Bankers Down played the IMpact

An SC bench headed by Chief Justice R. M. Lodha cancelled the allocation of all but four coal blocks awarded between 1993 and 2010, having a month earlier ruled that the process was illegal, arbitrary and had resulted in the “unfair distribution of national wealth”. Photo: Mint

Day after SC coal verdict, bankers and firms assess impact

Order too dent profitability of metal and mining companies and power producers, put their credit ratings under pressure, say analysts

Mint  :Joel Rebello |  Aman Malik 26 Sep 2014

Mumbai/New Delhi: The Supreme Court (SC) order de-allocating 214 coal blocks will dent the profitability of metal and mining companies and power producers, put their credit ratings under pressure and possibly lead to an increase in funding costs, analysts said on Thursday.

The full fallout of Wednesday’s ruling, which will also hit banks that have exposure to the users of the captive mines, was still being measured in the boardrooms of companies that have trillions of rupees in investment locked up in the mines and their end-use plants.

Stock indices tumbled to a one-month low as the ruling weighed heavily on investors in power, metal and bank stocks.

An SC bench headed by Chief Justice R. M. Lodha cancelled the allocation of all but four coal blocks awarded between 1993 and 2010, having a month earlier ruled that the process was illegal, arbitrary and had resulted in the “unfair distribution of national wealth”.

The 214 blocks will now have to be re-auctioned in a fresh process that will commence in the next financial year.

The ruling also set in motion the attendant problem of unwinding investments and loans already made in the projects.

According to credit rating agencies, metal and mining firms may see their operating margins get squeezed and face higher funding costs. Companies whose mines were operational will be the worst hit.

Crisil Research, an arm of rating agency Crisil Ltd, listed 23 companies including Jindal Steel and Power Ltd, Hindalco Industries Ltd, GVK Power and Infrastructure Ltd and Essar Power Ltd that will lose operational mines.

Crisil expects these companies to witness “a sharp decline in profitability post 2014-15, as they would have to substitute captive coal with imported coal which is about four times more expensive”.

“In 2015-16, impacted players in the sponge iron and aluminium sectors are expected to witness a 900-1,000 basis points (bps) and 300-400 bps decline respectively, in operating profitability,” Crisil said. One basis point is one-hundredth of a percentage point.

The ruling threatens to disrupt the power sector in a chronically energy-short country where captive power makes up a tenth of the generation capacity.

The SC ruling may lead to a spike in coal prices, which in turn would squeeze margins, said Rajesh Mokashi, deputy managing director at Care Ratings Ltd.

“For metal companies whose mines stand de-allocated, the SC ruling has increased the uncertainty regarding the coal supplies and pricing...an unwarranted spike in the price of coal in India (due to the ensuing demand-supply mismatch following the SC ruling) would hurt the operating margins of metal companies as the higher production cost would largely have to be absorbed,” Mokashi said.

He added: “The difference between the cost of thermal grade coal produced from captive mines and procured from the market is almost four times and the entities which operate on cost-plus basis (mostly state utilities) would ultimately pass on the hike to offtakers thereby restricting impact on their credit profile,” Mokashi said.

Uncertainty stemming from the SC ruling may also hurt the fund-raising plans of some companies that had been hoping to raise funds either via non-convertible debentures (NCDs) or raising equity capital through a qualified institutional placement (QIP).

State-owned NTPC Ltd, for example, has approvals to raise up to Rs.13,000 crore by selling bonds, while Tata Power Co. Ltd has the go-ahead to raiseRs.7,000 crore by selling NCDs. Tata Steel Ltd, JSW Energy Ltd, JSW Steel Ltd, Hindalco Industries, Jindal Steel and Power and GVK Power and Infrastructure have also taken approvals from shareholders to raise funds.

Reacting to the order, Hindalco Industries said only one of its four cancelled coal blocks is operational, adding that the company was evaluating the implications of the ruling, which imposed a fine of Rs.295 per tonne of coal extracted on 42 functional mines that were allowed to continue operating until the end of March 2015.

The company said the penalty would lead to a one-time hit of Rs.500 crore to it.

“The only incremental impact because of the cancellation of coal blocks would be on the cost of production at Hirakud smelter starting April 2015, which is not expected to be significant,” the company said.

Jindal Steel and Power, in a stock exchange filing, said it was evaluating the material impact and its consequences, if any, of the SC order.

The company, which had eight coal blocks cancelled, is also seeking legal and administrative remedies on the Rs.295 per tonne levy imposed by the top court, Bloomberg reported on Thursday, citing a call with Ravi Uppal, managing director and group chief executive officer. According to the report, Uppal also said the company would look at importing coal and buying more from the domestic market to replace the production from one of the mines—Gare Palma IV—that was in production and will now have to close in March 2015. Jindal Steel and Power is India’s fifth-largest steelmaker.

According to a submission by the Coal Producers Association to the apex court, industry has invested in excess of Rs.2.57 trillion in 157 blocks and Rs.4 trillion in end-use plants. Out of this, banks and financial institutions have lent about Rs.2.5 trillion and State Bank of India (SBI) alone has lent more thanRs.78,000 crore.

SBI, however, contested these figures in a statement on Thursday, saying, “the exposure of the bank to the affected companies is substantially lower. State Bank of India does not apprehend any major problem/difficulty in recovery of the above dues”.

Other lenders, too, downplayed the impact.

“If fresh bidding is invited for the coal blocks, the existing companies will again re-bid and secure some of the blocks. If a new investor comes, he will have to buy the assets, along with the debt, from the existing companies. It’s not that everything is lost,” said M.S. Raghavan, chairman and managing director, IDBI Bank Ltd.

Stock indices tumbled.

The 30-share Sensex ended lower by 1%, or 276.33 points, at 26,468.36 points, while the National Stock Exchange’s 50-share Nifty shed 1.1%, or 90.55 points, to close at 7,911.85 points. Both indices closed at their lowest level since 26 August.

Shares of Jindal Steel and Power fell 7.83% on the BSE to close at Rs.174.85 while Hindalco shares were down by 4.32% and closed at Rs.149.55 per share. The broader BSE metal index fell 3%.

SBI lost 4.38% to Rs.2,378.35 and ICICI Bank Ltd fell 3.28% to Rs.1,466.85.Allahabad Bank declined 12.3% to Rs.96.95, Union Bank of India fell 7.38% toRs.190 and IDBI Bank gave up 11.03% to end at Rs.60.10. The BSE Bankex ended 2.69% lower at 17,525.09.

Anup Roy and Ruchira Singh in Mumbai and Bloomberg contributed to this story.