State-owned Coal India has raised prices for the second time this fiscal year in a bid to boost revenue as the world's largest miner of the fuel grapples with muted demand amid a supply glut.
Coal India last week said two of its units have increased the prices of coking coal by 20%, a move that will bring its prices on par with international levels. The price hike of coking coal, which accounts for 10% of the company's total output, comes on the back of a more than two-fold jump in international prices.
In May, the miner increased overall prices by 6%, and said the move would lead to an increase in revenue by 32.34 billion rupees ($475.27 million) for the period until March.
The latest price hike comes even as coal demand from power utilities is waning. Coal India, which controls more than three-fourth of the country's total output, is planning to nearly double its production to 1 billion tons by 2020, as the country is set to be one of the largest users of thermal fuel in the coming decade.
As a result of the price revision, Coal India will receive additional revenue worth 7.02 billion rupees for the rest of this fiscal year ending in March, and 29.86 billion rupees next year from one of its units, Bharat Coking Coal, the company said in a statement last Friday.
Meanwhile, the price hike at the other unit Central Coalfields will lead to additional revenue of 899 million rupees between January and March, and 2.22 billion rupees in the next fiscal year.
In the last fiscal year, Coal India produced 538.75 million tons, a 9% increase from the previous year. The company has set a production and sales target of 598.6 million tons for this fiscal year, which most analysts dismiss as a tall objective in the face of weak demand.
Analysts are also cautious of factoring in the incremental revenue from the price hike in the near term.
Coal India's estimate of a 30 billion-rupees revenue increase next year implies a 20% increase in price, along with a 12% growth in volume between fiscal year 2016 and 2018, JM Financial said in a report on Sunday. "Given the depressed coal demand, we believe the targets will be cut to reflect actual demand," the brokerage said.
However, the brokerage expects benefits to kick in in the long run when the operating leverage starts driving earnings growth.
"We find the price hike to be a long-term positive as it indicates management's willingness and independence in setting prices at par with international coal indices," JM Financial said.
Meanwhile, brokerage CLSA said Coal India faces the risk of a price cut this year, since coking coal prices are now directly linked to international prices and will be revised quarterly.
Coal India used the global average coking coal price of last January-March -$260/ton- as a reference to determine the price hikes, CLSA said, adding that global prices have already started to decline.
"CLSA's resources team expects global coking coal prices to decline sharply in 2017. Hence, we see risk of Coal India needing to cut coking coal prices later this year."
Shares of Coal India gained 0.80% in Mumbai trading on Wednesday, while the S&P BSE Sensex index ended 0.08% higher. - Nikkei