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COAL hikes high grade coal prices by 8%; would help partially offset the higher wage bill

* COAL has approved a price revision for its high grade G2-G10 non-coking coal w.e.f. 31st May 2023. COAL has hiked prices by 8%, which is expected to realize an incremental revenue of INR27b in FY24. The last FSA price revision was taken in 2018 and COAL has now taken the first major price hike. This is expected to offset almost 50% of higher wage bill, following the mutual agreement between COAL and four central trade unions under NCWA-XI. The price hike affects ~30% of the volumes.

* The wage bill is expected to increase by ~INR60b in FY24, post the recent negotiations. This price hike would likely offset ~50% of the incremental wage bill.

* We have increased our revenue estimates by 2% 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/APAT estimate by 2.4%/2.5% to factor in the price hike benefit, which would be partially offset by the lower e-auction premiums. COAL trades at EV/EBITDA of 3.9x FY24E. We reiterate our BUY rating on the stock with a revised target price of INR290 (5x EV/EBITDA). We believe COAL is well placed to capitalize on the growth opportunity ahead.

Price hike to support earnings

* Price hike of 8%, positively impacting 30% of the volumes, would help COAL partially offset the cost increases, especially the wage bill.

* The wage bill is expected to be higher by INR60b in FY24 and the incremental revenue from the price hike is expected to be at INR27b.

* More such increases are unlikely in the near term, considering the inflationary environment and upcoming elections

e-auction cooling off, but still at elevated levels

* COAL sells ~10% of its volumes in e-auction at auction-determined prices and we expect COAL to clock a total volume of ~65-70mt in FY24.

* E-auction premium, which had touched a high post the Russia-Ukraine conflict, has now started cooling off. As indicated in our previous notes, although e-auction premiums have cooled off from their highs, the expected increase in volumes for e-auctions is expected to be adequately compensate for this decline.

* Higher sales via the auction route should help garner better profitability as the prices are higher than FSA-determined prices.

* We believe e-auction prices have substantially moderated from their highs; however, in our current estimates, we have already accounted for a reduction in e-auction premium, which is similar to the prevailing premiums, thus factoring in the potential reduction in revenues

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