Coal India’s wage increase may lead to price rise
Might consider price hikes if unable to contain operational expenses; observers say this could be inevitable
Faced with additional yearly outflow of at least ~5,600 crore on account of wage revision, Coal India might need to raise prices at some point, to maintain its profit margin.
An immediate rise isn’t under consideration. Senior officials at the governmentowned company say they first need to curtail operating cost — closing of loss-making mines, a voluntary retirement scheme, mine mechanisation.
“Eventually, if these don’t help to maintain margins and if global prices start going up to, say, $100 a tonne, we might have to opt for a price correction,” a senior company official told Business Standard. After a prolonged sluggish period, coal prices are currently $91 a tonne.
Wages and other employee benefit expenses account for 48 per cent of the total cost overhead, up 49 per cent since 2011 at ~29,660 crore. Annual net profit has dipped nearly 15 per cent since 2011, to ~9,266 crore. Analysts say net sales rose a little over 50 per cent in this period but steep dividends and overhead costs peaking by 60 per cent will impact the operating margins.
“If Coal India wants to maintain its profit margin like the immediate previous years, it has to increase prices,” Rupesh Sankhe, research analyst with Reliance Securities, told this publication.
Sankhe reasoned that faced with an increase of ~5,600 crore as cash outflow every year, Coal India had been able to provision ~3,000 crore so far; it faces a lag of ~2,600 crore in the current year. If able to close loss-making mines in the current year itself, it will be able to reduce ~600-700 crore in operating cost, leaving a shortfall of ~1,900 crore.
Optimistic of a boost in demand, sector analysts had projected a ~11,000-13,000 crore net profit, factoring in an 18 per cent wage hike. However, with the hike exceeding Street expectations by two per cent, analysts believe profits will be ~9,00010,000 crore this year.
Earnings per share, after rising nearly 61 per cent to ~27.63 during 2011-13, had started heading south, dipping by 47 per cent. In 2016-17, this fell by 34 per cent.
An analyst from Motilal Oswal estimates employee overhead costs at ~36,400 crore in 2017-18 and ~36,200 crore the next year. “This will impact operating earnings by 11 per cent in 2017-18 and by six per cent in 2018-19,” the analyst told this daily.
Coal India officials are optimistic. In the first place, they feel that coal grade correction (post revision) and quality improvement (controlling grade slippage) will lead to higher realisations from longterm fuel supply agreements, about 70 per cent of the company’s revenue. And, expect eauction prices to fare well for the company in the near term.
“Coal demand has again started picking up and is expected to remain steady. If demand remains strong, eauction prices, in tune with recovering global prices, are expected to go up and further the profits,” an official reasoned.
Although analysts agree that coal demand and prices are on a revival track, they say it would be tough to maintain the current profit margins if it doesn’t increase the prices.