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BW Businessworld

New Terms of Commitment

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After resisting for months, Coal India Ltd (CIL) has agreed to higher penalty levels for fuel supply agreements (FSA), which are to be signed with power units commissioned after March 2009. CIL will pay a penalty of 1.5 per cent if it supplies only 65-80 per cent of the annual contracted value. The penalty will rise to 5 per cent if CIL supplies only 60-65 per cent, 10 per cent if it’s 55-60 per cent, 20 per cent if the supply is 50-55 per cent and 40 per cent when the supply falls below 50 per cent. This is a huge jump from the earlier 0.01 per cent penalty.

Citing bankability concerns, power producers such as NTPC had strongly opposed CIL’s weak penalty terms. CIL’s concern was to protect its finances since production and supplies were bound to fall short. The mining goliath has also agreed to import coal, if necessary.

Would the new terms damage CIL’s profits? Rupesh Sanke, analyst at Karvy Stock Broking, says there will be no material impact on them.

Assuming CIL supplies 90 per cent of committed quantity to old FSAs and 80 per cent to new ones, it might need to import 18 million tonnes of high grade foreign coal in 2013. In this scenario, CIL’s earnings could take a hit of 0.4 per cent. If it supplies less than 50 per cent, the impact could be 11 per cent. That is unlikely if the company maintains the 6 per cent production growth it achieved this year.

(This story was published in Businessworld Issue Dated 20-08-2012)