Hindalco, Secures coal supply; but pricing the key… :: ICICI Securities,

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Secures coal supply; but pricing the key… The first round of e-auction for coal blocks, which began on February 14, 2015 and ended on February 22, 2015, witnessed robust interest among qualified bidders. The bidding was aggressive as companies focused on secure supplies and hedging themselves from the risks of a potential rise in international coal prices. In the first tranche, Hindalco managed to win three blocks viz. Kathautia, Gare Palma IV/5 and Gare Palma IV/4. The three coal blocks have a cumulative annual production capacity of 2.8 million tonnes per annum (MTPA) and will cater to ~20% of Hindalco’s peak annual requirement. From a cost comparison perspective, we have done a back of the envelope calculation for comparing the cost of captive coal (post auction) vis-à-vis the landed cost of similar grade imported coal. Furthermore, we have also taken into account the impact of cancellation of Talabira – 1 coal block. Subsequently, on account of elevated coal costs, we have downward revised our consolidated EBITDA estimate by 1% and 2% for FY16E and FY17E, respectively, thereby arriving at a target price to | 142. We maintain HOLD rating on the stock. Kathautia coal block Hindalco has acquired the Kathautia coal block in the auctions at an annual bid price of | 2860/tonne. It is an operational open cast mine with mining capacity of 0.8 MTPA. Unlike the low quality and high ash coal, which is usually found in India, this mine has high calorific value coal with gross calorific value (GCV)/kg in the range of 5200 to 6100. The Kathautia coal block is ~225 km away from the Mahan power plant and ~160 km away from the Renukoot power plant, which makes transportation easier to manage. The high quality coal from this block can replace imports and be easily blended with locally available coal. Post auction, after taking into account the bid price, the total cost of extracting coal from the Kathautia mine is likely to be lower than landed cost of similar grade imported coal. This block is likely to meet ~6% of Hindalco’s total coal requirement coal.

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http://content.icicidirect.com/mailimages/IDirect_Hindalco_EventUpdate_Feb15.pdf