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Sesa Sterlite fears rise in coal costs for power ops

Higher coal cost may impact overall margins

Sesa Sterlite is fearing rise in coal costs for its power business as the coal availability through e-auction in the country is likely to go down and lead to increase in coal imports, the company indicated on Tuesday in post earnings call.

"We are not going to get coal we need from domestic sources. It's a tragedy," said Tom Albanese, CEO at Sesa Sterlite. "Our business will be running hand to mouth in the next few months as the government is considering reducing the quantity of coal sold through e-auctions," he said. S Roongta, who is heading the company's aluminium and power operations, said that prices of coal in e-auction could go up by 15-20%.

Following the severe scarcity of the coal in the country, coal ministry has asked Coal India (largest producer of the fuel) to reduce selling coal via e-auctions, and instead feed the coal-fired power projects that are reeling under severe fuel scarcity. Almost 50% of power plants have reached the critical stage with less than seven days of coal stock.

Citing the concerns of the country's dismal coal production, Albanese spoke of his recent meeting with Odisha chief minister, who pointed that despite the state sitting over huge coal resources, the fuel may have to be imported from South Africa.

The flagship company of Vedanta group currently meets its coal requirement for power operations in Odisha through linkages and e-auctions. Any rise in coal cost also impacts the company's aluminium operations, which have huge power requirement.

"It's going to be a double whammy for the company as the price of coal is likely to go up in e-auctions and also as it would need to import higher quantity of coal from overseas," Gautam Chakraborty, an analyst from Emkay Global Financial said, terming this a negative development for the company's overall margins.

Roongta in the earnings call, however, did insist that currently international coal prices were lower and not prohibitive or expensive even after considering logistic costs.

The average coal costs during the June quarter was at Rs 1.60 per unit.

"This means that average coal cost in current quarter would be minimum Rs 2 per unit," Chakraborty said.

Although analysts were unable to give exact increase in coal cost immediately, they said it would have an impact on overall margins of the company.

"Higher coal cost is bad for the company, however power prices have also moved up in recent months. So there should not be much impact on July quarter profitability. I feel that this issue of e-auction would also cool down in one or two months and availability of coal would again go up," Giriraj Daga, a senior analyst with brokerage Nirmal Bang Securities said.

He said that incremental supply of around 30 million tonne (mt) from Coal India would go to Fuel Supply Agreement (FSA). Another 8 mt would be diverted through e-auctions. "In a month or two people will realise that FSA may not be able to absorb incremental coal, which would again increase coal availability in e-auctions," Daga said. It must be remembered last year also off-take by FSA was lower, leading Coal India to offer more stock through e-auctions.

Sesa Sterlite reported a 25% decline in net profit (before exceptional items) at Rs 1,341.2 crore in April-June compared with Rs 1,788.65 crore in previous quarter on account of lower revenue in oil & gas, copper and aluminium businesses. Profit (after exceptional items) stood at Rs 375.6 crore as against Rs 1,621.55 crore a year ago. The company has reported an exceptional item of Rs 1,627.4 crore (versus Rs 167.10 crore quarter on quarter) due to change in method of depreciation on some of its oil & gas assets by its subsidiary Cairn India. Total income dropped 17.7% at Rs 17,186.5 crore in the quarter ended June 2014 compared with Rs 20,894.41 crore in March quarter, driven by lower production at Sterlite Copper due to a planned maintenance shutdown of 23 days during first quarter and lower volumes in zinc businesses and Cairn India. Year-on-year numbers are not comparable due to merger of Sesa Goa and Sterlite Industries, and Vedanta Group consolidation in previous financial year.

Source: DNA