Following the emergence of worries over domestic coal availability coupled with recent tightening of global coal markets, we are beginning to get concerned about the resultant impact on Indian utilities and cement producers. For Indian power utilities, peak utilisation levels could drop 2,000bps by FY14E supporting a demand growth <6%. For cement players already grappling with excess supply, the tightness in coal markets will likely exacerbate margin pressure.

We estimate that Indian coal availability will now rise at a CAGR of only 4.2% over FY10-14E, which is insufficient to meet the power capacity growth of 10.4%. Operating rates (PLF) would hence compress by 2000bps over FY11-14E, assuming other sources of capacity do not suffer from lack of fuel. Risk of running plants at a PLF of less than 55% may result in the deferral of capacity-addition in early stages of development. Consequently, we estimate that medium-term spot rates will stay at INR4/unit vs. the street's expectation of a sharp decline. 

Weak utilization and rising costs may force cement companies to discipline production or risk a sharp compression in margins. Our estimates factor in some benefits from manufacturers' production discipline for six to seven months in FY12. 

In the power sector, we prefer companies with: (1) low-cost, vertically integrated businesses; (2) a greater proportion of operating assets leveraged to merchant power rates; and (3) an ability to improve RoE. In cement, we prefer diversified companies where other businesses are expected to see substantial free cash flow gains.