Companies & Sectors
SEB reforms still mean little for the thermal power sector

Oversupply in the thermal power sector means we can expect margins and return ratios to trend downwards. Espirito Santo Securities recommends ‘sell’ on shares of BHEL, Thermax and BGR Energy—key power equipment suppliers

In order to revive the SEBs (State Electricity Boards), the government has initiated large-scale reforms in the power sector, including the restructuring of loans taken by the SEBs. But the expected revival in the power sector is not good news for the thermal power sector, as the risk/reward for investment in thermal capacity is still unfavourable, according to an Espirito Santo Securities insight report. Several near-term concerns remain including Coal India’s plans to import coal and not go in for increase in production. (Please refer Table on the agreed penalty levels for Coal India).

As coal is the most important input in the thermal power plant, aggregate coal production for the next decade has been planned for and debated for some time now. It is now clear that any plans implemented towards increased mining of coal within the country would only yield results in the long haul. This is bound to lead to muted order inflow for the next few years for BHEL, Thermax and BGR Energy. As Coal India is freezing capacity for fuel supply, fresh ordering, especially from the private sector, will be elusive in the near term. (Please refer to the Table on the demand-supply gap widening for Coal India).

Consequently, there is an oversupply position in the thermal power sector, in spite of power shortages for the general public in the country. We can expect margins and return ratios to trend downwards, according to Espirito Santo Securities. It is a double whammy for companies now with no visibility of orders on one hand and excess industry capacity on the other. Boiler capacity at 37GW and turbine capacity at 36GW is much higher than industry wide ordering at 25GW, even assuming a revival in orders from FY15 onwards. This oversupply in the industry will keep the long-term profitability of the companies under pressure.


The industry oversupply situation would also mean that every incremental order would be bid for aggressively; leading to downward trends for EBITDA margins and return ratios for the power equipment suppliers. Espirito Santo Securities initiates coverage on BHEL, BGR Energy and Thermax with ‘Sell’ recommendations in the equity market (Please refer Table on the Valuation Snapshot for these three companies in the thermal power sector).


Sensex, Nifty may struggle to move up: Thursday Closing Report

Another day of negative on the Nifty may means sideways movement for now

The market witnessed a highly volatile session on the derivatives expiry day with the benchmarks slipping into the negative in the second half of trade and ending lower for the second day. Although the Nifty saw a higher high and a higher low, it ended in the negative with a minor loss. If the index reports a loss for the third consecutive day, we may see sideways movement setting in. The National Stock Exchange (NSE) saw a higher volume of 117.30 crore shares and an advance decline ratio of 938:838.


The Indian market opened with minor gains tracking the Asian markets, which were firm after a sharp decline seen yesterday. The Nifty opened at 5,674, up 11 points over its previous close and the Sensex started off 28 points higher at 18,660.


The market pared some of its initial gains in early trade but select buying soon pushed the indices higher. The gains helped the benchmarks hit their intraday wherein the Nifty touched 5,694 and the Sensex went up to 18,736.


However, profit taking at higher levels saw the market headed lower. The indices drifted into the red in noon trade despite a green opening in the European markets. The market touched its intraday low around 2.00pm as selling expanded. At this point the Nifty fell to 5,647 and the Sensex dropped to 18,586.


Choppiness in late trade saw the benchmarks fluctuating between red and green and finally settled lower. The Nifty closed 14 points down at 5,650 and the Sensex finished 53 points lower at 18,580.


In the broader markets space, the BSE Mid-cap index gained 0.49% and the BSE Small-cap index rose 0.15%.


The main sectoral gainers were BSE Fast Moving Consumer Goods (up 1.51%); BSE Consumer Durables (up 1.36%); BSE Capital Goods (up 0.91%); BSE Realty (up 0.42%) and BSE Healthcare (up 0.22%). BSE Oil & Gas (down 1.60%); BSE IT (down 1.10%); BSE TECk (down 0.89%); BSE Metal (down 0.52%) and BSE PSU (down 0.42%) were the main losers.


Eleven of the 30 stocks on the Sensex closed in the positive. The key gainers were Larsen & Toubro (up 2.21%); Tata Power (up 1.85%); Hindustan Unilever (up 1.59%); ITC (up 1.25%) and Bajaj Auto (up 1.06%). The key losers were Sterlite Industries (down 2.93%); Hero MotoCorp (down 2.37%); ONGC (down 1.97%); BHEL (down 1.92%) and Reliance Industries (down 1.65%).


The top two A Group gainers on the BSE were—United Spirits (up 10.31%) and Rashtriya Chemicals & Fertilisers (up 5.39%).

The top two A Group losers on the BSE were—Voltas (down 5.76%) and SAIL (down 3.48%).


The top two B Group gainers on the BSE were—Arvind International (up 17.01%) and Silicon Valley Infotech (up 16.67%).

The top two B Group losers on the BSE were—Vinayak Poly Containers (down 18.02%) and GKB Ophthalmics (down 16.17%).


Out of the 50 stocks listed on the Nifty, 19 stocks settled in the positive. The top gainers were Tata Power (up 2.63%); L&T (up 2.09%); HCL Technologies (up 1.96%); HUL (up 1.72%) and DLF (up 1.35%). The key losers were SAIL (down 3.81%); Sesa Goa (3.38%); Sterlite Ind (down 3.13%); Cairn India (down 2.20%) and ONGC (down 2.13%).


Markets in Asia closed in the positive on speculations that the Chinese would announce fresh initiatives to improve the economic growth following a Chinese government report which said that profit at industrial companies dropped a fifth month in August.


The Shanghai Composite jumped 2.60%; the Hang Seng surged 1.14%; the Jakarta Composite climbed 1.07%; the KLSE Composite rose 0.53%; the Nikkei 225 gained 0.48%; the Straits Times advanced 0.42%; the Seoul Composite rose 0.42% and the Taiwan Weighted settled 0.18% higher.


At the time of writing, the key European markets were trading higher and the US stock futures were in the positive.


Back home, foreign institutional investors were net buyers of shares totalling Rs688.49 crore on Wednesday whereas domestic institutional investors were net sellers of stocks amounting to Rs695.90 crore.


Agro-chemical manufacturing company Insecticides India today said it has entered into a joint venture with Japan-based Otsuka AgriTechno to set up an R&D centre in Rajasthan. The Japanese firm would provide the technology and research know-how, it said, adding that the JV would mainly focus on new agro-chemicals. Insecticides India tumbled 4.18% to close at Rs412.90 crore.


Ahmedabad-based private sector power player, Torrent Power has allotted 10.35% secured redeemable non-convertible debentures (NCDs) of Rs550 crore through private placement. The NCDs have a tenure of 10 years. The stock gained 0.95% to close at Rs170 on the NSE.


Auction not the only route for resource allocation: SC

The apex court referred to various judgements delivered by it earlier while upholding government's decision to allocate natural resources through means other than auction

New Delhi: Auctions are not the only permissible method for disposal of natural resources across sectors, the Supreme Court of India on Thursday said holding that the 2G verdict was confined to allocation of spectrum and is not applicable to other resources, reports PTI.
Giving its opinion on the presidential reference arising out of 2G verdict, a five-judge constitution bench headed by Chief Justice SH Kapadia also ruled that common good is the touchstone for any policy and if it meets that then any means adopted is in accordance with the constitutional principles.
Auction despite being a more “preferable method” of allotment of natural resources cannot be held to be a constitutional mandate, observed the bench also comprising justices DK Jain, JS Khehar, Dipak Misra and Ranjan Gogoi.
“In our opinion, auction despite being a more preferable method of alienation/allotment of natural resources, cannot be held to be a constitutional requirement or limitation for alienation of all natural resources and therefore, every method other than auction cannot be struck down as ultra-vires the constitutional mandate,” the bench said.
The bench said that auctions may be the best way of maximizing revenue but revenue maximisation may not always be the ultimate motive of the policy and natural resources can be allocated to private companies by other methods for the purpose to subserve public good.
“Common good is the sole guiding factor under Article 39(b) for distribution of natural resources. It is the touchstone of testing whether any policy subserves the common good and if it does, irrespective of the means adopted, it is clearly in accordance with the principle enshrined in the Article,” the bench said.
The apex court referred to various judgements delivered by it earlier while upholding government's decision to allocate natural resources through means other than auction.
“It is manifest that there is no constitutional mandate in favour of auction under Article 14. The government has repeatedly deviated from the course of auction and this court has repeatedly upheld such actions,” the bench said.
It said “whenever the object of policy is anything but revenue maximization, the Executive is seen to adopt methods other than auction”.
Justice Khehar, who wrote a separate but concurring judgement, said that natural resource should not be dissipated as a matter of charity, donation or endowment, for private exploitation.
“No part of the natural resource can be dissipated as a matter of largess, charity, donation or endowment, for private exploitation. Each bit of natural resource expended must bring back a reciprocal consideration. The consideration may be in the nature of earning revenue or may be to best subserve the common good. It may well be the amalgam of the two.
“There cannot be a dissipation of material resources free of cost or at a consideration lower than their actual worth.
One set of citizens cannot prosper at the cost of another set of citizens, for that would not be fair or reasonable,” justice Khehar said.
The court disagreed with the contention that auction should be the only means of allocation as other methods can be abused by the private companies in connivance with government authorities as happened in 2G case.
“It may be said that even auction has a potential of abuse, like any other method of allocation, but that cannot be the basis of declaring it as an unconstitutional methodology either. These drawbacks include cauterisation, winners curse etc.
“However, all the same, auction cannot be called ultra vires for the said reasons and continues to be an attractive and preferred means of disposal of natural resources especially when revenue maximisation is a priority.
“Therefore, neither auction, nor any other method of disposal can be held ultra vires the Constitution, merely because of a potential abuse,” the bench said.
The court said that revenue maximisation cannot always be the primary consideration while allocating resources to private companies and assume secondary consideration when the development is the main consideration.
“Revenue maximization is not the only way in which the common good can be subserved. Where revenue maximization is the object of a policy, being considered qua that resource at that point of time to be the best way to subserve the common good, auction would be one of the preferable methods, though not the only method.
“Where revenue maximization is not the object of a policy of distribution, the question of auction would not arise.
Revenue considerations may assume secondary consideration to developmental considerations,” the bench said.
It said that the suggestion that disposal of a natural resource for commercial use must be for revenue maximization is based “neither on law nor on logic”.
“Economic logic establishes that alienation/allocation of natural resources to the highest bidder may not necessarily be the only way to subserve the common good, and at times, may run counter to public good.
“Hence, it needs little emphasis that disposal of all natural resources through auctions is clearly not a constitutional mandate," the 208-page opinion given by the apex court said. 


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