Who wins, who loses from Coalgate? The markets know
The shareholders of power companies have already paid the price, and consumers will soon. Only the promoters may have benefited so far
It is a wonder why the CAG (Comptroller and Auditor General) reports on coal mine allocations and the Delhi airport privatisation are raising such a hue and cry. It is a well known fact that the government did not do its homework properly before awarding projects to the beneficiary private sector companies. It is also well known that the private sector companies that were awarded the projects went to town with their windfall gains (all notional). The equity markets gave these companies sky-high valuations based on their access to coal mines and land. The end result, as everyone knows now, is the sharp fall in valuations of the stocks of the so called "coalgate" beneficiaries.
The sharp fall in the share prices of the companies most affected by the report, including GMR, Tata Power, Adani Power and Reliance Power, shows that the markets made a mistake in valuing companies based on their coal mines or land. Stock prices of GMR, Tata Power, Adani Power and Reliance Power have fallen dramatically from their highs. The shareholders of these companies have lost heavily, which is punishment enough for their mistake in valuing these companies.
Tata Power and Adani Power, who have been awarded power projects in Mundra, Gujarat, have approached regulators for a revision in tariffs. These two companies have been hit by a change in laws in Indonesia, where they acquired coal mines and found that coal prices in Indonesia have risen and the power projects are no longer viable at their bid prices. Tata Power bid Rs 2.26 per unit for the Mundra UMPP (Ultra Mega Power Project) and is now incurring a loss of Rs 0.75 per unit of power generated. Adani Power's bid for its Mundra project was Rs 2.50 with no escalation clauses and is facing losses due to a rise in the price of Indonesian coal.
Reliance Power's bid of Rs 2.33 fixed for 25 years for the Krishnapatnam project is another case of valuation getting ahead of profitability. The company finds that the project is no longer viable due to cost escalations and has requested a price revision.
GMR bid for the Delhi airport project, more for land valuations than for the profitability of the project itself. The airport, which has actually been well executed, is bleeding GMR and its increase in airport charges has not gone down well with the regulator and the airlines.
The government, in the meanwhile, is hit on both ends. One is the accusation by the CAG of not realising the full potential revenues from resources and the second is that the projects themselves are facing headwinds in terms of cost. The CAG report only adds to the government's woes.
The lenders to these projects have also been affected as loans given to these companies are at risk due to rising losses. The absurd prices at which these companies bid for projects are hitting everyone involved hard.
Who wins who loses?
The losers include shareholders of companies whose market values have fallen dramatically. Consumers lose on higher charges. Bankers lose on loan defaults. Government loses revenues and its face in front of the public.
The gainers are only the promoters who have encashed profits on high valuations given by the markets and the consultants, investment bankers and other middlemen who made their money by working in these projects.
Going forward, there will be rationalisation of tariffs and the projects may yet prove profitable. However, before that, the ruckus on the CAG report has to die down and that is not going to happen too soon.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.
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