Coal India's Price Hike To Partly Offset Higher Wages, Push Up Power Tariffs
Tariffs are expected to rise for power plants using high-grade coal above 4,200 kcal.
Coal India Ltd.'s decision to hike the price of high-grade coal by 8% will impact the power tariff for electricity consumers by 12–18 paise per unit for plants using high-grade coal.
The miner hiked the price of grade 2-10 coal for power utilities, including independent power producers, fertilisers, and defence companies, under one category and simultaneously increased it for all other segments in a separate category, according to a May 30 company notification.
The state-run utilities have long-term contracts and buy very small quantities in auctions, and coastal plants are dependent on imported coal, Deepak Kannan, global head for coal pricing at S&P Global Commodity Insights, told BQ Prime. But after the price hike, the packs may be reworked on the pricing side, Kannan said.
The 8% hike on an average of Rs 3 per unit tariff will lead to a hike of Rs 0.12-0.18 per unit in power tariff for consumers using high-grade coal, Kannan said. He expects more clarity in due course.
"Impact could be around 10–12 paise per unit, depending upon the station heat rate of the plant and the calorific value of the coal grade," Rupesh Sankhe, vice president and power analyst at Elara Securities, said.
However, according to others, the impact will be limited since the majority of coal used by power companies is low-grade.
Since the majority of power producers use low-grade coal in the range of 4,200 kcal and below, the price hike will be limited to companies using high-grade coal, according to Vikram Reddy, vice president, sector head-corporate ratings, ICRA Ltd.
Imported coal-based plants use 10–20% of domestic coal for blending purposes, especially if import prices go up. However, import prices for coal have also dropped from their peak of $140 per tonne in September 2022. Hence, the impact on import-based plants would be negligible, Kannan said.
The non-coking high-grade coal of the G2-G10 series constitutes roughly 30–35% of Coal India's total volumes. Around 80% of that volume goes to power generation companies.
Coal India's production of this coal is around 210 million tonne per annum. Of that, 80% is dispatched to power companies, which is around 168 million tonne.
Hike To Partly Offset Coal India's Higher Wage Bill
The 8% fuel supply agreement price hike is the first in five years and is expected to partly offset the company's increased wage bill. The last FSA price revision was in 2018.
"CIL's wage bill is expected to increase by Rs 6,000 crore in FY24. Post the price hike, it is likely to offset 50% of the incremental wage bill," Motilal Oswal Financial Services Ltd. said in a report.
"We have increased our revenue estimates by 2% to factor in the incremental revenues due to the price hike," the report said.
The e-auction premiums have drastically fallen in April and May, and the near-term outlook on premiums remains soft, according to Motilal Oswal.
The brokerage has increased Coal India's EBITDA/APAT estimate by 2.4% to 2.5% to factor in the price hike benefit, which would be partially offset by the lower e-auction premiums.
Coal India's shares were trading 1.37% lower on Friday, compared to a 0.89% drop in the benchmark Sensex.