Stock Review: COAL INDIA

COAL India (CIL) has reported a reasonable growth in sales and profits on a consolidated basis for the halfyear ended September 2010. This was due to higher realisations, although production rose only marginally. The company could not step up production due to high level of inventory and transportation issues, which would be the real challenge for the company going forward. With nearly fixed profit margins, the company's profit growth would depend on how quickly it resolves these issues. While the outlook for the company remains reasonably optimistic, profit growth is expected to remain lower than the half-year growth.

   The company recorded sales growth of nearly 17%, aided by higher realisation as the company hiked prices by about 10% in October 2009. The company also managed better prices and higher volumes for its coal sold through e-auction, which accounts for about 10% of the total sales. While most of the cost items were within reasonable limits, employee cost recorded considerable increase. However, some of it was due to oneoff factors and should have lower impact on profitability in the near term.

   The limited increase in operating cost helped the company post almost 50% growth in operating profits. However, with sharp increase in depreciation and tax provisions, net profits growth came down to about 30%.

   While the half-year results were better than expected, the worrying factor for the company is that actual production grew by only about 2% as against about 6% to 7% in previous years. Since a considerable part of this is due to transportation issue and lack of coordination with the railways, the company would need to deal with it on a more urgent basis. Further, the company may see some production glitches due to another notification of the ministry of environment and forest (MOEF), which may mean stopping of production in eight of its coal blocks. On the positive side, the company has utilised this period of lower pressure on production to accelerate the overburden removal, which went up by about 10% and was higher than the target. OB removal is an initial stage before coal extraction and would facilitate higher production in the near future.

   Another important development is the current aggressive stance of the company in acquiring coalmines abroad. With high cash balance of almost . 40,000 crore, a ready domestic market and significantly lower production problems in overseas mines, the overseas strategy has a potential to accelerate the company's future growth.