The Supreme Court on Monday declared all captive coal blocks allocated since 1993 as illegal. The apex court has reserved judgement on the consequences of illegality and further hearing will be taken up on September 1, 2014.
The biggest casualty of the judgement will definitely be mining, but even the power and metals space will see some impact.
Discussing the many-sides ramifications of the move, Debasish Mishra, Senior Director, at Deloitte, said the capacities which were supposed to come onstream by using this captive coal, may get affected.
Capacity addition in the power sector has happened at 6-7 percent in the last 10 years and Coal India has not able to ramp up its production to the extent that power capacity is getting added, he said.
He thinks power generation to the extent of 12,000-14,000 MW will get hit in the near term. “But overall, for the next 18-24 months, (the decision) will have an impact of around 25 gigawatt on power generation.”
Mishra fears that coal would have to be imported if mining from these blocks are completely banned as it could dent coal procurement to the tune of 50 mtpa. He however feels that coal import may not work well for projects in hinterland.
He said the banks are already under pressure due to power companies not declaring their commercial operation date.
Misal Singh, Director - Institutional Research at Religare Capital Markets, said the SC verdict will impact the order inflows in the long-term.
He said the valuations on Power Grid look attractive at current level and even NTPC’s current valuations are fair.
Religare Capital Markets likes Power Grid over NTPC in the defensive utility space.
Below is the transcript of Debasish Mishra and Misal Singh's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Give us an idea of what is going to be the impact for the economy first?Mishra: There is lot of capacity, which was coming onstream, which was to use this captive coal. As you are aware that Coal India is not able to ramp up its production to the extent that power capacity is getting added whereas the capacity addition in the power sector has been 6.5-7 percent in last 10 years whereas Coal India’s production in last five years is increasing only at 3 percent. So there is a huge gap in countries already importing.Latha: That is the capacity that will come onstream.Mishra: Many of these coal mines -- if you see the distribution of the allocation, it happened around 2007-08-09 and those mine capacities were coming onstream this year and next year. That would have added around 100-150 million tonnes of captive coal production, which completely gets affected now.
Latha: How much less power will be generated you think because of this over the next quarter or two?Mishra: Power generation immediately will get hit to the extent of 14,000 megawatt but if you take the overall impact for the next 18-24 months, it will have an impact of around 25 gigawatt. What will happen is country will have to import more coal if there is a complete ban on mining from these mines. But if SC gives a dispensation in some way, mines which are ready and operating or about to be operated then in some manner if production is still possible from these mines by paying some fine or I don’t know what dispensation the highest court is having in its mind then probably import will not go up. But if there is a complete ban and you cannot touch these mines then obviously the country needs power, the economy is in a revival mode. Last year we had only one percent increase in power demand but we are expecting this year it will jump back to 5-6 percent. So that will be filled up by getting more imports.
Sonia: From the companies that are in your coverage universe, which ones would be impacted the most and what could the quantum be?Singh: Most of the companies here are capital goods companies on the equipment side. So it is probably more of a sentiment impact in the short-term and in the longer-term it will have an impact on the order inflows because there needs to be clarity on the fuel side only then you could see orders in the power sector and various other sectors to pick up. So to that extent, quantifying what exactly would be the impact would be difficult but it just puts a spanner in the works for the sector as such because the total capex that you see in India every year about 35 percent comes from the power sector. So to that extent, it is a sentiment dampener.
Latha: Some of the companies you cover have had a dream run over the past 12 months, notably Voltas and Crompton. Are you expecting that run now to get stymied?Singh: I think for that run to continue, you require business confidence to keep improving and to remain stable. But something like this will have an impact on the business confidence if not today over the next few months. So to that extent, I think the upsides over the short-term to the medium-term would be limited in these stocks.Latha: What about stocks like National Thermal Power Corporation (NTPC) and Power Grid? Do you think investors will now migrate to companies like these?Singh: I would believe so because those are more defensive business models, which are to an extent insulated from some of these issues. So at decent valuations, investors would like to move into those defensive business models. In case of Power Grid valuations are still attractive in case of NTPC in our opinion, valuations are almost fair. So yes, Power Grid is probably offers more upside than what NTPC does.
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