ANALYSIS. Delay in price hike hits Coal India profits

Indecision has cost Coal India dear.

From August last year, the top management has been looking for a price rationalisation (read, hike) to shore up revenues, but failed to push it through. Now, with the Budget proposals raising the final price of coal by over ₹100 a tonne, CIL has had to keep in abeyance any moves on the price front.

The prospects are not encouraging for investors, with CIL’s profit declining 28 per cent in the September quarter and 16 per cent in the three months ended December. The miner will be hard put to post any profit growth in the fourth quarter.

The problem can be traced to CIL’s production profile vis-à-vis pricing structure.

Low-grade (3,700-4,300 gross calorific value) thermal coal for the power sector comprises half of CIL’s production. To keep electricity tariff low, CIL sells this fuel at wafer-thin margins. The profit mostly comes from the 10 per cent e-auction offerings, sales of 5-10 per cent of high quality fuel at import-parity price, and supplies to steel and cement industries at 40 per cent more than the rate for the power sector.

CIL’s bottomline started to feel the pressure beginning 2013-14, after the Centre forced the company to divert supplies from steel/cement sectors to the power sector.

The ban on e-auction sales by the Narendra Modi Government between June and November, last year, added to the stress. Though most of these restrictions have now been removed, the recent meltdown in global commodity prices whittled CIL’s margins on such sales to half.

To ensure profit growth, CIL was planning a marginal increase in the prices of low-grade fuel that it sells at less than half the global prices.

But this could not be put through as the organisation remained headless for nearly six months since last June and the reluctance of the Modi Government to hike prices.

To complicate things, Finance Minister Arun Jaitley, in his latest Budget, proposed doubling the clean-energy cess to ₹200 a tonne.

This and the service tax hike will raise the prices of even low-grade fuel by nearly 15 per cent. Coupled with the rise in Railway freight, any move by CIL to tinker further with prices would have evoked a sharp response from consumers.

The miner hopes retention of Cenvat benefits will nullify the negative impact of the service tax hike. The higher service tax will push up the company’s payout to contractors engaged right from coal extraction, over-burden removal to transportation. But this will be adjusted against the excise duty paid by CIL.

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