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India: Utilities
Equity Research
Likely diversion of e-auction coal positive for Lanco and Adani
News
According to CNBC, the Planning Commission may ask Coal India Limited
(CIL) to divert a portion of its coal sold via the e-auction route to the power
sector.
Analysis
Our discussions with Central Electricity Authority (CEA) indicate that CIL
(COAL.BO; Neutral; May 18, 2011: Rs374) agreed to deliver about 340mn
tons in FY12 to the power sector i.e., 306mn tons under the Fuel Supply
Agreement for projects commissioned until FY09 and the remaining 35mn
tons (vs. demand of about 89mn tons) will be allocated pro-rata for
capacity commissioned from FY09 onwards. This would imply that only
45%-50% of the requirement for FY12E would be met for projects that
commenced operations in 2009.
We believe Coal India could sell about 52mn/56mn tons of coal in
FY11E/12E (vs. 46mn tons in FY10) under the e-auction scheme. Though
there is no clarity on the transfer pricing of this coal, we believe any
diversion of e-auction coal would be positive for projects commissioned
after FY09, as it mitigates the risks relating to the transportation of
imported coal and improves visibility on their utilization levels.
Implications
While we view the news flow on the improvement in domestic coal
availability as positive for companies under our coverage (except for JSW
Energy), we believe Lanco Infratech (CL-Buy), Adani Power (Buy) and KSK
Energy (Neutral) would benefit the most as they are not only paid for
higher plant availability, but also benefit from a decline in fuel costs given
that they operate on non-fuel pass-through mechanisms. We estimate that
e-auction prices are now at a 10%-15% discount to landed cost of the
imported coal and provides earnings upside risk of about 2%-8% for FY12E
for these companies on diversion of coal earmarked for the e-auction
market. While we have assumed 50% of fuel requirement to be met
through imported coal in our earnings estimates, we await for more clarity
on implementation of this new mechanism (quantum of diversion and its
pricing) before reflecting these changes in our earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Utilities
Equity Research
Likely diversion of e-auction coal positive for Lanco and Adani
News
According to CNBC, the Planning Commission may ask Coal India Limited
(CIL) to divert a portion of its coal sold via the e-auction route to the power
sector.
Analysis
Our discussions with Central Electricity Authority (CEA) indicate that CIL
(COAL.BO; Neutral; May 18, 2011: Rs374) agreed to deliver about 340mn
tons in FY12 to the power sector i.e., 306mn tons under the Fuel Supply
Agreement for projects commissioned until FY09 and the remaining 35mn
tons (vs. demand of about 89mn tons) will be allocated pro-rata for
capacity commissioned from FY09 onwards. This would imply that only
45%-50% of the requirement for FY12E would be met for projects that
commenced operations in 2009.
We believe Coal India could sell about 52mn/56mn tons of coal in
FY11E/12E (vs. 46mn tons in FY10) under the e-auction scheme. Though
there is no clarity on the transfer pricing of this coal, we believe any
diversion of e-auction coal would be positive for projects commissioned
after FY09, as it mitigates the risks relating to the transportation of
imported coal and improves visibility on their utilization levels.
Implications
While we view the news flow on the improvement in domestic coal
availability as positive for companies under our coverage (except for JSW
Energy), we believe Lanco Infratech (CL-Buy), Adani Power (Buy) and KSK
Energy (Neutral) would benefit the most as they are not only paid for
higher plant availability, but also benefit from a decline in fuel costs given
that they operate on non-fuel pass-through mechanisms. We estimate that
e-auction prices are now at a 10%-15% discount to landed cost of the
imported coal and provides earnings upside risk of about 2%-8% for FY12E
for these companies on diversion of coal earmarked for the e-auction
market. While we have assumed 50% of fuel requirement to be met
through imported coal in our earnings estimates, we await for more clarity
on implementation of this new mechanism (quantum of diversion and its
pricing) before reflecting these changes in our earnings estimates.
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