High profits at low cost era over for Jindal Steel

Naveen Jindal, Congress leader and the biggest beneficiary of illegal coal block allocations, has been hit the most.

Till Wednesday morning, his group was sitting on coal reserves of 2580 million tonne. It was mining coal from captive coal blocks at a cost of Rs 300-350 per tonne. It was selling power through short-term contracts, making huge profits.

Following the Supreme Court verdict to cancel 214 coal block allocations, Jindal Steel & Power Ltd is the most impacted listed company.

Its coal-powered 1,000 mw power plant in Chhattisgarh of Jindal Steel & Power Ltd (JSPL) would be starved for coal six months hence.

Commissioned in 2008, the company was making huge profits selling power at prices far higher than those of rivals. So much so, according to a report by research firm Motilal Oswal, Jindal Power had become "debt-free within two years of operation due to strong cash flows on account of low cost", mostly because of the availability of low-cost cheap coal from captive coal blocks, Gare Palma IV/2 and IV/3, which together had combined reserves of 246 million tonne of coal.

Both the Gare Palma coal blocks are in SC's blacklist of 214 blocks.

What happens to JSPL now?

While the immediate impact was a sharp fall in its share price on the operational side, the company has six months to look for alternate sources of coal. JSPL's Raigarh steel plant and Tanmar power plant are casualties. The high-profits-at-low-cost era for the company is over. The three coal blocks allocated to Jindal Group and which were operational now stand cancelled. The company will have to pay for loss of production at Rs 295 per tonne for coal blocks in its possession which were not operational.

The company will now be forced to search for coal overseas.

Experts see an irony here.

In February 2009, JSPL was awarded the Talcher coalfield in Angul in Odisha, some say well after the UPA government's cut-off date for allocation of coal blocks. While JSPL got coal blocks worth thousands of crores, the government's Navratna, Coal India Ltd, was asked to go look for coal in Mozambique.