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Business News/ Opinion / Online-views/  Investors cheer Coal India’s new pricing mechanism
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Investors cheer Coal India’s new pricing mechanism

Investors cheer Coal India’s new pricing mechanism

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On Monday, Coal India Ltd (CIL) said it has decided to switch to gross calorific value (GCV)-based pricing mechanism from useful heat value-based grading system from 1 January. Under the new pricing system, the company has categorized its coal under 17 price bands from just seven earlier.

So, what does this mean? The GCV-based pricing mechanism is internationally accepted and should help in bringing domestic coal prices closer to tracking global rates.

Analysts expect this move to result in an improvement in price realizations. Having said that, the precise increase is difficult to determine immediately given the lack of product-wise sales output data.

The current quarter should help in giving some indication of the increase in price realization. A note from IDBI Capital Market Services Ltd maintains that a weighted average realization increase is estimated to be about 15% for the non-coking coal segment. “Prima facie, it appears that blended notified price could effectively rise by 15-20%," says a note from Nomura Equity Research.

Of course, this should help the company in setting off the impact of the wage hikes to some extent. Last month, CIL had also revised its production target for the current fiscal year to about 440 million tonnes (mt) from 452 mt earlier. That was not surprising considering that production had declined by 5% for the half-year ended September.

Meanwhile, the CIL stock has outperformed the Sensex since the beginning of this fiscal year. However, it has fallen by 21% from its high in June. Concerns on the impact of wage revisions, implementation of the mining Bill and proposal of cross-holdings among state-owned firms are some reasons for the decline in the company’s share price.

In the near term, these concerns are likely to keep a check on the stock performance. Currently, the CIL stock trades at about 12 times estimated earnings for the next fiscal.

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Published: 04 Jan 2012, 09:51 PM IST
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