MUDAJYA 目标价：RM2.88 (OSK - 23/7/23)

It's been four months since we highlighted that Mudajaya's potential coal supply woes in India could jeopardize its maiden IPP venture via 26%-owned RKM Powergen. 

 

As the current situation remains in deadlock pending the conclusion of FSAs, we are revisiting the latest developments in India's coal and power industry. 

 

Maintain NEUTRAL on Mudajaya pending the long-awaited signing of the FSA between RKM Powergen and CIL. Our FV is unchanged at RM2.88, pegged at a 50% discount to our SOP valuation.

CIL board meeting postponed again. Coal India's (CIL) board meeting to decide on the contentious fuel supply agreements (FSAs) with power companies, initially scheduled for 10 July, has been postponed for the 5^th time to 31 July. Previously, most power producers were reluctant to agree to the terms proposed by CIL due to the unacceptably low penalty of 0.01% of the shortfall should CIL fail to deliver 80% of the committed quantum. Following this, the Prime Minister's Office (PMO) had intervened and proposed to raise the penalty to 10% of the shortfall while at the same time reducing the commitment level to 65% of the annual contracted quantity for the first three years and 80% thereafter. We understand that PMO and CIL are currently negotiating on potential revision of the penalty clause but a decision has yet to be made.

Further delays likely. CIL has thus far signed 27 out of the 48 FSAs due this year, as state power ministers have warned that 55 of the 89 thermal plants in India are currently running on low capacity due to fuel shortages. Despite PMO leading the discussions, we foresee further delays in firming up the FSAs as the final decision would have to take into account CIL's ability to ramp up its production instantly. This in turn would depend on other factors, such as its existing manpower, issuance of mining approvals from the relevant authorities, as well as potentially increasing coal imports, which would translate into higher electricity tariffs and may in turn spark off unrest among locals.      

Mining rights hard to come by. To boost coal production, CIL would have to be assured of mining rights over the coal-rich areas identified. We understand CIL's inability to increase production is largely due to delay in approvals from the authorities. Under the Environment Protection Act 1987, mining projects in India require environmental clearance from the Environment Appraisal Committee before physical extraction works can commence. Experts said these approvals are hard to come by. CIL now has 102 mining proposals pending clearance at different levels. Should all these be approved, these projects would contribute over 600m tonnes of coal vis-''-vis CIL's 2011 production of 435m tonnes. For the FSAs to be finalized, we believe the government of India would have to accelerate the procedures in obtaining approvals to entice CIL to revise the penalty clause.

Coal imports likely to increase. According to India's latest 12^th five-year plan covering 2012 to 2017, the nation's coal imports are likely to hit 185m tonnes by 2017 from the projected 137m by the end of this year. The sharp increase is mainly due to the anticipated spike in demand from the power sector, which is expected to make up 75% of India's total coal demand by 2017. In its last 11^th plan covering 2007 to 2012, total demand for coal grew by about 8.0% p.a. against the domestic production growth of only 4.6% p.a. Going forward, we expect the deficit between domestic demand for coal and domestic supply of coal to widen further. This is likely to compel CIL to source its coal production from the international market.  

Potential coal price pooling. With these in mind, India's Ministry of Power as well as most power producers have agreed in general to the price pooling model for coal purchases initially proposed by the Ministry of Coal. Price pooling essentially means common pricing for coal of similar grade. These prices are calculated based on the average prices of imported and domestic coal and all consumers equally share the common prices. According to the model, CIL will import coal and then supply it to power generators. Power plants in coastal areas will be supplied 30% of their total requirement in imported coal, while those within 300 km of the coastline will be supplied 15%. The rest of the generators will use 100% domestic coal. The resultant increase in coal prices will be distributed equally among all consumers irrespective of the coal supplied. Although the proposal is still at a rather preliminary stage, we deem it as a huge positive step should it materialize, as it would help to even out the impact of expensive imported fuel for power generation. Should the PMO endorse the initiative, this would help to alleviate concerns on shortage of domestic coal production and more importantly, make it obligatory for all state electricity boards to revise their electricity tariffs accordingly, whether willingly or not.

Introducing FY14 numbers. While we make no changes to our FY12 and FY13 forecasts, we take the opportunity to introduce our FY14 numbers, with our revenue and core earnings forecasts of RM1.29bn and RM342.7m respectively. At first glance, this implies negative growth of 34.9% at Mudajaya's topline level, primarily attributed to the expected completion of works on the Chhattisgarh site by FY13. Its core earnings, on the other hand, is expected to inch up by 3.1% from FY13, thanks to the full-year contribution from RKM Powergen's IPP operations in India, which we expect to bring in some RM95.3m in FY14. 

Maintain NEUTRAL. Overall, the latest developments in India's coal and power industry remain somewhat inconclusive but we see some upside in the potential coal price pooling model as an alternative should domestic coal production fall short, which in our view is more likely than not. Nonetheless, we continue to take a cautious stance on Mudajaya pending the signing of the FSA between RKM Powergen and CIL. We believe that this or the official implementation of coal price pooling, could prove crucial in assuaging fears over state electricity boards' reluctance to increase their tariffs, lacking an official directive from PMO. All in, we maintain our NEUTRAL call for now, at an unchanged FV of RM2.88, pegged at a 50% discount to our SOP valuation. The steep discount to the entire SOP value is due to the fact that a sizeable 80% of the group's earnings comes from the Chhattisgarh project.