Should You Buy Power Stocks Ahead Of Tomorrow’s Meeting?

After the recent positives in the power sector, the optimistic news flow may continue when top executives from the power companies will meet the prime minister’s principal secretary, Pulok Chatterji, and deputy chairman of the Planning Commission, Montek Singh Ahluwalia, on Wednesday, February 22, 2012.

In the first such meeting on January 18, power companies had appraised the prime minster about the current situation of the power sector. The prime minister in turn had assured that the sector would get its due attention. On the back of this, during the last week the prime minister asked Coal India (CIL) to sign long-term fuel supply agreements (FSA) with the power companies that have long-term power off-take agreements in place. From the time of the first meeting the BSE Power Index has surged by 16 per cent till date, indicating positive sentiment on the sector.

Even though Coal India has been asked to meet all its coal obligations to the fullest, the issue of the domestic coal scarcity remains unanswered. CIL has also been asked to import coal about which we are apprehensive as the power companies don’t have that kind of pricing power. Besides, it is expected that coal imports will double to about 200 MT in the next five years which will see the prices of imported coal rising further. If Coal India really starts importing coal, then the demand in the international market will spike and in turn the prices will rise further.

We also see that with the rise in imports there will be a huge requirement of transport facilities like railway rakes. These transport costs will put further margin pressure on the power companies which have reported 21 per cent decline in their profitability in the December quarter results.

CIL’s recent statement that it is not in the business of coal imports reflects uncertainty about how it will meet the requirement. It has indulged in several unsuccessful attempts of coal imports in the past. Also, according to a recent report in the DNA, the Kolkata High Court has said that the letters of assurance (LoAs) issued by CIL are mere representations and are not legal contracts. This also creates uncertainty about the prime minister’s indication to CIL and doesn’t provide a clear path for the proposed FSAs.

We believe that in tomorrow’s meeting these issues will be on the radar. Besides the issue of power tariffs, which is yet to be answered, we expect some new developments as well. Even though the long-term view of the sector may be a cause of concern, the positive news inflow on tariff or the fuel front will cause a rise in the share prices of the power companies. This will also cause appreciation of stocks in the capital goods sector.

Adani Power, Tata Power, BHEL, GVK Power, Reliance Infra and Thermax have shown good momentum today and we expect the same to continue. Though not for a long term, investors willing to take the risk may look into buying these stocks for some quick returns.