Tips from Kotak Sec: How to play the power stocks now

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Tips from Kotak Sec: How to play the power stocks now

Sanjeev Zarbade of Kotak Securities picked power sector stocks like Suzlon Energy, Greaves Cotton and Kalpataru Power and gave outlook for each.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Buy Suzlon Energy at lower levels: Betadpur Suzlon Energy may go to Rs 45-44: Thacker See Rs 55-56 level in Suzlon Energy: Tulsian ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

With news doing the rounds that NTPC may get Rs 2,000 crore refund for scrapped hydel unit, will investors flock back to the power sector? Dismissing any such possibility, Sanjeev Zarbade, analyst, Kotak Securities, picked individual stocks in the sector and gave their outlook.

Suzlon Energy , which has been hammered down on the bourses, speaking about the stock's outlook, he said, Suzlon's order backlog is not sufficient for FY11 and it's visibility for FY12 revenues is also very low. To resurrect faith in the company, Suzlon has to focus on order inflow and execution. He maintain's a buy on Greaves Cotton , with a target Rs 450. For Kalpataru Power , he has set a price target of Rs 1,300 per share.

Here is a verbatim transcript of the exclusive interview with Sanjeev Zarbade on CNBC-TV18. Also watch the accompanying video.

Q: Suzlon, terrible quarterly numbers, but do you see the stock heading a whole lot higher or do you think its trading at base valuations?

A: It's very difficult to say where the stock can ultimately settle down because it all depends upon what kind of profits that they can generate in the overall visible timeframe. Currently, the order backlog that they have of 1,458 megawatts (MW) is not sufficient for FY11 itself and we have much lesser visibility for FY12. So, all in all, it's very difficult to say what kind of profit numbers that the company can make.

The things to monitor would be international order intake and overall global macro environment for wind power and the company's overall efforts to contain cost. So, these are various parameters that one should monitor to get a hang of where the stock price can settle down.

Q: Do you expect them to suffer even more on the volume front because that's basically the problem, the kind of volume slippage they have seen in markets like Europe and the US?

A: Actually, the company had some product specific issues way back in 2008 and then there were also execution related issues and they have not been quite successful in getting new orders in the past more than two years. As against that, there have been some improvements shown by European wind turbine makers, so it is more to do with some company specific issues that Suzlon needs to sort out. Then later on, it can probably get some new order intake. It is also looking at new geographies like Brazil wherein it is in a favourable position to win some large orders.

Q: So at sub-Rs 50, what are you recommending doing on the stock?

A: We are very cautious on the stock because the earnings before interest, taxes, depreciation and amortization (EBITDA) that they generated in the Q1 was in the negative. Despite reporting much higher volumes in terms of MW installed, the company's EBITDA margins actually came down, so that was a matter of concern for the company.

Going forward, the things that we will monitor are that how successful company is at building its order in-take, especially from the international geographies and its cost containment measures. Unless these two factors are there, the company will not be able to service the interest burden that it is currently having.

Q: The recent numbers of the industry leader there, Vestas, also did not look very optimistic and they cut their guidance quite a bit. Do you think the order book will pick-up in this kind of a global environment for wind power?

A: It's difficult to say. But given the pain that the Eurozone has gone through, the global environment for wind power is definitely not as good as it was maybe two-three years back. Moreover, for Suzlon there are company specific and earlier legacy issues of product related problems. So, what we have seen in Suzlon is that most of the orders that they got in the Q1, mainly 85-90% were from Indian geography. It used to be other way round some two years back. So, the company is finding difficult to get new orders.