Steep hike in cess to pay for higher pension costs darkens outlook for CIL

JP Morgan recently cut the per-share target price of the state-owned firm by almost Rs 35, largely on account of a 250 per cent increase in cess on each tonne of coal output

Financial services firm JP Morgan earlier this week cut the target price of Coal India (CIL) to Rs 395 from Rs 430 per share. While the price is still well above the quoted Rs 361.25 on the National Stock Exchange (NSE), the cut explains the challenges that the state-owned firm faces, and which are mounting even as coal consumption in the country continues its upward march.

One of the key reasons for the cut is the 250 per cent rise in the cess imposed on the firm to pay for the pension liabilities of its former employees. The cess was raised to Rs 25 per tonne from Rs 10 by the Coal Mines Provident Fund Organisation, which manages the pension corpus of both CIL and the smaller Singareni Collieries Company Limited (SCCL).

The rise will mean every tonne of coal sold from domestic mines will be correspondingly costlier. The costs add to what JP Morgan has noted. The firm anticipates CIL will face a weaker period of international thermal coal prices due to oversupply, corresponding with a weaker growth in demand for coal “in India since August 2024, which has led to muted production volume growth”.

Since the price of coal per tonne sold in the Indian market from domestic collieries is in the range of Rs 3226 to Rs 2416 (for power plants), the Rs 15 increase in cess could look puny.

It doesn’t look puny, however, when compared with the troubles Coal India has had raising the price of coal. Each such rise has been objected to by coal consumers because of which, in the nine years since 2016, when coal mine auctions began, CIL has been able to change the prices only four times. The last one was in May, 2023. CIL and SCCL sales account for over 80 per cent of total coal sales in India. Naturally, even a single rupee increase in the price of coal is fiercely contested.

In their objections to coal price rise, consumers have protested that the quality of domestic coal has not risen, so baking in a higher inflation concern was unwarranted. The largest consumers of coal, usually thermal power plants, have in any case moved to imports, which they calculate is more competitively priced.

“The rise in the cess has become necessary to finance the pension liabilities, but the price rise will certainly feed into domestic coal prices and make it less competitive with imports”, said Partha Bhattacharya, former chairman of CIL.

As JP Morgan's analysts note, CIL faces a rough time because the demand for coal from Coal India has plateaued. However, this does not mean aggregate demand for coal has flattened out. Data from the ministry of coal shows in that in the first 10 months of FY25, CIL's production has risen by only 1.5 per cent. Offtake of coal was more sluggish at 1.51 per cent. This means even with lower production, inventory continued to rise at the pitheads.  

The flat offtake of coal from CIL, however, does not mean coal demand is tepid. After decades of experiments, captive mines have ramped up their production to an impressive 155.91 million tonnes (MT) in the same April to January period of FY25, registering an impressive 32.38 per cent growth rate. The combined run rate of private mines mean they have already clipped CIL and SCCL production to 81 per cent which is quite a comedown from close to 90 per cent a decade ago.

The major cess on coal is the Clean Energy Cess at Rs 400 per tonne. A research paper by Shreshta Banerjee for think tank International Forum for Environment, Sustainability and Technology estimates this cess to have generated Rs 2 trillion since FY17 to FY23.

The pension cess is another imposition. The sum has become necessary, as Bhattacharya explains, because the number of pensioners from CIL has exploded. The company which used to have a staff strength of close to 4.5 lakh in 2010 has just about a third of them on the payrolls in FY25. Technological changes in mining and the need to cut costs have made CIL leaner but the increased ranks of pensioners have now imposed a new demand on the finances of the company. The JP Morgan neutral rating on CIL is a reflection of this pressure, some of the reasons why the premier coal producing company does not have too many good options to explore.