Stock Review: COAL INDIA

Although not reflected in its stock price, Coal India's financial numbers for the December 2010 quarter were substantially better. In spite of stagnating production, the company grew its net profit by 76% to . 2,626 crore against . 1,495 crore of the September quarter. 26% higher production and higher e-auction sales where realisations are better, contributed to this excellent performance. However, the company needs to maintain its ability to earn higher realisations for future profit growth.

In the December quarter, its operating margins jumped by 1,000 basis points from September quarter to 16.5%. It was driven by a 6% dip in employee cost and a higher premium of 93% earned on the e-auction coal, which had stood at around 60% in the September quarter.

Although Coal India is the world's largest coal producer, its production growth has been stagnating. The company lowered its production target for FY11 to 427 million tonne, or just 2%, higher against FY10. For FY12, it aims to produce 443 million tonne. The company is looking forward to a wage hike starting July 2011 and needs to raise prices to maintain margins. However, considering the inflation concerns of the government, it is unlikely to get a substantial price hike.

The ministry of environment and forests has suspended few of Coal India's future projects. Recently, the company obtained some relaxations on 16 blocks, which could add production by FY13. The company is also aiming at ramping up its washed coal capacity from the current 39.4 million tonne to 111 million tonne by FY16, which will improve realisations. It's actively searching to acquire coal mines overseas with a war chest of over 40,000 crore. Any such acquisition will enable to sell larger quantities at open market prices and boost the company's profits. And till the acquisition materialises, the high cash pile would generate increasing other income in the rising interest rate scenario. Despite concerns over its production growth, the widening gap between the demand and supply of coal, which has made the government resolve clearance issues, puts Coal India in a favourable position.