India Power Sector Syncing the cash and growth tales :JPMorgan

We reassess our view on the power sector with a hypothesis that a stock
with assurance of profitable growth and the cash to achieve it is more
investment worthy, at the right valuation.

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 Growth Tales: Power companies with high absolute growth in operating
cash flows over FY13-15 rank low on consolidated profitability. Adjusting
growth tale for risk to operations and credible medium-term growth
opportunities, PGCIL ranks over NTPC and both over IPPs. On assurance
of profitable growth among IPPs, TPWR and RPWR score over JPVL and
ADANI in that order and JSW has the weakest growth tale.
 Cash Tales: The pursuit of high growth in an uncertain sector environment
has impacted the ability of few IPPs to service near-term cash liabilities
from internal accruals. Refinancing debt or leveraging further appears to be
the only viable option which can be a risk to earnings projections. Barring
ADANI, JPVL and RPWR, base case estimates of operating cash flow are
sufficient to meet interest liabilities, debt repayment liabilities, and equity
commitment for under construction projects. RPWR has comfort from cash
on the balance sheet. NTPC and JSW have healthy cash tales, Mundra
UMPP remains a cash bleed for TPWR. Unless PGCIL capex plan sees a
meaningful uptick beyond plan or capitalization slows down, the company
can ward off dilution risk in the medium term.
 Syncing the two: We weigh the outcome of our screening exercise on cash
and growth tales to current and target valuations. Despite the sell-off, on a
P/E basis, ADANI (UW) and RPWR (UW) are still the most expensive,
although there are uncertainties in operations and pipeline plans,
respectively. Factoring in disappointment of performance in Indonesian coal
mines, we think TPWR (N) is fairly valued, but even a mild NPV positive
outcome on Mundra UMPP (uncertain timing) could swing the argument to
a buy. We believe beaten down valuations provide an entry opportunity into
JSW (OW), best placed to rally on INR appreciation. We like JPVL’s (OW)
hydro and part captive coal-based thermal portfolio at current valuations;
however, significant cash shortfall over the next two years weakens the
investment argument for an unqualified buy. We think PWGR (OW)
provides the best mix on P/E valuation and fundamentals in the current
sector environment, followed by NTPC (OW) - we rank both over IPPs.