Moneycontrol Bureau
In a landmark judgment, the Supreme Court on Monday termed as illegal the allocation of all coal blocks handed out by the central government between 1993 and 2012.
The apex court is yet to decide on the penalty for the indictment (the ruling is expected to take place on September 1) though experts believe that the court may likely decide to fine the companies involved rather than go in for wholesale de-allocation of mines.
It is likely that the SC did not choose to de-allocate mines keeping in mind the impact such a may have on the larger economy, analysts at Motilal Oswal wrote.For instance, a highly adverse ruling could have ripple effect across power and cement and have a negative impact on both growth and inflation.According to Motilal Oswal, the apex court may go in for either of the two solutions.“Iron and steel sector may be asked to pay market price of coal (e.g. Coal India linkage price) and the difference between cost of production (inclusive of cost of capital) and market price may accrue to government of India. This solution will not result in industrial/production disruption. At the same time, it will become fair,” the brokerage firm’s report said.An alternative course may be the power sector is asked to pass on the benefit of low-cost coal to state. “Power plant with captive mines will get to earn fixed capacity charge based on existing CERC guidelines.”Analysts believe that the worst hit from the ruling will be Jindal Steel and Power (JSPL) and Hindalco.Yet, even after pricing in the worst-case scenarios for both companies, they do not see significant declines for their share prices, which have already taken a serious knock after the initial ruling came out.
“JSPL’s entire 12 million tonnes of production comes from mines allocated after 1993,” Prabhudas Lilladher analyst Kamlesh Bagmar pointed out in a note.The two 6 million-tonne blocks (production in FY14) in Chattisgarh allotted to the company in 1996 and 1998, respectively, are used for a captive 1000 MW power plant in Tamnar and for a 3-mt steel plant in Raigarh.Further, the ruling will also impact the fate of the Utkal B1 block in Orissa, which was awaiting a mining lease, and which was expected to be critical to the company’s Angul steel plant in the state.Hindalco, which currently operates the 2.9 mt Talabira I block in Odisha, could also see an impact on its 217 kiloton per annum Hirakud smelter while the fate of the Mahan block in Himachal Pradesh hangs in the balance.However, even if the apex court were to decide upon the extreme step of de-allocating all blocks, and even if JSPL and Hindalco were to import their coal requirements, both are expected to remain profitable, according to a report by Macquarie’s Rakesh Arora.For its steel business, JSPL’s cost of coal would rise to Rs 2,500 per tonne or Rs 3,600 per tonne from Rs 1,753 in FY16 if it were to go for an e-auction or importing its requirement, Arora noted.This would result in an added cost of Rs 448 crore or Rs 1108 crore for the company.For the power business, an additional cost of Rs 1,009 crore (linkage coal/e-auction cost) or Rs 2,713 crore (import) could entail in the worst case scenario. If the company goes e-auction/linkage coal, it could 10 percent off FY16 EBITDA while imported coal could slice 27 percent off the company’s operating profit.Using price-earnings multiple of 10, Macquarie’s target for JSPL shares in either scenario is Rs 366 and Rs 224, respectively.The EBITDA impact on Hindalco is seen to be relatively less at 4-8 percent, arising from a Rs 486-crore rise in coal cost, according to Macquarie, which puts a price target of Rs 168 for the stock.
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