Labour pangs for Coal India, put a squeeze on stock

Share prices of Coal India fell by over 3 percent on reports that its labour unions have asked for a 100 percent hike in wages. Salaries and wages account for nearly a fourth of the company’s expenditure. The shares recovered towards close, but the concerns remain.

Employee cost, according to the company’s estimate, was Rs 18,201.45 crore for the financial year ended March 31, 2011. For the same period, the company posted an operating profit of Rs 18,278 crore and a net profit of Rs 10,867.35 crore. It is obvious that if the hike demanded by the labour unions is implemented, the company will barely make any operating profit. Thus, the 3 percent drop in prices is too small, given the magnitude of the problem.

There are two reasons why the stock has not fallen as much as it should. First, the final increase in wages will be much lower. The management has said it has provided for Rs 2,500 crore in the books, which corresponds to nearly a 20 percent jump in the base salary. Analyst reports suggest that the market is also factoring in a 20 percent wage hike.

Coal India is entering into a five-year agreement with its five labour unions, who represent its 400,000 employees. Its previous wage hike was 24 percent. The earlier wage agreement ended in June 2011. The new wage agreement will have to made effective from 1 July 2011.

The other issue is the company has the flexibility of raising the prices of coal to factor in the wage hike. Its management has gone on record saying it will not hesitate to jack up coal prices after a wage hike. Coal India increased prices by 12 percent on 27 February 2011 to adjust for a wage revision.

Every 1 percent increase in labour cost results in the company’s consolidated earnings per share (EPS) going down by a percentage point while every 1 percent increase in coal prices pushes up the company’s EPS by 2 percent. Thus, for every 2 percent increase in employee cost, the company will have to raise coal prices by 1 percent.

The company has also made it clear that raising coal prices is the company’s prerogative and not that of the government. However, it will do so after looking at the health of the state electricity boards (SEBs). Given the current state of these electricity boards and the government’s aggressive stance on inflation, Coal India will have little room to manoeuvre.

Furthermore, there is also the new mining bill to reckon with. It will increase cost for the company, as compensation for the displaced will rise substantially. Analysts feel that Coal India can see increased volatility going ahead. The scrip was trading at Rs 390.70 at 1425 IST on Tuesday, down 1%.