Coal verdict: Stocks tumble for second day

The shares of power and metal companies tumbled on Thursday in concerns that the Supreme Court’s order to cancel all but four coal block allocations since 1993 would hurt profitability and raise a question mark on business prospects. Banking stocks also witnessed heavy sell-off, as investors feared the scrapping of coal-mining licences would increase bad debt and hurt economic recovery.

Jindal Steel and Power, the most impacted by the court verdict, saw its shares tank another eight per cent to Rs 175 apiece on Thursday. This was after a 10 per cent decline the previous day. Shares of Aditya Birla Group firm Hindalco fell over four per cent to Rs 150 apiece, while those of Adani Power declined nine per cent to Rs 43. Scrips of mid-cap firms Monnet Ispat and Usha Martin dropped 11 per cent and 20 per cent, respectively. Brokerages on Thursday lowered their price targets and earning estimates for stocks of companies affected by the coal verdict.  

“There will be de-rating in these stocks (metal and power). That was clearly evident from the way the market reacted on Thursday. Unless there is clarity on the government’s thinking on this issue, these stocks will continue to languish,” said Rakesh Arora, managing director & head of research at Macquarie Capital Securities.

Shares of banking majors State Bank of India and ICICI Bank fell four per cent and 3.4 per cent, respectively, after analysts said the court ruling would negatively impact the sector. Andhra Bank and Allahabad Bank, which have exposure to power and metal companies, saw their scrips slump 12 per cent each.

The banking sector’s total exposure to the cancelled coal blocks is estimated to be Rs 2.5 lakh crore.

SAIL, NTPC and Reliance Power, which are not directly impacted by the ruling, also ended with losses, as investor sentiment turned sour due to uncertainty of availability of coal.

The decline in coal-related stocks pressured the broader market as well. The BSE Sensex, after declining as much as 395 points, settled 276 points, or one per cent lower than previous close, at 26,468.

Experts believe the cancellation of coal banks might impede India’s economic recovery. “The impact of this ruling will be felt across various channels and lead to a rise in non-performing assets of the banking sector, an increase in the cost of coal and, in turn, a rise in power tariffs, pressure on current account and finally on overall inflation in the economy. Besides impacting economic recovery, this could pose challenges for the macroeconomic stability of the economy,” said a note by India Ratings.

Analysts expect shares of certain power and metal companies to remain under pressure as the Supreme Court verdict has put a question mark on their business models. They say investors would remain cautious as there is no clarity on reallocation of blocks.

“Investors would now look forward to the timeline, bidding amounts and other details on coal block auctions. We expect the auctioning process to commence quickly for operational blocks and also for other blocks where clearances have been achieved,” said Barclays Capital analysts in a note.