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Coal India
Immediate price hike in the cards?
CNBC TV18 ran a flash "Coal India in pressing need to raise prices and board to
look to raise prices". Coal India has historically increased prices biennially at
about 10%. So, an immediate price increase would be a departure from
precedence. We have modelled a realization growth of 7.5%/7.4% for FY12/13.
! CNBC TV 18 ran a news flash just a while ago: "Coal India in pressing need to raise prices
and board to look to raise prices"
! Coal India sells almost 90% of coal on a fixed notified price basis, prices for which have
typically been raised only once every 2 years. This practice has been followed quite
consistently over the last 10 years. The last two price increases were 11% in October 2009
and 10% in December 2007. So logically, next price rise is due around October-December
2011 at about 10%.
! So if management decides to raise prices from February itself, it would be a departure from
precedence. We note that management had earlier indicated that the next price hike could be
after the wage increase is finalized and this is due in July 2011. They may also choose to wait
till clarity emerges on finer details of the proposed MMDR bill, as it could have a significant
impact on the company.
! Average realizations of coal sold is largely a function of notified price increase since the
majority of the coal is sold through FSAs (Fuel Supply Agreements). Realizations from eauction could improve with the increase in global coal prices, though volumes sold through eauction may not increase beyond the 10-12% level. We have assumed a average realization
increase in FY12/13 of 7.5%/7.4%, respectively.
! An earlier than expected notified price increase would definitely be positive for earnings but a
7.5% increase is factored in earnings in any case. A 1% increase in earnings beyond our
forecast would positively impact earnings by 3.3%.
! Given that this is just news at this stage and is yet to be confirmed by management, we are
not revising any of our estimates at this stage.
! We have a Sell rating and TP of Rs265/share on Coal India.
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