SC ruling may force power firms to rebid for mines

Earnings of Jaiprakash Power and KSK Energy to take a hit; R-Power's net present value to be impacted

Power companies are in for tough times, with the Supreme Court (SC) terming all coal block allocations since 1993 illegal. The apex court has also ruled that coal mines allocated to ultra mega power projects (UMPPs) may not use the surplus coal for commercial exploitation. The ruling puts at risk 22-23 Gw of capacity. The SC also put on hold the compensatory tariff hike granted by the Appellate Tribunal on Electricity to Adani Power and Tata Power for their respective UMPPs.

The worst-hit could be power companies that are close to commissioning their projects and for whom the captive coal mines are crucial. Unlike the cancellations of the telecom licences and loss of spectrum, in this case, the coal assets are tangible and viability of plants is linked to the availability of coal from captives. For Jaiprakash Power's Nigrie plant, which has captive coal mines, the impact would be significant if it has to return the mines or pay more. IDFC Securities says: "In case of a de-allocation of coal blocks allotted to state government companies, Jaiprakash Power (linkage to Nigrie) and KSK Energy (Mahanadi) would be the worst-hit in terms of earnings/valuations."

After the sale of the hydropower plants, Nigrie is the only other valuable asset left for Jaiprakash Power. If the coal mine is reallocated and costs are higher, the viability of the plant would come under question. Analysts are factoring in a 56 per cent fall in Jaiprakash Power's net profit this year and 36 per cent next year, following the apex court's ruling. The impact on the de-allocation of mines on Adani Power and Adani Enterprises would be marginal, as the Lohara West mine was already cancelled earlier.

The real financial impact of the SC ruling will be clear only after the same mines are re-allocated or a penalty is levied. Tata Power and CESC, which were allocated coal mines, will have to redo their math once there is clarity on whether they rebid for the same mines or pay a penalty.

ICICIDirect believes the SC verdict will impact investor's sentiments and affect many imported coal based projects that had won power purchasing agreements on competitive bidding. The compensatory tariff ruling will not impact Tata Power as the firm had not factored in the gains from the compensatory tariff hike in its June-quarter earnings.

The stock price of Reliance Power, which won two coal-backed UMPPs, will also be impacted. Emkay Global says if excess coal use is not allowed, there would be material impact on R-Power's net present value (NPV). The brokerage values plants linked to excess coal at Rs 41a share out of Rs 111 a share NPV.