An unexpected decline in sales coupled with “lump sum provisioning” against the anticipated wage hike in the forthcoming National Coal Wage Agreement-IX may impact Coal India Ltd's profits substantially in July-September 2011 quarter.
CIL posted 64 per cent growth in net profit to Rs 4,144 crore in the April-June 2011 quarter against the corresponding period of last year.
While the profit for July-September 2010 is not available in public domain (CIL was listed in October 2010), available estimates suggest that a 20 per cent anticipated rise in annual labour cost (approximately Rs 25,000 crore) may call for a quarterly provisioning of Rs 1,250 crore.
CIL, it may be recalled, hiked wages by 15 per cent in the last wage pact.
Though labour unions are demanding a 25 per cent hike in the forthcoming agreement, CIL sources maintain that they are now looking forward to “lump sum provisioning” for wage hike.
While wage cost provisioning was rather expected; what had hit the company hard was the flooding of its mines in Orissa and a few other places leading to a huge shortfall in production and a decline in off-take. Production was 17 million tonnes short of target during the last quarter. Overall however, off-take grew in the first half of the fiscal.
It is understood that the unexpected drop in production will offset the benefits of price rise (elected in February 2011) when compared to the same period in 2010.
Positive factors
In the final analysis, the company's profit growth will be largely dependent on two factors: Interest income against a monumental cash reserve in excess of Rs 50,000 crore and the quantum of provisioning.
During the first quarter interest income of Rs 478 crore against fixed deposits contributed nearly 30 per cent of the incremental profit of Rs 1,618 crore. It is expected that the interest income will increase in the second quarter during to further firming up of interest.