With the Indian government's November deadline for CIL and power producers to seal their fuel supply agreements  (FSAs) now well and truly over, we take a look at  some  recent  developments  in  that country's power  sector.  We  believe  the lengthy  chapter  on  the  coal  epic  may finally be closing since NTPC Ltd, CIL's biggest  customer,  is  likely  to  sign  its  FSA by  Jan  2013.  As  this  may  spark  a  re-rating, we are upgrading our call to TRADING BUY, and lifting our FV to RM3.13.

November  deadline  over.  The  Prime  Minister's  Office  had  earlier  on  set  November 2012  as  the  ultimate  deadline  for  Coal  India  Ltd  (CIL)  to  firm  up  all  fuel  supply agreements  (FSAs)  with  independent  power  producers  (IPPs).  This  involved  49  power units that were set up between July 2009 and Dec 2011, as well as 81 units that are to be commissioned between Jan 2012 and March 2015. As at this juncture, CIL has only finalized  33  FSAs  while  discussions  with  the  remaining  more  than  100  companies  are still ongoing.

NTPC to give green light. While the negotiations seemed to have made little progress earlier, we are now positively surprised by news that NTPC Ltd, the largest Indian state-owned electric utilities company, is expected to sign the newly formulated FSA with CIL within  a  month.  This  was  confirmed  by  NTPC  chairman  Arup  Roychoudhury  and  CIL chief,  Narsing  Rao.  The  decision  was  reached  after  top  executives  from  the  two companies met on Monday. NTPC, currently CIL's single biggest customer, will take up more  than  35%  of  the  coal  that  CIL  would  be  supplying  under  the  new  FSA.  We understand that the proposal will now be presented to the boards of the two companies for ratification, with the CIL board scheduled to meet today while NTPC's board will be convening next Wednesday.
 
CIL has the upper hand. While the details on the soon-to-be-signed FSA are still scant at this juncture, we gather from sources that there would not be any changes to the draft that  has  been  approved  by  CIL's board earlier. That  being  the  case,  this  would  imply that CIL has gotten the better of the deal, with its proposed penalty clause likely to stay put for now despite strong objections from some of the existing power producers for an upward revision in the penalty in the event of a coal supply shortfall. Already facing fuel shortages due to the prolonged delay in firming up the FSAs, we believe NTPC's latest move indicates that some of the power players might have finally given in to ensure that their existing operations return to normal as soon as possible.

Others likely to follow suit. We believe that NTPC's decision to come on board could possibly pave the way for  the  conclusion  of  the  long-drawn  FSA  negotiations between  CIL  and  all  the  remaining  power  producers. While we do not discount the potential  of a supply shortfall based on the proposed penalty structure - which we  think  reflects the low  level  of  commitment on CIL's part, at  least in  the  first 3  to 5  years  -  we  find some comfort  in  the  fact  that  the  potential  conclusion  of  the  long-awaited  FSAs  is  in  the  interest  of  India's power producers.

The  skies  clear  up  for  RKM  Powergen.  Should  RKM  Powergen  conclude  its  FSA  negotiations  with  CIL albeit at less-than-desirable terms, we believe this would still mitigate the concerns over Mudajaya's venture into India's IPP sector. Although the group had previously secured a back-up block of 99m tonnes of coal that could last for more than 15 years, we understand from management that the official mining licence has yet to be approved and hence, finalizing the FSA was essential. The first unit of RKM Powergen's 4x360MW power plant is expected to commence operation by end-1Q13, while the remaining three should come on stream on a staggered basis every three months thereafter.
 
Upgrade to TRADING BUY. We are glad that there is now light at the end of the tunnel as the much-debated ''coal-gate'' episode is potentially  coming  to  an  end. We  see  more  power  producers  following  suit  now  that NTPC has agreed to conclude its supply negotiations with CIL. Although these power plants might not be able to operate at full capacity in the near term unless more extensive arrangements  governing coal imports, coal price pooling and accelerated domestic mining approvals are in place, we believe the finalizing of the FSAs, which got a shot in the arm after NTPC came on board, could spark an immediate re-rating for Mudajaya, at least  by  way  of  alleviating  investor  concerns  over  adequate  compensation  in  the  event  of  a  fuel  shortfall.  Hence,  we  are  upgrading  our  call  on  Mudajaya  to  TRADING  BUY  but  our  forecasts  stay  for  now.  We  are revising  higher  our  SOP-based  FV  to  RM3.13,  but  pegging  a  marginally  lower  discount  of  45%  vs  50% previously, as India's coal supply woes are finally reaching a solution.

Source: OSK