Coal Verdict: JSPL Plunges 20% in 2 Days, Hindalco Recovers

Jindal Steel & Power shares fell over 7 per cent on Tuesday on concerns that the company's earnings will be sharply hit if the Supreme Court cancels its two operational captive coal blocks.

Shares of JSPL, Hindalco and many other companies had fallen sharply yesterday after the top court ruled that all coal block allocations done since 1993 were illegal. The final decision on the fate of these blocks is likely to be taken on September 1.

The coal blocks were allotted in Jharkhand, Chhattisgarh, Maharashtra, West Bengal, Odisha and Madhya Pradesh to private companies and parties. In its verdict, the court said that no objective criteria were followed and guidelines were breached in these allocations.

According to Morgan Stanley, cancellation of coal blocks will lower JSPL's FY16 earnings per share (EPS) by 29 per cent. Macquarie says JSPL's ebitda will go down by 8-10 per cent if the company has to procure coal through e-auction or imports. According to UBS, coal block allocation could impact JSPL's valuations by 30 per cent.

JSPL was the top loser in the Nifty 50 for a second straight day.

Aditya Birla Group firm Hindalco traded off the day's low though. The stock had fallen 3 per cent in early trade on top of a 9.6 per cent cut yesterday.

Analysts say the Supreme Court's ruling reduces the probability of Hindalco getting the Mahan coal mine in Orissa, which was supposed to fire the company's smelter. If Mahan coal block gets cancelled, there will be a slight downside to Hindalco's FY17 EPS estimate, analysts say.

Hindalco's Talabira coal mines (allocated in 1994) also face cancellation. 25 per cent of Hindalco's existing aluminium output (from Hirakud smelter) is backed with captive coal from Talabira.

Reliance Power shares fell 5 per cent on top of a 4 per cent cut yesterday. The government had allowed the company to divert surplus coal from to Sasan UMPP in Madhya Pradesh. Though the top court allowed coal block allocations to ultra-mega power projects to continue, it stopped companies from using the coal for any purpose, other than captive consumption.

What should investors do?

Macquarie says there is limited downside in both JSPL /Hindalco, but investors should wait for clarity.

JSPL shares closed 6.53 per cent lower at Rs 236.90. Reliance Power ended 6.79 per cent lower at Rs 76.90. However, Hindalco shares closed up 3.64 per cent at Rs 170.65. The broader Nifty ended 1.55 points lower at 7,904.75 on Tuesday.