Coal India hikes prices of high-grade fuel by 8%; stock falls 2%

Shares of Coal India Ltd (CIL) slipped 2% in early trade on Wednesday after the world’s largest coal producing company raised the prices of its high-grade (G2 to G10) non-coking coal by 8% with effect from May 31. This is the first hike in non-coking coal prices in the last five years since 2018, which will be implemented across all its subsidiaries.

The price hike is expected to generate incremental revenue of ₹2,703 crore for the balance period of financial year 2023-24, which will help the state-owned company to offset 50% higher employee cost post wage hike announced in January 2023. 

“The board has approved price increase of 8% over the existing notified prices for high grade coal of grade G2 to G10. This will be applicable to all subsidiaries of Coal India Limited including NEC for regulated and non-regulated sectors. Due to this revision, CIL will earn approx. incremental revenue of ₹2,703 crore for the balance period of financial year 2023-24,” CIL said in a BSE filing on Tuesday.

As per ICICI Securities report, CIL sells almost 80% of its coal in G7-G12 grades, hence the benefit of price hike is expected to be substantial. “Management has indicated incremental revenue of ₹2,703 crore for the balance period of FY24. As per our analysis, this equates to a hike of 2.2% for the entire volume of coal to be sold in FY24. However, we do not expect most power plants to be impacted as they take lower grades of coal. That said, sponge iron and other players in non-regulated sectors are likely to be adversely impacted,” it said.

The brokerage has maintained “ADD” on stock, with a target price of ₹280 from ₹255 earlier.

The development came merely a week after the CIL approved a new wage agreement allowing higher allowances and benefits for non-executive employees. On May 22, CIL said in a regulatory filing that it inked national coal wage agreement with its 2.38 lakh strong non-executive workers for the period of five years, effective from July 1, 2021. As per the agreement, a minimum of 19% guaranteed benefit on emoluments (basic, VDA, SDA & attendance bonus) and a 25% increase in allowances have been granted to non-executive employees. Further, CIL has made provision of ₹9,252.24 crore for a period of 21 Months from July 1, 2021 to March 31, 2023, for this effect.

“The final impact of a 25% increase in allowances will be intimated shortly which is not likely to be significant,” it said in the filing.

Reacting to the news, shares of Coal India opened 1.4% higher at ₹247.85 against the previous closing price of ₹244.35 on the BSE. However, the blue chip stock lost its momentum and dropped 2% to hit an intraday low of ₹239.45, while the market capitalisation slipped to ₹1.48 lakh crore. The stock has fallen as much as 3.4% from day’s high levels.

The share price of Coal India is currently down 9% from its 52-week high of ₹263.30 touched on November 9, 2022, whereas it trades 37% higher than its 52-week low of ₹174.60 hit on June 20, 2022.

According to ICICI Securities, the price hike is likely to partially allay investor concerns about the adverse impact of the recent wage hike on profitability even as the high-grade coal production is limited to subsidiaries such as BCCL and CCL.

“In our view, the benefit of ₹2,703 crore would partially mitigate the impact (₹6,000 crore) of wage hike. Also, the price hike is unlikely to impact the economics of most power plants, which generally take lower-grade coal. That said, sponge iron players and some of the other unregulated sectors are likely to feel the pinch,” the domestic brokerage said in its report.

Taking cognisance of the higher prices, the brokerage raised its FY24E/FY25E earnings per share (EPS) for CIL by 10.5%-11%. The price hike, though inadequate to cover the entire wage hike, mitigates almost 50% of the impact, it said.

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