Weak rupee to hurt IPPs, may offset gains from lower global coal prices

Written by Viraj Nair | Mumbai | Updated: Nov 23 2012, 06:58am hrs
The rupee's recent slide is expected to eat into the profits of India's major power producers in the current quarter and offset potential gains from soft international coal prices.

Analysts said companies, such as Adani Power and JSW Energy, which are more reliant on imports, will be hurt more by the weakening of the rupee than others like Tata Power, which owns coal mines in Indonesia.

Almost all of JSW's operational capacity relies on imported coal, while Adani also mostly sources the fuel from abroad at present for its flagship 4,620-MW Mundra plant. Tata Power imports roughly half of its coal consumed.

"Primarily, we are concerned about the cost of coal as about 12-15% of total coal demand is expected to come from imports this year and shipping costs would also rise," said Kameswara Rao, executive director, power, PwC India.

The cost of debt is also a worry as a result of a weaker rupee, while power equipment costs will also rise, including for the renewable space, as almost 40 GW of projects under development source imported products, Rao added. Adani Power and Tata Power declined to comment on the story, while JSW Energy could not be reached for a comment.

Power companies benefited in the previous quarter from the sharp appreciation of the rupee in the month of September. A stronger rupee helped boosted JSW Energy's profit by R92 crore, while Adani Enterprises, which holds a 68% stake in Adani Power, registered a forex gain of R130 crore. However, strengthening demand for the dollar from importers and continued concerns over the debt crisis in Europe have weakened the rupee, which has lost about R4 to the dollar since the start of October. The rupee touched a two-month low of 55.35 on Wednesday. At the end of the September quarter, the rupee was at 52.8.

In the September quarter, Tata Power took an impairment charge of R250 crore for its unit, Coastal Gujarat Power mainly because of a change in the long term outlook for the rupee versus the dollar to 50 from 45.

The fall in the rupee is also expected to largely offset gains from soft imported coal prices, especially if the slide continues, analysts said. Power producers have been forced to increase imports because of stagnating production at the country's largest miner Coal India and lower gas output at the KG-D6 block.

Recently international coal prices have weakened as more supplies from the US, where large discoveries of shale gas have been made, flood the market.

API-4 FOB Richards Bay steam coal index is trading at $85, nearly 20% lower than year ago levels. They touched a 52-week low of about $80 last month. However, Prasad Baji, SVP at Edelweiss Research, reckons international coal prices are now going to tick up."International coal prices are stabilizing and in the coming quarters we'll see them going up," he said.