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What's worrying power stocks?
Mon, 13 Sep Pre-Open

The holiday shortened last week turned out to be a good one for Indian markets. With gains of 3.2%, the BSE-Sensex closed the second consecutive week on a strong note. India was in fact the best performer among key Asian and other global markets. China distantly followed with a 1.5% gain. BSE-Power was the worst performing sectoral index in India during the week, closely followed by the BSE-Auto.

It was unusual to find both these sectors in the same category last week. This is given that if one were to chart their respective performances since their 52-week lows of late 2009, these have moved on different paths. So while auto stocks have surged during this period, power stocks have lagged.

Source: BSE

Let's talk auto stocks first. Stocks from this sector were among the worst sufferers in the financial and economic crisis of 2008. And then these were among the front-runners in the bull-run that started in March last year. One of the biggest reasons for their downfall and then the recovery was the availability of cheap auto financing for consumers.

A shortage of money for in 2008 negatively impacted auto companies as consumers cut back on their consumption of automobiles. And then the flush of cheap liquidity that started in March 2009, and that brought the much needed cash for to the banks to lend, auto companies rode the wave.

The buoyancy does not seem to be ending. India's auto sales continue to chart new peaks. As per the latest data, aided by easy finance and a slew of new launches, the domestic 2 and 4-wheeler market recorded high volumes in August 2010. Car sales spiked 33% YoY during the month, a record growth number that beats even the aggressive estimates. Sales of motorcycles rose 19% YoY, while the overall 2-wheeler sales jumped 23%. And if that's now all, sales of commercial vehicle grew by a strong 28% YoY.

Coming to the power sector, it has been facing investors' apathy, and this has been ever since the bull market started in early 2009. As far as the overall performance of power companies is concerned, while it has improved over the last few quarters, the improvement is not so prominent. Companies continue to face execution delays in the expansion. And their profitability has also been volatile owing to uncertain fuel prices. We do not see the macro situation improving for the sector by a wide margin the coming quarters. The key issue will remain of improper availability and pricing of fuel resources.

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