Coal India (CIL) agreed yesterday to revise up the proposed penalties it would pay for failing to provide sufficient supplies to new Indian power projects that range from 1.5% to 40% of the shortfall, depending on the level of default. It also agreed to pool the prices of imported coal with domestic supplies.

Details on the penalties. According to CIL's board's previously-proposed Fuel Supply Agreements (FSAs), the company would pay only 0.01% of the value of the shortfall should it fail to supply at least 80% of the contracted coal to new power stations. Nonetheless, the Ministry of Power and the Independent Power Producers (IPPs) have since rejected the proposal due to the undesirably low level of penalties stipulated. CIL has thus proposed to pay a revised 1.5% penalty if it supplies 65%-80% of the contracted coal volume and 5% if they reach 60%-65%. Penalties will rise to 10% for 55%-60%, 20% for 50%-55% and a maximum of 40% for a supply of less than 50% of contracted volumes.

Slight positive. We deem the move to revise up the penalties as a slight positive. The final FSAs will be cleared at CIL's next board meeting scheduled on 13 Aug. It is useful to note that some board members are still opposed to the higher fines as they view this as exposing CIL to financial risks.

Coal price pooling to be decided. On a separate note, CIL has also agreed to pool the prices of imported coal with that of domestic supplies. 25% of the cost of imported coal will be pooled and divided equally among all power producers while the remaining 75% will be borne by the power producers consuming imported coal. The Central Electricity Authority will make a final decision on the matter, after seeking power producers' as well as state electricity boards' opinions. Should it be implemented, price pooling will raise existing plants' coal costs and increase power tariffs by about INR0.08/kWH, an approximate 2.4% increment over Mudajaya's 26%-associate RKM Powergen's contracted tariff rate. Such a pricing mechanism is set to be a huge positive for the power industry, but we caution that it will only be implemented if all domestic consumers are willing to accept the resulting higher price.

NEUTRAL. While things currently look upbeat for Mudajaya, with CIL's stronger commitment to meet coal requirements in the burgeoning power sector, we continue to maintain our conservative stance given that the proposed 1.5% penalty (should CIL meet 65%-80% of the coal requirements) still come in way below the 10%-20% penalty level initially requested by utility players. The key re-rating catalyst in our view would be the finalization of the FSAs between CIL and India's power producers to mitigate the risk of shortages in coal supply, which may subsequently jeopardize IPPs' operations. Hence, maintain NEUTRAL for now with our FV unchanged at RM2.88.

Source: OSK