Pricing change is a good long-term move but analysts are not expecting a big impact on realisations, earnings.
Coal India, the world’s largest coal producing company, moved a step closer to market-oriented pricing, after its board approved pricing based on gross calorific value (GCV). The new pricing will be effective from January 1. With this, the company has moved away from the outdated heat-value-based grading system. Under the new grading system, coal would be classified into 17 slabs of 300 kcal bandwidth, compared to the seven grades under the old system.
Despite the change in pricing mechanism, neither the company nor analysts have clarity on the exact impact on realisations and earnings. The reason why the upside may be capped is because FY10 data shows that Grade G and F quality of coal accounted for 45 per cent of coal production. According to JP Morgan, “It (grade G & F category) would see little change in prices, while D and E, which accounted for 30 per cent of production, would likely see an increase.” Analysts are not expecting an across the board increase in prices in over the next three months. Also, the company has cut its FY12 production target from 452 million tonnes to 440 million tonnes due to heavy rain.
According to Citi, realisations could rise 13-14 per cent, with an upside bias (provided grade slippage in under control). Its estimates incorporate a two per cent increase in FY13 notified prices. However, Citi’s sensitivity analysis shows that one per cent increase in realisations will result in 2.3 per cent higher net profit in FY13. However, the revised structure is applicable only to non-coking coal. Coking coal accounts for 8-10 per cent of total volumes. Though the range of notified prices has increased meaningfully (10 per cent to 30 per cent) across various categories of coal, a precise computation of the benefit is difficult in the absence of company-wise product sales output, explains Kotak Institutional Equities. The upside would be limited as a part of the increase would be offset by higher wages. The stock has corrected 7.4 per cent in the last three months on concerns emanating from higher wage provisioning, lower than targeted volumes, pricing flexibility and the mining bill. The stock is currently trading at 13 times its FY13 price/earnings and most downside risks are factored in; analysts are finding this level attractive.