Power sector: Uptrend in coal prices to affect profitability
The first three weeks of the New Year have proven to be rather tumultuous for Indian equities. The broader benchmark indices have lost over 8% of values during the period. This will be a little difficult for investors since it becomes more important for them to look all over again at the prospects of various sectors and stocks within. One way to simplify the exercise is to focus on sectors that missed out on the last years stock market rally and to search for possibility of a turnaround.
And when it comes to laggards, sectors such as telecom and cement are the usual suspects. Companies in these sectors are grappling with issues such as over capacity and higher competition. This also justifies their lacklustre performance on bourses. In sharp contrast, the underperformance of the power sector looks rather intriguing in a country, which has a history of power deficit. ET Intelligence Group took a closer look at the sector to understand the reasons for its depressed performance. Our analysis reveals that while the sector is facing issues of fuel shortage and falling tariffs, there are a few companies that hold promise for investors.
NOT SO 'POWER'FUL
Over the past one year, the power sector has not contributed to the overall buoyancy in the stock market. The ET Power Index has lost 16% against the 12% gain in the Sensex during the period. This is despite the fact that demand for electricity almost always outstrips the supply.
In the past three years, the countrys power generation capacity rose by around 70%. Despite this, the power deficit increased to 10.2% from 9.6% during the period. This is because the rate of capacity addition was slower than required. The wide demand-supply gap was also the primary reason why Adani Power, JSW Energy and Indiabulls Power enjoyed higher valuations during their initial public offer (IPO) in 2! 009. Sin ce their listing, however, these stocks have underperformed the benchmark indices. This is because, issues such as rising fuel costs on the back of higher coal prices and volatility in spot prices of power, known as merchant power sales, have impacted their growth.
THE CONUNDRUM OF COAL PRICES
The price of coal is probably the major issue for the power industry. Thermal power accounts for over two-thirds of the power generated in India. Coal is a major raw material for power companies forming half of the total cost component. Coal India supplies around 60% of the required coal, while the remaining is sourced either from captive mines or buying directly from international spot markets. While the reliance on imports is lower at present, this may not be the case in future since Coal India is finding it difficult to achieve its mining targets. Even after assuming 5% annual increase in the domestic coal supply, it will not be sufficient to quench the rising demand from thermal power companies. This means the dependence on international coal supply will increase and so will the impact of price volatility on the domestic power companies.
And when it comes to laggards, sectors such as telecom and cement are the usual suspects. Companies in these sectors are grappling with issues such as over capacity and higher competition. This also justifies their lacklustre performance on bourses. In sharp contrast, the underperformance of the power sector looks rather intriguing in a country, which has a history of power deficit. ET Intelligence Group took a closer look at the sector to understand the reasons for its depressed performance. Our analysis reveals that while the sector is facing issues of fuel shortage and falling tariffs, there are a few companies that hold promise for investors.
NOT SO 'POWER'FUL
Over the past one year, the power sector has not contributed to the overall buoyancy in the stock market. The ET Power Index has lost 16% against the 12% gain in the Sensex during the period. This is despite the fact that demand for electricity almost always outstrips the supply.
In the past three years, the countrys power generation capacity rose by around 70%. Despite this, the power deficit increased to 10.2% from 9.6% during the period. This is because the rate of capacity addition was slower than required. The wide demand-supply gap was also the primary reason why Adani Power, JSW Energy and Indiabulls Power enjoyed higher valuations during their initial public offer (IPO) in 2! 009. Sin ce their listing, however, these stocks have underperformed the benchmark indices. This is because, issues such as rising fuel costs on the back of higher coal prices and volatility in spot prices of power, known as merchant power sales, have impacted their growth.
THE CONUNDRUM OF COAL PRICES
The price of coal is probably the major issue for the power industry. Thermal power accounts for over two-thirds of the power generated in India. Coal is a major raw material for power companies forming half of the total cost component. Coal India supplies around 60% of the required coal, while the remaining is sourced either from captive mines or buying directly from international spot markets. While the reliance on imports is lower at present, this may not be the case in future since Coal India is finding it difficult to achieve its mining targets. Even after assuming 5% annual increase in the domestic coal supply, it will not be sufficient to quench the rising demand from thermal power companies. This means the dependence on international coal supply will increase and so will the impact of price volatility on the domestic power companies.
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