BackBillionaires fret on debt as coal auctions loom
Aggressive bidding may increase acquisition costs, while staying away isn't an option as that would wreck projects, say companies
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Mumbai/New Delhi: Indian billionaires seeking to regain lost coal mining permits face rising debt at their companies when they take part in auctions the government plans to hold early next year.
Aggressive bidding may increase acquisition costs, while staying away isn’t an option as that would wreck projects, according to Hindalco Industries Ltd, Jindal Steel and Power Ltd and Monnet Ispat and Energy Ltd. The Supreme Court in September cancelled almost all of the 218 coal mining permits given since 1993, terming the allocations arbitrary and illegal.
“We are keen on participating," K.M. Birla, the billionaire chairman of Hindalco, the world’s largest maker of rolled aluminum, said in an interview. “The cost of acquiring will go up. The cost of aluminum production has gone up, and debt reduction will get delayed."
Indian metal makers, utilities and cement producers are among those hurt most by the Supreme Court decision that came amid cooling demand and the slowest pace of economic growth in a decade. The companies are looking to get the assets back to protect earnings as the government, according to the coal ministry, plans to auction 74 coal mines by 31 March, including 40 operational ones.
Loss to state
The nation’s top court rescinded the licences tainted by graft allegations after the state’s auditor in 2012 found that giving away the mines without an auction may have cost the exchequer ₹ 1.86 trillion. India changed its law in 2010 to adopt a policy of auctions for granting coal mining permits to companies for their own use. No mine has so far been awarded through bids.
The court’s decision threatened to deal a blow to the $1.9 trillion economy already contending with coal shortages caused by inadequate output growth at monopoly producer Coal India Ltd. Supply bottlenecks led to idling of some power plants, while severely hampering supplies to some others.
The cancellation also put at risk at least $47 billion in investments ranging from power plants to aluminum smelters, according to Ashok Khurana, director general of the Association of Power Producers.
“The impact of the auctions will be two-pronged," said K. Rajagopal, chief financial officer at New Delhi-based Jindal Steel, which is controlled by Savitri Jindal’s family. “One is on our debt levels and the other is on our capex plans."
Paring investment
Jindal Steel has reduced its investment plans to ₹ 5,000 crore for the year to 31 March from ₹ 6,000 crore, Rajagopal said in a phone interview. Further plans for next year will depend on the “resource scenario", he said.
The company’s debt may rise 14% to ₹ 40,000 crore by March 2015 from earlier estimates, he said. It more than doubled in two years to ₹ 36,370 crore as of March 2014, while Hindalco’s rose 58% to ₹ 64,700 crore in the same period.
“Whatever price we pay, we will need to go to the banks," said Ajay Bhat, group chief financial officer at Monnet Ispat, a New Delhi-based steel and electricity producer. “We don’t have much cash. While the coal mines will be a long-term positive, in the immediate term, our balance sheet will be stretched."
Competition
Birla’s Hindalco lost two blocks that were originally allocated to feed its smelters in Odisha and Madhya Pradesh, while Jindal Steel lost 10. They will have to ward off competition from rivals such as Sesa Sterlite Ltd and JSW Steel Ltd, which didn’t have any operating mines, said Alex Mathews, head of research at brokerage Geojit BNP Paribas Financial Services Ltd.
“There will be stiff competition," Mumbai-based Mathews said. “These are capital intensive sectors and big players would be interested in large coal mines while smaller companies may bid for blocks with lower reserve price."
Although the court order has come as a shock, the new competitive bidding process may provide policy certainty, Birla said in the 10 November interview in his office in Mumbai.
“These are bids on mines that have been the backbone on the basis of which we have put up certain projects," Birla said. “It seems to me that the government has thought through this process of auctioning thoroughly, and we might land up in a situation that is actually better than what we had envisaged."
Shares slump
An understanding among bidders for mines that are advantageous to them may also reduce competition and cap the prices, said Giriraj Daga, a Mumbai-based analyst at Nirmal Bang Equities Pvt. Ltd.
Jindal Steel has slumped 47% since the court on 25 August termed the coal mine allocations illegal, compared with a 7% gain the benchmark S&P BSE Sensex. Hindalco has slipped 15% during the same period.
Jindal Steel used coal from its Gare Palma block in Chhattisgarh to feed a 3 million tonne a year steel plant in the state. The company was also counting on a final permit for its Utkal B1 coal block to fuel a steel project in the Odisha, the first in the country to use gas produced from thermal coal to run a steel mill. The company is now buying coal to run the plants.
“If we don’t get back our mines, it will be a big setback for us and we’ll have to arrange for alternative sources of raw materials," said Ravi Uppal, Jindal Steel’s managing director, said in an interview. “If we do get them back, it will still be a setback because of the price we will have to pay."
Bidding cap
Coal generates 60% of India’s electricity and a reliable supply of the fuel is critical for Prime Minister Narendra Modi’s pledge of an unbroken power supply by 2022.
The fuel is also used to fire cement factories and metal smelters, such as aluminum and steel. Local shortages have driven many of the producers to more expensive purchases from overseas, raising cost for them and proving a drain on India’s foreign exchange reserves.
Coal India, under pressure to double its output in four years to meet rising demand, has failed to meet production targets as slow approvals, lack of transport infrastructure and difficulties in land purchases impede the opening of new mines. The Kolkata-based miner produces 80% of India’s coal.
The government should not only have a floor price at the auctions, but also cap the bid prices to ensure there’s no runaway escalation in costs, said Sminu Jindal, managing director of Jindal Saw Ltd, a maker of pipes and steel strips.
“We don’t want to go to the government and tell them that we can’t repay our debt and we are defunct," she said on the sidelines of an industry event in New Delhi on 13 November. Bloomberg
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