Coal India Ltd (CIL) has signed its wage hike agreement for five years and analysts aren’t happy about it. The hike is higher than expectations, prompting many analysts to prune their numbers.

The total estimated average annual impact is Rs5,667 crore, according to the coal producer. The Street was building in lower numbers than this. For instance, based on Motilal Oswal Securities Ltd’s calculations, the average hike of 22% is higher than its estimate of 18%.

No wonder, the brokerage raised its estimate for the annual wage bill for this fiscal year and the next. “This will impact Ebitda and PAT by 11% in FY18E and by 6% in FY19E," pointed out a Motilal Oswal report. Ebitda is a measure of profitability and is short for earnings before interest, tax, depreciation and amortization. PAT is profit after tax.

How can CIL cope with this? The answer is by taking a price hike. Around 5% price hike in FSA prices would be needed to offset the additional wage provision, wrote Bhaskar Basu, analyst at Jefferies India Pvt. Ltd in a report on Tuesday. FSA is fuel supply agreement. But the moot question is whether CIL will take a price hike. The company took a price hike last year. “Another price hike, though unlikely near term, may not be ruled out," said the Jefferies report, adding that there is uncertainty around whether government would allow another price hike especially given the financial stress at state electricity boards.

Interestingly, the CIL stock did not react too much to the wage hike announcement, which came after market hours on Tuesday. On Wednesday, its shares declined 0.63%, on a day when the benchmark Sensex declined marginally by 0.28%.

But investors anyway haven’t had much luck with the stock. So far this fiscal, the CIL stock has shed 3% compared to the 7.5% rise in Sensex. Not without reason. Uncertainties on wage hikes, concerns on volume growth and grade slippages are some factors that weighed on sentiments.

Currently, the stock trades at nearly 16 times estimated earnings for this financial year, based on Bloomberg data. With the wage hike behind it, investor focus will shift to performance now (improvement in volumes) and whether the company takes a price hike.

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