Credit Suisse: Coal India -Understanding wage costs; Past wage settlements were delayed 2.5-4 years

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Coal India ----------------------------------------------------------------------- Maintain OUTPERFORM
Understanding wage costs; Past wage settlements were delayed 2.5-4 years


● The next big event for Coal India is the quinquennial wage
revision for non-executives (~97% of workforce; ~85% of wage
costs) starting Jul-11. Wages are its largest cost (51%). We run
through details as well as history to gain some perspective.
● Delays: Previous negotiations ended 2.5-4 years after the start of
the period (Fig 1). Management is working towards an early
settlement this time, but it would be prudent to expect delays. That
said, 12-15% interim rises have been given in the past (Fig 4).
● 24-30% increase: Wages are inflation-linked, and together with
increments, are already up 63% since the last revision (Fig 2 & 3).
The % increase is on this new expanded base. While the past two
negotiations saw ~24%, CIL has hinted at a 30% raise this time.
● Accounting: Provisions for wage hikes should start in FY12,
triggering a rise in coal prices. While past price changes have not
been immediate, the delay narrowed from 3.5 years (NCWA-VI) to
10 months (NCWA-VIII). We have a 15% wage cost increase in
FY12 (=> 25% settlement) and no further price increases,
implying upside to our estimates. Maintain our OUTPERFORM.

Long delays in wage negotiations of Coal India workers
Wage costs for Coal India are 51% of total expenses – the largest
cost head. The next wage revision for non-executives (~97% of the
workforce and ~85% of the wage cost) is scheduled in July 2011.
Given delays seen in past such settlements (Figure 1), it is likely that
wage costs will not be finalised for another year at least.
Since the last pay revision, the Consumer Price Index has risen 50%,
directly impacting wage costs, since a significant part of employee
wages is inflation-linked (Figure 2). This, together with the annual
increments, means the wage cost is already up 63% (Figure 3).
The percentage rise will be on this new base (as of June 2011). The
last two negotiations saw ~24% rises. CIL guides to ~30% this round.


Compensation structure for non-executives, July 2006 revision
Type Methodology of change
Basic Annual increment of 3% every September
Attendance Bonus 10% of basic
Special D.A 1.795% of basic
Variable D.A (VDA) Change in inflation since July,2006 (% of Basic)
Source: Company data, Credit Suisse estimates.


In any case, provisions are likely to start in July 2011. Coal price hikes
in the past (June 2004, December 2007 and October 2009) were not
immediate after wage settlements, though the delay has narrowed:
from 3.5 years (for NCWA-VI) to 10 months (NCWA-VIII). The gap this
time should be shorter, as CIL has spoken of price hike possibilities.
We currently build in a 15% increase in total wage costs in FY12
(implies ~25% increase settlement for non-executives) but no further
increase in prices. Even a 25% hike in wages for non-executives and
a 0% price hike would lead to a fair value of Rs390