Power stocks lose charge on choppy stocks, turn penny

Power generation and infrastructure companies have led the list of midcap and small cap stocks that have turned into penny stocks — shares that trade below Rs10 — this year, as dismal macroeconomic environment, persistent policy concerns and weak market sentiment savaged investor confidence.

Lanco Infratech, one of the leading power generation and infrastructure companies, has suffered the worst fall, with its market capitalisation plunging from Rs15,277.49 crore since the start of calendar year to Rs2,212.77 crore on December 19, 2011.

In the same period, Lanco’s shares have nosedived 85.5% to Rs9.19 from Rs63.45.

In terms of market capitalisation, other ‘power’ stocks like Indiabulls Power (down 69%), Orient Green (down 68%) , GVK Power and Infra (down 75% with intra-day low of Rs9.56), GTL Infra (down 83%), KS Oils (down 87%) and Karturi Global (down 70%)  also lost heavily, and now trade in single digits.

Market-wide, the sheer number of penny stocks has risen 71% from 386 to 662 in 2011.

According to the DNA Money database, 67.5%, or Rs53,602.74 crore, of the 662 firms’ combined market capitalisation has been eroded so far this year.

Experts attributed the freefall in power generation stocks to multiple factors that eroded business confidence in general.
Several private power firms have suffered delays in new projects due to problems relating to fuel availability and supplies, environmental clearances for captive mines and import of costlier coal.

For existing projects, many companies do not have guaranteed power offtake agreements with electricity boards.
The merchant power rates have also dropped significantly from the levels projected earlier.

“This has impacted the sentiments of investors and of those who provide funding to these companies,” said Salil Garg, director, Fitch Ratings.  

Sandeep Singhal, co-head, institutional equities, Emkay Global Financial Services, concurred. “The macro(economic) environment has not been good. Apart from global issues, there have been concerns on the domestic front relating to inflation, policy paralysis and fiscal deficit.”

That is not all. Low investor interest and selling pressure due to poor market sentiment also contributed to the rise in the number of penny stocks.

“The tax collections have been falling and earnings estimates are consistently being lowered. In this kind of environment, informed investors have been selling while only a few casual players have been buying. We expect markets to remain subdued over the next six months or so, unless there is a reversal in global risk appetite or domestic reforms start rolling,” said Singhal.

The small and midcap indices are down 43% and 34% respectively so far in 2011, compared to the 25% drop in the benchmark Sensex. Experts foresee further wealth erosion in the next two months and beyond, given domestic uncertainty.     In their India strategy report last week, Deutsche Bank strategists Abhay Laijawala and Abhishek Saraf wrote that factors like continuing policy uncertainty, the possibility of a new wave of civil activism this month and the fear of populist policy announcements ahead of Uttar Pradesh — India’s largest state —polls in February or March, raise the prospect of “value-destruction” that bedeviled 2011 overshooting. If foreign investors, who have been cautious but on the sidelines so far, “capitulate on redemption pressure and are forced to liquidate existing positions”, there could be a “sharp selloff”, they added.