Capital goods sector to remain under stress: Emkay

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Capital goods sector to remain under stress: Emkay

Dhananjay Sinha, Co- Head, Institutional Research- Economist & Strategist, Emkay Global Financial Services Ltd states that the capital goods sector would remain under stress.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Dhananjay Sinha, co-head of institutional research at Emkay Global Financial Services Ltd has recommended a sell rating on Coal India and NTPC .

He states that the capital goods sector would remain under stress. The broking house is negative on BHEL and has downgraded the stock as well.

Below is an edited trasncript of the interview. Also watch the accompanying video.

Q: This news from the PMOs office, the directive to Coal India. Have you all done specific analysis if which companies benefit in terms of coal for instance Lanco, to what extent? Can you give us just the arithmetic gain for the various companies?

A: I think it is too early to actually basically assess exactly how these individual companies will actually get impacted because we are not very sure about what will be the final shape of the pricing mechanism that will be agreed between Coal India and the government. Essentially what we are seeing, we will have to rely on a broader sense in terms of which are the parties which will actually benefit.

It seems like it will largely drift into a kind of pooling pricing mechanism wherein the cost of, the requirement through this FSA, the import demand that arises from there and if it is actually pulled in, there will be a certain amount of weighted average pricing which will be actually shared by most of the power producers including old and new.

As a result, it would impact various categories of producers. If you have a pooling mechanism, it is likely that private players are likely to benefit out of it - Adani Power, Lanco, Indiabulls and KSK but I think the bigger casualty would be on SEBs, on NTPC, and to an extent, Coal India as well.

Q: What about the other news that has just come in, in terms of Gammon and its JV partner not being able to participate in the NTPC order. Since that news, are you taking a re-look at stocks like BHEL? What would you watch out for?

A: Essentially as far as BHEL is concerned, I think there are broader things. We are looking at the order book and with respect to BHEL, we have seen cancellation of orders and there is other news also about certain amount of cancellations with respect to power companies. So, essentially the sector would remain under stress. I think it will be a scenario for the next year or so. So we have kind of been negative on BHEL and we have downgraded the stock as well.

Q: If I take you back to the big power story actually of these new FSAs, your reports state a couple of options that you have outlined. One of the things that was stuck was that at least private power producers, it makes more sense for them to import coal directly rather than through Coal India. What's the reasoning for this? How have you arrived at this conclusion? How does it look for these private power producers?

A: The rationale is if it has to be imported by Coal India and then certain fashion distributed amongst the power producers, then there would be certain amount of pooling that will happen and there will be a certain amount of transportation cost that will be involved. So, if power companies have to rely on imported coal, they can directly do it themselves. So I am not very sure if you involve Coal India in acting as a nodal agency wherein Coal India actually imports and then supplies the economics with respect to the transportation cost, the overall effective cost for the power companies and the logistics involved.

Q: Therefore what are you recommending to your investors in terms of buys in the power sector? A lot has run up in terms of Lanco going from single digit to Rs 19-20 and ditto for the other power stocks. In the entire space of power and power equipment, what are your buys or what are your other recommendations?

A: I think it will be contingent on how this whole thing actually gets finalized.

Q: So for the moment you do not recommend any buys?

A: I would basically consider Coal India to be a sell in the current scenario because it is likely that if a pooling mechanism is actually finalized, it seems like that's a recommendation of the planning commission as well. I think definitely there will be downside risk to that and also NTPC. You have a significant run up happening with respect to private players. I think there might be certain profit booking but I think, by and large, they should continue to remain positive.