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Business News/ Market / Stock-market-news/  Power, banking shares fall as SC order on coal block allocations stokes up concerns
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Power, banking shares fall as SC order on coal block allocations stokes up concerns

Analysts fear banks that have exposure to metals and power companies may see their bad loans rise

Concern that the licences may be cancelled, jeopardizing the prospects of steel makers and power plant operators, hurt the stocks. Photo: BloombergPremium
Concern that the licences may be cancelled, jeopardizing the prospects of steel makers and power plant operators, hurt the stocks. Photo: Bloomberg

Power, metals and banking stocks fell for the second day after the Supreme Court ruled that all coal-mining permits allocated since 1993 are illegal, fuelling concern that the licences may be cancelled and jeopardizing the prospects of steel makers and power plant operators.

Banks that have exposure to metals and power companies are vulnerable in the wake of the Supreme Court’s verdict, and may see their bad loans rise, UBS said in a report on Tuesday.

“We believe a portion of banks’ exposure to metals/power would be vulnerable to becoming NPL (non-performing loans) if the process of reallocation of coal blocks extends beyond six months," UBS said.

“At industry level, exposure to metals is at 6-7% of total exposure and exposure to power plants using captive coal (selling commercially) is unknown."

The Supreme Court on Monday said coal mines allocated between 1993 and 2010 were done in an arbitrary manner and were therefore illegal, and that it will have a separate hearing on 1 September to see whether to cancel the blocks or impose penalty.

Shares of power, mining and banking stocks fell for the second consecutive day on Tuesday, following the verdict. The S&P BSE Power index fell 1.32%, and the S&P BSE Bankex index lost 0.24%.

“Power and metal stocks are hit by uncertainty after the Supreme Court order," said Rakesh Rawal, head of private wealth management at Anand Rathi Financial Services Ltd. “They (court) have to find a practical way out. They just can take an extreme view of rejecting everything that has happened The damage from an extreme can be huge and unimaginable."

At stake are around 200 coal blocks given out to companies of all sizes individually or in consortiums, of which around 33 are producing mines with an output of about 53 million tonnes (mt) a year.

Some of the large companies that own the coal blocks are: Essar Power Ltd, Hindalco Industries Ltd, Sesa Sterlite Ltd, Jindal Steel and Power Ltd. Many of the blocks and their allied projects involve loans from banks.

“Given the far-reaching implications of the issue on economy, speedy action from Supreme Court/government could limit economic losses for the players and therefore banks, however the extent of damage could be known only in coming weeks," UBS said.

A Morgan Stanley report said the development could have a serious impact on the economy.

“Near-term coal deficit in the country may deepen and dependence on Coal India Ltd may grow for coal supplies," the Morgan Stanley report said.

“Captive coal blocks produce approximately 8% of India’s coal output. If all blocks are de-allocated, then the coal deficit will grow by this quantum. We feel de-allocation could have serious implications for the user industries and possibly for the economy."

Analysts attributed the sharp fall in stock prices to fears of a spurt in their cost of production if the apex court imposes a penalty or cancels allocations.

In a note on Monday, Macquarie Capital Securities (India) Pvt. Ltd. termed the move as “really harsh"

“We believe that, in the 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. It is difficult to imagine that all this could be done quickly," Macquarie analysts Rakesh Arora and Sumangal Nevatia said in the note.

Among metal companies, Jindal Steel and Power fell 6.02%, National Aluminium Co. Ltd (Nalco) fell 1.39%, Monnet Ispat and Energy Ltd fell 5.20%, Sarda Energy and Minerals Ltd declined 5.76%, while Prakash Industries Ltd gave up 7.76%.

Among power companies, Adani Power Ltd fell 6.91%, Jaiprakash Power Ventures Ltd shed 5.73%, Tata Power Co. Ltd lost 2.71%, Torrent Power Ltd lost 1.77%, Reliance Infrastructure Ltd declined 0.58%, CESC Ltd retreated 1.52%, Thermax Ltd lost 1.41%, NTPC Ltd retreated 0.63%, while PTC India Ltd dropped 1.10%.

Reliance Power Ltd lost 6.79% to 76.90 after the Supreme court said coal blocks allocated for ultra mega power projects (UMPPs) would only be used for that purpose and no diversion of coal for commercial exploitation would be permitted. Reliance Power was planning to divert surplus coal from its Sasan project to Chitrangi power plant.

Shares of banks that had lent to these power, mining and steel companies also declined.

Punjab National Bank lost 1.08%, Yes Bank Ltd slipped 1.66%, Bank of India retreated 1.23%, State Bank of India declined 0.64%, Bank of Baroda retreated 0.54%, Federal Bank Ltd dropped 0.84% and ICICI Bank Ltd lost 0.28%.

According to Karvy Stock Broking Ltd, the banking sector has exposure of 5.01 trillion to the power sector, and exposure to the sector has grown from 4.3% of the non-food credit in March 2008 to 8.83% in the June 2014, and banks had financed many new power projects in the period, which may be negatively impacted by the court verdict.

“We expect part of this exposure to turn into NPA over the next 18 months as many of these project will become unviable. We maintain our cautious view on the sector, specially on the public sector banks, which has relatively higher exposure to the sector," Karvy analyst Asutosh Kumar Mishra said in a note.

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Published: 26 Aug 2014, 10:41 AM IST
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