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Rulings on Cars and Coal Will Take Their Toll, Haunted by the Past


Two rulings have spooked markets yesterday, and the impact continues today.

First the Supreme Court declared that all coal block allotments since 1993 were arbitrary, did not follow due process and therefore are illegal. It will decide what to do with them on 1 September. We don’t really know if they will cancel such allocations totally, reassign them through auctions, impose a penalty, or demand a renegotiation of rights.

The most impacted seem to be Jindal Steel and Power, which lost 10% yesterday and is down about 4% today.The stock has fallen from Rs. 292 to Rs. 242. The company has existing operational coal blocks and also upcoming projects based on new allocations. These are all suspect now.

Hindalco too lost 10% yesterday but has recovered a bit today. According to a MorningStar analyst, Piyush Jain, the company has a 10%+ increase in costs if it didn’t have a captive coal block for its upcoming smelter.

Tata Steel and many other metal players too have been hit. Power companies like Tata Power, Adani power and Reliance Power are down too (most Indian power generation capacity is coal based). Financiers like PFC and many banks have been hit.

Our view: This is going to unravel on September 1, so we’d wait to see the impact. Right now, there is some bottom fishing going on in stocks like Hindalco, and those may be bets on the Aluminium cycle (prices are starting to go up) which might make up for the margin pressure.

The second was an order by the Competition Commission of India (CCI) fining car companies – nearly all of them – a collective amount of Rs. 2545 cr. They supposedly colluded to deny access to independent repair workshops to their spare parts and diagnostic tools. These were restricted to their own service workshops (or their dealers’) which amounts to a monopolistic practice.

Our view: Auto stocks aren’t down so badly because the CCI order may get challenged. However this is 2% of their turnover, which might anyhow not be a big enough amount to fret about; these companies will challenge the decision but even at the extreme it won’t hurt them enough.

What’s happening, though, is that some of these chickens are coming home to roost. While the situation is addressed – and hopefully we will get free and fair auctions – we will see power plants scampering around to get coal which they thought they owned but no longer do. This might hurt banks much more than it hurts these companies, who at the very least have an excuse that they couldn’t have predicted this.

The banks though will be worried if the cash flow situation at the large companies deteriorates; they already face challenges in infrastructure, real estate and power, and this judgement could create hurdles for what they thought were more sound investments.

It’s also quite worrying to see rulings on stuff as long past as 1993. The coal block piece is effectively a retrospective issue, but then it’s been in the courts for over a decade now. One way to deal with things is to charge heavy penalties but to keep allocations going; this won’t hurt things going forward but they pay for the mistakes of the past. The other way is to charge penalties and at the same time, ask for complete rebidding and auctions of all blocks. Let’s see what the supreme court does.


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