Arup Roy Choudhury, the chairman and managing director of NTPC, believes the penalty on supply defaults will be hiked once Coal India succeeds in ramping up its production capacity.
The Coal India board yesterday met and decided to charge 0.01% penalty in cases where the company is unable to meet the supply agreements.
Even though the quantum of the penalty is being debated, Choudhury tells CNBC-TV18 that he isn’t concerned with that. “As long as they sign the FSA of giving us more coal than they were giving us last year, we are quite optimistic,” he said.
However, he goes on to say that consumers will be hurt in Coal India decides to import coal to meet the fuel supply agreements (FSAs). “The power tariff will go up and the customer down the line will have to ultimately pay for it,” he explained.
Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.
Q: What have you made of how low the penalty is that Coal India has set because the criticism seems to be that there is now not much difference between the letters of assurance versus this fuel supply agreements (FSA) they hope to sign with companies such as yours?
A: Why do we look at the penalties; what we are interesting in is the coal. As long as they sign the FSA of giving us that much more coal than they were giving us last year, we are quite optimistic of getting that coal from them. So I don’t think the penalty bothers me too much.
Probably a low penalty has been given to them because the target is very steep for them. But as far as we are concerned, we are happy that they will sign the FSA and we are very optimistic and upbeat that we will be able to get that coal.
Q: The worry is if they cannot meet the kind of FSAs that they are signing with their own domestic production, which is a realistic possibility, and then they go on to import coal, who pays for the imported coal since they have very little by way of penalties?
A: As far as we are concerned, 10 out of 15 stations that NTPC owns, we have our own railway system getting the coal from them. So the tariff will not get affected with those. But in case they want to do good the FSA by giving us imported coal, I don’t think that will be a good idea because ultimately the power tariff will go up and the customer down the line will have to ultimately pay for it.
Q: But isn’t that a realistic possibility? There will have to be some imported element, so shouldn’t you also be thinking about that possibility?
A: We are at present working very closely with the company to get coal as much as possible, but I don’t deny that there is a possibility. But the modalities of how they are going to give this imported coal to us is not clear, so at this stage I don’t think I can speculate as to what is going to happen.
We can only mix a certain percentage of imported coal with domestic coal, so they will have to give us equivalent amount of domestic coal. We haven’t thought that they will push imported coal in place of domestic coal and I am very optimistic all their coal mines are capable of producing little more than they are doing today. We know this and I am sure they will make an effort to do so.
Q: Coal India themselves though have admitted that this is an onerous target that’s been set for them in terms of coal to be supplied. Assuming there is a mix between imported and domestic, are you confident the pass-through in terms of prices to your end users will be smooth because in the past the experience has been that the State Electricity Board (SEBs) have chosen less power offtake rather than pay for more expensive power?
A: We will be very careful on where we accept the imported coal because we are very sensitive to the cost aspect that it creates to the ultimate cost of power. That’s what I said earlier, that it’s a little hypothetical at the moment for me to comment unless they come and say that they are not able to meet the FSA. At that stage, probably we will have to take a call. But we should be upbeat of the fact that they are signing FSAs and that they will give us coal, so why should we try and look for the negative in all this.
Q: On the basis of the FSAs and what your requirements would be, have you also begun to pencil in any improvement in plant load factor (PLF), in terms of the improvement you hope to see over the course of this financial year and the next?
A: I am sure it will. About 4000 MW plus of my 37000 MW capacity is actually getting effective in the MoU route effective, so I am sure these stations will now generate more electricity
There is no doubt about a PLF increase. In any case, we are going to commission about 5000 MW. So we are looking at this very optimistically, that if we get the coal we will generate more energy and probably that will improve our PLF in all the stations
Q: Do you think that FSAs are a more firm binding commitment than letter of assurance (LOAs) that they signed with your earlier? Why is it different from the LOA which you had in the first place?
A: There is a penalty, it is wrong to say there is no penalty. Maybe it has been toned down, but I am sure this is going to gradually increase as Coal India becomes more capable of producing more coal. But it is not the penalty, it is sort of answerability that they will not be able to meet their FSA. They are answerable not only to the Government of India, who is the major shareholder, but they are also answerable to their stake holders and investors and they would know that Coal India has not been able to keep their commitments on FSA. So I am sure they will make efforts to really see that they meet the FSA commitments that they have.
Looking at our expansion plans let me tell you that we all the time do not sanction project unless the coal linkage is there. The coal linkage, the environmental clearance, the water connectivity, the land, these are some of the things we take into consideration at the time of investment approval. So all our expansion plans have coal linkage. We are very optimistic that we will try and get coal from Coal India as much as possible. With this FSA in position maybe our PLF will also increase. I am looking at positive side of all this.
Coal India stock price
On January 30, 2015, Coal India closed at Rs 360.85, down Rs 14.3, or 3.81 percent. The 52-week high of the share was Rs 423.85 and the 52-week low was Rs 240.50.
The company's trailing 12-month (TTM) EPS was at Rs 21.06 per share as per the quarter ended September 2014. The stock's price-to-earnings (P/E) ratio was 17.13. The latest book value of the company is Rs 26.04 per share. At current value, the price-to-book value of the company is 13.86.
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