Domino effect: sectors linked to coal take hit

Tags: News

Power and metal companies, equipment suppliers affected

Mining and power equipment suppliers like Larsen & Toubro, Siemens and financiers to companies in the metal and power sectors that were allocated coal blocks -- mostly PSU banks (SBI, PNB, BoB, Union Bank) and PSUs like PFC and REC – suffered a setback on Tuesday due to the Supreme Court order on coal block allocation, with their shares plunging in initial trade and finally closing with significant losses.

On Monday, after the Supreme Court ruled that the allotment of all coal blocks between 1993 and 2010 was illegal and unconstitutional, the market saw investors dumping all sto­cks that are likely to be impacted by the apex court’s ruling. The ruling implies that 194 coal blocks, excluding 24 that were earlier taken away, are illegal.

The award of these blo­cks to steel, cement and power companies had cost the exchequer up to $33 billion, according to the comptroller and auditor general (CAG) report in 2012.

After digesting the Supreme Court’s ruling, the market reacted on Tuesday, negatively impacting a much wider spectrum of companies on which the order would have a bearing.

A mass cancellation of coal blocks awarded since 1993 could cost the country up to $3 billion in additional imports and hurt financial firms that have lent to the sector, said a Reuters report quoting broking firms.

Union power and coal minister Piyush Goyal had said on Monday that he looked forward to a resolution of the issue, which has kept the sector in limbo for several years.

At close, Larsen & Toubro, a major mining equipment supplier, was down by 1.33 per cent, recovering partially after a sharp fall to Rs 1,490 in day’s trade.

Power project equipment supplier Siemens too fell more than 5 per cent and finally closed with a loss of 4.21 per cent.

PSU banks which have financed mining operations were also hit, with Union Bank of India down 3.62 per cent, PNB down by 1.08 per cent, State Bank of India 0.64 per cent and Bank of Baroda 0.54 per cent.

Power Finance Corporation, a government-owned company that finances power projects, also suffered a loss of 1.13 per cent to Rs 254.25 at the close of trade, as it recovered from a sharp fall to Rs 243 in intra-day trade.

Another government-owned firm Rural Electrification Corporation (REC) that finances power transmission and distribution networks in rural areas too suffered a sharp fall in intra-day trade as it plunged to day’s low of Rs 257.55, but later recovered to close 0.71 per cent lower at Rs 266.30.

Metal stocks that were impacted on Monday by the Supreme Court order registered further price fall on Tuesday. Jindal Steel and Power fell 6.16 per cent more to Rs 237.55, a total fall of around 21 per cent in two consecutive trading sessions. Among metal companies that maintained a losing spree was Monnet Ispat & Energy (4.74 per cent).

But the other big loser on Monday Hindalco Industries recovered, gaining 3.64 per cent. Tata Steel gained 2.54 per cent on value buying. SAIL also gained 1.54 per cent to close at Rs 82.60.

Chirag Shah and Saket Yadav, Asia ex-Japan metal & mining analysts at Barclays Research said, “The Supreme Court (SC) ruling today declaring the coal block allocation process followed by the government (between 1993 to 2010) as illegal and ‘apparently subjective’ would create further overhang on the sector till the next course of action is decided by the SC.”

“Stocks that have high exposure to captive coal blocks (Hindalco, JSPL) are likely to be impacted the most. However, an early resolution of the issue could provide much needed clarity for the sector to move forward and could pave the way for auction of mineral resources in India,” Shah and Yadav said.

Rakesh Arora and Sumangal Nevatia of Macquarie Research said, “In case of operational coal blocks, possible options could be penalties to regularise the coal blocks or a hand over to Coal India. Unopened coal blocks could face deallocation.”

“Given the far-reaching implications, it is better to wait for some clarity to emerge before buying. While we see limited downside in both these JSPL and Hindalco, upside could also be capped, given the overhang.”

Power producing companies also lost for the second day, with Reliance Power down 6.79 per cent, Adani Power (6.44 per cent) and Tata Power (2.77 per cent),

More power company stocks suffered losses on Tuesday as KSK Energy was down 7.37 per cent, Jaiprakash Power Venture 5.41 per cent, Lanco Infratech 4.28 per cent, CESC 3.71 per cent.

BSE Power index fell the most among the sectoral indices, registering a loss of 1.32 per cent.

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