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Home > Business > Business Headline > Report

Why are power sector stocks falling?

May 31, 2004 16:02 IST

If one were to look at the key losers in the recent stock market fall, power stocks are trading almost 50 per cent lower compared to the highs in the not-so-recent past. Why are they falling so steeply? Is it fundamental or is it just one off? We take a closer look.

First a brief backdrop. Power sector in India has remained victims of heavy T&D (transmission and distribution) losses that has left State Electricity Boards financially distressed.

As a result, SEBs are unable to pay dues to the power generation companies on time for the power purchased. This, in return, has been hampering the growth plans of power generation companies.

Other issues like distribution of free power to farmers (a political gimmick), low participation from private players and large-scale thefts are the other areas of concern.

Electricity Act 2003 addressed many issues that were overlooked till date. The SEBs have been unbundled into power generation, transmission & distribution companies. This will result in reducing the T&D losses, as incentives to these private players are directly linked to reduction in T&D losses.

The passage of the Securitisation Act was another major development. In this backdrop, power companies gained substantially on the bourses in last one year. But the honeymoon seems to ending, at least from the stock market perspective.

Post the general elections, it seems the investors have lost confidence in the power sector reform process. And why not? The major section of the ruling government has been thrusting on free power to farmers.

While free power to farmers is not new for India, what this could mean is taking one step forward and going back a mile in terms of the mindset. As can be seen from the graph given below, power stocks have witnessed heavy selling on the bourses in last one month.

The key concern for investors is how long will this free lunch last? The early signals given by the Congress led state government in Andhra Pradesh have not been encouraging, as the government has decided to give free power to the farmers.

The Left allies of the Congress led central government are opposing the privatisation of the SEBs and are also demanding the review of Electricity Act 2003. Privatisation of Delhi State Electricity Board that happened last year has shown good results, as private players have been able to reduce the T&D losses substantially. If this privatisation process is stopped, fundamentally, there could be no progress.

Though there has been no clear direction shown by the government as yet, the future growth prospects have come under a cloud. This could have an impact on valuations, though earnings growth may continue.

Overall, we would advice investors to exercise caution when it comes to choosing power or engineering stocks. This is one of the reasons why we had recommended Sell on stocks like ABB, Tata Power and Reliance Energy between December 2003 to March 2004. And we continue to hold a cautious view.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.



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Number of User Comments: 1




Sub: It is very simple.

The reforms relating to power are likely to be stalled by the vaampanthees. Free power, power at throw-away price to some, and other similar nonsenses ...


Posted by chanakya




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