The government starts the e-auction process for coal blocks for 24 blocks: IndiaNivesh

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 The government starts the e-auction process for coal blocks from December
25, 2014 by offering 24 of the shortlisted 42 producing assets.
 Out of 24 mines proposed to be auctioned, 7 are for the power sector, 16 for
other end use plants of iron & steel, cement and CPPs and 1 mine for steel
sector (coking coal). However, 4 mines, Gotitoria East and West and GarePalma
IV/2 and IV/3 shall be auctioned together.
 The auction process will comprise (i) Technical–commercial bid for qualification
and (ii) Financial bid (e-auction) for selection of successful bidder. Only 50%
of the qualified bidders from technical stage (subject to a minimum of 5
bidders) will be allowed to participate in the e-auction process.
 Mines set aside for iron & steel, cement and CPPs will be auctioned through
‘Ascending Forward Auction’, where qualified bidders will quote incremental
bids above the pre-determined floor price. Mines to be allocated for power
sector will be auctioned through ‘Descending Reverse Auction’ to minimize
impact on power tariffs of end use plants.
 For the power sector, the lowest bidder will win. The ceiling price will be
decided as per the rates at which Coal India sells a particular grade of coal.
Bidders in the power sector will also have to pay a reserve price of Rs. 100 per
tonne to State Governments. In the non-regulated sectors, the floor price
cannot be less than 150 per tonne.
 Last date for receiving technical bids will be January 31, 2015 and list of
qualified bidders will be placed on MSTC website on February 12, 2015.
 Bidders with specified end use plant are only permitted to participate in this
auction. After own consumption, if there is any surplus coal, the successful
bidder will be permitted to sell the surplus coal only to CIL at respective bid
price or notified price of CIL for that specific grade of coal.
Our Take
 We expect reverse bidding for the impending coal block auctions for power
sector wherein CIL coal price will become the final transfer price for the power
plants; in line with the Government’s objective to control power prices and
restrict SEB losses. Players would have to bid keeping in mind that their final
pit head price of coal including the bid amount and the cost of operations
should not exceed the Coal India price. We believe, through this mechanism
power generation could become a little more efficient (possibility of higher
volumes, lower T&D losses and stable tariffs). However it will cap RoEs of the
company.
 Through the forward bidding process (for sectors like steel, sponge iron,
cement, captive power) competition will increase resulting in aggressive
bidding. We expect cost of coal for these companies to rise sharply. As the
output prices of most of these companies are deregulated (steel, cement,
aluminium), this increase in coal costs would result in a negative impact on
margins and RoCEs. However Logistics distance and cost would play a crucial
role in bidding. Transmission of power is more economical and less strenuous
than transportation of coal. This may make end-use projects in far-off areas
less attractive.
 Out of the companies under our coverage JSPL should be the key beneficiaries
if coal blocks (Gare-Palma IV/2 and IV/3) are allocated at rational prices,
ensuring raw material security. We believe JSPl would get the benefit of its
strategic location. We maintain hold rating on JSPL with target price of Rs. 200.
It is positive for NTPC, as it would allow a higher proportion of captive coal in
the fuel mix and assure dedicated supply. We maintain buy on NTPC with
target price of Rs. 190.