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Tuesday, January 3, 2012

Windfall coming for CIL from new pricing method

Tuesday, 03 Jan 2012

Having an unenviable record of zero production growth in 2010-11 and now facing an uphill task in posting production growth this fiscal, the price rationalization move seems to have offered Coal India Ltd a clear opportunity to post a substantial profit growth in the January-March quarter.

Company officials, however maintain that the new system should keep pressure on the respective mining subsidiaries to maintain quality or risk witnessing a revenue slippage. However, considering that the company has yet to have adequate calorie metres and coal would be sold in the next three months merely by converting existing products from UHV to GCV by using available calculators, there is little doubt that CIL would witness an approximately INR 1,500 crore positive impact on the bottomline in the next quarter on account of the new mechanism

Since the company had last enhanced prices with effect from March 2011 the price benefit will be even higher for January to February.

1. End result

Even though CIL is facing an uphill task posting production growth this fiscal compared to 2010-11 and profits for the fourth quarter of this fiscal may spiral. What is more interesting worker unions are demanding a minimum wage hike of 30% under the ongoing negotiation for a five year wage pact with effect from July 1.

Rough estimates suggest that such a payout should cost CIL INR 6,000 to INR 6,500 crore annually over and above the existing employee cost. This is nearly double the company current provisioning of an estimated INR 3,000 crore annually.

Assuming that Coal India will yield to pressure from the trade unions, the new pricing exercise therefore will offer the company sufficient room to strike the wage deal without negatively impacting the bottom line.

2. Price hike?

However, if the entire price benefit is passed on to employees and it will be mandatory for the company to either enhance the production and productivity or escalate prices further to ensure profit growth in 2012-13.

Needless to mention, the company official sources are tight lipped about the emerging possibilities.


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