Power bosses to meet PM, stocks may see volatility

The heads of the top Indian power companies are scheduled to meet the Prime Minister on Wednesday, Jan 18, 2012, to discuss the various problems associated with the power sector. Power stocks have been beaten down on the exchanges for the last 3 years. A positive outcome of the meeting may prove to be a boon on this front. Needless to say, negative news will hurt the sector. The chiefs of the companies will also meet the Ministers of Finance, Coal and Power in order to discuss their list of problems. This event is quite important for the sector, and we believe that it may cause a sudden movement in the stock prices.

The sobering list of problems mainly includes inadequate gas and coal supply, lower tariffs, a clause for passing on input prices, stringent environmental laws, financing worries, etc.

Gas supply is the key concern, as nearly 8200 MW of gas-based projects will be ready in CY12. Of this, 4000 MW of capacity will be available by Mar 2012. The outlook of the gas-based stations looks weak on account of lower gas production from the KG-D6 basin. If the companies go for imported gas supply, one can only imagine the rise in the input prices of the power companies.

Besides, domestic coal production has also declined. According to estimates, the total domestic coal availability for FY12 will be 629.91 MT, against a total demand of 713.24 MT. The net deficit of 83.33 MT is being met through coal imports. According to the Ministry  of Coal, this figure of 83.33 MT would rise to 110 MT in this fiscal. We expect this figure to increase further, due to the adverse weather in the country and the strike over the Telangana issue that affected coal production in the Singareni Collieries Company (SCCL).

International coal prices have also increased, settling over the US$ 100 mark for more than a year now. Indonesia, the largest exporter of thermal coal, has also changed its laws and permitted its miners to sell coal at international benchmark prices. This has put pressure on companies like Tata Power, Adani Power, Reliance Power, etc. These companies are not able to pass on the fuel costs, and hence, are facing issues like lower profits or lending issues. In our opinion, this is one of the major reasons that their stocks have been underperforming and are not favoured by investors.

It has also been seen that the coal blocks have been delayed due to stringent action by the Ministry of Environment and Forests (MoEF). In Sep 2011, about 203 coal blocks were declared as ‘No Go’. There is no firm decision taken on the coal blocks so far, apart from the review of the coal blocks.

Beside these issues, the sector also faces financing woes, as banks are a little skeptical to lend money to the power companies.

We believe that power companies, which have united and kept all their differences aside, may receive some good news now. However, it must be remembered that there are 4 different ministries involved in the decision-making process, and hence, actual execution may be a little slower. Any positive news may cause a sudden movement in prices for the day or two. However, a positive decision doesn’t mean that the fundamentals would change overnight. Some factors like the coal prices in Indonesia cannot be regulated by the govt., and thus, things may largely remain unchanged.

One factor that can be changed by the govt. though, is the tariffs. If the govt. allows the utilities to raise tariffs, investor sentiment on  the power sector may reverse. Investors should not start buying power stocks yet, as there is no very clear visibility on the decisions that the govt. will make. Await the outcome of the meeting in order to take cues for future guidance of the profitability of the power companies.