Adani Power's projects expected to be hurt by India's rail freight hike

Reliance Power earnings impact is negligible, meanwhile.

As part of its FY2015-16 Railway Budget presented to the Parliament recently, the Government of India (GoI) has proposed a reclassification of select commodities for the purpose assessing the freight rates to be levied by the Indian Railways.

According to a research note from Nomura, upon reclassification, to be effective from 1 April 2015, the applicable freight rate for coal indicates a hike of 6.3% from current levels.

Nomura noted that, expectedly, the hike has negative implications for IPPs as cost of power nudges up.

For instance, it said that Adani Power is largely exposed to rail freight for its Tiroda facility (1980MW Phase-I + 1320MW Phase-II), Kawai facility (1320MW) and 1980MW capacity at Mundra-III (wherein 70% coal supply from CIL will entail transport from the mine to a port on the East coast before being shipped to Mundra).

Here's more from Nomura:

While its long-term PPAs for Tiroda Phase-II and Kawai facilities have a built-in escalable freight charge, we think profitability at Tiroda Phase-I (1980MW) and Mundra-III (1980MW) will likely get dented by this development.

Reliance Power (RPWR IN, Neutral): As RPWR’s 1200MW Rosa and 600MW Butibori projects have 100% offtake tied up in PPAs wherein fuel cost is a pass-through and its 3960MW Sasan project (with its captive mine) does not depend upon coal transport by Indian Railways, impact on earnings would be negligible, albeit cost of power at Butibori and Rosa would rise.