Govt proposals fail to buoy infra, power stocks

Written by fe Bureau | Updated: Jun 27 2013, 06:11am hrs
Shares of infrastructure and power companies continued their underperformance on the bourses as recent government initiatives to revive growth in the sectors failed to cheer investors, who remain uncertain about the implementation of these proposals.

Shares of power companies have remained weak in the last one month despite the governments announcements last week intended to increase the supply of coal to the sector and allow higher imported coal costs to pass through to the end consumer.

The announcements, made last Friday, were considered positive for companies like Tata Power, Reliance Power and Adani Power but failed to push up stock prices with Reliance Power and Adani Power losing 1.6% and 1%, respectively, on that day. Tata Power, which spiked 3.7% after the announcement, also closed with less than 1% in gains after analysts expressed scepticism over the efficacy of the announcements.

The proposals are likely to face opposition from consumers and discoms due to the high cost of power produced by using imported coal, said analysts. Upon implementation, the likely obvious rise in wholesale power tariffs would put pressure on distribution companies (discoms) to raise retail tariffs and/or seek higher subsidy from the respective state governments, Nomura analysts Anirudh Gangahar and Vishal Khandelwal said in their research note. They added that the discoms will have to pass through fuel-cost adjustments in cost of power to consumers if the directives are to be complied with.

Over a one month period, Adani Power has lost 31.6% while Reliance Power and Tata Power have lost 18.5% and 12.2%, respectively.

A similar pattern has played out for stocks in the road and infrastructure sectors, where the government has announced a slew of measures intended to ease the stress being faced by corporates. For instance, the government allowed road developers to exit projects before completion by diluting equity in favour of an interested company. The move was expected to be positive for corporates with excessive leverage who are unable to achieve financial closure on some of their projects.

While the demand for easier exits had been a long standing one from the industry, IRB Infra, GVK and GMR failed to respond positively as no near term impact on company financials was seen by analysts. The proposals are long-term in nature and the road development industry is likely to witness both consolidation and exits in the near future given the liquidity woes faced by the companies, said rating agency ICRA

Over a longer period of time too, Shares of infra firms have taken a severe beating. In the last one month, IRB Infra is down about 25% on BSE, while GMR Infra and GVK Power Infra have tanked 20.5% and 17%, respectively.

Policy decisions are also keenly awaited in the oil & gas sector. While last Friday, a decision on gas pricing was deferred, the government assured that talks on the proposed hike in gas prices to near $8/mmBtu are on. Shares of companies impacted, like ONGC and Oil India, however, have continued to languish.