Global financial services firm JP Morgan has revised its target price for Coal India Limited (CIL) downward by ₹35 per share, attributing the adjustment to a sharp 250% hike in cess levied on each tonne of coal production.
Earlier this week, JP Morgan lowered its target price for CIL from ₹430 to ₹395 per share. While this revised estimate still surpasses CIL’s current National Stock Exchange (NSE) price of ₹361.25, it highlights the mounting financial challenges for the state-run coal giant. This comes at a time when coal consumption in India continues to rise.
Major Factor: Pension-Linked Cess Increase
The primary reason for JP Morgan’s downward revision is the substantial increase in cess imposed on CIL to cover pension liabilities for its retired employees. The Coal Mines Provident Fund Organisation (CMPFO), responsible for managing the pension corpus for both CIL and Singareni Collieries Company Limited (SCCL), recently hiked the pension cess from ₹10 to ₹25 per tonne.
This increase will directly impact domestic coal prices, further straining CIL’s financial position. JP Morgan also expressed concerns about weakening international thermal coal prices, which are expected to decline due to oversupply and a slowdown in India’s coal demand growth since August 2024. As a result, CIL’s production volume growth may remain subdued.
Challenges in Raising Coal Prices
Though the ₹15 per tonne cess hike may seem minor compared to the current domestic coal price range of ₹3,226 to ₹2,416 per tonne for power plants, its effect is significant given CIL’s struggles in raising coal prices. Consumer resistance has been a major hurdle, and CIL has only managed four price revisions since 2016, the most recent being in May 2023.
With CIL and SCCL contributing over 80% of India’s coal sales, even minor price hikes face stiff opposition from thermal power producers. Many consumers argue that domestic coal quality has not improved enough to justify higher prices, making imported coal a more attractive option.
“The cess hike is necessary to fund pension obligations, but it will inevitably push up domestic coal prices, making them less competitive against imports,” stated Partha Bhattacharya, former CIL chairman.
Coal Demand Stagnation and Rising Inventory
While overall coal demand in India remains stable, JP Morgan noted that demand for CIL’s coal has stagnated. Data from the Ministry of Coal reveals that in the first 10 months of FY25, CIL’s coal production increased by just 1.5%, with offtake growth at 1.51%. Despite lower production, coal inventory at mine pitheads continues to rise, signaling weaker demand for CIL’s output.
On the other hand, private and captive coal mines have significantly increased production. Between April and January of FY25, these mines produced 155.91 million tonnes (MT), reflecting an impressive 32.38% growth rate. This surge has resulted in CIL and SCCL’s combined market share shrinking to 81%, a notable decline from nearly 90% a decade ago.
The Burden of Multiple Cess Levies
The largest cess on coal currently remains the Clean Energy Cess, set at ₹400 per tonne. According to a research paper by Shreshta Banerjee from the International Forum for Environment, Sustainability, and Technology (iFOREST), this cess has generated a massive ₹2 trillion between FY17 and FY23.
However, the new pension cess adds another layer of financial pressure on CIL. Bhattacharya explains that this levy has become unavoidable due to a growing pool of retired employees. In 2010, CIL had around 4.5 lakh employees, but due to technological advancements and cost-cutting measures, its workforce has shrunk to one-third of that size in FY25. Despite this leaner workforce, the number of pensioners continues to rise, increasing financial strain on the company.
JP Morgan’s Neutral Rating on CIL
JP Morgan has maintained a neutral rating on CIL, emphasizing the limited options available to navigate these financial hurdles. While coal demand remains stable, the combined impact of cess hikes, pricing challenges, and increasing competition from private miners raises concerns over CIL’s long-term growth prospects.
As India’s largest coal producer grapples with these pressures, the company must find ways to balance financial obligations while remaining competitive in a changing energy landscape.
