I had written an article on the power generation business in India and how it is unlikely to generate any huge wealth for shareholders given the fact that there are too many players who have got into the business looking at the success of a few early entrants and how their expectations of huge returns on capital are unlikely to be fulfilled as by the time most of these capacities will start generating any meaningful cash flow there is likely to be an overcapacity in power supply sometime in the next 6-7 years.
I believe that despite the huge growth potential of
However today we are sitting in a scenario where not only are the large existing players creating new capacities, a number of players that were of smaller size have also announced huge capacity addition plans. The total capacity addition in the industry in the current financial year has been nearly 57 million tonnes and the expected addition next year is around 27 million tonnes. This is on a base of consumption of around 200 million tonnes per annum. This will lead to the industry being in overcapacity over the next couple of years. However this is not the main area of concern as cyclical industries have their ups and downs.
The main issue is that the industry is again moving towards becoming one where too many players are becoming bigger and looking at the cash flows of existing players a number of new players, big and small have announced capacity addition or expansion plans. The strong growth in consumption in the near term of 12-13% has resulted in prices being stable in the near term, however given the fact that we are again moving towards a phase where the number of players in the industry will double or more over the next three years it is unlikely that there will be any sustainable pricing power with the industry. The other disadvantage of new players coming in is that they will initially need to establish their brands for which they will need to break the prices in the market.
We have also seen a phenomenon where existing regional players are looking at moving out of their regions and going to other regions where they are not well known players. This will also lead to greater pricing pressure in these regions as the capacities come on stream. From only two blocs of companies having a capacity of 15 million tonne, we are likely to move to a scenario where more than 5-6 players among the existing set of players will be above this capacity. Besides this there are other players from unrelated industries who are planning to get into the business over the next three years. As such there will be several more regional players.
In conclusion without getting into specific numbers and detailed quantitative analysis, a qualitative analysis of the business reflects an average return potential from the industry over the long run.
Overall markets are looking to show a strong breakout rally with financials and Oil &Gas leading the rally.