Power - Limited impact on CESC, NTPC of new coal pricing mechanism - Sharekhan

The Event: Coal India having changed the pricing mechanism:

From January 1, 2012, Coal India Ltd (CIL) has changed the pricing mechanism of thermal coal from Useful Heat Value (UHV) based grading system to Gross Caloric Value (GCV) based pricing now. According to industry sources, as per the new policy, coal prices could go up by 13-15% effectively on an average. In this note we look at the impact of the same on power generation companies that we cover.

To push power generation cost: While CIL will gain from this new structure, coal consumers would bear the higher cost. If the average price of coal goes up by 13-15% then the cost of power generation would be up by approximately Rs0.50 per unit for an average power producer.

But regulated players like CESC and NTPC could pass on the same: Though the cost of fuel would rise across the board, we see that the regulated players with an ability of passing on the higher cost of fuel would not see an affect on their bottom lines. Our recent interaction with the managements of NTPC and CESC reinstate the same.

Additional 6% levy on ECL; negative surprise over and above the event: Apart from the rise in price as a result of the new pricing mechanism, CIL has indicated that it will levy an additional 6% on all the coal produced by Eastern Coalfields Ltd (ECL). Hence, companies procuring coal from ECL are likely to witness an around 20% hike in the cost of coal. CESC procures linkage coal from ECL, hence it will witness a 20% hike over the current rate.

West Bengal government opposing the move as the region would be impacted the highest: As per media reports, the West Bengal government is opposing CIL's decision to adopt a new pricing formula. It is apparent that while the nationwide impact of the new mechanism would be that of a push in the coal cost by 13-15%, but for West Bengal and other customers of ECL, the increase in the coal cost would be of 20%.

View: NTPC and CESC would be able to pass on the fuel price rise; bottom line impact for them to be limited: The move will push India's domestic coal procurement cost by 13-15%; subsequently it will push power generation cost by Rs0.5 per unit. The adverse impact of the move would be felt the most by companies which are procuring domestic coal and don't have a coal escalation clause. However, regulated power generators like NTPC and CESC could pass on the fuel cost rise into tariffs. On the other hand, state electricity boards would feel the pinch to some extent as they can't revise their tariffs with immediate effect and many of them have already revised tariffs just recently. We reiterate our positive stand on CESC based on its integrated status and attractive valuation. We rate CESC as a Buy with a target price of Rs 413 (based on sum of the parts methodology). We do not have an active coverage on NTPC.

Source : Equity Bulls

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