The price revision is meant to rationalise the coal price from the mine due to grade reclassification and price adjustment. As per our discussion with the CIL management, the Rajmahal mine produced 14.3 mt coal in FY14 (~3% of CIL’s total production during the year).
As production from the mine is unlikely to rise materially going forward, at the margin, its contribution to CIL’s overall production/offtake would decline (we expect CIL’s production/offtake to rise 5-6% y-o-y during FY15F-18F). Ceteris paribus, the R90/tonne hike in the add-on price of coal would yield an additional income of R90 crore (post-tax), implying a ~0.5% uptick to our FY15F/FY16F earnings forecasts for CIL. Moreover, we already build in a 5.5%/4.0% hike in FSA/blended realisation for CIL in FY15.
As the add-on price revision was expected, we do not see this as a positive surprise. CIL has demonstrated its ability to raise effective prices twice in FY14, besides raising surface transportation and loading charges in November 2013. While the revision in Rajmahal coal prices is again a one-off move, we believe CIL would be in a position to effect a more broad-based hike in notified coal prices in mid-2014 to sustain margins. Maintain ‘buy’; our earnings forecast for CIL are under review. On FY15F normalised earnings, the stock trades at 8.9x P/E (EPS of R31.4) and 4.8x EV/Ebitda (10.7xP/E and 6.3x EV/Ebitda on reported earnings).