SC coal verdict: Power stocks take another beating

Shares of power companies declined sharply over concerns on coal availability, a day after the Supreme Court declared coal blocks allocated by the government between 1993 and 2009 as illegal and arbitrary.

Investors rushed to pare their holdings in stocks of Jaiprakash Power, Reliance Power and Adani, fearing the apex court's ruling might jeopardise projects planned around coal blocks. Shares of all three power companies declined more than five per cent each, extending their two-day drop to as much as 10 per cent. The BSE Power index ended 1.3 per cent lower; the general benchmark BSE Sensex was up marginally by 0.02 per cent to 26,442.

The SC ruling during the second half on Monday had sent markets in a tizzy, pulling down shares of coal mining companies like Hindalco Industries and Jindal Steel & Power.

“Power companies had already been struggling with poor coal availability. The supply issue had only been addressed in the past couple of years and now this has cropped up. There will be more pain for these companies,” said Daljeet Singh Kohli, head (research), IndiaNivesh Securities.

Analysts said shares of power companies remain vulnerable to further declines, as the ruling could result in higher import, which will hurt financials. They said mass cancellation of coal blocks could result in import of up to Rs 20,000 crore. “Projects close to completion will need coal, and CIL (Coal India) cannot ramp up production any faster,” said a client report by Credit Suisse, based on calls with industry experts.

Coal prices in the international market have been subdued for a while but some analysts fear huge demand from here could push these up. However, the Credit Suisse report also said logistic difficulty in transporting coal could have an adverse impact on imports. “Many projects which were on allocated blocks are in Chattisgarh, Western Odisha and Jharkhand, and difficult logistics from the Paradip port could obviate imports,” said the report, authored by Neelkanth Mishra, Ravi Shankar and Prateek Singh.

The extent of damage for these stocks can be properly calculated only after the SC decision on September 1. “We believe that pending clarity on future action by the government and the apex court itself, the overhang might continue. If we assume cancellation (of blocks), the impact on various (power) companies would depend upon whether blocks are auctioned and at what price,” said a client note by Emkay Global Financial Services.

Shares of Jindal Steel & Power fell another 6.5 per cent, after dropping nearly 14 per cent on Monday.

Macquarie in a note asked investors to wait and watch till further clarity on the issue. "The government will impress upon the court about coal shortages, power cuts and derailment of the investment process," it said.