Coal India Limited Increases Coal Prices: Major Implications Disclosed

Coal India Limited (CIL), the largest coal miner in India, has announced an 8% price increase in high-grade coal. Notably, this is the first major price revision by CIL since January 2018 when prices were increased by 11%, and the new prices will be applicable to all CIL subsidiaries. This decision has raised hopes for further price increases for other grades, which may occur after the General Elections in CY24. The price hike is also anticipated to offset approximately 50%-55% of the higher employee costs incurred by the company. Let’s explore more about the price hike.

Major Highlights

Here are major price-hike highlights that you must know:

• Price Increase Effective From 31 May 2023 – CIL stated that its Board of Directors approved the revision of non-coking coal prices, effective from 31 May 3 2023. An 8% price increase will be applied to high-grade coal of grade G2 to G10, and it will impact both regulated and non-regulated sectors across all subsidiaries including NEC.
• Revenue Expectations & Wage Revision – CIL expects to generate a revenue of Rs 2703 crore for the remaining period of the financial year 2023-24, and all additional charges will follow the existing practice. Earlier in May 2023, the company reached an agreement with its non-executive workers regarding the revision of wages. The agreement granted a 19% minimum guaranteed benefit from 1 July 2021, along with a 25% increase in allowances. This wage revision has led to an additional liability of approximately Rs 6,000 crore for CIL.
• Impact: Power Tariffs & Production Target – The coal price revision is likely to affect India’s power tariffs. Coal-fired electricity accounts for a significant portion, contributing between 73%-77% of India’s power demand, which is growing at an annual rate of about 6.4%. Furthermore, CIL has set a production target of 1 billion tons for the year 2025-26.
• Incremental Revenue & Volume Impact – A high-grade coal price hike is expected to result in significant incremental revenue for CIL. The approved increase is projected to generate approximately Rs 2,703 crores of additional revenue for the remaining financial year 2023-24. Around 30% of volumes will be affected by this price hike.
• Implication On Brokerages & Outlook – The price hike has different implications for various brokerages. Some had already factored in the Fuel Supply Agreement (FSA) hikes, so they will not upgrade their earnings projections. On the other hand, brokerages that did not consider the FSA hikes will experience only a marginal increase in their earnings outlook. Motilal Oswal, for instance, has increased its revenue estimates for Coal India by 2% to account for the incremental revenues resulting from the price hike. The stock is currently trading 1.5% lower on the exchanges as of 31 May 2023.

OFB’s Insight

Coal India Limited’s decision to increase high-grade coal prices by 8% marks a significant development in the coal industry. The price hike is expected to generate substantial incremental revenue for the company while helping to offset higher employee costs. It is anticipated to have an impact on India’s power tariffs and contribute to meeting the growing power demand in the country. As the first major revision in coal prices since 2018, this decision opens possibilities for further price adjustments in the future.

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