Fitch's debt caution to power firms on coal hunt abroad

Indian power companies’ hunt for coal assets abroad might lead them into huge debts, said rating agency Fitch, in a report today.

Almost all major Indian power producers — GMR, Reliance Power, Adani, GVK, Lanco, etc — are known to be scouting for coal mine assets in Indonesia, Australia and Africa.

“Many of India’s power producers, especially those in the private sector, are increasingly investing in coal assets outside India. Such debt-fueled acquisitions can weaken the financial metrics of the power companies or increase the capital cost of power projects which acquire captive overseas supply,” said Fitch.

Power companies purchase these assets to reduce risks due to coal price volatility. Any financial risks which might arise due to increased debt will be mitigated by these advantages, the report conceded.

With liberalisation in the domestic coal sector still far away, power producers have little choice but to depend on fuel supply from abroad, whether captive through an acquisition or joint venture or third-party contracts. This strategy, according to Fitch, exposes them to international shipping risk and additional gearing to fund investment in captive mines.

Apart from private power companies, state-owned NTPC is also evaluating coal mine purchases abroad and is planning to invite offers from foreign miners through an expression of interest. It is also evaluating two coal mines in Australia, while in discussions with minining companies in Indonesia, Mozambique and South Africa for equity participation to secure long-term coal supplies.

“Fitch does not expect any of these transactions to be of sufficient size to threaten NTPC’s rating,” said the report.