• OUTLOOK ARENA
  • VIEWS ON NEWS
  • MAY 31, 2004

Power- Why stocks are falling?

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407