MOSL: METAL-Upgrading earnings for Coal India led by big price hike-But lowering EPS estimates for aluminum smelters

​METAL: Upgrading earnings for Coal India led by big price hike; But lowering EPS estimates for aluminum smelters

Coal price hike of 8%: Coal India (COAL) has announced a price hike of INR64b for FY19E, based on its target coal production of 630mt. This translates into an average price hike of ~INR100/t, which is ~8% of average realization in FY18 for linkage supply.

Steep price hikes in many grades: We note that the price hike is not uniform across grades (Exhibits 1 and 2), as COAL has tried to rationalize pricing on INR/Kcal basis (refer Column 3 & 4). Grades 11-14 have witnessed a sharper price increase compared to grades 8-9. Price hike for grades 6-7 is steepest. Prices for grades 1-5 and grades 15-17 - which account for barely 8% of its total volumes - have been reduced slightly. COAL intends to move fully toward INR/kcal basis of pricing from 1st April 2018, which should be revenue-neutral if not revenue-accretive.

Imports are still very expensive: COAL's prices remain highly competitive compared to imports. According to our ballpark calculations (Exhibit 3), the average landed price of coal on INR/kcal basis on India ports is at 80 - 159% premium to cost of coal at COAL's mines. However, this is not an absolute conclusion because consumers have to add the inland transportation cost to arrive at the landed cost.

Aluminum smelters worst impacted: The price hike is likely to increase average cost of power generation by 7paise/kwh. For independent power generators, the increase in cost is largely pass-through to the power distribution companies (discoms), but non-power sector consumers like metal and cement producers will have to absorb the cost increase. Aluminum smelters will be worst hit because the production process is highly energy-intensive at 14,000kwh/t compared to other metals - for example, 500kwh/t for BoF-based steel making, 1,000kwh/t for EAF-based steel making, and 3,000-4,000kwh/t for zinc/copper/ferro-alloy production. Secondary steel producers can easily absorb the cost increase as they are benefiting from the steep steel price increase.