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Metal, power stocks in a tailspin post Supreme Court order on coal allocation

Investment mangers, however, advised long-term investors to buy metal stocks on the decline, as many think that cancellation of 206 coal block mines is unlikely, as the pro-reforms government at the Centre will step in.

Aug 26, 2014, 04.00 AM IST
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Investment mangers, however, advised long-term investors to buy metal stocks on the decline, as many think that cancellation of 206 coal block mines is unlikely, as the pro-reforms government at the Centre will step in.
Investment mangers, however, advised long-term investors to buy metal stocks on the decline, as many think that cancellation of 206 coal block mines is unlikely, as the pro-reforms government at the Centre will step in.
MUMBAI: Shares of leading metal and power companies such as Tata Steel, Hindalco, Jindal Steel, JSW Energy and others went into a tailspin, crashing up to 15% on Monday’s trade, after the Supreme Court held that all coal blocks allocated by the government to various firms between 1993 and 2009 were done in an illegal manner. Investment mangers, however, advised long-term investors to buy metal stocks on the decline, as many think that cancellation of 206 coal block mines is unlikely, as the pro-reforms government at the Centre will step in and find a solution to the issue.

“We expect metal stocks to remain under pressure this week, but are optimistic about a proper outcome to the issue; hence, advise investors to enter metal stocks at lower levels,” said Pankaj Pandey, head of research at ICICIdirect.com.

“We expect more clarity to emerge only post September 1, as the SC will decide how coal blocks should be allocated.”

The SC has said that the final decision on the fate of the blocks will be taken on September 1. Analysts say it’s still possible for these companies to get their respective coal mines, but they might now have to pay a price for them or take part in an auction, depending on the SC’s direction on September 1, which reduces the economic benefit of these mines.

“Once clarity emerges on the Supreme Court verdict, investors can consider buying into stocks such as Tata Steel, Hindalco and Jindal Power, if and only, there are no negative surprises in the verdict,” said Vinay Khattar, head of research at Edelweiss.

Metals and power companies depend heavily on coal to run smelters and generate electricity and these sectors had run up on expectations of reforms by the Modi government.

The ET Metal Index has gained about 73% in the last one year, where companies such as Tata Steel, Hindalco, JSW Steel and SAIL have gained up to 135%.

“The impact shouldn’t be much. However, the actual impact would depend on at what price these companies are able to source coal now — whether their coal linkage is with Coal India, or from e-auction, or do they import coal,” said Rakesh Arora, metal analyst with Macquire Equities.

The company that could be impacted the most is Jindal Steel & Power (JSPL) which has been allocated eight coal blocks while Hindalco will be able to pass on the extra cost if it has to source coal externally.

As far as Tata Steel, JSW Steel and Tata Power were concerned, whose shares also took a beating, analysts were confident that there would be no earnings impact on these stocks.

“The sharp declines in metal stocks are due to knee-jerk reaction in derivatives market ahead of expiry. We would advise investors to buy quality metal stocks on declines as the new government policies will definitely improve,” said Kunj Bansal, executive director & chief investment officer at Centrum.

Currently, there are about 33 captive coal blocks which are under production of which 19 belong to private sector companies such as Hindalco, JSPL, R-Power, CESC and Usha Martin. The total production from all 33 captive mines in FY15 is expected at 53 mt, and could be at risk, say analysts. S&P BSE Metal index, the investor gauge of metal companies, crashed 558 points, or 4.34%, to close at 12,291, against 17 points rise in the benchmark BSE Sensex on Monday.

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