Margins stressed till coal issues are resolved: Adani Power

Speaking to CNBC-TV18, Prabal Banerjee, chief financial officer of Adani Power says that unavoidable import of non-Bunyu coal from Indonesia impacted Q3 performance for the company. The cost of coal had almost doubled in the third quarter due to supply issues.

Banerjee says that Adani’s margins will stay under pressure until the issues plaguing coal sector are resolved. He however sees signs of improvement in merchant rates.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What the market was surprised by was the fact that your parent basically decided not to supply coal at USD 36 per tonne as was decided earlier. What led to that change and how significantly would it have eroded your margins going forward?

A: Let me correct the market perception if it were so. As far as Adani is concerned, there is no iota of doubt that the Bunyu mines with which Adani Enterprises has got the arrangement of supplying coal to Adani Power at USD 36 is continuing and will continue to do so. There has been no change of stance on that.

What has happened is because of the Indonesian rule which has come into effect from September 2011, no other coal can come which is required to be imported from Indonesia at the prices that were given earlier. So obviously, now it will become at a rate which is market-driven, which is why you see that the average coal cost during this third quarter where we had to perforce import coal at a higher level has come around USD 92-100 per tonne. That has impacted the profitability because the coal cost moved up from about Rs 1.02 per kilowatt-hour from the previous year same quarter to about Rs 2 per kilowatt-hour for this particular quarter.

On top of that, there was some unrealized loss of forex gains for import to the tune of about 44-45 paisa, which made the total cost to the tune of about Rs 2.45 per kilowatt-hour. So I hope that clarifies the stance.

This is nothing but some sort of a force-majeure that happened for the non-Bunyu coal that we are importing and getting it at Adani Power.

Obviously, the steps being taken by the government at the highest authority from even the Prime Minister’s Office, we expect that prioritized reallocation of coal to the power plants will actually do the necessary remedial action to the power sector and also to Adani Power.

Q: Could you outline in that case what it is that you expect margins to improve to over the course of the next two quarters for Adani, and what happens on realizations as well because sequentially there has also been a drop on realizations for you?

A: As a matter of company principal and corporate governance, we do not give any figurative guidance for the future on margins. But certainly, I can give you a clear contour as to where it should be. Looking at the imported coal that is going to be a perforce scenario for Adani Power, there is no doubt that till the time the coal reallocation and prioritization is done, there will be some pressure on margin as it has happened in this quarter.

As far as the pricing is concerned, the pricing is almost at the same level on a year-on-year basis. In fact, it has bettered for the simple reason that merchant power proportion has improved a lot and merchant power rates too have improved. But certainly, there has been certain power purchase agreements (PPA) which are not really capturing the real cost of coal, and that needs to be reassessed and looked at by the appropriate authorities which is what the expectation of the power sector and also obviously of Adani Power, being no exception to the power sector.

Q: I believe there are some issues with your Mundra plant for which you are not able to access some of the lucrative merchant power markets or sell in the merchant power market. Can you clarify on those?

A: There is no issue on Mundra plant as far as we are concerned. What has happened is that for unit number five and six, which is there ready and operational, we have not been able to supply to the appropriate authorities because the transmission line is not made operational by them. We are waiting for the transmission line, we are discussing with them, negotiations were done and then at appropriate level, we will be supplying the power to the appropriate authorities.