August 20, 2024 (MLN): Indian metal and mining companies’ operating costs are likely to rise significantly if states impose additional mining taxes, as allowed by the recent Supreme Court judgment, says Fitch Ratings.
Fitch sees increased risks from a sustained weakening of the companies' EBITDA margins due to the prospective levies.
At the same time, we expect limited financial impact from the payment of past dues, as the court has provided a long timeframe of 12 years for the payment of such dues, starting from the financial year ending March 2027 (FY27).
Fitch believes Tata Steel Limited’s (TSL, BBB-/Negative) low rating headroom exposes it to greater credit risks from the impact of prospective taxes compared with JSW Steel Limited (JSWS, BB/Stable).
TSL’s average EBITDA over FY21-FY24 would be lower by around 9%, and its EBITDA leverage higher by around 0.3x, if it were to treat the respective year’s tax imposed by Odisha state as operating cost, instead of additional contingent liability.
The agency further expects the impact of past dues to be lower for JSWS than TSL, given the former’s lower scale of mining operations than TSL and shorter ownership period of its mining assets.
TSL had INR173 billion of accumulated contingent liabilities to the state of Odisha as of June 2024.
It believes the steel and mining sector companies are more at risk from state-imposed taxes than sectors such as power and cement.
Metal and mining companies have limited ability to pass on the potential increase in operating costs, as their products track global prices.
Moreover, additional state taxes on coal will lead to an increase in electricity prices, as fuel cost changes are passed through to consumers under the power purchase agreements of most of the domestic coal-based power plants, and more than two-thirds of India’s power generation remains coal-based.
The higher prices should quicken the pace of investments and growth in renewable power generation.
Fitch thinks that the impact of the court ruling will become gradually clearer in the next few quarters. A key unknown is whether individual states will raise demands for past dues or impose additional taxes.
The governments will have to balance the benefits of additional tax inflows with the risk of deterring further mining investments in their state.
The Supreme Court's earlier judgment on July 25, 2024 upheld the right of states to levy taxes on mineral rights and mineral-bearing land. It subsequently ruled that arrears are payable from April 2005.
The latest ruling states that demand for past dues will be staggered in installments over 12 years starting from April 2026, and waived interest and penalties on tax arrears.
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Posted on: 2024-08-20T14:45:37+05:00
