Coal India Downplays The Penalty Clause

The state-owned coal miner is seen downplaying the penalty clause for not meeting 80 per cent of the required coal quantity mentioned in the fuel supply agreements. This could become a concern for the power companies as it gives a signal that the company may not be able to honour the FSAs in the future. The company was expected to sign the agreements before March 31, 2012 but now it will sign the fuel supply agreements before April 20, i.e. in the next three days.

After the board meeting yesterday the company has said that the penalty will be 0.01 per cent of the shortfall in supplies. That apart, the penalty will not be exercisable in the first three years. NDTV Profit, in an article, had said that the penalty would be between 10-40 per cent on the basis of the percentage of the coal supplied. The 0.01 per cent penalty is way less than the market expectations. This implies that the company may miss the targets set for the next year. There could also be another thought of protecting the interests of the minority shareholders like The Children’s Investment Fund (TCI) which is threatening to take legal action against Coal India.

Another update that would also be seen as negative for the power sector is that the company is yet to decide on the issue of coal imports. After yesterday’s board meeting it was clarified by the company that the issue of coal imports is yet to be decided. According to Coal India’s chairperson Zohra Chatterji, things are yet not clear about what would happen to the the coal handling facilities if import activities are carried out.

DNA has reported that the e-auction coal would remain at the present level. Earlier the markets had expected that Coal India would cut down the e-auction coal quantity from 10 to 7 per cent to increase coal supply to the power sector.  At the 7 per cent level about 13 MT of coal would have been made available to the power sector in FY12. In the new fiscal the company intends to produce 470 MT of coal which means that it will sell about 47 MT of coal through the e-auction route which would help sustain the current margins of Coal India.

For Coal India this move looks safer as there won’t be negative cash flows for the next three years. Besides the e-auction coal will also keep the profits at the current level. Due to this news, the stock is trading up by 2.62 per cent at Rs 348.10. Even though the company is coming up with these new updates, we are not sure how many of them will get the nod of the prime minister as well as the planning commission. It is quite likely that the stock may remain under pressure in the coming days.