Two losers and a potential victor

Hindalco, Jindal Steel and Power and Coal India are among the companies that could be significantly impacted by the Supreme Court judgement on cancellation of coal block allocations.

Aluminium major Hindalco faces a double whammy. The de-allocation of Mahan and Talabira II coal blocks, which were critical for its new 720-kilotonne-a-year aluminium smelter plants raises questions on the plant’s viability. Smelting is a power-intensive operation and the company was hoping to tap into output from these captive blocks. Margins for aluminium manufacturers have been under pressure globally, with prices on a downtrend. While they are looking up now, insufficient coal linkages can raise costs to financially unviable levels.

Hindalco was getting nearly 2.5 million tonnes (mt) of coal annually in the last few years from the Talabira I coal block, with reserves of 22.5 mt. The Court has imposed a penalty of ₹295 per tonne of coal mined so far, to be paid before December 31.

Assuming three years of supply remains and around 15-16 mt were mined, the penalty to be paid could be around ₹450 crore. This is around 20 per cent of the company’s consolidated net profit of ₹2,128 crore in 2013-14. Also, procuring coal at the higher market price after March 2015 would dent profitability.

Even as revenue growth and profit prospects appear uncertain for Hindalco’s local aluminium segment, it can still count on a few key strengths. The company derives over 65 per cent of its revenue and 35 per cent of its profits from its US-based subsidiary Novelis. The expected uptick in the US economy should help boost revenue and profit growth for Novelis’ aluminium products.

The JSPL stock lost 10 per cent following the cancellation of coal block allocations, and for good reason. Unlike many other companies, whose coal blocks are not yet operational, JSPL’s Gare 1V/1, 2 and 3 thermal coal blocks in Chattisgarh meet its existing requirements; the coal helps generate captive power for the 2.35 million tonnes per annum (finished steel) plant at Raigarh and feeds the 2,800 MW power plant at Tamnar in Jharkhand, run by Jindal Power.

From March 2015, replacing captive coal with coal sourced from the market could push up the company’s raw material cost. Assuming a 10 per cent increase in JSPL’s current per tonne cost of coal of ₹1,336 (standalone operations), the annual net profit could be impacted by about 7 per cent.

Is the loss for coal block allottees a gain for Coal India (CIL)? Not quite. The de-allocated blocks will come under CIL after March 2015. It will then mine and sell the coal at market prices. This will increase revenue and profits. Also, for mines where infrastructure is in place, CIL can start earning profits starting April 2015, when it takes over these blocks.

However, while CIL stands to gain more reserves and can boost output, it still has to overcome several operational issues. It was decided to allocate coal blocks to end-users directly in 1993 because CIL was not able to ramp up production. This continues and coal imports have been on a rise. In 2013-14, output stood at 566 million tonnes, while demand was over 720 million tonnes.

CIL is committed to fuel supply agreements with power producers. Failing to meet these will lead to penalties. Also, higher commitments reduce the amount of coal available for e-auctions which, typically, fetch a higher price. CIL’s prices are linked to global prices, which are on a decline.