Coal India Aiming For A Price Hike

Latest news reports suggest that state owned coal supplier, Coal India is looking at hiking prices. The coal mining major has been looking to raise prices for more than five years now. Last year it had indicated moving away from the old coal pricing method (Useful Heat Value (UHV)) to the internationally accepted method of applying the Gross Calorific Value (GCV). The new method would have created a total of 17 categories of coal bands instead of the original seven categories. It was also expected that the new categories would lead to an increase of 5-12.5% in coal prices. In fact, it went ahead with the new pricing in the beginning of last year which resulted in a big uproar with its customers in various sectors such as power, cement, steel and aluminum taking up the issue rather very seriously. The extent of the uproar was such that the company was forced to roll back the new pricing norms.

The coal giant has now hinted at a price hike as higher diesel prices were hurting at the operational level. The rising wage bill is also another reason due to which it is looking at hiking coal prices. In July 2011 it had hiked employee wages by about 30%. This resulted in higher employee expenses for Coal India. In the September quarter of the current fiscal, the company reported a rise of 14.86% in its employee expenses. As a percentage of sales, employee costs increased by 157 basis points to 44.85% reflecting the higher wages that were paid to its employees.

Its power & fuel expenses too rose by 7% to Rs 561 crore in the September quarter of 2012. The diesel price hike was effected towards the end of the September quarter and hence the full impact of that price hike would only be visible in the December quarter now.

Overall due rising input costs, have brought down its EBITDA margins on a sequential basis. It had reported margins of 29.05% in June quarter of 2012 quarter, which came down to 19.64% in the September quarter of 2012.

The company currently seems to be under a tremendous pressure of hiking product prices so as to maintain a decent operational performance.

Given the fact that many states have increased power tariffs, coal India may aggressively push for higher coal prices. It may seek the same considering that the higher tariffs may improve the profitability of power generation companies. On the flip side however power companies can force Coal India to roll back any prices hike as increasing coal prices may offset the hike in tariffs that have been effected recently. We are of the opinion that coal prices must be hiked if the Government wants to avoid the same mess in the coal sector as is currently seen in the power sector.