Aggressive bids in coal block auctions will hit companies' profitability, says Crisil

Mumbai: Rating agency Crisil today said the aggressive bids by companies in the ongoing coal blocks auctions, especially by the power sector, will be credit negative for them. “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,” Crisil said in a note. [caption id=“attachment_2108211” align=“alignleft” width=“380”]  Representational image. Reuters image[/caption]For the regulated power sector, 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, but “aggressive bidding will be a credit negative”, it warned. 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 to 10-15 per cent for the latter, Crisil said, adding that operating margins, however, will be impacted if the final price paid is too high and those fail to win back coal blocks, profitability will be dented. The currently low plant load factors will improve, but the risk shifts to under-recovery in fuel cost, especially for developers with existing power purchase agreements. 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. As a result 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. PTI