BackMark to Market | Jindal’s secret sauce
That Jindal Power has been generating strong cash flows by utilizing low-cost coal from its captive mines shouldn’t come as a surprise
Premium(Jindal was the first company to actually develop its mines before building a power plant.)
That Jindal Power Ltd, a unit of Jindal Steel and Power Ltd, has been generating strong cash flows for a couple of years by utilizing low-cost coal from its captive mines shouldn’t come as a surprise. Least of all to lawmakers who allocated the coal blocks to the company knowing very well that there weren’t any rules prohibiting it from selling the power produced in the merchant market.
The company has been able to recoup its investment in the power project owing to a couple of factors.
One is, of course, that it was a beneficiary of government largesse in giving away scarce natural resources. However, note that Jindal Power was awarded three coal blocks and its parent one block during 1996-2003. At that time, coal prices were lower at $25-30 a tonne and Coal India Ltd (CIL) wasn’t interested in developing these blocks, terming them uneconomical.
Jindal invested in extracting coal from these blocks—one of the few beneficiaries to do so—and is enjoying the rewards. It was the first company to actually develop its mines before building a power plant. The rewards didn’t come without risks either, as it had to use the strength of its steel company balance sheet to build the power plant without securing any long-term power purchase agreements.
As a result, Jindal’s cost, according to brokerage firms’ estimates, comes to about ₹ 500 a tonne. Add ₹ 140-odd royalty and paltry logistic costs due to the proximity of its power plant to the pit head, and the company’s total coal cost would come to below ₹ 700 a tonne. That is a clear advantage when compared with costs for other producers. Even the price of linkage coal from CIL increases with time, and fuel costs for bigger producers such as NTPC Ltd comes to around ₹ 1,000 a tonne. Naveen Jindal should probably brag about his business acumen or luck, rather than try to be defensive and say coal cost was not a factor.
Secondly, Jindal Power was able to sell its output in the merchant market at a time when rates were high. In 2009-10, merchant rates hovered near ₹ 6 a unit and the company was able to make a profit of ₹ 2,318 crore. As merchant power rates declined over the next two fiscal years, so too did the company’s profit. In 2010-11, it made a profit after tax of ₹ 2,002 crore, which further declined to ₹ 1,765 crore in the last fiscal.
The outlook for the company and its parent gets murkier as it seeks to develop new mines and tries to get linkage coal for newer power plants. One of the blocks it got as early as 2003 in Orissa is still to get its mining lease approved, casting a shadow on earnings from its Angul plants. If Jindal is asked to cap the price of power it sells, that could lead to further dents to earnings.
Four of the blocks it got after 2003 have been named in the Comptroller and Auditor General of India report. The political risk associated with that has seen the stock tumble since mid-August. But the larger question that needs to be asked is how beneficiaries of coal blocks alone can be singled out as making supernormal profits. Aluminium and steel makers, too, are allotted ore mines and coking coal blocks. Will anyone ask Tata Steel Ltd or Hindalco Industries Ltd to cap the prices of their output?
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