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Cramping the merchant dream. Recent media reports suggest a less favorable
regulatory regime for merchant power plants in terms of (1) allocation of incremental
coal/gas supplied, and (2) even revoking captive block allocations if the benefits of lowcost fuel are not passed on to end-consumers. Jindal Steel and Power (JSPL) among our
coverage universe has enjoyed a higher allocation of captive coal blocks, monetized
through the lucrative merchant sale of power, and remains most susceptible to an
unfavorable regulatory regime in the wake of current coal deficit and the recent CAG
report that raised questions on allocations made in the past.
Seeking competitive bids for plants enjoying low-cost captive blocks
As per media reports, the Ministry of Power (MOP) has asked the Ministry of Coal (MOC) to ensure
that all IPPs such as the Tamnar I project of JSPL, with captive coal blocks (extant or future),
mandatorily sell power through competitively bid PPAs. We highlight that media reports had
previously indicated a proposal by MOP to cap the power tariffs through the cost-plus tariff
mechanism for plants running on captive or domestic linkage coal, thus passing on the benefits of
low cost fuel to the end-consumers.
Advantage of low-cost resources could be lost, risk of regulatory clampdown looms large
JSPL (after NTPC) among our coverage universe has enjoyed a higher allocation of resources (2.6
bn tons, see Exhibit 4) compared to peers. We note that our fair value estimate ascribes value only
to the Tamnar I project that runs on captive coal, while the balance captive coal-based plants are
still in the development stage. Our current estimates factor a sustainable merchant realization of
Rs3.5/kwh for Tamnar I, and note that Rs0.5/kwh reduction in tariff will erode Rs20/share from our
fair value estimate (see Exhibit 1).
Execution pitfalls notwithstanding, regulatory risks increase; maintain REDUCE
We note that apart from our concerns on the slow pace of execution of JSPL’s expansion projects,
the potentially negative outcome from containing returns from merchant capacities (with captive
coal blocks) increases the earnings risk for JSPL. Our target price factors Rs105/share for future
projects in the power business (CPP and Tamnar II) and earnings contribution from gas-based DRI
plant at Angul. In our view, CMP factors a meaningful contribution from future growth projects—
susceptible to execution pitfalls. Our SOTP-based valuation of JSPL comprises (1) Rs230/share for
the steel business, (2) Rs196/share for the operational Tamnar I project, (3) Rs38/share for the
1,200 MW of coal-linkage dependent Tamnar II project, and (4) Rs67/share for the captive power
plants distributed between Raigarh and Angul.
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