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Despite metal and power companies heading for turbulent times, with the Supreme Court scrapping 214 coal block allocations on Wednesday, the Street views the move as a positive, as it will lead to greater transparency in allocation of resources. The apex court exempted only four coal blocks, belonging to NTPC and SAIL, while cancelling the allocation of the rest, including 40 operational mines. Companies extracting from these will have to pay an extra penalty of Rs 295/tonne to make good the loss to the exchequer. The market is factoring in a retrospective penalty on the total coal mined by these companies since operations started.
Vinay Khattar head of research (retail capital markets), Edelweiss Financial Services, says: "JSPL's Ebitda (earnings before interest, tax, depreciation and amortisation) will be impacted to the tune of 25 per cent, while CESC's 500-Mw power capacity is also expected to be impacted because of the ruling. Overall, the step is appropriate - though there will be short-term pain, the system will become more transparent. A lot also depends on the course taken by the government."
The financial impact on Hindalco isn't significant, but the cancellations will delay its mining operations, which will have an impact on its margins.
The 40 operational blocks exempted from cancellations have a combined capacity of 95 mt; excluding the Sasan ultra-mega power project, the capacity stands at 75 mt. Of this, 45 mt was allotted and mined by eight government companies, which could go to Coal India. This is a positive for the company and was reflected in its stock, which rose five per cent on Wednesday.
On the downside, financially weaker power and metals companies will have to find suitors with the financial capability to pay for the asset and penalties and re-bid for the mines. The Street believes smaller companies such as Sri Virangana Steel, Prakash Industries and Jai Balaji Industries will find the going tough. Also, stressed Jai Prakash Associates might have to find a suitor for its plant, as the Mandla North mine (with capacity of one million tonnes a year) will stand cancelled. Given the company might not be able to raise more resources from banks, analysts feel it might have to sell the assets.
While there will be collateral damage on financial institutions and banks with exposure to these companies, there is no clarity on the extent of the damage. Analysts believe most of these loans are collateralised and so, banks will have recourse to assets such as plant and machinery. The coming week might provide more clarity on the exact nature of the impact.
