That Jindal Power Ltd, a unit of Jindal Power and Steel 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 the company 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 Ltdwasn’t interested in developing these blocks, terming them uneconomical.

Indian laborers load coal onto trucks . Photo: AP/Channi Anand

As a result, Jindal’s cost, according to brokerage 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. That is a clear advantage when compared with costs for other producers. Even the price of linkage coal from Coal India increases with time, and fuel costs for bigger producers such as NTPC Ltd comes to around 1,000 a tonne. Naveen Jindalshould probably brag about his business acumen or luck, rather than try to be defensive and say coal cost was not a factor.

Secondly, Jindal 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 financial 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 factories. 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 factories. 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 (CAG) 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 Ltdor Hindalco Industries Ltdto cap the prices of their output?

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