JSPL: Captive coal uncertainties raise concerns

Analysts watchful on fuel sourcing arrangements, costs

The boost to investor sentiment that came after Jindal Steel & Power (JSPL) emerged the highest bidder for two mines has not only waned but the episode has taken a legal turn. With the government not accepting the bids, stating the values were much lower than bids for other blocks, JSPL has appealed in the Delhi High Court for status quo. While a favourable decision can revive market sentiments, the stock fell 6.3 per cent to Rs 155 on Monday, giving up all gains since February that took it to highs of almost Rs 200.

JSPL was the highest bidder for the Gare Palma IV/2 and IV/3 (premium of Rs 108 a tonne over ceiling price of Rs 700/tonne) and Tara coal blocks (premium of Rs 126/tonne over the ceiling price of Rs 970/tonne), both in Chhattisgarh. Had JSPL been allotted these, it would have added to its fuel security. Higher availability would have ensured increase in plant load factor. JSPL could have also sold up to 15 per cent of power at merchant rates. These, in turn, would have led to better revenues and profits.

  The Gare Palma IV/2&3 coal blocks were necessary for the Tamnar-1 and Tamnar-3 power units and Tara for Tamnar-2. The first unit of the Tamnar power (4x250 Mw) project, which was running at 90 per cent utilisation, would continue to do so. The second unit (2x600 Mw) having coal linkages would operate at 60 per cent utilisation. While the third unit has also been commissioned, the decision to start the fourth will depend on demand and coal availability.

Although JSPL will continue to resort to a mix of imports, linkages and e-auctions for the crucial raw material, in the absence of captive coal, analysts estimate an earnings before interest, depreciation, taxes and amortisation (Ebitda) impact of 15-17 per cent. The management, too, believes there will be some impact on Ebitda, with margins coming down from 30 per cent levels to around 25 per cent. It, however, says overall operations will remain profitable.

While JSPL is doing its bit, looking at uncertainties on captive coal blocks, weak steel demand as well as realisation scenario, the concerns were bound to increase. Analysts at Kotak Institutional equities have suspended their rating on JSPL pending clarity on the coal-sourcing arrangement for both power and steel businesses. The future course of business is entirely contingent on the type of fuel sourcing arrangements and the cost at which it procures fuel, they add.

The decision, though, is also negative for Balco as it loses its captive coal block. However, since its contribution to Sesa Sterlite is very low (majority stake with the government), the Sesa stock did not react negatively.