COMPANY QUICK COMMENT
Takeaways from our call with CIL’s management on non-executive wage revision: [1] Meeting on Sep 22-23 concluded by CIL asking the trade unions to present a common set of demands [2] There is disagreement over the quantum of festival-related bonus/ex-gratia for FY12 [3] Next meeting likely post the festive period in October. Earnings sensitivity – one-day labor strike can lead to production loss of 1-1.2mt and if the demand for higher bonus is met, FY12F employee cost would be higher by 1.7%; combined impact on FY12F EPS would be ~2%. Maintain Buy; wage revision remains a near-term overhang.
Wage revision – negotiation to resume post October festivities
Event We had a call with the Coal India (CIL) management to assess the progress on negotiations relating to non-executive wage revision and on news reports suggesting the labor force would be going on a country-wide strike on October 10, 2011 following the breakdown of negotiations with the trade unions on bonus/ex-gratia/coverage for contract workers for 2011.
As per media reports (Press Trust of India, Business Line) on September 23/24, 2011, the labor unions demanded Rs25,000/laborer as productivity-linked bonus (or ex-gratia) whereas CIL has promised a bonus of to Rs17,000/laborer (up YoY from Rs15,000/laborer). As per CIL, the promised increase in bonus would raise total outgo on bonus from Rs5.6bn to Rs6.2bn.
ANALYSIS
Wage revision negotiations – where do things stand?
As per our conversation with the CIL management on outcome of the September 22-23, 2011 meeting with the trade unions on wage revision, we gather – [1] Meeting broadly concluded by CIL asking the five trade unions to present a common charter of demands / expectations, [2] There was disagreement over the quantum of festival-linked bonus/ex-gratia for FY2012 (as highlighted by the news reports on this issue), [3] Next meeting is likely to be scheduled after the festive season in October (i.e. potentially in October-end / November).
Bonus/ex-gratia payment – how material is the amount involved?
Based on the data available as per the news reports, the festival-linked bonus/ex-gratia accounted for ~3% of CIL’s overall employee cost in FY11; CIL’s promise to raise the per laborer bonus/ex-gratia from Rs15,000/- to Rs17,000/- would imply a 11.5% YoY rise in this salary component to Rs6.2bn (~3% of our FY12F total employee cost) for CIL. If CIL management agrees to the union’s demand for Rs25,000/- bonus/ex-gratia per laborer, ceteris paribus, our FY12F the incremental employee cost would rise by 1.7%.
Wage revision – sensitivity to earnings
Our earnings forecast for CIL builds-in [1] A 30% wage would increase for non-executive workers (effective July 2011), which translates into 19% / 9% YoY rise in employee cost in FY12 / FY13 respectively, [2] FY12 production/offtake at 447.5mt and 452.8mt. If the reported strike on October 10 takes place, it would lead to a loss of 1-1.2mn tons of coal production. Ceteris paribus, the potential production loss together with 1.7% increase in FY12F employee cost (if labor demand for higher bonus is met), would lower our FY12F EPS forecast by ~2%.
IMPLICATIONS
[1] Although the potential impact of the debated bonus/ex-gratia component is not very significant, we expect the impending wage negotiations (and related threat of potential production/offtake disruption) to remain an overhang on the near-term stock price performance.
Instead, we focus on CIL’s capacity to make-up for the shortfall in 1HFY12 production/offtake (following the sharper-than-expected monsoon-related slowdown in production / dispatches) and the magnitude of wage revision as bigger downside risks to our FY12F/13F earnings forecast for the company.
Maintain BUY as the structural growth story remains intact. Stock trades at FY12F EV/Resource and EV/reserve of 2x and 0.6x respectively.
Takeaways from our call with CIL’s management on non-executive wage revision: [1] Meeting on Sep 22-23 concluded by CIL asking the trade unions to present a common set of demands [2] There is disagreement over the quantum of festival-related bonus/ex-gratia for FY12 [3] Next meeting likely post the festive period in October. Earnings sensitivity – one-day labor strike can lead to production loss of 1-1.2mt and if the demand for higher bonus is met, FY12F employee cost would be higher by 1.7%; combined impact on FY12F EPS would be ~2%. Maintain Buy; wage revision remains a near-term overhang.
Wage revision – negotiation to resume post October festivities
Event We had a call with the Coal India (CIL) management to assess the progress on negotiations relating to non-executive wage revision and on news reports suggesting the labor force would be going on a country-wide strike on October 10, 2011 following the breakdown of negotiations with the trade unions on bonus/ex-gratia/coverage for contract workers for 2011.
As per media reports (Press Trust of India, Business Line) on September 23/24, 2011, the labor unions demanded Rs25,000/laborer as productivity-linked bonus (or ex-gratia) whereas CIL has promised a bonus of to Rs17,000/laborer (up YoY from Rs15,000/laborer). As per CIL, the promised increase in bonus would raise total outgo on bonus from Rs5.6bn to Rs6.2bn.
ANALYSIS
Wage revision negotiations – where do things stand?
As per our conversation with the CIL management on outcome of the September 22-23, 2011 meeting with the trade unions on wage revision, we gather – [1] Meeting broadly concluded by CIL asking the five trade unions to present a common charter of demands / expectations, [2] There was disagreement over the quantum of festival-linked bonus/ex-gratia for FY2012 (as highlighted by the news reports on this issue), [3] Next meeting is likely to be scheduled after the festive season in October (i.e. potentially in October-end / November).
Bonus/ex-gratia payment – how material is the amount involved?
Based on the data available as per the news reports, the festival-linked bonus/ex-gratia accounted for ~3% of CIL’s overall employee cost in FY11; CIL’s promise to raise the per laborer bonus/ex-gratia from Rs15,000/- to Rs17,000/- would imply a 11.5% YoY rise in this salary component to Rs6.2bn (~3% of our FY12F total employee cost) for CIL. If CIL management agrees to the union’s demand for Rs25,000/- bonus/ex-gratia per laborer, ceteris paribus, our FY12F the incremental employee cost would rise by 1.7%.
Wage revision – sensitivity to earnings
Our earnings forecast for CIL builds-in [1] A 30% wage would increase for non-executive workers (effective July 2011), which translates into 19% / 9% YoY rise in employee cost in FY12 / FY13 respectively, [2] FY12 production/offtake at 447.5mt and 452.8mt. If the reported strike on October 10 takes place, it would lead to a loss of 1-1.2mn tons of coal production. Ceteris paribus, the potential production loss together with 1.7% increase in FY12F employee cost (if labor demand for higher bonus is met), would lower our FY12F EPS forecast by ~2%.
IMPLICATIONS
[1] Although the potential impact of the debated bonus/ex-gratia component is not very significant, we expect the impending wage negotiations (and related threat of potential production/offtake disruption) to remain an overhang on the near-term stock price performance.
Instead, we focus on CIL’s capacity to make-up for the shortfall in 1HFY12 production/offtake (following the sharper-than-expected monsoon-related slowdown in production / dispatches) and the magnitude of wage revision as bigger downside risks to our FY12F/13F earnings forecast for the company.
Maintain BUY as the structural growth story remains intact. Stock trades at FY12F EV/Resource and EV/reserve of 2x and 0.6x respectively.
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