Equity Research

Basic Industries | Asia ex-Japan Metals & Mining 3 July 2013 Stock Rating Industry View Price Target

Coal India

Connecting the dots: nationalization, wages and pension

We take a deep dive into Coal Indias (CILs) productivity trends in this report, along with employee costs and retirement obligations. Investors are seeking clarity, we believe, on: 1) sustainability of productivity increase achieved over the past decade; 2) wage inflation trend going forward; and 3) unfunded liabilities with respect to employee retirements. We conclude the following:

OVERWEIGHT
Unchanged

NEUTRAL
Unchanged

INR 402.00
Unchanged

Price (02-Jul-2013) Potential Upside/Downside Tickers

INR 299.85 +34% COAL IN / COAL.NS 1893962 6316.36 10.00 0.2 3.4 N/A N/A

Our analysis of various factors driving CILs employee wages (refer Figure 4)
suggests wage costs would rise by a 7% CAGR over FY13-18E after building in benefits from natural attrition (retiring employees earn 2.5x of new employees), annual increments, inflation estimates and next National Coal Wage Agreement (NCWA-X) due in July 2016. Incrementally, we see contractor wages increasing in line with the employee wage trend since, following the recent wage hike for contractors, the spread with CILs employee wages has narrowed considerably.

Market Cap (INR mn) Shares Outstanding (mn) Free Float (%) 52 Wk Avg Daily Volume (mn) Dividend Yield (%) Return on Equity TTM (%) Current BVPS (INR)
Source: FactSet Fundamentals

We expect the rate of natural attrition to accelerate (to 3.5% over FY13-18E refer
Figure 7). Based on an analysis of Coal Indias employee profile by subsidiary, we believe legacy subsidiaries will account for the bulk of retirements which should result in an almost doubling of their productivity, while incremental volumes will shift towards efficient subsidiaries. We forecast the productivity improvement trend to accelerate to 8% over FY13-18E.
Price Performance 52 Week range Exchange-BSE INR 386.00-285.15

With a current pensioner base as big as the employee base, we take a closer look at
CILs pension obligations. The deficit in the Coal Mines Pension Scheme (managed independently) is large at Rs180bn (as of Mar 2012). Since the company pension plan is a defined contribution scheme, CIL cannot be forced to fund any shortfalls. However, considering the magnitude of the shortfall in the pension fund, this is a risk worth highlighting, in our view. Unfunded gratuity liabilities in CIL stand at Rs66.7bn (as of Mar 2012), which we expect would be funded by CIL progressively over FY14-16E. COAL.NS: Financial and Valuation Metrics INR
FY Mar EPS Previous EPS P/E
Source: Barclays Research.

Link to Barclays Live for interactive charting

Asia ex-Japan Metals & Mining Chirag Shah +91 22 6719 6081 chirag.x.shah@barclays.com BSIPL, Mumbai Ankur Niyogi +91 22 6719 6267 ankur.niyogi@barclays.com BSIPL, Mumbai

2011 17.21A 17.21A 17.4

2012 23.44A 23.44A 12.8

2013 27.80E 27.80E 10.8

2014 26.36E 26.36E 11.4

2015 27.91E 27.91E 10.7

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 13.

Barclays | Coal India

Asia ex-Japan Metals & Mining Industry View: NEUTRAL Stock Rating: OVERWEIGHT 2013E 683,027 182,836 252,174 251,605 175,425 27.80 27.77 6,316 14.00 2014E 731,489 175,914 249,297 248,526 166,513 26.36 26.36 6,316 15.00 2015E 756,308 178,652 252,606 251,854 176,298 27.91 27.91 6,316 15.00 CAGR 6.6% 4.5% 6.0% 5.8% 6.0% 6.0% 6.0% 0.0% 14.5% Average 24.9 34.6 34.5 23.9 13.5 36.0 50.9 CAGR 7.7% 79.8% 12.4% 10.2% 8.7% N/A 7.8% N/A 13.9% N/A 10.1% N/A 5.8% Average 11.4 7.0 10.3 3.8 4.5 -55.8 CAGR 5.2% N/A -0.7% 2.9% 0.4% 2.3% Price (02-Jul-2013) INR 299.85 Price Target INR 402.00 Why Overweight? We assume a WACC of 13.0% and a terminal growth rate of 2%, conservative, we believe, considering that CIL has more than c43 years of mine life and there is limited downside to realisations. Upside case INR 467.00 Our upside case assumes that non-power volumes are brought at par with seaborne thermal coal prices (Rs52/share). A drop in diesel prices for bulk consumers by 15% would add Rs13/share to our base case. Downside case INR 290.00 We assume 10% drop in seaborne prices (Rs37/share), flat volumes over FY13 (Rs23), further 15% hike in diesel costs (Rs13) and immediate implementation of the mining tax (Rs39) downside to our base case PT. An aggressive pricing for sale of governments stake is a key risk. Upside/Downside scenarios

Coal India Limited (COAL.NS)

Income statement (INRmn) Revenue EBITDA EBIT Pre-tax income Net income EPS (reported) (INR) EPS (adj) (INR) Diluted shares (mn) DPS (INR) Margin and return data EBITDA margin (%) EBIT margin (%) Pre-tax margin (%) Net margin (%) ROIC (%) ROE (%) Payout ratio (%) 2012A 624,154 156,678 212,355 212,727 147,882 23.44 23.41 6,316 10.00

25.1 34.0 34.1 23.7 17.9 40.0 42.7

26.8 36.9 36.8 25.7 14.9 39.8 50.4

24.0 34.1 34.0 22.8 10.3 33.0 56.9

23.6 33.4 33.3 23.3 10.8 31.2 53.7

Balance sheet and cash flow (INRmn) Tangible fixed assets 144,952 136,823 149,615 180,996 Intangible fixed assets 18,484 58,484 93,484 107,484 Cash and equivalents 592,372 627,352 755,950 840,336 Total assets 1,056,833 1,149,917 1,291,279 1,415,108 Short and long-term debt 13,333 18,012 17,847 17,119 Other long-term liabilities -11,941 -11,941 -11,941 -11,941 Total liabilities 652,459 673,581 759,283 817,665 Net debt/(funds) -579,039 -609,339 -738,104 -823,217 Shareholders' equity 405,066 477,029 532,690 598,136 Change in working capital -79,912 9,793 -120,896 -65,048 Cash flow from operations 198,879 163,489 308,845 265,213 Capital expenditure -34,094 -50,000 -70,000 -70,000 Free cash flow 164,784 113,489 238,845 195,213 Valuation and leverage metrics P/E (reported) (x) EV/EBITDA (x) Equity FCF yield (%) P/BV (x) Dividend yield (%) Net debt/capital (%)

12.8 8.4 11.3 4.7 3.3 -54.8

10.8 7.0 7.1 4.0 4.7 -53.0

11.4 6.6 12.7 3.6 5.0 -57.2

10.7 6.0 10.3 3.2 5.0 -58.2

POINT Quantitative Equity Scores

Value

Quality

Selected operating metrics (INR) Volumes (mt) (k) 432.6 Power FSA price (Rs/t) 0.0 E-auction price (Rs/t) 2,599.3 Blended price (Rs/t) 1,372.9 Employee cost (Rs/t) 579.4 Total operating cost (Rs/t) 1,072.6

454.2 1,239.0 2,564.6 1,457.8 601.5 1,101.3

483.6 1,294.8 2,553.1 1,511.8 599.3 1,148.8

503.7 1,294.8 2,544.7 1,493.8 587.0 1,146.8

Sentiment

Low

High

Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.

Source: Company data, Barclays Research Note: FY End Mar

3 July 2013

Barclays | Coal India

Key charts
FIGURE 1 Coal Indias past and future productivity and cost trends
900 800 700 600 500 400 300 200 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E FY18E Productivity(RHS)
NCWA-VII

Rs/t
NCWA-VIII

NCWA-IX

NCWA-X (expected)

tons/shift 8 7 6 5 4 3 2

Employee + Contract costs per ton

Source: Company data, Ministry of Coal, Planning Commission, Barclays Research estimates

FIGURE 2 Coal India hiked wages of contractors in Jan 2013, narrowing the wage gap with regular employees
700 600 500 400 300 200 100 NCWA-IX Pre-revised contract wages Revised contract wages (Jan'13) Statutory minimum wage 180 115 Rs/day 604 464

FIGURE 3 On a per-ton basis, we expect a c3.5% CAGR in total employee costs (including contractors) over FY13-18E
1,000 800 600 400 200 Rs/t

Employee Cost/t Employee + contract cost / t

Contract cost/t

Source: Company data, Barclays Research

Source: Company data, Barclays Research estimates

FIGURE 4 Past and future estimated break-up of employee costs

Rs mn 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 FY07 FY08 FY09 FY10 Basic + DA
Source: Company data, Barclays Research estimates

NCWA-X (expected) NCWA-IX NCWA-VIII

FY11 PF

FY12 Gratuity

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

Ex-gratia, PPLB

Others

3 July 2013

Barclays | Coal India

Employee productivity Coal India shedding a legacy

Coal India inherited around 700,000 employees during nationalization of the coal industry in the early 1970s. The employee strength has halved today, but a large number of legacy employees are still deployed at the older subsidiaries. As of FY12, an overwhelming two-thirds of the employee strength was employed at the four legacy subsidiaries (ECL, BCCL, WCL and CCL), but contributed less than one-third of the annual production. With nationalization approaching 40 years of completion, natural attrition of employees is likely to accelerate, the bulk being from the older subsidiaries. We foresee significant productivity jumps at these subsidiaries over the next few years. Combined with an increased focus on mechanization and outsourcing, we believe the productivity level in Coal India is poised to witness a CAGR of 7.8% over FY13-18E.

We expect employee reduction to continue over the coming years

Age-profile analysis of Coal Indias current employee base (by subsidiary) suggests that one-fifth of the current employee base will be retiring in the next five years. More importantly, the legacy subsidiaries (those formed during or soon after nationalization) will account for the bulk of the retirements. We expect a positive impact to the productivity levels at these subsidiaries and at Coal India as a result. FIGURE 5 Age profile analysis indicates c80,000 retirements (one-fifth the current employee base) in the next five years (FY13-18E)
56 - 60 yrs 20% <35 yrs 10% 36-40 yrs 12%

FIGURE 6 Legacy subsidiaries to witness 90% of these retirements

Employees (no)

18,000 16,000 14,000 12,000 10,000

8,000

51 - 55 yrs 21%

41-45 yrs 17%

6,000 4,000 2,000 FY14E FY15E FY16E MCL FY17E Others FY18E

46-50 yrs 20%

Source: Company data, Barclays Research estimates

Legacy subsidiaries*

*Includes BCCL, ECL, CCL, WCL and SECL. Source: Company data, Barclays Research estimates

FIGURE 7 Coal India will continue to shed employees at more than a 3% CAGR over the next few years
550,000 500,000 450,000 400,000 350,000 300,000 250,000 200,000 3.5% CAGR 3.1% CAGR

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

FY16E

FY17E

No of employees
Source: Company data, Barclays Research estimates

3 July 2013

FY18E

Barclays | Coal India

Significant variation in productivity levels across subsidiaries

Combined manpower productivity levels of regular and contract employees (measured in tonnes of output per man shift, or OMS) vary considerably across Coal Indias subsidiaries. The main factors for this variation, in our view are: 1) difference in expected volume growth among subsidiaries, which in turn depends on a host of factors such as statutory clearances, logistics availability, etc; 2) a significant number of regular employees being deployed at legacy mines of the older subsidiaries where production remains low; 3) the newer subsidiaries having a much lighter employee-base; and 4) differences in outsourcing levels (whose operations are more efficient) being adopted by various subsidiaries. For example, average tons of coal produced per man shift at MCL (Mahanadi Coalfields Limited) over the past six years has been 12x that of ECL (Eastern Coalfields Limited). FIGURE 8 The most productive subsidiary has been 12x more efficient than the least productive
18 16 14 12 10 8 6 4 2 0 FY07 FY08 FY09 OMS of MCL
Source: Company data, Barclays Research

tons

FY10 OMS of ECL

FY11

FY12

FIGURE 9 Operating parameters across subsidiaries

ECL Total No. of employees* Cost/ employee Productivity/employee (OMS) % of employees Workmen* Workmen as a % of total emplyees % output from underground mines Overburden removal (mn cu meters) Total production Strip ratio
* As of Mar 2012. Source: Company data, Barclays Research

BCCL 64,573 281,167 1.6 17.3% 57,337 89% 12.7% 83.3 29.0 2.9

CCL 50,307 270,322 2.8 13.5% 44,230 88% 2.7% 62.5 47.5 1.3

NCL 16,353 362,490 12.5 4.4% 12,920 79% 0.0% 182.2 66.3 2.8

WCL 57,312 285,834 2.8 15.3% 49,442 86% 19.9% 115.8 43.7 2.7

SECL 76,406 273,749 5.3 20.5% 65,376 86% 14.9% 138.4 95.9 1.4

MCL 22,013 299,482 15.5 5.9% 17,508 80% 2.2% 88.7 110.3 0.8

CIL 373,614 282,719 3.9

78,506 269,597 1.2 21.0% 69,788 89% 23.9% 56.3 30.8 1.8

321,180 9.3% 732 431 1.7

Expect productivity levels to double at legacy subsidiaries

With the bulk of the retirements coming at the legacy subsidiaries, we expect sharp jumps in their productivity levels. A significant number of these employees were deployed at legacy mines that contribute little to production and hence they could be categorized as surplus or bench employees. Retirement of employees from these mines is likely to lead to

3 July 2013

Barclays | Coal India much leaner operations at the legacy subsidiaries and positively impact overall productivity levels at Coal India, in our view. On average, we expect productivity levels to double at the legacy subsidiaries over FY1318E. Central Coalfields Limited (CCL) is likely to benefit the most; we also expect volume growth to shift towards efficient subsidiaries, such as MCL and CCL, and there to be a further increase in outsourcing levels. Overall, we expect Coal Indias productivity levels to witness a 7.8% CAGR over FY13-18E (compared to 6.7% over FY07-12). FIGURE 10 CCL likely the biggest beneficiary, with productivity levels catching up with MCL
tons / man-shift 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 FY07 FY08 FY09 FY10 FY11 MCL FY12 FY13 CCL FY14E FY15E FY16E FY17E FY18E Coal India

Source: Company data, Ministry of Coal, Planning Commission, Barclays Research estimates

FIGURE 11 Retirements from various subsidiaries will be close to 80,000 in the next five years
Company Exe ECL BCCL CCL WCL SECL MCL NCL NEC CMPDI DCC CIL(HQ) TOTAL 847 150 153 178 76 98 74 79 4 34 1 FY14E Non-exe 3373 2825 1985 2327 2450 706 464 121 130 32 50 14463 Exe 168 188 138 85 80 81 73 4 41 2 0 860 FY15E Non-exe 3255 2795 1988 2573 2631 793 530 118 130 35 42 14890 862 Exe 157 150 156 80 98 89 75 5 49 3 FY16E Non-exe 2792 2572 1648 2846 3127 787 612 111 161 52 33 14741 906 Exe 173 121 167 100 111 68 110 5 47 4 FY17E Non-exe 2636 2853 1749 2912 3188 836 727 137 136 39 33 15246 886 Exe 153 156 139 102 116 72 100 5 39 4 FY18E Non-exe 2527 2665 1634 2946 3389 855 718 176 157 50 41 15158

*Abbreviations: Eastern Coalfields Limited (ECL), Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Western Coalfields Limited (WCL), South Eastern Coalfields Limited (SECL), Mahanadi Coalfields Limited (MCL), Northern Coalfields Limited (NCL), North Eastern Coalfields (NEC), Central Mine Planning and Design Institute Limited (CMPDIL), Dankuni Coal Complex (DCC) and Coal India Limited - Head Quarters (CIL - HQ) Source: Company data, Barclays Research estimates

3 July 2013

Barclays | Coal India

Dissecting future employee cost trends

We forecast a c7% CAGR in employee costs over FY13-18. Our estimates include the impact of a wage hike from the 10th National Coal Wage Agreements (NCWA-X) (expected in July 2016). On average, retiring employees earn up to 2.5x the salary of new employees. We build in the difference in employee salary mix, regular annual increments of 3% (NCWAIX) and expected wage hikes due to inflation (dearness allowance). We also look at the funding status of the gratuity fund.

Non-executive wage structure and key factors

The non-executive employee class forms the core of Coal Indias employee base and contributes 88% to total employee cost. The break-up of non-executive salary and associated key factors driving them are provided in Figure 12. FIGURE 12 Break-up of a Coal Indias non-executive employee salaries
Salary component Basic wage Attendance bonus Special & house rent allowance Dearness allowance Key factors

Finalized in NCWA agreements for different grades of employees Annual increments in basic wage is fixed at 3% pa (NCWA-IX) Paid quarterly as 10% of basic wage Special allowance fixed at 4% of revised basic wage HRA at 2% of basic to employees not provided with accommodation Linked to All India Consumer Price Index for Industrial workers Base for calculation fixed at index value of 4245 (NCWA-IX) Percentage increase over base value paid quarterly as % of basic Varies with the level of outsourcing adopted by the firm Contract wages increased from Rs180 to Rs464 (/day) in Jan 2013 Defined benefit plan; cap of Rs1mn - paid at the time of retirement Assets against obligations invested with LIC India Funded status as per actuarial valuation is around c47% (Mar12) Coal India and employees contribute fixed % of salary Operated by Coal Mines Provident Fund (CMPF) under Coal Ministry Multi-employer defined contribution plan - CIL, central government and employee contribute fixed %; also administered by CMPF Retirees receive 25% of last 10 months average pay

Contractual expenses Gratuity

Provident Fund Pension Scheme

Source: Company data, Barclays Research

A brief history of wage agreements in Indian coal industry

Wages for the non-executive workforce of the Indian coal industry are negotiated and settled for tenure of five years between the managements of the coal companies (Coal India, its various subsidiaries and the Singareni Collieries Company Limited) and the five central trade unions through a joint bipartite committee. The detailed agreement across all grades of non-executive employees is laid down in the National Coal Wage Agreement (NCWA). There have been nine National Coal Wage Agreements to date. The most recent NCWA agreement (NCWA-IX) was signed in a record time of seven months, and led to an average hike of 25% for the non-executive class.

3 July 2013

Barclays | Coal India FIGURE 13 Historical perspective of NCWA agreements and agreement dates
NCWA I II III IV V VI VII VIII IX Start date Jan-75 Jan-79 Jan-83 Jan-87 Jan-91 Jul-96 Jul-01 Jul-06 Jul-11 End date Dec-78 Dec-82 Dec-86 Jun-91 Jun-96 Jun-01 Jun-06 Jun-11 Jun-16 Agreement Date Nov-74 Nov-79 Nov-83 Jul-89 Jan-96 Dec-00 Jul-05 Jan-09 Jan-12

Source: Company data, Barclays Research

FIGURE 14 NCWA-IX resulted in a hike of 25% in non-executive wages

NCWA periods V-1991 V-1996 VI-1996 VI-2001 VI-2001 VII-2006 VIII-2006 VIII-2011 IX-2011 Basic Wage (Rs/day) 65.40 65.40 126.90 126.90 213.50 213.50 321.50 321.50 604.33 Attendance bonus Special DA (Rs/day) @10% (Rs/day) 6.54 6.54 12.69 12.69 21.35 21.35 32.15 32.15 60.43 1.20 1.20 2.30 2.30 3.80 3.80 5.80 5.80 10.85 Variable DA (Rs/day) 0.00 52.90 0.00 51.20 0.00 51.20 0.00 205.00 0.00 Total (Rs/day) 73.14 126.04 141.89 193.09 238.65 289.85 359.45 564.45 675.61 25.0% 24.0% 24.0% 13.0% Wage hikes (%)

Source: Company data, Barclays Research

Basic wages
The basic wage is the biggest component of the employee salary structure. The key points related to this component, in our view, are:

NCWA fixes the minimum basic wage as well as the basic wages across different
categories, skills and grades of employees.

A number of other components of salary are calculated on the basic wage such as
provident fund contributions, leave encashment, dearness allowance.

NCWA-IX fixed the basic wage of the lowest grade employee at Rs604/day. NCWA-IX fixed the annual increment of basic wage at 3% in each employee grade.

Dearness allowance
The (variable) dearness allowance component is linked to the All India Consumer Price Index for Industrial Workers (base 1960=100). The percentage increase in the series is computed quarterly on the basis of average quarterly AICPI index value over the base index value of 4245 as fixed in NCWA-IX. This increase is paid out as percentage of basic pay on a quarterly basis. The dearness allowance component depends on the macroeconomic conditions of the economy with larger dearness allowance to employees during inflationary conditions. The index has shown a quarterly average increase of c2% or an annualized increase of c9% pa since 2005.
3 July 2013 8

Barclays | Coal India FIGURE 15 Increases in All India Consumer Price Index for Industrial Workers over base value is paid as Dearness Allowance
Period Sep-11 Dec-12 Mar-12 Jun-12 Sep-12 Dec-12 AICPI index 4245 4276 4443 4520 4550 4710 Rates of VDA (% increase over base =4245 as fixed in NCWA-IX) 0.0% 0.7% 4.7% 6.5% 7.2% 11.0%

FIGURE 16 Percentage changes in All India Consumer Price Index for Industrial Workers (base 1969 = 100)
18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Jun-04

Jun-05

Jun-06

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Jun-12

Source: Labour Bureau, Company data, Barclays Research

Source: Labour Bureau, Barclays Research

Gratuity
The total outstanding actuarial liability on account of gratuity stood at Rs126bn on Mar12. Assets for gratuity funds are maintained with Life Insurance Corporation (LIC). The funding status of the fund as of Mar 2012 stands at 47%. The average gratuity outgoing (at NCWAIX wage rates) is shown in Figure 17. Gratuity plan is a defined benefit plan with a cap of Rs1mn to be paid to employees on retirement. The risk of funding shortfall lies with Coal India. The major part of the unfunded portion is due from BCCL and ECL. The company expects these two subsidiaries to infuse the required funds in the future. BCCL was recently declared No longer sick by the Board for Industrial and Financial Reconstruction (BIFR) and management expects ECL to follow suit. We expect Coal India (through its subsidiaries) to fund the shortfall in the coming years. FIGURE 17 Average gratuity obligations (per employee) in non-executive grades on NCWA-IX pay (as of FY13)
1,200 1,000 800 600 400 200 Daily rated Excavation Monthly rated Average Gratuity
Source: Company data, Barclays Research estimates

Rs '000

Clerical grade

Piece-rated

Forecast a c7% CAGR in employee costs over FY13-18

Employee costs in FY07-12 witnessed the impact of two NCWAs (NCWA-VIII and IX). Going forward, we forecast a c7% CAGR in employee costs over FY13-18. The main factors driving this, in our view, are: 1) regular annual increments of 3% pa; 2) wage hikes due to inflation (dearness allowance) over and above regular increments; 3) impact of NCWA-X wage hike in FY17E; and 4) a shift in the employee profile mix due to increased retirements.
3 July 2013 9

Dec-12

Barclays | Coal India FIGURE 18 Past and future estimated break-up of employee costs
Rs mn 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 FY07 FY08 FY09 FY10 Basic + DA
Source: Company data, Barclays Research estimates

NCWA-X (expected) NCWA-IX NCWA-VIII

FY11 PF

FY12 Gratuity

FY13E

FY14E

FY15E

FY16E

FY17E

FY18E

Ex-gratia, PPLB

Others

Contract mining the way forward

Outsourcing development and operations of mines to private miners is steadily gaining importance in Coal Indias business model (refer Figures 19 to 24). We view this as a positive trend given efficient utilization of employees (productivity of contract employees could be as high as 5x Coal India employees) and higher mechanization levels in mining operations by contractors. We had highlighted the stark wage difference between regular and contract employees as a potential risk until Jan 2013, the minimum basic wage of a contract employee was less than one-third of a regular employee. However, we believe that now the risk has mitigated significantly on account of the following:

Increase in wages of contract workers from Rs180/day to Rs464/day effective from Jan
2013.

Coal India has been proactively pushing contract firms to shift from cash disbursement
to bank account disbursement of salary of contract workers.

Even after wage revision, there remains a gap between the wages. We believe the risk of
a friction on account of this is low as the nature of work assigned to contract and permanent employees is different. We expect a greater thrust to the outsourcing model, given cost and productivity advantages, and estimate that production share from outsourcing could rise by 7% over FY17E.

3 July 2013

10

Barclays | Coal India

FIGURE 19 FY13 employee cost and contract expense mix

Contracting costs 18%

FIGURE 20 FY18E mix we expect greater focus on contract mining

Contracting costs 21%

Employee costs 82%

Source: Company data, Barclays Research Source: Company data, Barclays Research

Employee costs 79%

FIGURE 21 FY12 volume mix from subsidiaries

ECL 7%

FIGURE 22 FY18E volume mix incremental volumes to shift towards efficient subsidiaries
BCCL 7% CCL 10%

MCL 24%

MCL 25%

ECL 7%

BCCL 7%

CCL 15%

NCL 15% SECL 27% WCL 10%

SECL 23%

NCL 15% WCL 8%

Source: Company data, Barclays Research

Source: Company data, Barclays Research

FIGURE 23 Coal India hiked wages of contractors narrowing the wage gap with regular employees
700 600 500 400 300 200 100 NCWA-IX Pre-revised contract wages Revised contract wages (Jan'13) Statutory minimum wage 180 115 464 Rs/day 604

FIGURE 24 On a per-ton basis, we expect c3.5% CAGR in total employee costs (including contractors) over FY13-18E
1,000 900 800 700 600 500 400 300 200 100 Rs/t

Employee Cost/t Employee + contract cost / t

Source: Company data, Barclays Research

Contract cost/t

Source: Company data, Barclays Research

3 July 2013

11

Barclays | Coal India

Coal Mines Pension Scheme can the deficit flow to CIL?

With a pensioner base roughly equal to current employee strength and sustained attrition over the coming years, we take a closer look at Coal Indias social security obligations. Pension obligations for Coal India through its defined contribution scheme should be ideally limited to a specific percentage of employee cost. However, we foresee uncertainties in funding plans, given a reported deficit of Rs180bn for the scheme and a fund life of 10 years as of Mar 2012. The Coal Mines Pension Scheme (1998) for coal employees is a multiple-employer defined contribution scheme with specific contributions from different stakeholders. The scheme is administered by the Coal Mines Provident Fund Organization (CMPFO), which is an independent government body under the Ministry of Coal and specifies contributions of c3.16% by employee, 1.16% by Coal India and 1.7% by the central government (subject to a specific limit). On the other hand, the scheme also promises 25% of the past ten months average salary to retiring employees. We have received a number of investor queries about the pension scheme, obligations of stakeholders and funding plans in case of deficits. With c300,000 pensioners (or more than 80% of the current active workforce) and c80,000 retirements in the next five years, the pension obligations towards retired/retiring employees are expected to increase. We believe Coal Indias obligation to the pension scheme (being a defined contribution plan) should ideally remain restricted to a specified percentage of total employee emoluments. However, an actuarial valuation exercise conducted last year reports a deficit of cRs180bn (as of Mar 2012) in the Coal Mines Pension scheme and concludes that at the current state, the balance in the fund is likely to be extinguished in the next 10 years. It has also suggested alternatives regarding pension amounts of retired/retiring employees and ways to fund the pension deficit. Following this report, there has been an ongoing deliberation between Coal India and the Joint Bipartite Committee regarding the pension deficit and funding alternatives. The pension scheme allows for increasing the employees contribution and this can be one of the alternatives, as per the management. However, we earmark such a scenario as a risk as it potentially implies newer employees subsidizing pension contributions of older employees. We also remain sceptical that given the scale of the deficit, Coal India might be asked to fund a part of the deficit in the future. FIGURE 25 Timelines in determining deficit of Coal Mines Pension Scheme (1998)
Timelines Mar-98 Mar-01 Jul-03 Jun-06 May-07 May-11 Jun-11 Jul-12 Feb-13 Event Coal Mines Family Pension Scheme (1971) merged with Coal Mines Pension Scheme Actuary valuation of Coal Mines Pension Scheme (1998) taken up Central Government asks CMPFO for re-evaluation of submitted report Revised report indicated deficit of Rs19bn and recommended enhanced contribution by employees CMPFO said Jun-06 report based on 40% data; suggests revised study on 100% data Total number of CIL pensioners reported at 285,126 Coal Ministry appoints fresh Actuary for valuation of pension fund Draft report submitted by actuary points to deficit of Rs180bn CIL informed CMPFO that matter is under consideration with Joint Bipartite Committee for the Coal Industry (JBCCI)

Source: Parliament of India Archives, Company data, Barclays Research

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Barclays | Coal India

ANALYST(S) CERTIFICATION(S)
I, Chirag Shah, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The POINT Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firms POINT quantitative model and Barclays hereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analysts account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. and Procedures, please refer to

The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Coal India (COAL.NS, 02-Jul-2013, INR 299.85), Overweight/Neutral, C/J

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IMPORTANT DISCLOSURES CONTINUED

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Barclays | Coal India

IMPORTANT DISCLOSURES CONTINUED

companies with this rating are investment banking clients of the Firm. 40% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Firm. 13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 42% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Guide to the POINT Quantitative Equity Scores: The POINT Quantitative Equity Scores (POINT Scores) are based on consensus historical data and are independent of the Barclays fundamental analysts views. Each score is composed of a number of standard industry metrics. A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow. A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability. A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions. These scores are valid as of the date of this report. To view the latest scores, which are updated monthly, click here. For a more detailed description of the underlying methodology for each score, please click here. Barclays offices involved in the production of equity research: London Barclays Bank PLC (Barclays, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Securities Japan Limited (BSJL, Tokyo) So Paulo Banco Barclays S.A. (BBSA, So Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCCI, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore)

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IMPORTANT DISCLOSURES CONTINUED

Coal India (COAL IN / COAL.NS)

INR 299.85 (02-Jul-2013) Rating and Price Target Chart - INR (as of 02-Jul-2013)

Stock Rating OVERWEIGHT Currency=INR Date 01-Jun-2013 Closing Price 324.95 332.80 Overweight Rating

Industry View NEUTRAL

Price Target 402.00 411.00

425

29-Mar-2012

400

375

350

325

300

275

Jan- 2011

Jul- 2011 Closing Price

Jan- 2012 Target Price

Jul- 2012

Jan- 2013

Jul- 2013

Rating Change

Link to Barclays Live for interactive charting

C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by Coal India or one of its affiliates. J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Coal India. Valuation Methodology: Our 12-month price target of Rs402 for CIL is based on our discounted cash flow (DCF) analysis in which we use a WACC of 13% and a terminal growth rate of 2%. We view 2% as conservative, considering that CIL currently has about 43 years of mine life and there is limited downside to realisations. Risks which May Impede the Achievement of the Barclays Research Price Target: Our downside assumes 10% drop in seaborne prices (Rs37/share), flat volumes over FY13 (Rs23), further 15% hike in diesel costs (Rs13) and immediate implementation of the mining tax (Rs39). An aggressive pricing for sale of government's stake is a key risk in near term, though not quantifiable.

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