KSK:: Morga-II coal block denied forest clearance; allocation of alternate block likely-- Credit Suisse,

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● Media reports suggest that the Environment Ministry has denied
forest clearance to the Morga-II captive coal block (fuel source for
KSK’s 1.8 GW Mahanadi-II project) given its location in a dense
forest area. Morga-II was among the eight coal blocks recently
recommended by a group of ministers for faster clearances.
● However, in lieu of Morga-II, the Environment Ministry has
recommended allocation of an alternate coal block (Bhalumunda),
identified by KSK, and sought the PMO’s intervention to expedite
the same. The CEA and Ministry of Power have also supported
the allocation but decision is pending Ministry of Coal’s approval.
● In light of the Environmental Ministry recently clearing few ‘no-go’
categorised coal blocks and government’s push towards meeting
power capacity addition targets, we believe the possibility of
Ministry of coal allocating an alternate coal block to GMDC is high.
● Allocation of coal block is not currently factored in our valuations.
If awarded, this could provide an upside of 2-9% to our current
valuation of Rs166/sh, assuming coal production from the block
commences from FY15/16. Maintain our OUTPERFORM rating.
Morga-II coal block denied environmental clearance
Media reports suggest that the Environment Ministry has denied forest
clearance to the Morga-II captive coal block as it is located in a dense
forest area of Chattisgarh, unlike the other recently cleared coal
blocks (Figure 1) which were on the fringes. Notably, Morga-II was
among the eight captive coal blocks recently recommended by EGoM
for faster clearances (Figure 2) owing to significant investments
having already been made in their end-use projects. KSK’s 1.8 GW
Mahanadi-II project in Chattisgarh was the beneficiary of coal from the
Morga-II block. The Environment Ministry further substantiated its
stance by indicating that since the Mahanadi-II project is not based on
super-critical technology (600 MW units), typical benefits of 5-8% CO2
emissions reductions too shall not be realised upon commissioning.

Environment ministry supports allocation of alternate block
KSK has identified an alternate coal block (Bhalumunda) if Morga-II is
denied environmental clearance, and allocation of the former has been
supported by CEA and the Ministry of Power; but is currently pending
Ministry of Coal’s approval. The Environment Ministry has also
requested allocation of an alternate coal block for Mahanadi-II and has
sought intervention from the Prime Minister’s Office (PMO) for
expediting its clearance to avoid project delays, which have already
incurred capex of c.Rs52 bn (for entire 3.6 GW Mahanadi I & II).
Given that the Environmental Ministry recently cleared some coal
blocks earlier categorised under the ‘no-go zone’ and also given the
government’s push towards meeting power capacity addition targets
to sustain economic growth, we believe the possibility of Ministry of
Coal allocating an alternative coal block to GMDC is high.
As per KSK, Bhalumunda block is favourably located (vis-à-vis Morga-
II); adjacent to its Gare Pelma-III coal block allocated for the 1.8 GW
Mahanadi-I project and should enable the company to optimise its
evacuation infrastructure.

Alternate block, if awarded, can give 2-9% valuation upside
Alternate coal block allocation has not been currently factored in our
valuations. If awarded, KSK expects to start coal production in three
years by FY15 (tapering linkage till then). We value 1.8 GW Mahanadi-
II project at Rs8/sh currently and could rise to Rs12-23 assuming coal
production starts from FY15/16 (and peak production by FY17/18); i.e.
2-9% valuation upside to our price target of Rs166/sh.