’s initial public offer (IPO) pricing is finally over, with the
government announcing a price band of Rs 225-245, which values the company at Rs
1,54,752 crores at the upper price band. However, the pricing has come as a surprise, and the
Street seems divided on this.

While the pricing is slightly higher than what most analysts had projected earlier, a few had
also pegged the company’s value at Rs 234-344 per share, based on different valuation
methods.

Last month, most experts and analysts had estimated the IPO to be priced in the range of Rs
200-220. Even after considering that the market (Sensex) has risen 4 per cent since then, the
final pricing at Rs 225-245 appears to be higher. At this pricing, the stocks PE works out to
14.4-15.7 times the company’s 2009-10 consolidated earnings.

"The issue is aggressively priced. It would have helped in attracting retail investors if the
price had been in the region of Rs 200 a share," said Mayank Shah, chief executive officer at
Anagram Capital.

While Coal India’s prospects and fundamentals are good, experts suggest that given the
somewhat aggressive pricing, the retail portion of the IPO could now get oversubscribed by a
little over one time. They argue that had the pricing been as expected earlier, the IPO could
have seen higher retail interest.

"Nevertheless, investors can still expect 10-15 per cent returns in the next one year," Shah
added. A benign IPO pricing would have left something for the investors in the near term as
well.

Meanwhile, Coal India’s IPO has many firsts to its credit. For instance, it is the first one
to be accorded a rating of 5/5 by rating agencies, which indicates superior fundamentals
compared to any other listed company. The other first is that its IPO, in terms of value,
will be the biggest ever India has ever witnessed. The offer, which is opening on October

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18, will help the government garner Rs 15,475 crores at the upper price band. This is
about 70 per cent higher that Reliance Power’s IPO in January 2008, which rose about
Rs 9,000 crores from the primary market.

Pricing apart, what places Coal India in a favourable spot is its status of being the world’s
largest coal miner and a dominant 81 per cent market share in the country. It has the world’s
largest proven coal reserves of 52,500 million tonnes (mt), accounting for almost 48 per cent
of India’s total reserves. Its annual production is estimated at 460 mt for 2010-11.
Assuming constant production at these levels, the company’s reserves would last for over 100
years.

Its huge cash and bank balance of Rs 39,000 crore as on March 2010, as well as robust
cash flows, would enable the company to pursue growth opportunities globally and also
comfortably fund its capital expenditure plans of Rs 8,450 crore over the next two years,
believes Crisil, a leading rating agency.

While a majority of the company’s coal is sold at notified prices (almost 60 per cent lower,
compared to international benchmark prices), any move towards market-based pricing would
provide further triggers. Nevertheless, the company makes a healthy 27 per cent operating
margin, aided by its low cost of production.

FII interest in Coal India IPO to disturb forex market

MUMBAI: Even as foreign portfolio investors are lining up cash to subscribe to the $3.4-
billion Coal India initial public offering (IPO), bankers are expecting some volatility in the
forex market, because of huge dollar inflows. At least 50% of the issue is reserved for
qualified institutional buyers (QIBs), and foreign investors are expected to bid for a sizeable
chunk of that quota.

Overseas investors have net-bought over $22 billion of shares in 2010 so far, and most
brokers expect the momentum to sustain for the rest of this calendar. The rupee closed at
44.51 to the dollar on Wednesday, and has gained over 4% in the past one month alone.

“The forex market is on tenterhooks in anticipation of lumpy flows in wake of significant

investments coming in for Coal India,” says Hemant Mishr, MD and head global markets at

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Standard Chartered Bank. He expects the rupee to hit 43.50 in a knee-jerk reaction on the day
the money comes into system.

The issue opens for subscription on October 18, and the remittance is expected to come in by
October 20. Coal India’s $3.4-billion IPO stands heads and shoulders above those of Reliance
Power ($2.9 billion), DLF ($2.2 billion), Cairn India ($1.2 billion), NHPC ($1.2 billion), TCS
($1.1 billion) which have been among the top 5 India IPOs so far.

“Going by the trend of portfolio flows, FIIs are likely to bring in fresh capital for institutional
bidding,” says Tirthankar Patnaik, chief strategist at Religare Capital.

This will exacerbate the impact on the rupee he added. Though FIIs typically put in their bids
on the last day, investment demand for CIL is such that some portfolio investors are also
weighing the option of liquidating a part of their holdings in sectors like banks, infrastructure
and construction, which have given good returns lately.

“These sectors could come under pressure,” said a senior strategist who is of the view that
FIIs have been overweight on these sectors and are looking to exit for sometime now. The
interest in CIL is also expected to see a spurt in domestic institutional flows

“Insurance companies are sitting on cash, but given the interest in CIL, mutual funds will
have to churn portfolios to take positions,” says Mr Patnaik of Religare Capital. Brokers and
fund managers expect the IPO to be subscribed 4-5 times at the very least, and as much as 10
times, on the higher side.

Fund managers maintain that close to $6-8 billion in cash has already come in. While data
available with custodians of leading foreign banks may not determine a pattern in the run-up
to the IPO, officials maintain that volumes are up by 20%.

“Gross FII data reveal that inflows are much higher than anticipated,” said the head-custody
at a foreign bank. He believes there are indications that some savvy investors have planned
ahead as a firm rupee base will move against them.

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Over the past week, the buoyant equity capital market activity for issuers in Asia (excluding
Japan) continued its momentum with the launch of four record-breaking IPOs in Australia,
India, Malaysia, and Singapore, with combined proceeds of $17.8 billion.

According to data from Thomson Reuters, year-to-date IPO volumes for Asia (excluding
Japan) total $97.2 billion from 548 issues, up 165% from the same period in 2009 that saw
IPO proceeds of only $36.6 billion. Year-to-date Asia (excluding Japan) IPO proceeds are the
highest same-period volume on record, beating 2007’s full-year proceeds of $93.3 billion.

CARE assigns 'IPO Grade 5' to Coal India's IPO

MUMBAI: Rating agency, CARE, on Monday said it has assigned a ' CARE IPO Grade 5'
grading to the proposed initial public offer (IPO) of Coal India Ltd, indicating the "strong
fundamentals" of the IPO.

CARE pointed out the assigned grading reflects Coal India Ltd (CIL)'s dominance in the
Indian coal industry. CIL contributes to around 82 per cent of coal production in India.

The balance 18 per cent is produced mainly for captive consumption by manufacturing/power
companies. Thus practically, CIL holds the monopoly in traded coal available domestically, a
press release issued here stated.

Besides, CIL's strong financial position with cash balances of Rs 39,077 crore with a
comfortable gearing ratio give it immense financial flexibility to fund its on-going and
planned expansion projects.

Moreover, CIL is one of the lowest-cost producers giving it an pricing edge over imported
coal. The grading also factors experienced management and impressive track record of
operations, CARE said in its release.

RISKS AND NEGATIVES WITH HIGHLY RATED COAL INDIA IPO

1) Low Quality of Coal Reserves – Indian Coal is of typically low content with high
amounts of impurities making it unusable in industries like the steel industry where

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 higher quality is a must. Also low calorific content of coal makes CIL Coal of lower
value leading to lower realizations.

2) Inefficient Mining Practices – CIL is not exactly a well run modern mining company
on the lines of BHP Billton or Rio Tinto. The Company with a long history tracing to
British days is organized haphazardly with a number of subsidiaries. It Mining
Operations are hardly efficient and its expertise in Underground Mining of coal as
opposed to Open Casting Mining is quite suspect.

3) Dangers of Being Government Owned – Government owned Fossil Fuel Companies

like IOC, ONGC, and BPCL have a long history of subsidies and losses. The profits
and losses of these companies despite being listed on the public markets are subject to
the whims and fancies of the government. The Company prices its products
significantly below international market costs which has little justification. Though
the Company manages to get 15% Net Margins, it could change drastically depending
on the fickle nature of the Party in Power. The Government is planning a new
legislation which will lead to giving of 20% of profits of mining companies to local
communities.CIL being government owned will definitely come under the ambit of
this proposed law leading to a potential decrease in profits.

4) Growth Rate is not Fantastic by Any Means – CIL has managed a decent growth of
around 10% which it will find difficult to accelerate despite huge demand due to its
not so competent management and organization. The Company’s structure won’t
change radically with public listing overnight. So while CIL should be a good safe
investment, it might not be a multi-bagger in the near future.

5) Global Carbon Tax and Climate Change Legislation – Coal is the Dirtiest form of
Energy and its cheapness is due to the fact that implicit costs on the society are not
added to Coal. It is already well known that Coal has huge pollution and health costs.
Mercury poisoning, Degradation of Land and Ecology are some of the other negative
environmental effects of Coal Mining and Usage. Its no wonder that Coal India’s
Advertisements show A forestation Measures to try and bolster its Green Credentials.
But make no mistake CIL is the biggest polluter in India. A Global Carbon Tax or

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 something to that effect might radically change the structure of the Coal Industry quite
negatively

6) Pilferage and Corruption – Illegal Coal Mining, Stealing and Pilferage is an

Institutionalized Form of Corruption in India. Whole Villages in India’s Coal Belt in
West Bengal, Jharkhand subsist through stealing of Coal. The Coal Mafia in India is a
powerful one with government links. Coal India suffers big losses though it is not
been adequately disclosed in the Red Herring Prospectus.

Summary
Despite the above Risks, I think that Coal India is one of the best quality stocks to come out
in India’s Primary Markets. However investors should be wary of the risks which will be
glossed over by the mainstream media and brokerages. As with every investment however
safe it might look, there are risks. This does not mean that investors should be fearful of every
investment. It is by being aware of the risks, that prudent risk management can be done which
is essential to successful investing.

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 What Are The Analysts Recommendations For Coal India IPO?

Coal India is owned by the government of India which is planning to raise around 15,000
Crore Rs. through this IPO of Coal India. It has 63 billion tonnes of coal which makes Coal
India the world’s largest reserves of coal.

After Reliance Power IPO, this IPO is expected to be the largest. The power needs for the
country are increasing day by day. Hence Power companies are expected to benefit.
Infrastructure developments are on the rise with a stable government at the center. However,
one needs to look at the valuations of the company and how well it is placed with regard to
the competitors. Being a government controlled Navratna Company; this is found to be
having strong fundamentals. The government is also expected to offer the shares of coal India
limited at 5% discount to retail investors, hence they will benefit.
Majority of the market experts and analysts say that this IPO should be subscribed to, and it is
even being cited that due to this IPO there might be a fall in the market. The reason is that this
is much awaited IPO and investors will take out money by selling their existing shares in the
market to apply for this IPO. Hence this IPO should be definitely subscribed to.
However, one must not go only with the recommendations. Remember Reliance Power IPO
and what happened to it on the day of listing?

Despite the above Risks, Coal India is one of the best quality stocks to come out in India’s
Primary Markets. However investors should be wary of the risks which will be glossed over
by the mainstream media and brokerages. As with every investment however safe it might
look, there are risks. This does not mean that investors should be fearful of every investment.
It is by being aware of the risks, that prudent risk management can be done which is essential
to successful investing.

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