State-run miner Western Coalfields Ltd (WCL) can now heave a sigh of relief! The standing linkage committee (SLC) has allowed the company to charge higher price for coal from its customers, a move that will help it recover initial investment on new projects.
Though this decision may boost WCL which will be able to earn atleast 12 percent on initial investment, its parent Coal India will not be much impacted. Analysts from JP Morgan in their latest report have stated that WCL makes up for hardly 2 million tonne or 0.4 percent of CIL's total volumes and the hike will not be that significant for CIL.
WCL, a subsidiary of Coal India (CIL) had earlier sought price revision because around 25 of its new projects were increasingly becoming unviable due to higher manpower and infrastructure cost. For instance, land that earlier cost Rs 3-4 lack for an acre has more than doubled.
While apprising shareholders about company's performance in 2011-12, DC Garg, chairman and managing director of WCL had pointed out that all projects may not yield 12 percent internal rate of return at 85 percent capacity utilization level, due to higher relief and rehabilitation packages which is to be provided while acquiring land for upcoming projects.
Meanwhile, the SLC has left the final price hike decision with the coal ministry.
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Price revision entails shifting pricing formula from notified to cost-plus method will push up price per tonne by atleast Rs 500 and therefore WCL customers will have to pay around Rs 1400-1600 per tonne of coal.
While notified price is decided by the government, cost-plus method is based on the actual cost incurred on a particular project.
WCL's 25 projects with production target of 45 million tonne will cost around Rs 5000 crore and the firm needs to recover initial cost by hiking price.
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