Would have taken another 5 years to extract coal from Rampia mine in Odisha
President of New & Emerging Business
In a landmark judgement, the Supreme Court on Wednesday cancelled allocation of 204 coal blocks allotted between 1993 and 2008. Of the total 218 blocks, 14 coal blocks, which are state-run non-joint ventures, have been spared.
The mines are allowed to run till March 31, 2015, up until the government readies the framework for auction. Moreover, the companies will have to pay penalty at Rs 295 per tonne for all the coal mined to that date.
Discussing the verdict, Madhu Terdal, Group CFO, GMR Infra , which has also seen cancellation of few mines, said the company would not get impacted by the SC order. He said the company would have taken another 5 years to extract coal from Rampia mines in Odisha, allotted to it.
Moreover, the company has already been given a tapering coal linkage for plants for the next five years till 2020. He says the company may look at bidding for coal blocks once the government starts re-auctioning process.
Prasad Baji, Senior VP, Institutional Equities – Research at Edelweiss Financial Services, says companies like Prakash Industries and Monnet Ispat may also get hit by the SC verdict.
Edelweiss has a target price of Rs 360 per share on Coal India , which does not include the benefits of new coal blocks. He feels opening up of coal sector to merchant miners is a long-term goal.
Sonia: Tell us about the impact that the Supreme Court ruling would have on GMR Infrastructure because two or three of your mines have been cancelled. What is the kind of damage that you see and how much would you have to pay to regain these blocks in the auction process, if there is any ballpark estimate on numbers that you have been working on?
Terdal: First of all let me clarify that GMR is not at all impacted by this order. There were certain coal blocks which were allotted to some of the operators have been cancelled. GMR got allotted a mine called Rampia in Odisha and that coal mine was given to six people jointly, along with us it was given to Arcelor-Mittal, Reliance, Lanco and others. All these people had different strategic plans, for example Arcelor-Mittal cancelled their plans for India and they did not use the coal mines.
Therefore, in our view we would have taken another five years minimum to expect coal from this coal mines and looking at the way land acquisition policies are there, the difficulties in the state of Odisha, I think it is better handled by the Government of India rather than private company like ours. So we are not impacted by the cancellation of coal blocks and indeed instead of that we have already been given a tapering coal linkage for the next five year – that is till 2020, already the problem in the coal mine was anticipated and government has already given us a tapering coal linkage for 2020.
Latha: When will you next need coal and have you got all the coal through FSA for that period? Terdal: Yes we have been given full coal. We are getting from the current coal mines which are given to us by Coal India. We have got a firm coal linkage for 500 megawatt; that is already in operation. For the balance of 550 megawatt we have been already given a tapering coal linkage. Wherever there is a shortfall we can import the coal from our own coal mines. So, that also is possible for us.
Latha: Will you therefore bid when the existing 46 guys are put on the block?
Terdal: We haven’t thought of that as a group. I will not be able to comment on that.
Latha: At least yes or no, not whether you will outbid the existing guys or anything but you would be interested because these are well prospected and running mines?
Terdal: I think it makes sense without talking from the company’s angle. I think it makes sense for us definitely to go for bidding.
Sonia: The judgement is silent on the auctioning process but if the de-allocated coal blocks when they are auctioned will it have any kind of inflationary impact on the power tariffs?
Terdal: To a minor extent it should be having an inflationary impact. However, what is important to know if we have understood the little bit of the government plans, what the government is likely to do is Coal India is going to bring in some very experienced and world class operators into the game.
Companies like Anglo, Rio Tinto which have very large mines with very high quality of technology and resources, if these kind of companies are given what is called as a mining contract by Coal India, in my opinion not only there will be very high quality of coal as well as the efficiency will be brought into the system.
So, I think whatever to the extent of minor inflationary impact it may have I think it can be offset by the quality as well as the speedness in which this mine can be extracted.
Latha: What is your sense of the most impacted companies? Now we know about Jindal Steel and Power (JSPL) and Hindalco but barring these companies which are the ones you think are going to be severely impacted?
Baji: After Hindalco and JSPL among the private producers Calcutta Electric Supply Corporation (CESC) is producing around 2.8 million tonne. So, they will need to bear a penalty at least from the group level as such. It is unclear whether this penalty can be passed on from the tariff at this stage but upfront at least the penalty is there.
After that the producers are much lower in number, you have Prakash Industries at 1 million tonne, Usha Martin at 0.8 million tonne coal production, Monnet is around 1 million tonne. So, it is around that level for four to five players. Totally the private producers are around 20-22 million tonne out of the 40 million tonne that India produces on a captive coal basis.
Sonia: Coal India was up 5 percent yesterday. They have been allotted these 40 coal blocks but there are so many unanswered questions with respect to what the management fee could be. So there is quite a bit of uncertainty. At this price what would your view be on Coal India, do you expect it to increase further?
Baji: Our current target is Rs 360. We have not taken the benefit of the new coal blocks. Upfront definitely these 40 million tonne production comes to Coal India but eventually there will be some e-auctioning.
Net-net what one can say is that out of this 40 million tonne if 20 million tonne is with state PSUs then there is some likelihood that that maybe retained by Coal India considering also that Supreme Court judgement that essentially ownership of resources for merchant mining should be with central government and only captive miners can be in the end use sector. So, considering that the state PSUs which are producing around 20 million tonne that be retained with Coal India and that benefit can certainly come.
There are question marks on how the takeover would happen, what happens to the land acquired by the existing mine owner to the infrastructure? So, there are many question marks. Directionally it is positive but the quantum cannot be ascertained fully at this stage.
Sonia: Many analysts are talking about a couple of scenarios. One could be auctioning of the coal blocks to the highest bidder, there could also be perhaps a tariff based bidding that the government could take and then finally something that politically may not be the best thing to do but opening up the coal sector to merchant mining, etc. What do you think is the best approach that the government should take now?
Baji: In the short to medium term definitely the auctioning of coal blocks has to happen. Government has already said that they would be auctioning coal blocks. However, I would say we would need very detailed guidelines and process in terms of how this would happen for the cancelled coal blocks.
So, in a cancelled coal block, we already have a mine owner who has invested in the land, invested in the infrastructure. If there is a winning bidder who is other than the incumbent how this gets transferred, whether the incumbent has a right of first refusal (ROFR). So, government will have to come up with a detailed framework for all this.
Government will also have to look at why all the earlier auctions which were only two or three failed. Government has said that they would like to do it with approvals and land. So, for the producing coal blocks it is easier but there will be clear guidelines on that.
Thirdly on the pricing or the reserve price for the auctioning, earlier the guideline was that it would be 10 percent of the DCF value with the valuation based on imported coal pricing. However, is that really viable or should we link it to Coal India prices and how do we come to 10 percent number. So, there are a lot many finer points that need to be thrashed out before the auctioning is done but I would say that is what we should expect going forward.
Opening up the sector to the merchant mining definitely is there but I would think that the government is going to consider it more in the longer term because there is a lot of immediate fixing that needs to be done considering all the cancellation that has now happened, so, that I would expect in fact for the longer term.
Latha: How are you going to approach the various power companies that you spoke about? They may not be in your coverage but basically even CESCs and GMRs and GVKs and a lot of others who will be looking for coal, do you expect that the coal auctioning could see some fairly aggressive pricing because these 46 as you said don’t have any land issues, titles are clear, you don’t have to prospect and see how much coal is available. Could there be aggressive bidding and would that bleed the sector?
Baji: We can’t conclude that there will be aggressive bidding because these coal mines, they are already supplying to certain plants. So, they will have all the infrastructure aligned for that. So, for example for JSPL coal blocks, there is a dedicated conveyor from the mine to the plant. If there is any another winner then how does he do the logistics as such; that is not clear at this stage.
So, definitely there will be bidding but all these issues will need to be thrashed out as to if a new winner comes how does the changed situation be addressed. So, I expect bidding but until this is clear, it may not be necessarily very aggressive.
Sonia: You spoke about what your fair value on JSPL is but if in case the premium paid during the auctions for the first few operational mines gets to be a little on the higher side or little aggressive then how much do you think it could hit JSPL further because now there is this whole uncertainty and overhang looming?
Baji: When we do our numbers we take a base case. So, we have taken around Rs 600 increase in coal cost for JSPL because the challenge is going to be that after Coal India takes it over whether 100 percent of the coal can come back to JSPL and after that will there be an auction, will JSPL be successful at price it will get. So, considering these uncertainties we have build in a certain increase in coal cost and arrived at a fair value of around Rs 209.
The issue remains that if the coal cost rises further then this, in a worse case the extent of imports of coal has to be higher then the coal cost can be much higher because the imported coal cost will be at least Rs 2000-3000 higher per tonne.
GMR Infra stock price
On September 25, 2014, at 13:30 hrs GMR Infrastructure was quoting at Rs 18.95, down Rs 0.55, or 2.82 percent. The 52-week high of the share was Rs 38.30 and the 52-week low was Rs 17.60.
The company’s trailing 12-month (TTM) EPS was at Rs 0.21 per share as per the quarter ended June 2014. The stock’s price-to-earnings (P/E) ratio was 90.24. The latest book value of the company is Rs 16.76 per share. At current value, the price-to-book value of the company is 1.13.