Coal supplies fire up power producers

After several quarters of lull in the industry, coal-based power generating companies saw some breather in their December quarter results. This momentum has gained pace, going by the good performance of the companies which have declared results so far.

For instance, Reliance Power and JSW Energy posted revenue growth of 45 per cent and 11 per cent, year-on-year, respectively.

Better offtake at Coal India (CIL) and access to imported coal has to a large extent brought back optimism in these companies, including Tata Power and CESC, apart from state-owned NTPC. A decline in global prices has aided the profitability of these companies in recent quarters.

CIL production rose 9.3 per cent in the quarter, while offtake grew 10.7 per over a year (to 138 million tonnes). Dispatch to power plants rose 5.2 per cent over a year during October and November. Closing coal inventory, an important benchmark, also picked up significantly from the earlier year's numbers.

Elara Capital noted the stock of coal in 101 power stations had more than doubled in December (31 mt). Only three plants were faced with a critical shortage (inventory less than seven days); it was 51 plants a year before. With better supply from CIL, the share of imported coal was seven per cent in December ’15.

Nevertheless, Tata Power, Adani Power and JSW Steel, where select plants are designed to operate on imported coal, are set to benefit from the steep decline in international coal prices; these units are not mandated to pass on the fall in coal prices For instance, while Tata Power’s Mundra unit and JSW Energy’s Vellary and Ratnagiri plants might benefit from the declining trend in international coal prices, this might not be possible for Tata Power’s Mumbai plants and JSW Energy’s Rajasthan plants.

Deepak Agrawala of Elara Capital says it might be difficult to quantify the benefit from falling prices for the entire generation sector. “The benefit has been partly taken off by rupee depreciation,” he adds. For most others, the fuel costs are a pass-through and their return on equity is largely capped, except for electricity generation-linked incentives.

That said, despite improving supply of coal, the woes for thermal plants might not end in the near term, as demand from power distribution companies (discoms) remains weak. While the ongoing loss reduction project of the government (Ujwal Discom Assurance Yojana or UDAY) might improve the demand scenario in the medium to long term, analysts believe it is unlikely to lend any near-term support for power producers.

HSBC thinks the high interest costs for discoms (Rs 28,000 crore) due to debt dues could reduce by half only by FY17, after successful implementation of UDAY.

Meanwhile, with no power purchase agreements signed in recent times, the plant load factors of coal-based plants at 63 per cent declined for a fourth quarter (down 3.15 percentage points year-on-year).

However, analysts feel with supply-side congestions easing and fuel costs lower, many coal-based power companies might report decent revenue growth, as well as better profitability at the operating level in the quarter. However, higher interest cost due to mounting debt on account of project-level losses for these companies might limit the net profit growth to around 10 per cent in the said quarter. The impact of interest burden was seen in JSW Energy as despite a 11 per cent growth in revenue, net profit for the December quarter were down 17 per cent, due to a near-doubling of interest cost.

There is a silver lining. HSBC expects that the lowering of interest rates and schemes such as the 5:25 loan restructuring mechanism should reduce the debt burden, while profit could grow 13 per cent and 18 per cent in FY17 and FY18, respectively. With this, it hints at a possible re-rating of stocks in the sector (currently trading at nearly a 30 per cent discount to their 10-year historical average), upon a sustained improvement in fuel supply and financial recovery of discoms.

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