While global coking coal prices have been buoyant, shares of Coal India Ltd (CIL), the world’s largest coal miner, had more or less tracked the 15% decline in the broader markets since it listed in early November. During the same period, shares of large coal companies such as Peabody Energy Corp. and CONSOL Energy Inc. have risen between 15% and 30%.
The reason for CIL’s underperformance was the uncertainty about its ability to hike prices, although, lower volumes, too, were partly responsible. About 80% of its sales are to the power sector and raising coal prices for a government-owned firm is a politically sensitive issue, especially when inflation is already high.
CIL has tackled the issue well by introducing a differential price strategy for sectors other than power, fertilizers and defence services. Customers from other sectors will now pay prices that are 30% higher. Also, A and B grade coal, which accounts for 7% of total volumes, will now be priced at a 15% discount to international prices, which effectively means a 100% price hike. According to the company’s estimates, the price hike would lead to additional revenue of Rs650 crore in this fiscal year and as much as Rs6,200 crore in FY12.
According to CLSAResearch, the blended hike in average selling price (ASP) will be roughly 12-13%. It adds that every 1% hike in coal prices leads to a 2.5% increase in CIL’s earnings per share (EPS). But this doesn’t mean earnings estimates for FY12 would jump by 30-32.5%. CLSA, for instance, was already assuming a 10% hike in average prices in FY12. The incremental hike, therefore, is just 2% and warrants only a 5% hike in earnings.
But as analysts at the brokerage point out, “The 12% hike in blended ASPs theoretically merits a 5% EPS upgrade, but we maintain estimates pending the wage settlement in June 2011 to get a better sense on FY12 costs. With a 12% hike now having been implemented, we view another price hike in 1Q (April-June quarter) as being very unlikely. The last wage hike was in 2006 when wages were hiked by around 22%. Our estimates assume a 20% hike in per-head staff costs in FY12.”
CIL shares have jumped by 16% since the price hike was announced and are back to the Rs340 levels they had reached on the day of listing. Of course, at current levels, they continue to underperform global coal players. But that’s because the firm doesn’t have complete freedom in pricing. About 80% of its volumes are still being priced at subsidized rates.