Jul 12, 2012, 08.23 AM IST | Source: CNBC-TV18

Tulsian picks REC, PFC as power stocks perform

Market analyst SP Tulsian of sptulsian.com explains to CNBC-TV18 that his first preference among the power stocks are the financing companies REC and PFC on which he expects a further upside of 15%

Market analyst SP Tulsian of sptulsian.com explains to CNBC-TV18 that his first preference among the power stocks are the financing companies REC and PFC on which he expects a further upside of 15%. Tulsian adds that he is unable to forecast if the upside will happen in July, but is positive that it will happen in the next couple of months.

Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video.

Q: What are your comments on the reports by Niko regarding the KG reserves? What kind of trajectory do you see on the stock?

A: The stock is quite promising. This news has been expected for the last over 12 months. The development expenditure for FY13 estimated at USD 500 million is very much within the planned target to double reserves. Last week, the sentiment was negative on news from the JV partners regarding the same KG-D6 blocks.

Once the confusion ends, the fact of an overdue timeline becomes clear. The moment it is estimated that the reserves can be doubled, it will be just a matter of when the extracting will begin.

I don't think there will be any fruitful extraction in FY13 because it will take about six months for the plans to be certified. If the timeline is adhered to by Reliance along with its JV partners, it will be a positive trigger for Reliance Industries from hereon.

The stock could mildly rerate from the current level of Rs 720-725 and has been moving up because of the share buyback. The fresh lease of life into the stock will take it to the Rs 775-780 levles.

Q: What do you make of the 6% fall in Cairn ever since the block deal and prices were more or less around expected lines?

A: There is a fall whenever major investors exit block deals. This has happened in the case of HDFC , Kotak Mahindra Bank on exit by the promoters.

In the case of Cairn, PLC was compelled to exit from the stock. They have put 3.5% stake on the block and will be left with 18% in the company.

In my view, the stock will be subdued as the remaining 18% stock is sold in tranches over the next 12 months. This stock is also under a double whammy- on one hand, falling crude prices have kept the prices under check and on tranches of stocks coming up for sale.

With the upside capped at about Rs 330, the stock makes for good short-term trading in a tight range of about Rs 305-320 for traders on a monthly basis.

Q: There haven't been any big gains in many of these power stocks though the news-flow has been positive. Do you see gains getting restricted is there an upside to stocks like Adani Power , Reliance Power or even ancillaries like REC and PFC ?

A: My order of preference starts with financing companies REC and PFC on whom I have been maintaining a positive view and I expect them to move further by about 15% from hereon. I am unable to forecast if the upside will happen in July, but I’m sure that it will happen in the next couple of months.

Both stocks are ruling at a PE multiple of close to 7-7.5 times with a price-to-book of 1.1-1.2 on the historic basis which in my view seems to be very low.

Next in the border of preference are capital-goods stocks like BGR Energy , BHEL , L&T , ABB , Siemens , Crompton Greaves and Thermax .

Last in the order of preference is power generation stocks like Adani Power and Reliance Power. Though they are moving up, I don't think that their rallies will be sustainable.

Q: Any reason why JSPL has seen such a huge move today?

A: In fact, JSPL has been languishing for all the wrong reasons. Its licence to the mines of Bolivia has been cancelled, it is making no headway in the domestic sector and the much-talked about acquisitions are yet to happen.

So lot of pessimism has been building up, resulting in huge shorts getting created into the stock which have been keeping it under check.

So probably some renewed buying interest sent these hefty shorts running to cover and that could be the reason for such a steep rise into the share.

But this cannot be assumed to be a sustainable rally and may find resistance at Rs 475 where fresh shorts will be created.

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