Power - Aggressive Bids - Calculated Strategies to Emerge; Sector Update :Edelweiss

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We believe bids for the coal mines dedicated to the power sector  are likely to be aggressive especially for the operational ones but within ~INR150/tonne discount to cost of mining for the rest. However, select mines which have logistical constraints or are at early stages of development may see moderate bidding. Some qualitative factors which would determine the bid levels include: 1) transfer price for merchant coal sales (await more clarity); 2) sustainable PPA tariff levels; 3) likely quantum of coal supplies post the current auction; and 4) extent of PPA required while bidding. Adani Group companies are ideally placed to encash on the opening up of coal mining in India on account of presence across the value chain viz., power, port and coal mining.

Adverse demand-supply coal scenario will lead to aggressive bids

From the power sector mines to be auctioned only ~19mtpa is currently being produced. Further, ~46mtpa is set to get operational over the next 1-3 years and ~54mtpa will commence production 3 years hence. The incremental requirement of at least ~170mtpa of coal for ~60GW of projects indicates an adverse demand-supply situation. This, coupled with an option to bid up to 150% of a power projects’ requirement is expected to result in widespread participation by the developers in the auction. Even on price bids, uncertainty of sourcing cheap domestic coal beyond these auctions and PPA tariffs will see aggressive bidding.

Qualitative and quantitative factors to influence bids

The reverse auction process adopted for the power sector will ensure that the successful bidders will mine the coal efficiently and pass on the benefits. However, developers with weak cash flows and unable to withstand losses over the next couple years will resort to under-cutting to minimise their losses.

Await clarity on merchant coal sale price and PPA status

We await greater clarity on: 1) pricing of surplus coal beyond the requirement of the power projects; 2) 80% PPAs can be tied up at a later date after securing the coal mine; 3) part captive projects being eligible to bid for balance capacity; 4) eligibility of 100% imported coal plants to bid; 5) roadmap of the Ministry of Coal (MoC) to auction another 103 mines; and 6) risks of lower Coal India (CIL) supplies for unsuccessful bidders. Pending clarity on these issues, bidding could be aggressive, with some developers abstaining from tendering a bid too.

Adani Group to be a key beneficiary

A successful coal mine allottee could have greater visibility/sustainable power cash flows (assuming rational bidding). We believe the Adani Group could be a key beneficiary due to its presence across the value chain. Adani Enterprises will have a wider diaspora for its MDO business, Adani Ports will see increase in cargo and Adani Power, if successful in securing coal mines, could record better cash flows.

LINK

https://www.edelweiss.in/research/Power--Aggressive-Bids--Calculated-Strategies-to-Emerge;-Sector-Update/27916.html