Stock Review: COAL INDIA

    Increased volume and higher realisations per unit were the drivers of growth for state-owned Coal India in FY11. Sales grew 12.6% to . 50,233.6 crore and earnings rose 12.9% to . 10,867.4 crore for the world's top coal producer for the quarter ended March 2011.
Higher average realisation from increased sale of coal through e-auction and through washed coal and hard coke, which yield higher margins than the sale in fuelsupply agreement, has improved the company's margins for FY11.

Additionally, a recent hike in coal prices in February 2011 helped the company boost its operating margins to 37.5% in the March quarter from 26.5% in the December 2010 quarter. For FY11, the company's operating profit margin was 26.7%, against 23.5% in FY10. The challenge centres around sustaining this growth momentum.

There are still a few concerns. From here on, it will be difficult for the company to raise prices this year. In the last two fiscals, the company has raised its coal prices twice.

Additionally, another rise in coal prices is bound to encounter resistance from the government considering the impact it could have on inflation.

Also, a further growth in sales through eauction appears limited given the pressure from the government and utilities to divert coal sold through e-auction to power companies.

At the end of March 2011, the company had an inventory of 70 mt. To reduce this high inventory, Coal India will need 180-185 railway rakes daily. However, it is able to manage only 160-165 railway rakes. In the coming quarters, ensuring adequate availability of rakes will be critical to the company's performance.

Given inflationary pressures, Coal India will have to raise wages. This is due in July. In FY11, wage costs accounted for over 50% of total expenditure. Assuming a conservative average hike of 15%, operating margins can then erode by 600 basis points. The company faced a similar problem last year and had to reduce its manpower by 13,000. Coal India's stock price rose 30% in the last three months. After the announcement of March 2011 quarter results, the stock price vaulted 4% to . 390. This price factors in all the positives leaving little room for further upside.