Adani, Reliance Infra get downgraded on coal worries

The future of many private power projects is black - black as in the lack of coal.

According to a Morgan Stanley report, the market doesn’t get it. There is a huge coal deficit looming, and capital is getting costlier. This will make projects without assured coal linkages dicey.

This is one reason why the brokerage house has double-downgraded Adani Power to ‘Underweight’ - which more or less means sell. It was earlier Overweight in Adani, two notches above Underweight.

[caption id=“attachment_25587” align=“alignleft” width=“380” caption=" The supply deficit is expected to increase to 130 million tonnes by 2013, which will force power cos to either source coal through e-auctions or buy imported coal. Image from Flickr"]  [/caption]

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Lanco has also been downgraded from Overweight to Equal Weight, due to an increase in the cost of equity and potential issues on coal and gas availability. Reliance Infrastructure has been downgraded to Equal Weight.

The public sector National Thermal Power Corporation (NTPC) is the only power company Morgan Stanley is bullish on. It has been upgraded to Overweight, as NTPC’s regulated business model will insulate it from rising fuel prices, the report argues.

The domestic coal deficit, says Morgan Stanley, will more than triple over the next two years as Coal India posts slower growth, constrained as it is by an inadequate distribution network and environmental restrictions.

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As a result of this, the supply deficit is expected to increase to 130 million tonnes by 2013, which will force power companies to either source coal through e-auctions (which are at an 80% premium to the domestic notified price) or buy imported coal, which is four to seven times costlier.

Either way, private sector power plants will either be running at lower capacity or face a squeeze on profits due to sky high coal prices. Natural gas prices are also set to get pricier, with Reliance Industries claiming it is having production problems at its Krishna-Godavari offshore fields.

In its report on India Utilities, Morgan Stanley has said that it is cutting earnings estimates for companies primarily on the back of higher coal costs, lower gas availability and delays in commissioning. These were also the fears expressed by IDFC, the infrastructure finance company, in a recently concluded Citi India Investor Conference.

IDFC said the current concerns in the power sector are related to execution. Though execution can be fixed by the second half of the current fiscal, fuel and coal sourcing issues are structural in nature and can lead to slower growth in power capacity addition in the medium term.

Morgan Stanley has double-downgraded Adani Power as the company’s coal linkages for the Mundra I, II and III units have been cancelled due to potential coal shortages. Also, the broking firm expects Mundra IV and Tiroda I and II plants to receive only 50% of the coal they had been assured earlier.

Lack of coal has already started having its impact on the equity downgrades of power companies. It is only a matter of time before lack of power leads to a downgrade of the whole economy.