Power- Why stocks are falling? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Power- Why stocks are falling?

May 31, 2004

If one were to look at the key losers in the recent stock market fall, power stocks are trading almost 50% 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 (SEBs) 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. 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, atleast 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 front 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 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 requests your view! Post a comment on "Power- Why stocks are falling?". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE POWER


Sep 18, 2020 (Close)

S&P BSE POWER 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS