MUDAJYA 目标价：RMv2.88 (OSK- 6/6/12)

基本上市场应该还在关注印度煤炭供给问题。只要问题解决了，股价应该会有新进展吧。

Mudajaya Group: Coal or no Coal?

Given the concerns on Mudajaya's power venture in India fuelled by the prolonged discussions between IPPs and Coal India to firm up the FSAs, we are taking a look at the latest developments in that country's power industry. We remain NEUTRAL on Mudajaya pending the long-awaited signing of the FSA between its 26%-owned associate RKM Powergen and Coal India, which we believe could dispel any doubts over the fate of its IPP venture. Our FV is unchanged at RM2.88, pegged at a 50% discount to our SOP valuation.

Coal supply of great concern. Previously, we highlighted that the potential shortage of coal supply to Mudajaya's Independent Power Producer (IPP) venture is of grave concern.  Although its 26%-owned associate RKM Powergen has secured a back-up coal block of 99m tonnes which would last over 15 years of operation, we understand from management that it has yet to secure the mining licence, which is the final hurdle to kick-starting physical extraction works. In this report, we will evaluate the latest developments in India's coal industry. We begin with the state of India's coal industry and its power sector before delving into the ongoing negotiations on the Fuel Supply Agreements (FSAs) in India.

India's coal industry. India has one of the world's largest coal reserves estimated at 300bn tonnes, trailing only the US, Russia and China. Nonetheless, due to production inefficiency, the nation has had to import some 100m tonnes of coal annually to meet its annual consumption of an estimated 600m tonnes. In terms of consumption by industry, the energy sector is the largest consumer of coal, accounting for an estimated 70% of total consumption given that almost 57% of India's power generation is from coal. The top coal-producing states are Orissa, Jharkhand and Chhattisgarh, in which RKM Powergen's 4x360MW power site is located.

Coal India the world's largest coal producer. India's coal industry comes under the control of the Ministry of Coal, which is under the purview of Indian Prime Minister Manmohan Singh, who is assisted by the Minister of Coal, Sriprakash Jaiswal. The ministry's functions are carried out by a vehicle known as Coal India Ltd (CIL). CIL is the world's largest coal producer, contributing a whopping 90% of India's domestic coal production. It recorded an annual production of 436m tonnes in FY03/12, of which 312m tonnes went to the power sector. Listed on the Indian Stock Exchange, CIL is 90%-owned by the national government, with the Children's Investment Fund - a UK-based hedge fund - being its second largest shareholder with a 1.0% stake. During its last analyst briefing, CIL's management guided that it is looking to increase production by some 6.4% in FY03/13, with 347m tonnes allocated to the power sector.

Electricity sector in India. Despite having one of the world's largest installed capacity for power, India is running at a negative reserve margin and a power deficit of over 10% due to its high population growth amid rapid economic expansion. In 2003, the government implemented the Electricity Act, opening up the power sector to IPPs in anticipation of increasing power consumption going forward. Currently, the nation has an installed capacity of 200,000MW as of April 2012, of which 10% came on stream over the last 12 months. Supply from the IPPs makes up some 60% of the newly installed 20,000MW capacity.


Electricity sector in India. Despite having one of the world's largest installed capacity for power, India is running at a negative reserve margin and a power deficit of over 10% due to its high population growth amid rapid economic expansion. In 2003, the government implemented the Electricity Act, opening up the power sector to IPPs in anticipation of increasing power consumption going forward. Currently, the nation has an installed capacity of 200,000MW as of April 2012, of which 10% came on stream over the last 12 months. Supply from the IPPs makes up some 60% of the newly installed 20,000MW capacity.

CIL's production shortfall sparks supply shortage. CIL supplies coal to all power plants in India under FSAs, with 90% of supply committed up to March 2009. However, since then, it has been insisting on supplying coal under MoUs at only 50% commitment and at no legal obligation, amid delays in the clearance of new mines, which has taken a toll on production. Consequently, several power stations had to stop or cut production late last year due to fuel shortages. To ensure sufficient coal supply going forward, India's Prime Minister Office (PMO) administration set an initial deadline of 31 March for CIL to enter into FSAs with power plants which were commissioned between April 2009 and Dec 2011. Nonetheless, this deadline was not met, prompting the administration to issue a presidential directive on 5 April instructing CIL to sign the accords within 15 days. Unfortunately, this deadline also expired with no concrete progress as most power producers were unhappy with the terms stipulated under the new FSAs proposed by CIL. Under the new FSAs, should CIL fail to supply at least 80% of the contracted coal to the new power stations, it would only have to pay 0.01% of the value of the shortfall as penalty, as opposed to the 10% stipulated previously. Furthermore, the penalty clause will only be triggered three years from the date of signing the FSAs, which further puts the power producers in India at a disadvantage.

CIL to give in eventually? Since then, there have been some new developments on the FSAs. CIL has so far inked agreements with 15 of the 48 identified power producers. These include major power producers such as Adani Power Ltd, CESC Ltd, Reliance Power-controlled Rosa Power, Lanco and Bajaj Energy.  Although the terms of these FSAs were not disclosed, we believe that there is a high possibility that CIL might have backed down by revising upwards the penalty to be paid to power producers (from the previously proposed 0.01%) should there be a coal production shortfall. Our view hinges on reports that India's Ministry of Power is now directly in talks with CIL over the controversial penalty clause in the FSAs, and hopes are high that both parties will settle their differences with amendments to the new FSAs likely. This is timely for all of the power producers in India as the Central Electricity Authority reported that about 30 thermal power stations in the country now operate on coal inventory of less than a week.

New power players like RKM Powergen to benefit too. In another unexpected twist of events, CIL yesterday directed its subsidiaries to enter into FSA negotiations with power units which are coming up between Jan 2012 and March 2015, with RKM Powergen likely to be one of them. This comes after reports that CIL had sought advice from PMO through the Ministry of Coal on finalizing the FSAs. We believe this could benefit all new power producers in India, including Mudajaya's 26%-owned RKM Powergen, with a total estimated capacity of 50,000MW coming on stream by 2015. We opine that CIL could be under immense pressure from the authorities to finalize the FSAs as soon as possible, as India's coal consumption is expected to hit 700m tonnes by end-2012. CIL is also widely expected to boost the nation's domestic production to reduce its dependence on imported coal.

Coal linkage crucial to RKM. We confirmed with Mudajaya's management that RKM Powergen has yet to commence talks with CIL at this juncture. Finalizing the FSA may be a major re-rating catalyst for the stock, especially in view of the ongoing heated debate between India's existing ruling United Progressive Alliance (UPA) coalition and its opposition to the alleged misused allocation of coal blocks over the last few years. To recap, India's Central Bureau Of Investigation set up teams to investigate possible criminal misconduct in the allocation of 64 coal blocks from 2006 to 2009, following allegations by the opposition Bharatiya Janata Party that the allocations might have been misused when Manmohan Singh was in charge of the Ministry of Coal. Although we are not certain if RKM Powergen's back-up coal supply is one of the 64 blocks being investigated, this seems to suggest that its back-up coal supply might not be as secure as it appears to be. Hence, we expect RKM Powergen to push through its FSA negotiations with CIL over the next few weeks to firm up the coal linkage for its Chhattisgarh site.

Imported coal not a viable option. Should the local coal supply fall short, RKM Powergen would likely have to meet its fuel requirements by sourcing from the international coal market as a last resort. Currently, imported coal is trading at USD90-USD110/tonne vis-''-vis RKM Powergen's coal linkage with the Indian Government at the price of USD20-30/tonne. Given that imported coal typically contain higher gross calorific value compared to India's domestic coal, power producers would have to incur higher costs to make some technical changes to the boiler units of their power plants to cater for blended feedstock, on top of the higher price they would have to pay for any coal supply that CIL could end up importing. Given the controversy kicked up each time a state electricity board contemplates a tariff hike, we continue to believe that imported coal may not be a viable option for now.

Maintain NEUTRAL. Overall, while we are happy to see some positive developments on the current FSAs being negotiated between India's power producers and CIL, we continue to take a cautious stance on Mudajaya, pending the signing of the agreement between RKM Powergen and CIL. We believe the finalization of the FSAs, potentially on terms that are more favorable to the power producers, is essential to allay fears over potential delays in RKM Powergen's commencement of commercial operations, especially amidst the ongoing investigation into retrospective coal block allocations. We maintain our NEUTRAL call for now, at an unchanged FV of RM2.88, pegged at a 50% discount to our SOP valuation.