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Coal India may consider price hike if unable to contain operational costs

 

Date | Oct 16, 2017:

Faced with the burden of an additional cash outflow of at least Rs 5,600 every year on account of wage revision, Coal India may eventually hike coal prices to maintain its profit margin, which may happen in case the Maharatna company is not able to curtail its operating costs.

 

Although an immediate price hike isn't under consideration, senior company officials are of the view that they need to curtail operating short-term and mid-term costs like the closure of loss-making mines, offering voluntary retirement scheme to curtail direct employees and opt for mine mechanisation.

 

"Eventually, if these doesn't help to maintain margins and in case global coal prices starts going up to touch, say, $100 a tonne, we may have to opt for a price correction", a senior company official told Business Standard.

 

After a prolonged sluggish period, coal prices are currently hovering around $91 a tonne.

 

Wages and other employee benefit expenses account for 48 per cent of the total cost overhead of the company, which has risen by over 49 per cent since 2011 at Rs. 29,660 while the company's net profit dipped by nearly 15 per cent at Rs 9,266 crore during the 2011-2017 period.

 

Analysts point out that although the company's net sales increased by over 50 per cent during this timeframe, loss of cash reserves owing to steep dividend and overhead costs peaking at 60 per cent is going to impact the operating margins.

 

"If Coal India wants to maintain its profit margin like the immediate previous years, it has to increase the coal prices; otherwise, margins will be impacted in the near term", Rupesh Sankhe, research analyst with Reliance Securities told this newspaper.

 

Sankhe reasoned that faced with an increase of Rs 5,600 crore as cash outflow every year, Coal India had been able to provision Rs 3,000 crore so far; still it faces a lag of Rs 2,600 crore in the current year. In case it is able to close loss-making mines in the current year itself, it will be able to reduce Rs 600-700 crore as its operating costs. Even then, the world's largest miner faces a shortfall of Rs 1,900 crore.

 

Optimist of a boost in coal demand, sector analysts had projected a Rs 11,000-13,000 net profit for Coal India factoring in an 18 per cent wage hike. However, with the hike exceeding street expectations by two per cent, analysts believe that profits will remain between Rs. 9,000-10,000 crore for the ongoing year.

 

"Coal India will still be able to post profit considering the demand for coal and its marketing approach", Sankhe added.

 

Earnings per share (EPS) of the company, after rising by nearly 61 per cent at Rs. 27.63 apiece during 2011-13, started heading south, dipping by 47 per cent. In the last fiscal year alone, the EPS fell by over 34 per cent.

 

As per an analyst from Motilal Oswal, Coal India's employee overhead costs are likely to touch Rs 36,400 crore during the 2017-18 fiscal year and will stand at Rs 36,200 crore in the next year.

 

"This will impact the Earnings before Interest, Tax, Depreciation and Amortisation and Profit after Tax by 11 per cent in 2017-18 and by six per cent in 2018-19 respectively", the analyst told this business daily.

 

Coal India officials, however, considering the revival in coal demand, are optimistic.

 

In the first place, they are of the view that coal grade correction (post revision) and quality improvement (controlling grade slippage) will lead to higher realisations from the long-term fuel supply agreements, which accounts for over 70 per cent of the company's top line and e-auction prices are expected to fare well for the company in the near-term.

 

"Coal demand has started picking up again and is expected to remain steady. If demand remains strong, e-auction prices, in tune with recovering global prices, is expected to go up which will further the profits", a Coal India official reasoned.

 

Although analysts agree that coal demand and hence, the prices are on a revival track, it would be tough for the company to maintain its current profit margins if it doesn't increase the coal prices.

 

 

(Source: http://www.business-standard.com/)