JP Morgan: Indian Power Sector- coal cost due to new 26% profit share

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Indian Power Sector
Possible increase in coal cost due to new 26% profit
share clause for mining


• 26% profit sharing clause in the new mining bill gets approval from
GoM: As per various media reports (ET, HT, BS), the Group of Ministers
(GoM) has approved the critical profit sharing clause in the new Mining
Bill, entailing sharing 26% of the mining profit with displaced locals. Although it is difficult to
quantify the impact and predict timelines based on current newsflows, our
colleagues believe mining cost would rise eventually.  



• Several questions at this stage  a) Applicable only to new mines or
operating mines? B) Applicable only to independent miners or captive
mines too? C) Will Coal India have to pay the tax or will it be allowed to
set it off against social expenses (Rs20B in FY10)?
• Genco tariff sensitivity to coal cost increase: As Indian power sector
returns are generally protected due to the pass-through clauses, a 5%
increase in the coal cost (for example) would entail a genco tariff
increase to the tune of 2-3%. However IPPs with merchant exposure
and no fuel cost pass thru in PPAs will be impacted.
• Impact on IPPs using linkage coal: negative for Adani, Lanco; neutral
for NTPC, TPWR. Adani Power and Lanco depend upon linkage coal for
6.8GW and 4.8GW respectively - that is 74% and 51% of the capacity
that's factored into our SOP (see break-up on next page). Of this, some
PPAs do have a partial / whole pass-through. In our estimate, projects
based on domestic coal but not having pass-through, is 5.6GW for Adani
and 2.7GW for Lanco. Thus, 60% of Adani's total capacity and 29% of
Lanco's total capacity will likely be negatively impacted by the new
development. A 5% rise in linkage coal prices, everything else remaining
equal, would impact Adani and Lanco SOP by 3% and 2.5% respectively.
On the other hand, NTPC, the largest procurer of domestic linkage coal, is
insulated due to its regulated return structure. We will wait for this bill to
be adopted to factor the extra cost in our estimates.  
• Impact on captive coal miners. Impact on captive coal miners is unclear,
as, with transfer pricing at cost, they could actually circumvent any profit
share tax, in our view. Assuming they do show segmental profitability,
companies likely to be negatively impacted are RPWR and JSW Energy,
as they have a larger % of MW from captive coal / lignite mines