Stock Review: Coal India

 

TOsay Coal India is sitting on agold mine would be an understatement. The company is not only the world's largest coal reserve holder and producer but also controls 80 per cent of the Indian coal market. But, soon after becoming India's most valuable company, Coal India's stock fell 5 per cent on Wednesday, as news of potential wage hikes and closure of its 22 mines in Jharkhand came in. Coal India's subsidiary, Bharat Coking Coal (BCCL) is said to be facing environmental issues over 22 mines. If there is a closure, then daily production, to the tune of 50,000 tonnes, would be affected. What makes it worse is the fact that BCCL is a nontax paying entity and the mines produce coking coal have a 50 per cent profit margin. The impact would add up to `1,500 crore for FY12 if the shut-down is for real. However, analysts maintain the government cannot afford such a closure at this point. The other issue the company has been facing pertains to impact of impending wage rises on earnings per share. Wage revisions are due from July and employees are demanding a 100 per cent rise. However, analysts expect no more than a 30 per cent increase. Earlier in the year, the company had increased prices of coal, factoring in wage hikes due in July. The company may have to undertake another round of price hikes to compensate for the higher than estimated wage cost, if any. According to Nomura, a one per cent swing in total employee cost would lower CIL's earnings per share by one per cent. The stock also fell on news of closure notices to select mines in Jharkhand. However, the company denies this. Apart from these issues, the company continues to be plagued by operational issues. Analysts say an analysis of the company's FY11 annual report points to sluggish progress in sanctioning new mining projects, delays in commissioning of new mines and decline in incremental volumes from newly-commissioned mines. According to IndiaInfoline, incremental volume from XIth Plan projects was 23 million tonnes (mt) in FY11. The company expects only 8.6 mt additional volume from these projects in FY12. In FY11, only three projects totalling 11 million tonnes per annum were sanctioned. Inventory pile-up will ensure FY12 sales targets can be achieved even if production slips, but IIFL sees a few upsides to its estimate of 4.4 per cent sales volume compound annual growth rate in the medium term.