Corporate_Finance_Deep_Diagnostics_2 by Sutherland Global Services

Case Study and Sample Slides India: Coal Industry Assessment

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Indian Coal Industry Assessment Client • The client is a leading private equity firm seeking to identify investment opportunities in the coal-mining value-chain in India

Client Ask • The client engaged SGS to map the value-chain, size the market in each step of the value-chain and identify list of potential targets • In detail, client required SGS to provide an overview of coal mining activity in India covering aspects such as coal’s relevance, consumption, reserves, production, major players, pricing mechanism, future prospects, industry profitability etc.. Further, client needed to understand business dynamics of each segment – size, growth, competitive intensity etc. • Further, SGS was asked to map out the entire industry value-chain by identifying each associated business activity to coal mining • Finally, client needed a comprehensive list of players in each segment & obtain information pertaining to revenues, margins, etc.

Sutherland’s Solution • SGS conducted an in-depth secondary research to establish the mining value-chain and business dynamics of each segment in India. Further, SGS evaluated competitive landscape within each segment in the value chain. Interviews were conducted across segments to arrive at the market size, competition and growth prospects in the respective segments • Findings from the study were collated, analyzed and presented to the client . Additionally, a deal sourcing Excel was prepared that identified over 445 players associated with various aspects of coal business in India

•Benefits to the Client • SGS’ research provided detailed insights on the industry which helped establish the relative attractiveness of each segment vis-à-vis the other. It was inferred from the study that the while the Coal Mining Equipment – HEMM Equipment (Opencast Mining) provides INR 126 billion opportunity in the next 4-5 years, underground coal mining equipment market provides INR 16 Billion opportunity in the next 3-4 years • Primary research conducted by SGS helped in establishing lesser-known business segments such as mechanical transmission products associated with open-cast mining

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India Accounts for 13% of Global Coal Reserves but only 8% of Production Global Proved Reserves

Global Production

• India has the fourth largest proven coal reserves and is the third largest producer of coal in the world. India lags in production share primarily due to poor coal quality, low productivity, review of reserves, logistics challenges and problems, regulatory barriers, resettlement problems • While there is a general slackening in global proven reserves growth, India’s proven reserves have been steadily increasing

Source: Sutherland Research

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Reserve Estimates Uncertain While Reserve Areas Remain Unexplored India’s Coal Reserves (Bn Tonne)

Observations

300

250

253.3

257.4

264.5

267.2

245.7

247.8

116.2

117.1

119.8

120.2

124.2

123.5

105.8

99.1

101.8

91.6

95.9

37.9

37.8

37.7

38.1

38.5

37.9

2004

2005

2006

2007

2008

2009

200

150

100

• Significant coal reserves but estimates remain uncertain – Reserves classification system does not take into account quality, mineability and extractability – Reserves are tentatively estimated based on CMPDIL’s assumption of parameters rather than actual testing of the same • Vastly unexplored – an estimated 22,400 square km of coal-bearing area, exists in the country, of which only 45% has been systematically explored by GSI (Geological Survey of India) • As of December 2009, coal reserves stood at 267.2 bn tonnes, of which only 39% was proven

Proved Inferred

Indicated Total

Source: Sutherland Research

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Coal Reserves are Concentrated in the Eastern Part of the Country Coal Reserves Distribution in India

States

Arunachal Pradesh Meghalaya Uttar Pradesh

Madhya Pradesh Maharashtra

Jharkhand

Assam

Orissa West Bengal

Andhra Pradesh

Proved Reserves (MT) (2008-09)

Jharkhand

39,480

Orissa

19,944

West Bengal

11,653

Chhattisgarh

10,910

Andhra Pradesh

9,194

Madhya Pradesh

8,041

Maharashtra

5,255

Uttar Pradesh

866

Assam

348

Meghalaya

Arunachal Pradesh

Nagaland

Total

105,820

Chhattisgarh

Reserves more than 10,000 MT Reserves more than 5,000 MT Reserves more than 100 MT Reserves less than 100 MT Source: Ministry of Coal (Government of India), Coal India Ltd. (CIL)

• Coal is present in 14 out of 28 states in India. Jharkhand accounts for about 37% of the total proven reserves of the country, followed by Orissa (with 19% share), West Bengal (with 11% share) and Chhattisgarh (with 10.2% share) • Eastern region of the country has major coal deposits, with the four major states i.e. Jharkhand, Chhattisgarh, Orissa and West Bengal accounting for about 77.5% of India’s total coal reserves

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Reserves are Low in Calorific Value and of Sub-Standard Quality Proven Reserves

Non-Coking Coal

Ash + Moisture (%)

Coking Coal

55.0%

GRADE E,F,G – 53.9 Bn Tonnes

34.0%

GRADE D – 12.5 Bn Tonnes

28.6%

GRADE C – 9.6 Bn Tonnes

23.8%

GRADE B – 4.3 Bn Tonnes

19.6% GRADE A– 1.2 Bn Calorific Value (Kcal / Kg)

• Quality of coal is inferior – only about 15-20% of reserves are of high quality (A, B and Prime coking), rest are relatively sub-standard • The majority of deposits are of the non-coking type that find application in power production. Reserves of coking coal meant for metallurgical purposes, are limited and India has to import coking coal to meet the requirements of the domestic iron and steel industry Source: Ministry of Coal, CIL Presentation

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Most Reserves Controlled and Explored by State-Owned COS (Coal India & SCCL*) Proven Reserves In Billion Tonnes

~ 470

~ 210

~ 55

Mines / Blocks

• Coal mining was nationalized in 1971 largely due to then existing dissatisfactory mining conditions e.g. slaughter mining, violation of mine safety laws, industrial unrest, failure to make investments in mine-development, reluctance to mechanize etc. and to meet India’s long term coal requirements • Coal India Limited and Singareni Collieries were entrusted with the task of exploration and development of coal resources in the country and hence came to own the reserves that existed • In 1993, the act was amended to allow coal mining for captive consumption by the power and iron and steel sector. Subsequently, cement was added to the list. Since 1993, ~210 coal blocks have been awarded to private parties for development • Yet, Coal India & SCCL continue to dominate and control the largest tracts of coal reserves and are the primary channels of regulating the supply and prices of coal in the country

*SCCL = Singareni Collieries Limited Source: CIL, SCCL Presentation

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Consistent Production Growth at CIL and SCCL has Mildly Accelerated Production in the Past Two Years Coal Production

Observations CAGR (Mn Tonnes)

493 457 407 328

341

361

431

383

6.01% 20.47% 0.81% 5.39% 5.38%

• Coal production has been consistent in India, with major contribution coming from CIL • Non-coking coal dominates coal production in India and is mainly used for power generation and industrial uses • CIL is the dominant coal producer in the country and accounts for approximately 82% of annual supply • Captive production has not taken off in a significant way owing to delays in regulatory clearances. Only about 20 of the auctioned ~200 blocks are currently under production

Source: Ministry of Coal (Government of India), Coal India Ltd. (CIL)

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Depleting Existing Mines to Compel CIL & SCCL to Invest in ‘New’ Projects to Meet Production Targets Segmentation of Annual Production Target (MT) CIL

Observations CAGR

End of X Plan

7.5%

End of XI Plan

4.7%

• In contrast to the 11th Plan period, bulk of the targeted incremental production of ~150m tonnes during the 12th Plan period is proposed to be met through commissioning of new mines • CIL’s mines are mature, and hence in a depletion cycle stage wherein production has been declining steadily

End of XII Plan

Segmentation of Annual Production Target (MT) SCCL CAGR End of X Plan

2.1%

• Commissioning of new mines is likely to bolster the demand for equipment and contracting services

End of XI Plan

1.9% End of XII Plan

Source: Annual Report-Ministry of Coal, Coal India Limited (CIL), SCCL, IDFC-SSKI Coal Report

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Fast Awarding Coal Blocks to Private Players – Most Captive Blocks Await Environment and Other Clearances to Begin Production Blocks 209

Total 209 Blocks

• Mining was opened to the private sector post an amendment to the Coal Nationalization Act, made in 1993

2009 2008 2007

2006

• Approximately 210 blocks were identified from SCCL & CIL’s inventory, for allocation to private players, for captive consumption

2005 2004 1993-03

Total Reserves 48.4%

Observations

Total 48.4 BT Reserves

2009 2008 2007

2006

• Government has awarded 209 blocks till date • The majority of the reserves have been awarded to the power sector • However, only 20 blocks out of the total ~200 awarded, are currently operational

2005 2004 1993-03 Source: Ministry of Coal

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India’s Coal Demand, Largely Driven by Power, has Always Outstripped Supply India - Coal Demand & Supply (Million Tonnes) 555 MT (2008-09)

Observations • Demand for coal has grown rapidly (CAGR of 7.2% over 2003-09) and has outpaced supply (CAGR of 6.3%) during the same period • As a result, coal deficit – with a CAGR of 16.6% over 2003-09) –prompted heavy imports from other coal producing nations • Power utilities, steel and cement are the key coal consuming sectors in India. Apart from direct demand from utilities (67% share in coal consumption), captive power generation by steel and other metal industries also generates demand for coal • Growth in economy and subsequent demand for power generation regulates coal demand • Coal demand is likely to sustain as it remains a preferred source of energy, specially for power generation • Also sectors supporting India’s growing infrastructure (steel and cement) requirements, are expected to boost demand for coal

Source: Annual Report-Ministry of Coal, Working Group Report on Coal & Lignite

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We Mapped a Total of 445 Companies Operating in the Coal Mining Value-Chain in India Category

Subcategory

Number of Companies

Mining Equipment

Drilling Equipment

Coal Handling Equipment

Coal Exploration

Coal Explorations Services

Coal Mining

Coal Mining Services (including captives)

Coal Transportation

Coal Transportation Services

Coal Trading

Coal Trading Services

Coal Washing

Coal Washeries

EPC

Mine Planning & Construction (including lab testing) Washery Plants Integrators

Contract Mining – Integrated Services (OB, Mining & Haulage)

Contract Mining – Overburden Removal (OB Only)

Coal Mining Equipments

Mining Contractor