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).
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.
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