Coal India: Mkt awaits clarity

GCV-based pricing was likely to offset the higher wage bill, but after the rollback, the stock may be re-rated

Coal India, the world’s largest miner, has kept analysts busy this month. At the beginning of the year, it came out with a new pricing mechanism based on gross calorific value (GCV). According to analysts, the new method was expected to give a leg-up to profits, which could have, possibly, offset the increase in the company’s wage bill.

However, on Monday, the company decided to roll back its decision to increase prices under the new mechanism. The company may adopt such a model eventually, but not from the current quarter. Analysts say end-users questioned the company’s infrastructure to evaluate coal on the basis of the GCV model. However, the coal minister has indicated the 12.5 per cent increase in prices, under the new system evoked protests from end-users.

The confusion among analysts speaks volumes about the world’s largest coal-producing company. Say Kamlesh Bagmar and Dhrushil Jhaveri of Prabhudas Lilladher, “Given the ambiguity on the actual GCV of coal and the unknown variable of grade slippage, it remains difficult to assess the net impact on revenue with the revised prices, as it was with the prices announced earlier. However, we strongly believe there lies no urgency on Coal India to take a revenue hit.” Despite the ambiguity, analysts like the company’s monopoly play.

With the price increases rolled back, the overhang of wage increases returns. Analysts are not certain about the percentage of wage increase that would be given to non-executive workers, even as the market has built in a 25 per cent rise. According to Nomura, while the potential impact of the price revision is fairly clear (broadly, revenue and

EPS-neutral), the final magnitude of the wage revision is awaited. What has sent analysts into a tizzy is the outgoing chairman’s comment that the outgo could be Rs 6,500 crore, which implies a 45 per cent revision. Sonam Udasi, head of research at IDBI Capital, says: “If the market feels Coal India does not have the liberty to price its product, the premium commanded by the company will go. The stock is currently trading at a forward EV/Ebitda multiple of less than seven times, lower than the 7.5x it commanded earlier.” Some brokerages have already cut target prices accordingly.