PTC, Lanco, Adani to gain from SEB restructuring: IIFL

Once the SEB restructuring is in place and the liquidity in the system improves, companies like PTC, Lanco, Adani and Reliance Infrastructure tend to benefit, said Harshvardhan Dole of IIFL.

Dole expects the SEBs to go cautious on the merchant power rate because a majority of them have received tariff orders with a specific cap on power purchase rate in the short-term markets.
"Given their current financial health, they certainly would not want to go against the regulator's order which otherwise would lead to further cost under-recoveries. Right now, the focus will be to improve quality to the end consumers by increasing the supply time or cutting down the load-shedding. That will be the focus for the discoms in the near-term," he said.
Dole retains 'Buy' on JSPL. "From a tactical reason, you should be overweight on the stock, and in hindsight, that risk reward paid off well in our favour. But now, I should caution that the stock is trading near fair value," he added. Here is the edited transcript of the interview on CNBC-TV18. Q: Which are the companies that will benefit when SEBs get money?
A: Those who have huge receivables pending from problematic SEBs will tend to benefit in the first phase once the liquidity in the system improves. For instance, PTC, which is the largest power trading company in India, have receivables of around Rs 700-800 crore from Tamil Nadu and Uttar Pradesh. These will gradually get liquidated over the next 3-4 quarters once the liquidity within these two Discoms improves.
Within the private sector generation companies, there are companies where the receivables are stuck for more than a couple of months whereby the liquidity will ensure that receivable days for these companies start coming through. To name a few, PTC, to an extent, Lanco, Adani and Reliance Infrastructure will tend to benefit in the first phase. Q: The other positive from this development is that now the SEBs would be in a better shape and power volume off take could begin to improve. By when do you think material improvement could start reflecting in terms of the generators and their volumes being sold and the merchant prices?
A: Improvement in volumes gradually has started to come through. The off take from SEBs has gradually improved during this quarter. As the tariff increases happen and as the end consumer billing starts, the off take from SEBs will improve. To that extent, the PLFs of thermal power companies, thermal generator companies over the next four quarters will definitely see an improvement vis-à-vis what they are today.
With regard to the merchant power rate, the SEBs will go cautious because a majority of the SEBs has received tariff orders with a specific cap on power purchase rate in the short-term markets. Given their current financial health, they certainly would not want to go against the regulator’s order which otherwise would lead to further cost under-recoveries.
If you actually go through the debt restructuring package in detail, any losses which are over and above estimated in the debt restructuring package, either the states would have to fund on their own or the SEBs will have to take on their own books. Banks will not fund the incremental losses. I think revival in the merchant power prices is still sometime away. Right now, the focus will be to improve quality to the end consumers by increasing the supply time or cutting down the load-shedding. That will be the focus for the Discoms in the near-term. Q: Why are you so positive on JSPL?
A: The 'Buy' recommendation still continues when the stock price had gone to Rs 320. Therefore, we thought that Rs 320 was in the price. From a tactical reason, you should be overweight on the stock, and in hindsight, that risk reward paid off well in our favour. But now, I should caution that the stock is trading near fair value. A lot depends on how the clearance of Utkal B1, which is a coal mine which will feed the upcoming power projects at Angul and the steel mine gets mining lease from the state government.
If the mine is cleared this year, probably FY15 onwards you should see the company back in great earnings growth action. If the mine is delayed by another 12-15 months then you are looking at flat earnings growth for the next two years. At Rs 450 or so, the stock will be certainly pricing in one year earnings growth. At Rs 320, the stock was pricing in most of the negatives but near to Rs 450, one should be cautious because that is the fair value for the stock.
_PAGEBREAK_ Q: What is your expectation from Utkal B1? What has been your interaction with the company or the sector experts?
A: The way in which the news flow on implementation of reviving the sector and the essential sectoral outlook has changed, over the next two quarters, it looks like you should have fair certainty in terms of all the mining leases getting cleared. But we would certainly keep a watch on the developments, particularly CBI scrutinizing the coal blocks which have being awarded or now the case has been pushed to Supreme Court.
How Supreme Court deals with all these issues will matter a lot now. Therefore, on a one-year forward basis, the earnings are pretty much discounted. Any disappointment in earnings is not there in the price, therefore, the stock is trading near to the fair value. Q: When you give a target price of Rs 110 for Tata Power, are you factoring in anything positive on the power purchase agreement (PPA) front?
A: Not at all, in fact, the target price assumes that the status quo prevails on Mundra site. This year, they incur profit before tax (PBT) loss of closer to about Rs 600 crore. Next year on the unchanged basis, the peak losses will be estimated close to about Rs 1,150-1,200 crore. The Rs 110 target price is based on net present value (NPV) of coal special purpose vehicle (SPV) and Mundra put together along with the other businesses where things remains more or less unchanged.