CIL: Higher costs take the sheen out of volume surge

Inability to pass on cost increases led to lower-than-expected profits

Coal India Ltd (CIL) posted better-than-expected performance for the December 2012 quarter, with sales of Rs 17,325 crore against expectation of Rs 16,958 crore, while net profit at Rs 4,395 crore was also ahead of estimates of Rs 4,225 crore, albeit due to higher other income and lower tax rate.

Better sales were on account of higher offtake at 120.45 million tonnes (mt), compared to 110.27 mt in December 2011 and 101.74 mt in the previous quarter, positive given the despatch constraints recently faced by the company. Blended coal realisation increased from Rs 1,391 a tonne to Rs 1,438 a tonne, thanks to the price rise last February. However, despite the 2.4 per cent year-on-year rise in output to 117.37 mt, CIL will not be able to meet its production target of 464 mt, as it has produced only 308.91 mt in the first nine months. While there are reasons to be happy, the same cannot be said about the quality of earnings.

Operating profit of Rs 4,288 crore for the quarter was not only lower than expectations of Rs 4,444 crore but lower than that of the December 2011 quarter of Rs 4,554 crore, despite a 13 per cent rise in sales. Operating profit margin fell from 29.7 per cent to 24.75 per cent during the period. Employee and welfare expenses, along with contractual expenses increased from Rs 7,215 crore to Rs 8,526 crore.

Despite the rise in cost, CIL has been prevented from taking a price hike in recent months due to reasons ranging from political to inability of its consumers to bear the increase.

But, more than the results, the market is looking at the coal pricing issue, expected to be decided soon. Reports say the government is considering pooling of prices of coal produced by Coal India and of imported coal. While independent directors, along with the second largest shareholder, The Children’s Investment Fund, are reportedly opposed to such a move, the outcome will decide the future movement of the stock. The other factor that will influence the stock is the likely liquidity overhang, as the government plans to further dilute its stake in CIL to meet its divestment target in FY14. Sentiments could get a boost if CIL is allowed to offset cost pressures / higher cost of imported coal through price hikes and if it gets approval to start production at new mines.