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Coal India is to make provisions for wages increase of up to 24%, although these are subject to
negotiation. However, 1QFY12 earnings should be robust (possibly hitting a peak) on the back of
price hikes in February for non-power customers. Timing of future rises is uncertain
Volumes remain subdued, but we expect earnings to peak
After an initial pick-up in sales volumes in the early part of the quarter, rake availability has
dropped sharply from a high of 190 in April to 162 currently. We expect 1QFY12F production to
have lagged targets and come in at 92-95mt (2-5% yoy growth) and dispatches to be at 100-
105mt (4-7% yoy growth). Heavy rainfall in the early June could hit volumes. However, earnings
should remain robust on the back of price rises in February 2011, the full effect of which should
be felt in 1Q. We expect 1Q EBITDA of Rs53.1bn, up 50% yoy.
Pricing issues need to be addressed
Coal India’s opaque pricing mechanism results in lumpy earnings and there has been a definite
departure from the past practice of raising prices once every two years. The price rise in February
was done selectively and based on a new principle of ‘market prices for customers selling goods
at market prices’. As a result, the bulk of power customers, representing about 80% of volumes,
have been virtually untouched. Rather we are hearing noises from the Power Ministry asking Coal
India to give away its cash cow, the e-auction business’ which covers 10-11% of volumes, but
close to 25% of the profitability.
Staff costs matter, expect a 24% pay hike. Sell, TP of Rs315
The wages of more than 350k workers at Coal India are due for revision from 1 July 2011. But the
talks can take several months to conclude. Over the last five years staff costs have risen at a
CAGR of 13.2%, while the top line and net income risen by CAGRs of 11.8% and 12.2%. We
expect staff costs to increase 24%, but due to past price hikes, the impact on earnings should be
limited, in our view. The stock trades at substantial premium to international peers. Sell.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal India is to make provisions for wages increase of up to 24%, although these are subject to
negotiation. However, 1QFY12 earnings should be robust (possibly hitting a peak) on the back of
price hikes in February for non-power customers. Timing of future rises is uncertain
Volumes remain subdued, but we expect earnings to peak
After an initial pick-up in sales volumes in the early part of the quarter, rake availability has
dropped sharply from a high of 190 in April to 162 currently. We expect 1QFY12F production to
have lagged targets and come in at 92-95mt (2-5% yoy growth) and dispatches to be at 100-
105mt (4-7% yoy growth). Heavy rainfall in the early June could hit volumes. However, earnings
should remain robust on the back of price rises in February 2011, the full effect of which should
be felt in 1Q. We expect 1Q EBITDA of Rs53.1bn, up 50% yoy.
Pricing issues need to be addressed
Coal India’s opaque pricing mechanism results in lumpy earnings and there has been a definite
departure from the past practice of raising prices once every two years. The price rise in February
was done selectively and based on a new principle of ‘market prices for customers selling goods
at market prices’. As a result, the bulk of power customers, representing about 80% of volumes,
have been virtually untouched. Rather we are hearing noises from the Power Ministry asking Coal
India to give away its cash cow, the e-auction business’ which covers 10-11% of volumes, but
close to 25% of the profitability.
Staff costs matter, expect a 24% pay hike. Sell, TP of Rs315
The wages of more than 350k workers at Coal India are due for revision from 1 July 2011. But the
talks can take several months to conclude. Over the last five years staff costs have risen at a
CAGR of 13.2%, while the top line and net income risen by CAGRs of 11.8% and 12.2%. We
expect staff costs to increase 24%, but due to past price hikes, the impact on earnings should be
limited, in our view. The stock trades at substantial premium to international peers. Sell.
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