Struggle for coal to weigh on JSPL's profits

With the cancellation of mining allocations, Jindal Steel & Power will either have to import coal or buy it from Coal India. In both cases, its earnings will be hit

Early in June, the Naveen Jindal-controlled Jindal Steel & Power (JSPL) was trading on the Bombay Stock Exchange at Rs 350 a share. By the end of September, the share price had nosedived to a range of Rs 165-170. It was not the company's performance, but the verdict of the Supreme Court that caused this huge fall. On August 25, the Supreme Court held the entire dispensation of allowing captive coal blocks to companies illegal. On September 24, it followed up the verdict with another that cancelled all the 214 allocations that had been made. In the process, JSPL lost its right to the mines that supplied coal for its power plants.

Of the nine mining blocks allocated to it, JSPL has three mines in operation in Chhattisgarh, with a capacity of over 12 million tonnes annually. The six others are yet to start production. Of this, one block meant to supply coal for a liquid project had been de-allocated by the government but the cancellation has been challenged in court. Apart from taking away the right to mine the natural resource, the court also asked the allottees to pay Rs 295 a tonne as penalty on coal extracted till now. In the case of JSPL and Jindal Power this translates into a hit of about Rs 2,950 crore.

WHAT JSPL STANDS TO LOSE

PRODUCING MINES

• Gare Palma-IV/1, Chhattisgarh
• Gare Palma-IV/2, Chhattisgarh
• Gare Palma-IV/, Chhattisgarh

The mines produce about 12 million tonnes of coal annually

OTHER MINES

• Gare Palma-IV/6, Chhattisgarh
• Utkal B1, Odisha
• Jitpur, Jharkhand
• Amarkonda Jharkhand
• Urtan, Madhya Pradesh
• Ramchandi, Orissa

JSPL's earnings per share this year would be impacted by 107 per cent and its valuation by 35 per cent if, following the court order, it lost its coal block assets and it paid the stipulated penalty, according to financial services company UBS. Other analysts have predicted a 30-70 per cent impact on the company's earnings since it will be forced to purchase coal from linkages or through e-auctions. The company itself says it is difficult to quantify the expected impact of higher coal prices on EBIDTA (earnings before income, depreciation, taxes and amortisation) margins. "However, based on our internal assessment, we reckon that the impact will not be huge," said a JSPL spokeperson in response to a mailed query, "and we should be able to maintain EBIDTA levels of 25 per cent plus."

On the impact on the earnings in the current financial year, the company says it is still in the process of estimating the total amount of penalty that will be appropriated against total coal produced in its mining operations. In a recent interview, JSPL Chairman Naveen Jindal had questioned the basis of this penalty. "Applying a levy of Rs 295 a tonne on coal produced since 1993 based on financial information in 2010-11 is not justified since the coal prices were much lower in the earlier years. For example, in 1996, the prices of F and G grade coal were Rs 257 and Rs 183 respectively," he had said.

According to JSPL, the total requirement of coal for its existing plants is 12 million tonnes a year. It was meeting this demand through its own mines. "We have overseas mines in Mozambique, Australia and Indonesia and we source a part of our requirements from these mines. However, the main supplies are being fed from the mines in proximity to our industrial plants in India," says the spokesperson.

The road ahead
The alternatives available to the company are either to get coal through linkage from government-run Coal India, in whom the cancelled blocks have been vested, or import at a higher price. The UBS report says, "In case of linkage prices, the negative impact will be lesser. For example, JSPL's earning cuts will be 30 per cent if it buys at linkage prices versus 69 per cent if it has to buy coal in e-auction."

Jindal believes that companies from whom the mining rights will be withdrawn should be given a priority in coal linkage by Coal India. "We will urge the government to ensure that since these were producing mines, linkage of coal should be given to the respective companies from these producing blocks. Companies that have made huge investments over the years in setting up end-use plants should be given a priority," he says.

The JSPL spokesperson says that the company has made substantial investment in developing the mines and has been running them for the past 8-10 years. Apart from development of mines, investment was made to build infrastructure to support the mining activity.

Going forward, JSPL says if new mining rights are offered in India, it will want to secure them but will keep options open because at present there seems to be a lot of ambiguity in mining, especially regarding policy. The company plans to take part in any auctioning of coal blocks, but says that the government should go for timely auction to ensure coal linkages to steel, power and cement projects. "The government is well aware of the catastrophic effects if coal is not facilitated for the operating units by March 31, 2015," says the spokesperson. "Hence, we envisage speedy action in this regard and we have no reason to believe that this will remain an open issue after that date."

A day after the court's final verdict, Ravi Uppal, group CEO and managing director, reassured an investors' conference that the company was working out plans to ensure its plants continue to operate without any interruption after the six-month time that the court has given the coal allottees. "So rest assured, JSPL will not let down our investors," Uppal said. "We will do our utmost to continue the performance of the kind that we delivered in the past."

Citing a precedent in the 2G spectrum cancellation, Uppal said the company is also considering filing a review petition. "We might ask for our extension of the six-month's time limit that the Supreme Court has stipulated as of this moment. This was done also in the case of the 2G Spectrum where the six month grace period was extended to 12 months."

For JSPL, on a growth tangent till 2012, the coal setback comes at a time when its consolidated profit has more than halved in two years from Rs 4,002 crore at the end of March 2012 to Rs 1,894 crore in March 2014. It is all the more important, therefore, for the company to quickly come up with a plan for coal to minimise any impact of the cancellation of its mining allotments.