Recently, UP announced a hike(yet again!) in the prices sugar mills need to pay farmers for their cane. This, without any improvement in yield. Unsurprisingly, the states moved court, and demanded a stay on the order. But irrespective of the legal gymnastics, the market already responded and hammered down sugar stocks, sending premier players like Shree Renuka Sugars to their 52 week lows.
But this story is not only for sugar. When the draft Land Acquisition Bill was promulgated mandating compensating existing project affected people to the tune of 25% of profits, the coal sector took a major hit especially PSUs like Coal India, because unlike the private sector, they do not have the option of challenging the act in court. Another factor which played havoc under the previous Environmental Minister Jairam Ramesh, was the delaying/banning mining in certain areas. While that hit even other companies, Coal India again took a major hit. And while one may argue that the policy stayed same-only the law of the land was enforced-one cannot deny that this was a political shock.
And when the export tax on domestic iron ore was increased, the steel lobby salivated at the prospects of cheaper steel. But when the Karnataka mining scam forced the Supreme Court to react, it switched to the other extreme and stopped mining in all but 2 mines, and ordered open auction disregarding the existing supply contracts. Hence, companies like JSW Steel without their own captive mines, suffered the most and saw lower capacity utilization. Of course, the Govt policy of not challenging the SC order, played a role in this, but again it was in no position to do so.
Takeaway: When the inputs/outputs are strongly regulated by the state, there is a case to embedd this discount into the stock, because one does not know what will happen next in this political environment.