Shares of power distribution companies under pressure with AAP likely to form government in Delhi

MUMBAI: Shares of power distribution companies such as Tata Power and Reliance Infrastructure may come under severe selling pressure, after the exit polls suggested that the Aam Aadmi Party ( AAP) may win Delhi elections with majority.

Analysts fear that Aam Aadmi Party’s policies such as subsidies for electricity and inspection of books of power distribution companies will adversely impact investor sentiment.

“Power distribution companies such as Tata Power and Reliance Infra may come under severe selling pressure as the exit poll results were shocking, which suggested that AAP may win the Delhi elections with majority,” said Rakesh Goyal, senior vice-president at Bonanza Portfolio.

AAP earlier during the election campaign had said audit of private power distribution companies books will be ordered if the party comes to power in Delhi.

Alleging monopoly of power distribution companies in Delhi, the party had said more competition will be encouraged among power suppliers so that consumers can benefit. The AAP government when it came to power for 49 days in December 2013 had earlier ordered a CAG audit.
“Power stocks that have operations in Delhi may see kneejerk reactions on Monday as exit poll results were disappointing,” said P Phani Sekhar, fund manager, PMS, Karvy Stock Broking.

“The larger worry for investors is the likely audit of private power distributors by the new government.Though we believe that the audit may not find any meaningful evidence against power distribution companies, the element of uncertainty will continue to persist.”

Tata Power and Reliance Infra stocks fell about 9% and 10%, respectively, in February from their highs. Both the stocks have underperformed the BSE Power Index, which fell 5.7% over the same period.

Power companies have come under selling pressure since the opinion polls were out in the beginning of February.

“High-beta socks such as Reliance Power can correct up to 8% and Tata Power can fall up to 5% while NTPC and Power Grid up to 3% on Monday,” said Chandan Taparia, derivative analyst at Anand Rathi. “These power-related stocks have seen build-up of short positions as there was a lot of uncertainty related to outcome of Delhi election results. Traders’ sentiment is expected to remain bearish as political parties, including AAP, have pushed for cheap electricity, which may be negative for power companies that operate in Delhi.”

Tata Power derives one-fifth of its total revenue from power distribution business in Delhi. Last year, revenue from this business was Rs 6,521 crore of the total revenue of Rs 35,292 crore. Reliance Infra also derives a sizeable chunk of its revenues from the Delhi distribution business. “Power stocks may come under pressure as the broader markets display weakness. Having said that, we do not expect large negative movements in the stocks as most of news has already been priced in by the markets,” said Sahil Kapoor, AVP-retail capital markets at Edelweiss Financial Services.