Worst behind JSPL; co winning blocks for decent price: IIFL

Below is the transcript of Harshvardhan Dole's interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Reema: The big winner today is Jindal Steel & Power Ltd (JSPL) that is higher by close to about 6.5 percent. Has the street factored in the winning of Gare Palma II/3 as well as yesterday’s Tara coal block and what is the outlook on JSPL post these wins?

A: They have been able to get the two coal blocks pretty well and in both the cases, the premium that they have paid is significantly lower than what we have seen in the alternative bids. For example, for Gare Palma, the producing mine, effectively the premium has been paid just about Rs 8 over and above the Rs 100 base of royalty. In case of Tara block it is marginally higher. I would say that they have been able to get these coal blocks at a pretty competitive price way below what the alternative bids have been.

Having said that, I think the next challenge ahead in case of JSPL is to tie up the long-term power purchase agreements (PPAs) which remains key for that annuity cash flow after FY16 and FY17 once particularly the Tara coal block starts commercially producing coal.

We have a buy recommendation on JSPL and that is largely based on the fact that worst is over for the company clearly they have been able to get coal for the power business, business continuity has been assumed and we as of now do not ascribe great value to the steel business.

Latha: How would Adani Power look on balance, win some, lose some, how does it tally?

A: It is a bit interesting case because on one side, they are grappling with the debt on their books, which particularly is rising because of the losses that they are encountering at Mundra where the PPAs are being challenged at various forums and on the other hand, the company is going ahead in acquiring these stressed assets at reasonable price.

So I am not sure how the banking circle is looking at Adani and I will be curious to see the outcome of the acquisition that they have recently done and how can they pull it off considering the fact that the bankers have been pretty vigilant and wherever there have been stressed points, they have been particular to sell down the underlying assets. So as of now, we are curious and we are awaiting the key developments at Adani.

The acquisition of Avantha Power if I were to evaluate on a standalone basis, it is a pretty good one. The coal mine that they have acquired should allow them to tie up long-term power from Avantha and if I were to look at on the standalone basis, it is a pretty good deal. But if I were to sum total and look the big picture for Adani Power, I think there are a lot of ‘if’s and ‘but’s whereby one needs to see how the bankers take a view on the consolidated debt.

Reema: The Adani Power losing the Mandakini block would not pay much of a deterrent?

A: Certainly it is, there is no denying but Adani Power has already signed certain fixed price contracts from its generating assets and whenever a coal block is won at a substantial premium or negative value being ascribed to the extraction cost etc, the PPA gets reset, the variable cost in the PPA gets reset and probably that is the reason why Adani has not been as aggressive to acquire these underlying coal blocks for its operational assets. The problem with Adani or rather what they need to deal with is basically how to tackle the consolidated debt rather than secure the additional coal.

Latha: There is CESC as well. What is the assessment? Even they got it at a negative bid right?

A: Yes but I think the focus of the company was to ensure business continuity. Had they not got access to the coal block, probably the plant load factors (PLFs) of the underlying assets would have fell below something like 50 percent and clearly with delay in ramp up in linkage coal production from Coal India, there was business continuity issue from CESC.

Therefore, they probably chose to bid at a substantial higher price and ensured that PLFs of the existing plants don’t basically fall or they remain unaffected. Probably with that view, they acquired the block and we had told by the management that there are several operational levers that is selling part of the coal through merchant power etc. The worst for the stock is over. It should be one of the better performing stocks in the entire sector.

Latha: Can you run us through what your price levels and what are your buy or sells for the power stocks?

A: In the PSU, clearly our top pick is Power Grid, that continues to remain our preferred pick and that offers the best risk adjusted returns over the next maybe 24-36 months and I think if the investors are unwilling to take greater risk in the sector, this is one stock that they should hold in the portfolio. If the risk level slightly goes up then probably stocks like CESC should definitely fall on radar and that remains our second top pick in the sector.