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BW Businessworld

Mining Profits

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In its third quarter (Q3) results for 2011-12, Coal India posted a massive 54 per cent increase in net profits — up from Rs 2,626 crore in Q3 of FY2011 to Rs 4,038 crore in the same period in FY2012. Even their net profit compared across the first nine-months of FY2011 and FY2012 is 62 per cent higher. But while the jump in profit beat expectations, the change in revenue was about 21 per cent — from Rs 12,686.73 in Q3 of FY2011 crore to Rs 15,349.26 crore in Q3 of FY2012.

The interesting part is the company managed to more than double its net income even though production levels have remained almost static. It was 113.77 tonnes in the third quarter of FY2011 compared to 114.62 million tonnes in Q3 of FY2012. And their off-take levels fare just as poorly.

The rise in profits is believed to be largely due to higher realisations of about 21 per cent on the price front. E-auction prices have gone up substantially, too, says a senior analyst from a domestic brokerage firm. Overall, the company's costs have gone up by about only 16 per cent. On top of that, other income has grown by 48 per cent year-on-year. That is on account of higher cash balance — aided by low major capital expenditure and interest cost — and increased treasury yields.

But looking ahead to the fourth quarter, the picture may not be as rosy. It is likely that the last quarter's profits will be hit by, among other things, a wage rise. Wage costs account for about 40-50 per cent of the total costs. The state-run monopoly agreed for a 25 per cent wage hike earlier this year. But the actual wage cost rise could actually stand at 31 per cent due to increased provisioning. The company was hoping to tide this over by increasing prices. It moved to the internationally accepted standard of gross calorific value to determine pricing around November 2011. But its attempt to increase prices under this system was met with stiff resistance, mostly by power companies.

And that was largely attributable to the fact that it would put an upward pressure on power tariffs. Despite being a monopoly, Coal India has been unsuccessful in raising coal prices at will. And the decision has now been postponed to end-March. But there is a possibility that prices could be raised by about 10 per cent after April, says an analyst who doesn't wish to be named. If that happens, domestic coal prices could close in on its huge discount to international prices.

In terms of production, there is little chance that the world's largest coal mining company will meet its FY2012 production target of 440 million tonnes. But with critical shortage of the fuel particularly for electricity, the Prime Minister's Office cracked down on the company asking it ensure sufficient supply to power utilities. Coal India has, at least for now, agreed to enter a fuel supply agreement to meet its commitments.

But that might mean having to import coal which, in turn, could lead to profits being pulled down eventually. The dilemma is by no means a new one. But it does force a hard look at the inefficiencies both within Coal India and the system. Opening up this sector will not only take the pressure off any one company, it could also bring in newer, better technologies as well as better linkages.

(This story was published in Businessworld Issue Dated 27-02-2012)