With the Indian government’s November deadline for CIL and power producers to seal their fuel supply agreements (FSAs) now well and truly over, we take a look at some recent developments in that country’s power sector. We believe the lengthy chapter on the coal epic may finally be closing since NTPC Ltd, CIL’s biggest customer, is likely to sign its FSA by Jan 2013. As this may spark a re-rating, we are upgrading our call to TRADING BUY, and lifting our FV to RM3.13.
November deadline over. The Prime Minister's Office had earlier on set November 2012 as the ultimate deadline for Coal India Ltd (CIL) to firm up all fuel supply agreements (FSAs) with independent power producers (IPPs). This involved 49 power units that were set up between July 2009 and Dec 2011, as well as 81 units that are to be commissioned between Jan 2012 and March 2015. As at this juncture, CIL has only finalized 33 FSAs while discussions with the remaining more than 100 companies are still ongoing.
NTPC to give green light. While the negotiations seemed to have made little progress earlier, we are now positively surprised by news that NTPC Ltd, the largest Indian state-owned electric utilities company, is expected to sign the newly formulated FSA with CIL within a month. This was confirmed by NTPC chairman Arup Roychoudhury and CIL chief, Narsing Rao. The decision was reached after top executives from the two companies met on Monday. NTPC, currently CIL’s single biggest customer, will take up more than 35% of the coal that CIL would be supplying under the new FSA. We understand that the proposal will now be presented to the boards of the two companies for ratification, with the CIL board scheduled to meet today while NTPC’s board will be convening next Wednesday.
CIL has the upper hand. While the details on the soon-to-be-signed FSA are still scant at this juncture, we gather from sources that there would not be any changes to the draft that has been approved by CIL’s board earlier. That being the case, this would imply that CIL has gotten the better of the deal, with its proposed penalty clause likely to stay put for now despite strong objections from some of the existing power producers for an upward revision in the penalty in the event of a coal supply shortfall. Already facing fuel shortages due to the prolonged delay in firming up the FSAs, we believe NTPC’s latest move indicates that some of the power players might have finally given in to ensure that their existing operations return to normal as soon as possible.
November deadline over. The Prime Minister's Office had earlier on set November 2012 as the ultimate deadline for Coal India Ltd (CIL) to firm up all fuel supply agreements (FSAs) with independent power producers (IPPs). This involved 49 power units that were set up between July 2009 and Dec 2011, as well as 81 units that are to be commissioned between Jan 2012 and March 2015. As at this juncture, CIL has only finalized 33 FSAs while discussions with the remaining more than 100 companies are still ongoing.
NTPC to give green light. While the negotiations seemed to have made little progress earlier, we are now positively surprised by news that NTPC Ltd, the largest Indian state-owned electric utilities company, is expected to sign the newly formulated FSA with CIL within a month. This was confirmed by NTPC chairman Arup Roychoudhury and CIL chief, Narsing Rao. The decision was reached after top executives from the two companies met on Monday. NTPC, currently CIL’s single biggest customer, will take up more than 35% of the coal that CIL would be supplying under the new FSA. We understand that the proposal will now be presented to the boards of the two companies for ratification, with the CIL board scheduled to meet today while NTPC’s board will be convening next Wednesday.
CIL has the upper hand. While the details on the soon-to-be-signed FSA are still scant at this juncture, we gather from sources that there would not be any changes to the draft that has been approved by CIL’s board earlier. That being the case, this would imply that CIL has gotten the better of the deal, with its proposed penalty clause likely to stay put for now despite strong objections from some of the existing power producers for an upward revision in the penalty in the event of a coal supply shortfall. Already facing fuel shortages due to the prolonged delay in firming up the FSAs, we believe NTPC’s latest move indicates that some of the power players might have finally given in to ensure that their existing operations return to normal as soon as possible.
Others likely to follow suit. We believe that NTPC’s decision to come on board could possibly pave the way for the conclusion of the long-drawn FSA negotiations between CIL and all the remaining power producers. While we do not discount the potential of a supply shortfall based on the proposed penalty structure - which we think reflects the low level of commitment on CIL’s part, at least in the first 3 to 5 years - we find some comfort in the fact that the potential conclusion of the long-awaited FSAs is in the interest of India’s power producers.
The skies clear up for RKM Powergen. Should RKM Powergen conclude its FSA negotiations with CIL albeit at less-than-desirable terms, we believe this would still mitigate the concerns over Mudajaya’s venture into India’s IPP sector. Although the group had previously secured a back-up block of 99m tonnes of coal that could last for more than 15 years, we understand from management that the official mining licence has yet to be approved and hence, finalizing the FSA was essential. The first unit of RKM Powergen’s 4x360MW power plant is expected to commence operation by end-1Q13, while the remaining three should come on stream on a staggered basis every three months thereafter.
Upgrade to TRADING BUY. We are glad that there is now light at the end of the tunnel as the much-debated ‘’coal-gate’’ episode is potentially coming to an end. We see more power producers following suit now that NTPC has agreed to conclude its supply negotiations with CIL. Although these power plants might not be able to operate at full capacity in the near term unless more extensive arrangements governing coal imports, coal price pooling and accelerated domestic mining approvals are in place, we believe the finalizing of the FSAs, which got a shot in the arm after NTPC came on board, could spark an immediate re-rating for Mudajaya, at least by way of alleviating investor concerns over adequate compensation in the event of a fuel shortfall. Hence, we are upgrading our call on Mudajaya to TRADING BUY but our forecasts stay for now. We are revising higher our SOP-based FV to RM3.13, but pegging a marginally lower discount of 45% vs 50% previously, as India’s coal supply woes are finally reaching a solution.
The skies clear up for RKM Powergen. Should RKM Powergen conclude its FSA negotiations with CIL albeit at less-than-desirable terms, we believe this would still mitigate the concerns over Mudajaya’s venture into India’s IPP sector. Although the group had previously secured a back-up block of 99m tonnes of coal that could last for more than 15 years, we understand from management that the official mining licence has yet to be approved and hence, finalizing the FSA was essential. The first unit of RKM Powergen’s 4x360MW power plant is expected to commence operation by end-1Q13, while the remaining three should come on stream on a staggered basis every three months thereafter.
Upgrade to TRADING BUY. We are glad that there is now light at the end of the tunnel as the much-debated ‘’coal-gate’’ episode is potentially coming to an end. We see more power producers following suit now that NTPC has agreed to conclude its supply negotiations with CIL. Although these power plants might not be able to operate at full capacity in the near term unless more extensive arrangements governing coal imports, coal price pooling and accelerated domestic mining approvals are in place, we believe the finalizing of the FSAs, which got a shot in the arm after NTPC came on board, could spark an immediate re-rating for Mudajaya, at least by way of alleviating investor concerns over adequate compensation in the event of a fuel shortfall. Hence, we are upgrading our call on Mudajaya to TRADING BUY but our forecasts stay for now. We are revising higher our SOP-based FV to RM3.13, but pegging a marginally lower discount of 45% vs 50% previously, as India’s coal supply woes are finally reaching a solution.
Source: OSK
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