"Power stocks are underperforming due to routine profit booking," says Harshavardhan Dole, analyst, IIFL in an interview to CNBC-TV18. Dole expects the power sector to perform well over the 6-12 months, as the sector heads into recovery.
Recently, we came out with a detailed report on power sector and at this juncture every power stock offers with a two-three year view reasonable risk reward opportunity
"Power stocks are underperforming due to routine profit booking," says Harshavardhan Dole, analyst, IIFL in an interview to CNBC-TV18. Dole expects the power sector to perform well over the next 6-12 months, as the sector heads into recovery. "These regular movements in the stock price largely reflect the sentiment involved with respect to investors rather than anything macro which is expected to go wrong at this juncture," adds Dole.
Below is an edited transcript of Harshavardhan Dole's interview on CNBC-TV18
Q: In the past couple of weeks the advantage for retailer to get into National Thermal Power Corporation (NTPC) is dwindling. Do you see that affecting the stocks prospects? Do you still expect that it to be over subscribed at the divestment?
A: Well, the issue will be subscribed given the participation so far. The issue is more than 50 percent subscribed and so the full issue will go through. In the long run if someone buys the stock between Rs 145 and Rs 148, you are well poised to get about 12-15 percent compounded return over a period of next three-four years at a risk which is far lower than what the private sector independent power plants (IPPs) offer at the moment.
Q: What is your target price for NTPC and what is your fundamental call on the stock in terms of earnings going into FY14-15?
A: Our target price is Rs 170 and we have a positive bias on this stock. The hypothesis is simple that worst for NTPC is behind us. The key issues such as pick up in capacity addition and fuel shortages are behind us. Yesterday, we saw that the pooling of coal price has been cleared.
Q: Because of this pooling imported coal and domestic coal would not the coal prices go up for NTPC which as one of the oldest power generators would be enjoying better supplies from Coal India? We have started looking at improving the fortunes of the state electricity boards (SEBs) only now. Are there are a couple of quarters when the stock will linger before it gets to the price that you are speaking about?
A: Of course, this is 12 month forward target price and stems from the belief that while the worst is over, for the best to come it is going to be a prolonged recovery period of around 12-15 months. But the advantages that NTPC enjoys with the private sector player are three folds.
Q: What are the key risks to your target price and the key risks with regards to the fundamentals for NTPC as a whole?
A: The target price is vulnerable to two issues. One is the expected addition in capacity. We are building about 2500 megawatt each year for next three years. If that slows down, the growth outlook for the stock changes and then the 1.5 times price to book multiple that we are basing upon may see some compression.
Q: Is this the sole power stock you like?
A: Recently, we came out with a detailed report on power sector and at this juncture every power stock offers, with a two-three year view, reasonable risk reward opportunity. Our top pick within the private sector players is Tata Power and within the PSU pack we like Power Grid along with NTPC.
Q: A lot of these power stocks are underperforming except for Adani Power . Any news on power or any thoughts with regards to this decline or is it just routine profit booking?
A: I would suspect that it is more of a routine profit booking. This is because if you look at the developments which have happened in the past 6-12 months and are likely to happen over the next 6-12 months, we are heading towards recovery in the power sector in general. These regular movements in the stock price largely reflect the sentiment involved with respect to investors rather than anything macro which is expected to go wrong at this juncture.
Tata Power stock price
On September 30, 2014, Tata Power Company closed at Rs 83.00, down Rs 0.7, or 0.84 percent. The 52-week high of the share was Rs 115.25 and the 52-week low was Rs 68.95.
The company's trailing 12-month (TTM) EPS was at Rs 3.15 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 26.35. The latest book value of the company is Rs 52.69 per share. At current value, the price-to-book value of the company is 1.58.
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