Sensex

Monday, April 16, 2012

Fw: Investor's Eye: Pulse - Inflation moderates but upward pressures remain; Special - Coal (Revised royalty on coal to have insignificant impact); Update - Transmission and distribution (PGCIL ordering picks up, but so does competition)

 

Sharekhan Investor's Eye
 
Investor's Eye
[April 16, 2012] 
Summary of Contents
PULSE TRACK
Inflation moderates but upward pressures remain 
  • The Wholesale Price Index (WPI)-based inflation for March 2012 came in at 6.89%, ahead of the Street's expectations. The inflation rate for January 2012 too has been revised upwards to 6.89% from the provisional figure of 6.55%.  
Outlook
In the recent months, the WPI inflation has started to show signs of deceleration in the much expected level of 6-7%, but the sequential growth pattern of WPI inflation shows stickiness around the current levels. The decline is being driven partly by base effect and some transitionary factors. However, in view of the deteriorating industrial growth, and need to revive the slowing economy the street is factoring in a rate cut (repo rate) by 25 basis points in the forthcoming monetary policy meet on April 17, 2012.
 

SPECIAL REPORT
Coal    
Revised royalty on coal to have insignificant impact  
The Cabinet Committee on Economic Affairs recently approved the proposal for adoption of ad-valorem regime, in place of the present hybrid formula, for charging royalty on coal and lignite at the rate of 14% and 6% respectively. Hence, it would percolate into higher cost of coal and lignite production for miners which we believe would be passed on to the coal consuming products and eventually to consumers. Hence, we have tried to assess impact of the royalty hike on coal / lignite consuming sectors. Primary coal consuming sectors are power, metal and cement.
As per our analysis, only in case of higher grade coal (A &B), the impact would be meaningful with change of around 5%. However, in case of grade C to F which are mostly used by power generators and cement manufacturing, the impact is likely to be of around 1-2%.
 

SECTOR UPDATE
Transmission and distribution    
PGCIL ordering picks up, but so does competition  
Key points 
  • In Q4FY2012, the momentum in the Power Grid Corporation of India Ltd (PGCIL) ordering picked up as it awarded projects worth Rs10,791 crore (up 41% year on year [YoY] and 45% quarter on quarter [QoQ]). In FY2012, the total orders awarded by the PGCIL are valued at Rs22,143 crore, a yearly growth of 70%. (excluding the BHEL- ABB HVDC order worth Rs5,325 crore in FY2011). 
  • Nonetheless, the market is getting fragmented with more domestic players entering the transmission and distribution (T&D) space. Also, in the 765Kv transformer space, the competition remained stiff as Chinese companies continued to grab big orders although only few.
  • Uncertainty over order inflow amid intense competition and margin pressure would maintain the bearish sentiment in T&D stocks. While the investment trajectory of PGCIL in the higher rating transmission network looks sound, continuous presence of overseas companies (mainly Chinese) and higher local competition are likely to eat away the market share of the traditional T&D stocks- ABB, Siemens, Crompton Greaves and Alstom T&D India. Hence, we maintain our cautious stand on these stocks.

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Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.