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• Power is one sector which has had an unforgiving year. Despite losing over 50-80%, Harshavardhan Dole of IIFL tells CNBC-TV18 that the problems for this space might not yet be over because of the financial health of state electricity boards and shortage of fuel. "Therefore, we advice picking those large cap names that are relatively insulated from macro issues like the underlying volatility in the fuel prices as well as power prices," he said. He further adds that looking for a strong balance sheet is also important.Therefore, Dole bets on Tata Steel , NTPC and Power Grid right now because they fuel ties for the existing as well as future projects and they are going ahead with their capex plans as per schedule.

• Q: What do you expect will be the key agenda points when supposedly the big guys are going to meet the Prime Minister?

• A: Well the key issue encircling power sector are two; one is of course the health of the state electricity boards and second is the fuel or rather short fall of domestic supplies of coal from Coal India. There is very little that the central government can do because distribution is a state determined subject and at the most central government can issue certain guidelines which may or may not be adhered to by the state government.

• However when it comes to fuel, it is a matter of policy action. I expect that over the next six months or so, and particularly during this particular discussion, the focus will remain on making available good quality coal from the domestic sources to these upcoming as well as the existing power plants.

• Q: In November, the core sector indices showed that coal did reasonably well compared to its record in the previous three months. Does that convince you that action is already afoot? There is also some bit of recovery in all those power stocks, so would you extend the argument that because it is become an area of national focus you would start dabbling in any of those stocks?

• A: Well I wouldn't disagree that the government is basically not doing anything, but this is an issue where certain haphazard initiatives will not lead to a structural changes in the entire sector. It is a fact that our domestic requirement of coal is much more than what the incremental supply in the market is. In the short term, the government can certainly make available the existing coal on a priority basis to power companies. That is what it did in the month of October when most of the power plants were running coal inventory which was way below the critical level and that is what has lead to recovery in the PLF's of most of these companies.However in the long term, the solution is to increase the domestic coal supplies and that can happen only when the certain environmental restrictions are kind of loosened out or Coal India essentially steps up it capex plan and ramps up the production.

• Of course one other alternative that government could also consider is allowing the private companies to extract coal and sell that even at a price which is bilaterally negotiated to the power companies on a priority basis.Coming to the second question, if you look at the private sector utilities, aside from Jindal Steel and Power and Tata Power, most of the stocks have massively underperformed the index and some of them have corrected to an extent of 70-80%. That correction was largely led by concerns on not only the existing cash flows, but the cash flows that their upcoming power plants will actually generate. The concern was whether these companies will ever be able to meet their debt obligations. The valuations had corrected to an extent that some of these valuations were pointing out that these companies will eventually go bankrupt. This coupled with some marginal news flow triggered a partial rerating in these stocks.

• But does it mean that these companies are out of woods or this sector is out of woods? Well certainly there are indications that government is taking action, but not enough for one to say that the sector is out of woods. Certainly something major should come from the government on the coal front and I expect that to happen over the next 6-8 months at least from the policy framework. But till then I think it is worth sticking only to the large cap names which have got solid balance sheets and who are insulated from these fuel risks.

• Q: What is your buy list and your avoid list?

• A: Clearly we prefer something like a Tata Power or NTPC who have got fuel tied up for their existing as well as upcoming power projects. Even Power Grid is something we prefer because it is insulated from the underlying volatility in the fuel supply as well as the underlying power prices and is definitely progressing with their capex plan which they have charted out for themselves.
  What one should avoid is pretty simple; someone who doesn't have fuel tie ups or is basically working on a PPA which is non-functional as of now. They would have to essentially tie up rather get into intense discussions with the off takers and the bankers to structure out either the loans or structure out the PPA's and that's actually a very long process.

• Q: Any other stocks that you would watch out for in the penumbra of the power sector, say transmission companies, power equipment companies? Do you have any stocks in that list?

• A: Well as a house we prefer KEC but essentially we would certainly would want to play this whole theme right now through someone whose cash flows are insulted from the underlying volatility in the fuel prices as well as power prices and who have got stronger balance sheet. I think that is the best way to play this whole theme.

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