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India Equity Research Reports, IPO and Stock News
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Earnings are falling, so are stocks: We don’t think it is time to jump back
into the sector yet, as fuel constraints, high leverage and onerous PPAs still
pose downside risk. We recommend trimming Adani Power (downgraded
to Neutral with PT of Rs90) – relative outperformer so far, but recent
concerns on fixed-tariff-PPAs and rising coal costs might belie high growth
expectations. We would continue to avoid Lanco (N, PT lowered to Rs19),
RPWR (UW, PT lowered to Rs72) and JSWE (UW, PT at Rs55). A
defensive strategy might pay off over the next 6 months, and we stay OW
on TPWR, Powergrid, and Neutral on NTPC.
Stock-specific risks are high, but systemic risk is lower: Besides fuel
constraints, we see emerging risk from fixed tariff PPAs and rising coal
costs, as foreign governments disapprove cheap coal exports (affecting
Adani, RPWR, TPWR). Financially distressed distcoms’ default risk
continues to be a hanging sword, although payment security mechanisms
have worked well so far. Companies taking on significant debt for pipeline
projects are still vulnerable to overruns, as pre-construction risks have risen,
fresh equity appetite is drying up and funding costs are on the rise. On the
positive side, we see operating projects wading through teething issues, and
low risk of system failure, thanks to dominant players like NTPC entering
into regulated return PPAs with cost pass-throughs.
Stock valuations in troubled times–prefer asset-based multiples: Our
price-value mismatch analysis highlights Lanco and JPVL as ‘must-watch’
stocks, which could be on their way to bottoming out if catalysts described
below come through. On the other hand, Adani is on a high FY12E P/B of
2x, suggesting RoE expectations might be unrealistic given recent newsflow.
Our prescription: At the policy level, we see (1) measures to improve fuel
availability, (2) relaxation of coal mining norms and (3) state distcom
reforms as necessary catalysts. At the macro level, reversal of the interest
rate cycle and return of equity funding appetite would aid sentiment,
particularly for Lanco and Adani. Company-specific catalysts include (1)
attempt to renegotiate onerous PPAs (+ for TPWR, RPWR, Adani), (2) fuel
security (+ for JSWE) and (3) beefing up execution (+ for Lanco, NTPC).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Earnings are falling, so are stocks: We don’t think it is time to jump back
into the sector yet, as fuel constraints, high leverage and onerous PPAs still
pose downside risk. We recommend trimming Adani Power (downgraded
to Neutral with PT of Rs90) – relative outperformer so far, but recent
concerns on fixed-tariff-PPAs and rising coal costs might belie high growth
expectations. We would continue to avoid Lanco (N, PT lowered to Rs19),
RPWR (UW, PT lowered to Rs72) and JSWE (UW, PT at Rs55). A
defensive strategy might pay off over the next 6 months, and we stay OW
on TPWR, Powergrid, and Neutral on NTPC.
Stock-specific risks are high, but systemic risk is lower: Besides fuel
constraints, we see emerging risk from fixed tariff PPAs and rising coal
costs, as foreign governments disapprove cheap coal exports (affecting
Adani, RPWR, TPWR). Financially distressed distcoms’ default risk
continues to be a hanging sword, although payment security mechanisms
have worked well so far. Companies taking on significant debt for pipeline
projects are still vulnerable to overruns, as pre-construction risks have risen,
fresh equity appetite is drying up and funding costs are on the rise. On the
positive side, we see operating projects wading through teething issues, and
low risk of system failure, thanks to dominant players like NTPC entering
into regulated return PPAs with cost pass-throughs.
Stock valuations in troubled times–prefer asset-based multiples: Our
price-value mismatch analysis highlights Lanco and JPVL as ‘must-watch’
stocks, which could be on their way to bottoming out if catalysts described
below come through. On the other hand, Adani is on a high FY12E P/B of
2x, suggesting RoE expectations might be unrealistic given recent newsflow.
Our prescription: At the policy level, we see (1) measures to improve fuel
availability, (2) relaxation of coal mining norms and (3) state distcom
reforms as necessary catalysts. At the macro level, reversal of the interest
rate cycle and return of equity funding appetite would aid sentiment,
particularly for Lanco and Adani. Company-specific catalysts include (1)
attempt to renegotiate onerous PPAs (+ for TPWR, RPWR, Adani), (2) fuel
security (+ for JSWE) and (3) beefing up execution (+ for Lanco, NTPC).
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