Smaller power and steel companies, whose profitability was largely driven by the now cancelled coal blocks, have debt of around $10 billion and would face bigger challenges, while servicing these debts, says Nomura

The Supreme Court on Wednesday cancelled all but four coal block allocations and

also imposed a penalty of Rs295 per tonne on any coal extracted since allocation of these mines. While large power and steel companies will not face much issues while servicing their debts, it is the smaller one who would face significant challenges, says Nomura in a research note.

"Some of the smaller steel and power companies are now facing significant debt

servicing challenges after the cancellations as their profitability was largely driven by these block allocations. We estimate $10 billion of system lending to these companies," the report said.
 

According to Nomura, large power and steel companies, which have coal blocks that were cancelled, cumulative have a debt of about Rs4 lakh crore. It said, "Despite the blocks being cancelled, most large power and steel companies will not face significant debt servicing challenges, in our view, though their equity returns are likely to impacted due to cancellations and penalties imposed."

Talking about exposure of banks and non-banking finance companies (NBFCs), Nomura said exposure of Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) is highest to the smaller power companies linked to these cancelled coal blocks.

In state-run lenders, Punjab National Bank, Union Bank of India, IDBI, UCO Bank and United Bank of India has highest exposure to steel and power companies affected by the Supreme Court decision. "PNB and Union Bank of India has the highest exposure to these assets as a percentage of their net worth at 10-15% of FY14 net-worth (NW) compared with 6%-7% of NW for State Bank of India (SBI), Bank of Baroda (BOB) and Bank of India (BOI)," Nomura said.

Private banks like ICICI Bank and Axis Bank do not have exposure to affected steelmakers but these lenders have exposure of around 4-5% of NW to power producers. According to Nomura, exposure of other private banks to these assets is relatively negligible.

"Although the cancellation of coal blocks weakens the business models of some of the names mentioned and will likely lead to some credit or restructuring charges, we think the impact on our top picks Axis Bank and ICICI Bank is manageable," the report added.