Coal India's first price hike since 2018 to support stock valuation; here are new share price targets

Analysts gave thumbs up to Coal India's decision to increase prices for its high grade (G2 to G10) non-coking coal by 8 per cent with effect from May 31, even as they do not see more such increases in the near term, considering the inflationary environment and upcoming elections.

The price hike is seen realising an incremental revenue of Rs 2,700 crore for Coal India in FY24 and helping the PSU offset 50 per cent of higher employee cost post wage hike announced in January 2023. The hike in conjunction with higher FY24 volumes has the potential to neutralise Ebitda decline, analysts said.

This would be Coal India's first major hike since January 2018 and Nuvama Institutional Equities believes that the coal producer may consider lifting prices for G11-plus after general elections.

"Announcing a price increase of 8 per cent above the notified price, Coal India has chosen a pragmatic path. The hike, effective 31 May, 2023 applies to high grade G2–G10 coal – 30 per cent of FY23 volume. With grades G11 onwards (used largely by power companies) beyond the scope at this point, the hike implies 3 per cent rise in FSA prices (i.e. Rs 45/tonne) – revenue impact of Rs 2,700 for rest of FY24 i.e. Rs 3,200 crore per year," Nuvama Institutional Equities said.

Motilal Oswal said the move is expected to offset almost 50 per cent of higher wage bill, following the mutual agreement between Coal India and four central trade unions under NCWA-XI. The wage bill, it said, is expected to increase by Rs 6,000 crore in FY24, post the recent negotiations.

Motilal Oswal said more such increases are unlikely in the near term, considering the inflationary environment and upcoming elections. It noted that e-auction prices have substantially moderated from their highs. It said its valuation estimates already accounted for a reduction in e-auction premium, which is similar to the prevailing premiums, thus factoring in the potential reduction in revenues.

Nuvama said the price increase under FSA after a gap of five years was much-needed, especially after CIL agreeing to 19 per cent wage hikes to non-executives. This, along with higher volumes, will allow only a paltry 2 per cent YoY Ebitda decline in FY24E to Rs 40,000 crore, still 60 per cent higher than FY18-22 average of Rs 25,100 crore.

Nuvama projects a dividend per share of Rs 20 each for FY24 and FY25, with a dividend yield of 8 per cent. It said the stock trades at a cheap valuation and revised its target price to Rs 365 from Rs 362 for Coal India.

Coal India sells 10 per cent of its volumes in e-auction at auction-determined prices. Motilal Oswal expects Coal India to clock a total volume of 65-70 mt in FY24.

"We have increased our revenue estimates by 2 per cent to factor in the incremental revenues due to the price hike. The e-auction premiums have drastically come off in April and May and the near-term outlook on premiums remain soft. We have increased our Ebitda/PAT estimate by 2.4 per cent/2.5 per cent to factor in the price hike benefit, which would be partially offset by the lower e-auction premiums. COAL trades at EV/Ebitda of 3.9 times FY24E. We reiterate our BUY rating on the stock with a revised target price of Rs 290 (5x EV/EBITDA). We believe Coal is well placed to capitalise on the growth opportunity ahead," Motilal Oswal said.

Kotak Institutional Equities said restricting price revision to high-grade coal possibly compensates for life-high e-auction
realisations and contains the fuel bill for electric utilities already burdened by high-cost imports.

Coal India, Kotak said, faces headwinds from lower auction prices, higher-than-provisioned employee cost and now, lower-than-expected revision in FSA prices. Street has been optimistic about the revision in FSA prices, which have so far been
restricted to high-grade coal alone (30 per cent of sales). The brokerage has a target of Rs 240 per share on the stock.

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