Jindal Steel and Power Ltd (JSPL) was clearly one of the biggest losers when the Supreme Court, in September...
Jindal Steel and Power Ltd (JSPL) was clearly one of the biggest losers when the Supreme Court, in September, held all coal mine allocations since 1993 illegal and withdrew their allocation to Indian companies. The Naveen Jindal-led firm lost around eight mines that were allocated to it and this raised a serious question mark on the viability of some of the company’s existing and upcoming power and steel projects.
But an analysis of the potential outcome of the upcoming auction of these coal blocks by brokerage ICICI Securities finds JSPL may emerge one of the biggest winners and recover a lot of lost ground.
The ICICI Securities report segregates the coal blocks on the basis of two end uses – independent power generation (meant for grid consumption) and everything else (including captive power for the concerned firms and other uses like making metals). The government intends to follow a reverse auction process for awarding coal blocks that are meant for independent power producers. This means that a reserve price would be set (based on Coal India prices for a particular grade of coal) and companies that bid the lowest below the floor price would get the blocks.
The report states that companies that have low fixed costs per unit of power generation will benefit under this process, as they would have greater flexibility to bid lower and yet keep their power projects viable. On this criterion, JSPL is a front runner among firms. “The possibility of reverse auction for power end use coal blocks is a significant positive for incumbents like JSPL as it helps them to bid aggressively as the fixed costs are low,” it said. “Also, being an incumbent JSPL is naturally placed to be the favoured party on technical competence.”
For instance, the brokerage compares the fixed price per unit of power generated by 10 companies who are expected to bid for the Gare Palma IV/2&3 block; located in Chattisgarh, and which earlier belonged to JSPL. At 48 paise per unit of power, JSPL has the lowest fixed cost and its closest competitor Sesa Sterlite would have a fixed cost of R1.10 per unit, if it were to utilise coal from the same mine for power generation. “JSPL can quote the lowest production-linked payment in the coal auctions and yet make a sustainable return on the back of this low fixed cost advantage while bidding for power purchase agreements,” the report said.
For other coal blocks that are meant for captive consumption, like Gare Palma IV/1 block, which also belonged to JSPL earlier, the rules would change. Here, the government will look for maximising its own revenues and companies would be expected to bid higher, depending on the economic value they expect to derive from these assets. Even in this scenario, the report finds JSPL may emerge a winner as its expected return on equity after using coal from this block looks better than its closest competitor, Bharat Aluminium Co Ltd (Balco) – a Sesa Sterlite subsidiary.
However, there may be a twist in the tale for the second block if the Odisha government agrees to Sesa Sterlite’s proposal to convert the end use of its 2400 MW power plant in Jharsuguda to captive use for Balco’s aluminium business in the same state.
If Sesa Sterlite can bid for this block as a captive consumer, the economics of the project for Anil Agarwal-led company changes and gives it an edge over JSPL, as the former’s expected return on equity would trump that of JSPL.
The brokerage also expects JSPL to be a frontrunner to acquire other coal blocks it lost in the auction, such as Utkal B1 in Odisha and if it can fend off competition from Sesa Sterlite for Gare Palma IV/1, it expects JSPL’s shares to perform better in FY16 and FY17, rising by 50% from its current market price.