SC's double whammy for power sector pulls shares down up to 8%

Power sector shares declined today reacting to two Supreme Court orders, the first one on the coal blocks allocation and the second on the Aptel’s interim order on compensatory tariff.

Passing an order in the coal scam, the apex court yesterday held that all blocks allocated to private and public sector companies right from 1993 were illegal as the process was non-transparent and lacked objectivity.

As many as 218 blocks have been allocated during the period of which some have already been de-allocated. The fate of the others will be known on 1 September when the Supreme Court is expected to pass a final verdict on the matter. If the court decides to cancel the allocation, power manufacturing companies’ dependence on costly imported coal will increase, which is a huge negative for the companies.

The court also put on hold the Appellate Tribunal for Electricity’s (Aptel) interim order on compensatory tariff that had allowed the Tata Power and Adani Power to charge enhanced power tariff from Haryana discoms since March this year.

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The Uttar Haryana Bijli Vitran Nigam Ltd, represented by the Haryana Power Purchase Centre, had petitioned against the Aptel order.

The apex court, while staying the hike in power tariff, said that two companies could not seek a tariff hike on the grounds of unforeseen escalation in the imported fuel prices as it had secured the contract for the supply of power to the state discoms based on tariff based competitive bidding process.

Asking the tribunal to decide the matter as expeditiously as possible, the court took on record the statement by senior counsel Harish Salve and Abhishek Manu Singhvi who appeared for Tata Power and Adani Power respectively that they would accept payment in terms of power purchase agreements without prejudice to their claim for hike in tariff.

This development is also a negative for the power sector.

According to a report by ICICI Securities, Tata Power (TPL) and CESC were allocated coal blocks during the period mentioned in the Supreme Court order. CESC received the licence for Sarisatolli block in West Bengal with 140.5 million tonne reserve in August 1993 and Mahuagarhi block in Jharkhand with 110 reserve in January 2008. Tata Power got the Tubed block in Jharkhand with reserve of 189.0 million tonne in August 2007 and Mandakini block in Orissa with 96.8 million tonne reserve in January 2008. The uncertainty over these blocks could be significant overhang for the stocks until the court passes the final judgement.

IDFC Institutional Securities does not see adverse impact on NTPC’s earnings in the near term as its power plants are operating on a regulated basis. However, the company will have to offset any domestic shortage with imports.

“In case of a de-allocation of coal blocks allotted to state government companies, Jaiprakash Power (linkage to Nigrie TPS) and KSK Energy (Mahanadi TPS) would be the worst hit in terms of earnings/ valuations,” it said.

As far as compensatory tariff is is concerned, Aptel’s earlier order had allowed a 0.36/Kwh tariff hike for Tata Power’s Mundra ultra mega power projects to make good the losses the company incurred due to a the increase in Indonesian coal prices.

“…The verdict will not have any financial impact on TPL as the company hadearlier refrained from incorporating the revised tariff rate after Aptel’s positive order. However, the SC verdict will negatively impact investor’s sentiments and, thus, would impact many imported coal-based projects, which had won PPAs on competitive bidding,” ICICI Securities said.

At 10:52 am, shares of Tata Power was down 3 percent, CESC 1.4 percent, Jaiprakash Power Ventures 4 percent, KSK Energy 8 percent and Adani Power 4.2 percent.

With inputs from IANS