Coal e-sale boon for Hindalco, JSPL, NTPC: Macquarie Cap

Happy with the current reform push, Arora said that if the government sticks to the development, it will attract more funds for India, making it one of the best places for investment.

Below is the transcript of Rakesh Arora's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Sonia: What have you made of the announcement that came in. There is no talk as of now of denationalisation of the sector but purely on the announcements what would your reaction be and how would you approach individual stocks?A: It is a good move by the government. I would not say that it is unexpected. It was expected that auction process will be introduced but the timing is welcome. The government has acted very fast. I think private companies now have an option to get back the coal blocks. I do not think there will be intense bidding here because enough coal blocks are available and government has said that enough would be there so that each company gets a coal block. So there will be sane auction process which will happen. Companies which were impacted by this decision of the court are Jindal Steel and Power, Hindalco and Adani etc; they will come back and get the coal blocks so it will be business as usual for them. So, overall a positive move.

Latha: Is this interpretation correct that public sector undertakings (PSUs) are going to get mine allocations. So NTPC is going to get back its mines without paying any money. On the other hand the other private companies will have to pay but it is going to be sectoral auction – that was what the minister said yesterday, all the cement companies will bid in one auction and that will keep the prices low?A: Basically both of them. First of all in any case it is a sectoral allocation earlier also because certain coal blocks which were better quality coal were earmarked for steel and cement. Latha: It was sectoral allocation. When I am bidding and I do not have to out beat cement or power company or a power company doesn’t have to out beat a steel company whose margins are fundamentally different. The auction is easier for that power company isn’t it?A: For power companies today coal prices are pass-through so it doesn’t matter what you are paying for the coal. So whether NTPC gets it free and other companies get it by paying eventually it is consumer who is going to bear the cost. Power companies are going to make only 16 percent return on equity (RoE) in the modified power purchase agreement (PPA) drafts which are available. Therefore, for power companies I would say there is no problem, for the cement and steel companies – see how many cement companies can go and bid because their requirements are very low and yesterday MD of Shree Cement was mentioning on your channel that it is difficult to carry coal from east India to their plant in west India or south India.

Latha: There will be aggressive bidding for the coal mine in your locality – that could even push up the prices?A: The coal mines are only in East India.Latha: Net-net you think today and hereafter the shares of cement companies need not be beaten down on account of coal price?A: Most of these companies are moving towards petroleum coke (pet coke) which is much cheaper, so I do not think having a coal mine is too much of an attraction also remember that three coal blocks came up for auction only two months back and those coal blocks were limited for sponge iron and cement etc, no bids. So I will not be surprise if the government try to be to fair and puts very high base rate for auction. I will not be surprise if there are no bids at all for lot of coal blocks. Sonia: You spoke about Hindalco Industries and JSPL but will round one of these auctions present an opportunity to some of the other private independent power producers (IPPs) like Adani Power, KSK Energy Ventures etc?A: Everyone benefits, whoever lost a coal block benefits. Hindalco and JSPL were either operating or close to operating mines so that is why I mentioned the name first but everyone who needs a coal block would benefit from this process which government is going to run over the next three-four months.Latha: PIB said that an enabling provision allowing government to frame rule in future action for mines, for self consumption/sale has been provided - /sale would mean commercial sale, isn’t it?A: They are making the provision for commercial sale of coal in the amendment but they are not going ahead with an auction process to allow coal blocks for sale of coal right now and my belief is that they will wait and see the reaction of these e-auctions for captive mining and some of the coal blocks may not attract any attention at all. There is a chance that those coal blocks then eventually might be offered for commercial mining maybe a year or two down the line.Latha: That will change the fortunes for Coal India?A: Even in our best case assumption India remains a net importer till 2020, so dependence on Coal India and pricing power of Coal India doesn’t erode in the next foreseeable future. So, I won’t worry too much about Coal India right now.

Sonia: I want your rating and target price on JSPL because that is a stock that fell sharply yesterday post that fresh CBI enquiry?A: We have a buy rating on JSPL with a target price of Rs 280. So the stock is crashed out, it’s a deep value stock and since there is so much of noise around it, investors are wary of getting into the name right now but that is where the opportunity is if things are going to resolve over the next three-four months.Latha: Any price targets on Hindalco Industries and NTPC?A: We have a neutral rating on Hindalco with a target of Rs 150, so its around in that range – that is more to do with our call on the aluminium price where we think that aluminium is in surplus situation globally and prices are going to remain range bound. We have an outperform rating on NTPC. I do not remember the target price but that is one of our key picks in the power space. Sonia: Would you not change your view on JSPL, not just because of the legal issues it is facing but also in this announcement there is no right of first refusal, there is no clarity on how previous owners would be compensated for the investments that are made. Wouldn’t that make you negative on the stock?A: We are already building in that JSPL will spend USD 500 million to acquire these coal blocks – that’s one. Second, I do not see too much of competition in bidding, so it will be easy for JSPL to get it whether there is first right of refusal or not. Getting a coal block doesn’t solve everything. Logistics is a big challenge. Coal India can produce another 300 million if they can get logistics right. So, only guys who are next to the coal mines can bid and be economically profitable about this coal blocks.Latha: An overall question – how do you rate the government’s reform process or speed. Are you happy; is the Modi premium likely to return?A: Yes because there was lot of expectation getting built that post the state elections government will get into action and they have been bang on till now and if they can continue at this process, India would be one of the best destination to invest because all emerging market countries, everybody is looking to do some or the other reform. So, the government which does the fastest will attract more funds.