Coal India Ltd reported a 28 per cent drop in net profit at ₹2,192 crore in the second quarter of this fiscal against the same period last year. Sequentially, the profit fell by almost half.
The decline in profit is primarily due to a huge margin squeeze on coal sales excluding the earnings from e-auction and interest income on fixed deposits. From nearly 15 per cent in the July-September quarter, the operating margin has dropped below 10 per cent.
Margins declined for two reasons. First, while production grew by a healthy 5 per cent in the rainy season – the most difficult time for the mining sector – the Government forced CIL to divert increasing quantities to power plants sacrificing the interests of other users such as steel and cement. The result is evident in a mere ₹267 crore (1.7 per cent) growth in net sales.
Second, while the realisation growth was restricted, costs grew by close to 8 per cent. Contractual expenses, a prime indicator, went up by nearly 17 per cent.
A drop in the sales margin increased CIL’s dependence on e-auction sales and interest earnings from cash deposits for net profit.
Other income (₹2,022 crore) contributed nearly 57 per cent of the pre-tax profit (₹3,554 crore) this year, up from 49 per cent in July-September 2013.
Fortunately for CIL, other income dropped by a mere ₹160 crore (7 per cent) this year despite a near complete halt on e-auction sales from September.
Though Union Coal and Power Minister Piyush Goyal asked the curb on e-auction in mid-July this year, the realisations continued till August. Also the announcement triggered hectic buying and rise in open market prices, compensating the volume loss in September.
With e-auction offerings down to one-fourth from September, CIL’s balance-sheet is likely to be hit severely this quarter.
Grim outlook in Q3On the production side, CIL is comfortable so far. Between April and October, output has gone up by a significant seven per cent.
At the current daily production rate of 1.45 mt, October-December quarter should bring major growth in volume.
However, the margin of net profit to net sales may decline from the current 14 per cent, unless e-auction sales are revived or price of fuel supplied to the power sector is increased.
Sources say both the options are so far discouraged by the Union Government.