Aggressive bids for coal blocks a key credit monitorable: Crisil

Participants at the ongoing e-auction of coal blocks for both regulated and unregulated sectors are facing difficult choices, as outcomes will redefine their cost structures and profitability in the short term, even as they ensure fuel security and sourcing flexibility over the long term, says ratings agency Crisil.

For the regulated power sector, the allocation of blocks will lead to a four-fold increase in captive coal availability to around 100 million tonne over the medium term.

This will improve the plant load factors (PLFs), but aggressive bidding will be a credit negative.

In the unregulated sector, steel and aluminium makers that win coal blocks will have a better handle on profitability than cement producers because coal accounts for a third of their production cost compared with 10-15 per cent for the latter. Operating margins, however, will be impacted if the final price paid is too high. And for companies that fail to win back coal blocks, profitability will be dented.

Reverse auctions for 15 coal blocks in the power sector, which can fuel generation of 10,000 MW, have opened on an aggressive note. Initial bids indicate long-term strategic fuel security is getting precedence over near-to-medium-term profitability – as underscored by multiple bids at zero cost and additional premiums per tonne that will be paid to state governments and cannot be passed on to consumers.

Currently, low PLFs will therefore improve, but the risk shifts to under-recovery in fuel cost, especially for developers with existing power purchase agreements (PPAs).

However, successful bidders who are yet to sign PPAs can seek higher fixed charges to compensate for the under-recovery. The impact on profitability will depend on the extent to which future PPAs support the incremental cost.

The allotment procedure for coal blocks in the power sector, which can fuel generation of over 40,000 MW, is being carried out for government-owned companies. The tariff structure here affords full pass-through of costs, which will keep their profitability intact whether they win any block or not.

Consequently, there will be no credit impact of the auctions for them.

In the unregulated sector – predominantly steel, aluminium and cement – successful bidders will enhance backward integration of their projects and thereby improve business profile. Crisil is monitoring whether companies that had coal blocks earlier are able to win them back, and if so what will be the economic benefit that will accrue. This will be a function of the final price paid per tonne of coal, its calorific value and the amount of reserves secured.

Companies that lost coal blocks due to the Supreme Court order and those that have end-use plants near pit-heads will tend to be the more aggressive bidders.

Crisil is monitoring the outcome of the bidding process and its impact on the ratings of entities participating in the auction. Any rating or outlook change will be announced shortly.