Bullish on Hydro: Everything you need to know about the Hydro Craze in NEPSE

Fri, Sep 25, 2020 3:46 PM on Stock Market, Exclusive,

The Hydropower index in NEPSE was sluggish for quite a long time.

For one reason or another, investors believed the sector was a slowly ticking time-bomb: You don't know when but the loss will destroy your investment hopes eventually.

However, hydropower companies have shown an unprecedented bullish surge. The overall index has shown more than a 40% surge upwards in the last 30 days. The sector which investors liked to toss to the dark corner has now been a major attraction, as if because of some mysterious Midas touch.

Like always, Sharesansar wanted to knock on the doors of experts and compile a general consensus about what might have fueled the aggressive rise of Hydro. This article is a condensed version of all the opinions we collected.

1) The Hydro sector has already sustained massive hits

If we look back on the bearish run that lasted a little over four years, we see that hydropower companies took the most hits. They lost voraciously, and the stock price essentially plunged.

While the overall NEPSE index lost about 42% in the bearish downtrend, the Hydropower index lost almost a massive 70%.

Even investors who bought the IPOs of hydropower companies lost. Keep in mind that IPOs are believed to give guaranteed profits to subscribers as seen in the overall history. 

Thus, several hydropower companies are still trading below their par value of Rs. 100. Before this sudden bullish run, you could ask any knowledgeable investor and they would advise you to stay away from hydropower companies.

On the flip side, this means that this could be the worst that we can see. When something is at the lowest bottom, the only place it can now go is up and above. For this reason, an investor can speculate that the sector won't be as bad as the bottom of the bear phase in the upcoming days. Also, given that the general consensus is that NEPSE is already in a bullish run now, the hydropower sector might also get some light.

2) Excess Liquidity in the economy; Low-interest rates; Less Interest payment expenses; Increased profits

Establishing and operating a hydropower plant is a costly enterprise altogether. Thus, almost all hydro companies operate on borrowed capital. It is just a matter of which company has more or fewer borrowings and can effectively utilize the borrowed funds.

During and after the first three months of lockdown, the banking sector witnessed a huge surge in liquidity. Since people's spending has been severely cut by the pandemic, it is logical for banks and financial institutions (BFIs) to see an increase in deposits.

And at the same time, very few entities are taking loans from the BFIs. This is because every constructive/ productive activity has been brought to a halt. Industries and factories are operating with very limited resources or not operating at all. The expansion of businesses and construction activities is almost null at this time. Thus, banks currently have more than 200 billion rupees in liquidity.

For all these reasons, banks are compelled to reduce their interest rates on loans and deposits. As a result, the interest payment expenses of hydropower companies have been slashed. Fewer expenses in any form only mean that the fund will be collected as profits.

Thus, investors believe that excess liquidity has actually created a favorable scenario for hydro companies, and thus, their investors.

3) Hydropower companies' operations weren't harshly affected by the pandemic

We still have to accept that construction and reinstallation projects were affected. However, for plants that are already up and running, the pandemic did not pose a challenge.

For example, Chilime Hydropower is producing its projected quantity of electricity from its hydropower projects. The company has an agreement with NEA to sell the electricity at a pre-determined price. NEA can't deny buying the produced electricity in any case. Thus, the pandemic and the lockdown posed no major challenge whatsoever to Chilime Hydropower and numerous other hydro companies.

4) Investor speculation

All the points elaborated above may not be entirely true. However, since they are what the majority of investors believe in, a self-fulfilling prophecy is created in the market.

The stock market does what its participants believe it does. If enough investors believe that a stock will go up for any reason whatsoever, their actions will be in sync and the stock will go up indeed.

This is called investor speculation in technical terms. The stock market is gigantic machinery with microscopic functional parts. Each part has its own conscience. But the action of each part affects the upcoming actions of other parts. Essentially, if we consider that the market participants are the microscopic parts, this speculation has the potential to drive prices higher via a domino effect.

Nevertheless, if investors' faith isn't backed up by a fundamental explanation, the uptrend can become a bubble and eventually burst. Thus, investors should be wary while following the trend (more on this later).

5) New investors demand the stock but the old ones hold

There is a popular saying that, if even your milkman is talking about stocks, you should know that the market is in an aggressive bullish momentum.

While NEPSE was gaining aggressively in February this year, an intense amount of volume was seen on an intra-day basis. This can either be explained as the active participation of existing investors or the addition of new ones. The latter is not unlikely because:

a) NEPSE was at the start of a bullish phase, and a bullish market attracts investors like a midnight street lamp attracts moths.

b) NEPSE has gone through immense technological changes in the last few years. Now, even the online trading platform can be made online. Investors can also pay and receive funds from the comfort of their bedroom.

Note that these new investors did not witness the decline of the hydro sector during the last bearish trend. These are beginners who think cheap is always better like we all thought when we started. God bless them, because no matter whether they are right or wrong, they are in part responsible for this upwards momentum.

6) The sector can potentially witness policy reforms

Rumors spread the fastest in the stock market. 

Investors are barraged with countless rumors and myths regarding the capital market on a daily basis. Social media sites are the target of such inauthentic news portals to spread their fake news. 

As a result, there have been rumors that the regulatory bodies will increase the license period of hydropower companies. If this happens, hydro companies can keep generating profits for long before their hydropower plants are eventually handed over to the Nepal Electricity Authority (NEA). 

Furthermore, we've also seen a significant number of investors highly optimistic towards the refinancing policies of Nepal Rastra Bank towards these hydro companies. 

In a lack of conclusive evidence, Sharesansar cannot rule any of the rumors above as true or false. Nevertheless, it is plausible that investors highly expect the aforementioned reforms to happen. Some might have also bought the shares already expecting to grab a portion of the profits when such news is finally published by authentic portals like ours. 

Proceed with caution

Financial markets are always prone to volatility and unexpected loss. Also, by the law of the market, anything that goes up fast has the potential to come down faster.

Short-selling isn't allowed in NEPSE. In simpler words, short-selling is to bet that the stock goes down instead of up. A short seller profits when the market is losing. Since short selling isn't allowed in NEPSE, our stock market only has one half of a standard capital market. Everyone in NEPSE wants the index to go up. Evidently, investors have cheerfully welcomed the rise in the hydropower sector as well.

However, there are a handful of concerns in the bullish rise of hydropower companies. No one knows whether these parameters will bring the index down eventually. But it is always wise to know of the potential constraints that can weigh the trend down.

1) Not all apples in the basket are edible

There are companies that do not lose even during a bear market. And there are companies that do not gain even during a bull market.

A basic rule of thumb here is that only those companies which have net worth per share of more than Rs. 100 are able to distribute dividends.

Out of 23 hydropower companies who have posted the Q4 report of the last fiscal year, 9 companies have reported net worth per share less than Rs. 100. This is less than the par value which means that they have a negative reserve. Consequently, they are unable to distribute a dividend.

2) Embrace the trend but fear the promoters

The provision for the promoters of hydropower companies is unique from the provision for the promoters of other companies.

Three years after a hydropower company issues an IPO, its promoters can sell their shares in whatever the market price is determined by the general consensus.

How exactly will this affect us?

If investors get overly aggressive and take prices higher, the promoters will want to sell their shares. After all, even the promoters want to squeeze maximum profits from their investment. Thus, the entry of promoters in the secondary market will topple the supply-demand balance.

The market will be flooded by an excess supply of shares. If the supply is more than the demand, the price will eventually plunge until another equilibrium is reached.

3) If you're looking for short-term profits, maybe you missed the train already

"I feel that the price has already discounted all the positive expectations and improved conditions," says a techno-fundamental investor who chooses to remain anonymous.

For him, the price is already overextended.

His thoughts are commendable. Many amateur investors enter a stock when the price has already gained significantly. This is because he develops the fear of missing out. He does not want to remain empty-handed when his friends and colleagues count their profits. As a result, he buys the stock even if the price has already gained.

But sadly for our innocent investor, the stock has already peaked out. The early buyers begin exiting the stock, which drives the price downwards. As a result, he is left with his underappreciated quantity of shares.

The stock market is a mentally challenging game. Greed and fear drive the stock market more than any other fundamentals or indicators. If you are reading this article and are looking forward to buying a few shares of hydropower companies, you will have to evaluate with more diligence than those who entered a month ago.

Or, if you want to avoid the extra burden and uncertainty like our anonymous techno-fundamentalist, you are better off avoiding this sector altogether.

4) You might be getting manipulated

Because the paid-up capital of hydropower companies is small, a handful of players might be manipulating the stock price, says Dipendra Agrawal, an investor with experience.

This is because it is easy for big investors to direct their chunk of investing capital towards a company and manipulate its stock price via multiple transactions.

In the stock market, and especially in NEPSE, shady activities like intentional speculation, cornering, and price manipulation are common. 

Wrapping Up

Like in every other area of life, we want to look for meaning and rationale in the stock market. We want to look for the cause behind every effect.

However, the stock market is the most irrational entity put together by mankind. Any expert opinion or future projection can fail when the market notices a slight change of mood.

But this is also what makes the stock market beautiful because it provides an equal ground for amateurs and experts. While we tried to derive the rationale and logic behind the rise of hydropower companies, Sharesansar still requests readers to do their own research and make their own decisions.