NTPC major beneficiary if Coal India ups production: IIFL

Power and coal Minister Piyush Goyal has said that Coal India will aim to more than double its output to 1 billion tonne in 2019.

But the other side of the argument, Dole pointed out, is that many power plants have been running at below optimal plant load factors (PLF), indicating less than ideal demand from state electricity distribution companies, many of which have been bogged down by regulated tariff in recent years.

Also read: Coal India to target output of 510 mt in 2015: Coal Secy

Below is the verbatim transcript of Harshvardhan Dole’s interview with CNBC-TV18's Sonia Shenoy and Senthil Chengalvarayan.

Sonia: How prepared is Coal India to achieve this dispatch target of 507 million tonnes and what are the key challenges that Coal India could encounter now?

A: The first single most change that has happened over the last 12-15 months is both power and coal ministry are headed by single person. There have been a lot of bureaucratic changes and there is a definite attempt to cut down the bureaucratic delays and cut down the systemic inefficiencies. There is an intent to scale up the production and with these forces behind definitely Coal India is very much equipped to grow the production from what they were to about 10 percent per annum in times to come.

If one gets into nitty-gritties they would need to definitely invest in some of the high end machineries so that the systemic inefficiencies within the mining side are addressed over the next few years but that will get addressed once the five year plan as to how the ministry wants to double the production is clear and that is what the coal sector has said that they should make it public over the next couple of weeks time.

Sonia: Which are the power companies that could stand to benefit from the eventual rising production from Coal India and which are the companies that one should invest into now?

A: There are two parts to it. One is if you look at the inter power sector there are certain assets which have signed PPAs and which are operating below their optimal PLFs for the reason there are inadequate coal supplies. Such power plants will tend to benefit in the first leg that is over the next 12-15 months when the actual coal uptake increases and the plants who are ready to generate power will be able to ramp up their PLFs.

The biggest single beneficiary if I were to point out will be someone like an NTPC which has got plants up and running. The newly commissioned power plants have not been running at optimal level for the reason the coal linkages have been bit of an issue. The important part is that the company has got 100 percent PPAs in place with fuel being a pass through. Even ACBs will be much more comfortable to off take this kind of low cost power. The state electricity boards will also see an improvement in PLFs.

On the private sector the benefits will of course be very selective and it will be restricted only to the companies who have signed long term PPAs and if I were to name a few it will be someone like a Calcutta Electric Supply Corporation’s (CESC) Haldia unit which is likely to be commissioned over the next six to eight months and which has signed 100 percent PPAs with its own distribution entity. Tata Power Maithon which has been running below the optimal level of PLF. So, the benefits will be actually very selective in the first leg.

In the second leg as the coal supply improves and that should incentivise the state electricity boards to sign more and more PPAs and that is where the majority of the upcoming power sector projects should tend to benefit. But that is something at least 18 months from here on to be. In the short term NTPC and select players like Tata Power or a couple of plants of Adani should be definitely benefitting.

Senthil: So you see the second leg starting only in 18 months from now or the effects to be seen in 18 months from now?

A: A lot depends on how efficiently and quickly the state electricity board’s financial health is revived. There were attempts made almost 12 months back to restructure the debt which was there on their books but somehow it has not fructified. Therefore power off take has been muted and it has been actually linked to the increase in the domestic coal production and therefore the increase in generation from plants linked thereof. So till the time the fiscal health of ACBs actually doesn’t improve which is the weakest link here the optimal benefits of increase in coal production may not fructify in the manner that one may anticipate. So, I am quite hopeful that the manner in which the sectoral changes are happening over the next 18 months the first leg of benefits should actually be visible in the earnings of some of these companies.

Sonia: As the coal secretary was telling us earlier the day the key issue is really of dispatch and on the subject of rake availability they are doing a lot of work. In your assessment because of the addition of rail linkages how much could the production go up by?

A: There are three key railway routes and as Pragya was pointing out earlier if these railways routes are actually fixed up on a priority basis these itself can add something like about 100 million tonne of incremental production into the overall system. The new routes may not directly be added. Even if debottlenecking is done on the key routes and if wagon availability is ensured the offtake can definitely go up and the biggest challenge for the government is going to be how to have seamless coordination between the three legs i.e. the ministry, the ministry of railways and ministry of power. Hopefully at least the two legs are headed by one single person. The confusion that we saw earlier should not be repeated even from here on.

Sonia: What did you make of the clarifications of the upcoming coal block auctions, the comments that came in from the coal secretary?

A: These are very positive and the manner in which the government is going ahead with the overall auction process that is very encouraging. It appears that FY16 at least by second quarter when all this formalities are completed the production more or less should be unaffected from these 42 coal blocks. We may not need to import which was the key fear in the mind of lot of the industry players. So from a systemic perspective FY16 the offtake or rather the production from the existing coal blocks that should be at least maintained in the base case scenario.

The document also provides that the mining plan could be changed and the production could be enhanced. We keenly look forward for such unique cases where by the ministry itself encourages people to extract more coal and use it for captive consumption. So we are quite upbeat in the manner in which these coal auctions are progressing.

Sonia: You track Power Grid very closely and Power Grid has received some additional projects on a nomination bases. Do you have any clarity on the timelines and what the dilution risk etc would be? How would you rate this stock now?

A: We did have a word with the management of Power Grid recently and we received the clarification that these projects Rs 36,000 crore projects over and above the Rs 1,10,000 crore projects that the company is executing and that is the big booster for the company.

In terms of timelines the projects are to be executed over the next 36 months and ordering for the same should happen over the next 6-8 months once the broad clears these projects and the detailed feasibility reports etc are in place. To us Power Grid is the best risk adjusted play on the coal as well as the power sector reforms which are currently happening. We see that stock as the best proxy to play both the coal as well as power theme adjusting for the risk that one is taking right now.

Sonia: What are your top picks in the power sector now and what kind of target prices have you ascribed to these stocks?

A: Power Grid is our top pick and our fair value for this stock over the next 12 months is close to about Rs 165 a share. In the private side we like CESC and we think that commissioning of Haldia and Chandrapur that should lead to almost 30 percent earnings Compound annual growth rate (CAGR) from here till about FY17.

Good part is over hang of dilution is already behind and with the other subsidiary the businesses that which were earlier loss making turning around. The earnings are well poised to grow at 25-30 percent. The valuations are at a discount to the fair value and at the private side CESC is our preferred pick.