Market hopes for quick resolution on coal blocks

Auctioning operating mines in 6 months could be tough; bidding documents might not be in place

All eyes are on the government after the Supreme Court (SC) cancelled 214 coal blocks on Wednesday. The government's claims on the preparedness for such an eventuality will be tested now, believe analysts. For starters, the investor community is looking at a clear timeline within which the government will auction the coal mines, especially the operational ones. However, if the government has to do this, there has to be clarity on the standard bidding documents and bid amounts. While Barclays views the SC ruling as an opportunity for the government to implement an image makeover of the mining sector, it says investors would now look forward to the timeline, bidding amounts and other details on coal block auctions.

The market believes the onus is on the executive to avert a crisis in the sector. While nobody's debating the benefits that will accrue in the long-term implications from this ruling, a crisis could well be around the corner if the government does not act swiftly to allocate the mines in a well-defined timeframe.

Kotak Institutional Equities believes the window available to the government is quite small and short-term uncertainties will increase the pressure on growth recovery in the absence of structural changes. To avoid a major disappointment, analysts hope there is some convergence between the government's horizon and the market's expectations.

The market believes the government is working with two options on allocation of operational mines. The first option includes auctioning of blocks and the second includes transfer of ownership to Coal India (CIL). The operational blocks have a total capacity of 53 million tonnes, of which the power sector has 37 million tonnes. Based on its interactions with stakeholders, JM Financial believes limited progress has been made on finalisation of standard bidding document essential for conducting tariff-based bidding. The Street believes the possibility of completing the bidding process is unlikely to happen in six months.

The second scenario, wherein the government hands over these mines to CIL, also have their own downside. While this would ensure seamless supply of coal to the power plants, the government does not benefit from it because it would not be able to charge a higher valuation from CIL for operational mines. Also, the efficiency of these mines might come down if the private sector does not participate.