IndiaEquityResearch Utilities

May02,2012

SectorReport
AdaniPower Rating CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m)(mn) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDbn) JSWEnergy Rating CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m)(mn) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDbn) NTPC Rating CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m)(mn) Avg.Val.(3m)(INRmn) 52wkH/L(INR) MCAP(INRbn/USDbn) TataPowerCo. Rating CurrentMarketPrice TargetPrice BloombergCode Reuterscode Avg.Vol.(3m)(mn) Avg.Val.(3m)(INRmn) StockChart(RelativetoSensex) MCAP(INRbn/USDbn) Valuations ADANI JSW* NTPC TPWR P/E(x) 03/12f 03/13f 91.3 9.2 48.5 12.3 13.4 12.8 13.5 13.7 Buy 63 81 ADANIIN ADAN.BO 8.61 653 119/59.3 138.11/2.61 Hold 50 46 JSWIN JSWE.BO 3.79 240 79.9/35.8 82.49/1.56 Buy 160 208 NTPCIN NTPC.BO 2.09 363 192/152 1,318/24.89 Add 103 118 TPWRIN TTPW.BO 5.23 565 136/80.2 244.55/4.62

Utilities
Turningpointmaybegettingcloser
Reforms are likely to be undertaken in FY13f to revive the Indian power sector. If left unchecked, annual losses of all statelevel distributingcompaniesarelikelytoreach1.2%oftheGDP.Likelytariff hikesbyDISCOMsneedtobesupplementedbymeasuresthatwould ensureasteadycoalsupplytothenewthermalgeneratingcapacityof c7GW at a stable and reasonable price. The benefits of such reforms and expected firming up of merchant tariffs are likely to improve earnings from FY14. Even with the wellknown stress, the consensus forecasts for the power companies FY13 and FY14 earnings growth exceedthatoftheNifty.Thisislikelytopreservethepremiuminthe P/EovertheNifty.WeinitiatecoveragewithBuyratingsonNTPCand ADANI,anAddratingonTPWRandaHoldratingonJSW. CompellingcasefornextphaseofreformsinFY13
If there are no reforms, DISCOM losses, as a percentage of the nominal GDP, arelikelytoreach1.2%byMar14f,aswaswitnessedearlierbetweenFY99and FY02. As of Dec11, cINR1,627bn, i.e., 32% of the banks, POWF and RECLs exposure to the power sector faces risk. As crisis reaches a tipping point, the next set of reforms may be initiated; this is visible with the Shunglu committees report submission, and the presidential directive to Coal India (COALIN,Add)tosignFSAs.

Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13f FY14ftobridgethenetgap.DISCOMsmaybeabletoraisetheARRperunitby aCAGRof11%inthenextthreeyears.Whilethismayreducelossesto0.8%of thenominalGDPinFY14ffrom1.0%inFY12f,thebreakevenmayneedmore.

Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Progressonminingatallocatedcaptivecoalblockswasslowduetothego,no gopolicyoftheMinistryofEnvironment.Thelastsixmonthsrevealsomesigns of the policys removal, but coal extraction may only begin after two years. Capacityof45GWwasapprovedin200610withfuelsuppliesfromthesecoal blocks,andc7GWmaybecompletedinFY13andFY14.

OutlooklikelytoimproveforearningsfromFY14f
FY14fearningsofprivateutilitieswithlargepipelinesmayimproveduetothe likely increase of lowercost domestic coal supply and rise in merchant tariffs forasmallperiodduetotheelectionsscheduledin1H2014.Companiessuchas NTPC and TPWR are relatively protected as a large part of their revenues are shieldedfromcostincreases.Thestructuralimprovementinprofitabilityarising fromanticipatedreformsmaybevisibleafterFY14f.

EV/E(x) 03/12f 03/13f HigherearningsgrowthmaypreservepremiumoverNifty 8.2 23.5 Consensus forecasts for the power companies FY13f and FY14f earnings 10.4 6.8 growthexceedthoseoftheNifty.Thisislikelytopreservethepremiumofthe 10.2 9.3 10.3 8.2 powerindexovertheNifty.WeinitiatecoverageonNTPC(Buy),ADANI(Buy),

Note:* For JSW, ratios for 03/12 are on actual domesticcoalproduction. numbers.

TPWR (Add) and JSW (Hold). Risk factors include a higherthanexpected

AbhayMoghe,+9102266842857 abhay.moghe@avendus.com
Pleaserefertothedisclaimertowardstheendofthedocument.

India Equity Research

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Investmentsummary
Reforms that are necessary to rejuvenate Indias power sector may finally be undertaken in FY13. If left unchecked, annuallossesofallstateleveldistributingcompaniesarelikelytoreach1.2%ofthegrossdomesticproduct(GDP).The needtodefusealoomingcrisisthatcouldaffectseveralsectorswithintheeconomymaycatalyzeaseriesofstepsthat canrestoretheviabilityofproducersandreducerisktolenderswithalowimpactonconsumers.Tariffhikesneedtobe supplementedbymeasuresthatwouldensureasteadycoalsupplytothenewthermalgeneratingcapacityofc7GWat a stable and reasonable price. Two elements in this effort are the supply from Coal India (COAL IN, Add) and developmentofcaptivemines.Thebenefitsofsuchreformsandexpectedfirmingupofmerchanttariffs,arelikelyto improveearningsfromFY14.Evenwiththewellknownstress,theconsensusforecastsforthepowercompaniesFY13 and FY14 earnings growth exceed that of the Nifty. This is likely to preserve the premium in the P/E over the Nifty. ProducerssuchasNTPC(NTPCIN,Buy)andTataPower(TPWRIN,Add)withahighproportionofrevenuesattariffthat providepassthroughoffuelcostshavemorestableearnings.WeinitiatecoveragewithBuyratingsonNTPCandAdani Power(ADANIIN),anAddratingonTPWRandHoldratingonJSWEnergy(JSWIN).

CompellingcasefornextphaseofreformsinFY13
Crisisinthepowersector isreachingatippingpoint withdistribution companies(DISCOM)s losses,asapercentageof thenominalGDP,likelyto reach1.2%byMar14f,if noreformsare implemented.

Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,as apercentageofthenominalGDP,likelytoreach1.2%byMar14f,ifnoreformsareimplemented.Such highlevellosses,asapercentageoftheGDP,wereearlierwitnessedinFY99FY02,whenkeyreforms pertaining to the bailout of state electricity boards (SEBs) and formation of the Electricity Act were initiated.Also,thepowersectorcrisismayimpactothersectorssuchasbanks.Ofthetotalloans,50% loanstotheWIPcapacityand90%toDISCOMsarelikelytobeatrisk.AsofDec11,thisamountwas likelytobecINR1,627bn,i.e.,32%ofthebanks,PowerFinanceCorporation(POWFIN,Buy)andRural ElectrificationCorporation(RECLIN,Buy)sexposuretothepowersectorthatfacesrisk.Asthecrisis reaches a tipping point, the next set of reforms may be initiated, including: (1) permitting a pass through of imported coal costs; (2) increase in tariffs by DISCOMs; and (3) approvals for already allocatedcaptivecoalblocks.Signsofalikelyinitiationofthenextsetofreformsarevisiblewiththe following: (1) submission of the Shunglu committees report addressing measures to improve DISCOMsfinancialhealth;(2)removalofbasiccustomsdutyonimportedcoal;and(3)directingCoal India(COALIN,Add)tosignfuelsupplyagreements(FSAs)forpowerplantscommissionedby31Dec11.

Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
The11%increaseinpower costsmayimpactprofits ofcompaniesinvarious sectorsbyc2.5%

Tobridgethewidenednetgap,DISCOMsofkeystatesneedtoraisetariffsataCAGRof13%58%in FY13fFY14f. However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of 1.9%7.0%inFY08FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradesh overFY09FY11,weexpectDISCOMstobeabletoraisetheirARRbyaCAGRof11%inthenextthree years.Whilethismayhelpreducelossesto0.8%ofthenominalGDPinFY14ffrom1.0%inFY12f,the breakeven may need more. With a CAGR of 11% in ARR, it may take nine years to achieve PAT breakeven. The 11% increase in power costs may impact the profits of companies in various sectors suchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupof BSE500 companies. Some steps were taken by nonstate entities to compel DISCOMs to improve financialhealthsuchaspreconditionsforrestructuringloansandaproposaltoincludeDISCOMlosses intostategovernmentdeficitsaswellasaskingSERCsforasuomotoriseintariffs.

Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Thermal capacity of about 45GW was approved in 200610 with fuel linkage to undeveloped coal reserves.Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdle beingthego,nogopolicythathelduptheMinistryofEnvironmentsapproval.Inthelastsixmonths, therehavebeensignsthatthepolicyislikelytoberemoved.Evenwiththis,coalextractionmayonly begin after two years. Of the new capacity linked to captive mines, we estimate c7GW may be completedinFY13andFY14;companiesmaybecompelledtooperatebybuyingcoalatmarketprices. Utilities 2

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SomeutilitiessuchasNTPCandTPWRarelikelytocommenceminingfromcaptiveminesinFY15f.As perourestimates,capacityofc41GWmaybesupportedbycoalfromsuchcaptivemines.

ChangesunderwaytoexpandprofitabilityfromFY14f
FY14fearningsofprivate utilitieswithlarge pipelinesmayimprove duetothelikelygrowthin lowercostdomesticcoal supplyandincreasein merchanttariffsfora smallperiod

The FY13f earnings of private utilities with large capacity in the pipeline are likely to remain under pressureduetoINRdepreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts. Larger and older companies such as NTPC and TPWR are relatively protected as a large part of their revenuesfromPPAsareshieldedfromcostrises.However,theFY14fearningsofprivateutilitieswith largepipelinesmayimproveduetothelikelygrowthinlowercostdomesticcoalsupplyandincreasein merchant tariffs for a small period owing to the elections scheduled in 1H2014. Supply from COAL wouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobethe firming up of merchant tariffs preceding the general elections due in 1H2014. The structural improvementinprofitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f.

HigherearningsgrowthmaypreservepremiumoverNifty
Consensus forecasts for the power companies FY13f and FY14f earnings growth exceed that of the Nifty. This is likely to preserve the recent premium of the power index over the Nifty. The power indexsrelativeunderperformancetotheNiftyreducedpaceinthequarterendingMar12comparedto the five consecutive quarters, preceding the last quarter. The power index underperformed Nifty in Apr12. Earlier underperformance may have been led by the significant drop in the yoy growth in consensusPATforecastsofthepowerindexinFY12.Thisbroughtgrowthforecastslowerthanthatof theNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL, the RoEs may reflect significant variance from ADANI and JSWs base caseforecasts. However, NTPC andTPWRsRoEsarelessexposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsdue to a large proportion of installed capacity under tariffs that enable passthrough of fuel costs. We initiate coverage on NTPC (Buy, INR208), TPWR (Add, INR118), ADANI (Buy, INR81) and JSW (Hold, INR46).Riskfactorsincludehigherthanexpecteddomesticcoalproductionandprojectdelays. Exhibit1: CoalbasedcapacityfuelledbyCOAL
120 GWofcoalbasedcapacityfuelledbyCoalIndia %ofcoalbasedcapacityfuelledbyCoalIndia 90 85 7.0 100

Exhibit2: RelativeperformanceofpowerindextoNifty(%)
14.0

60

70

0.0

30

55

7.0

0 FY10 FY11 FY12f FY13f FY14f FY15f

40

14.0 Jun10(3m) Dec10(3m) Jun11(3m) Dec11(3m) Apr12

Source:CEA,Company,AvendusResearch

Source:Bloomberg,AvendusResearch.

Exhibit3: Valuationssummary
NTPC TPWR ADANI JSW* CMP (INR) 160 103 63 50 TP (INR) 208 118 81 46 Upside (%) 30 14 28 9 FY12f 13.4 13.7 91.3 48.5 P/E(x) FY13f 12.8 13.5 9.2 12.3 FY14f 11.2 17.4 8.1 9.6 FY12f 1.8 1.7 2.1 1.4 P/B(x) FY13f 1.6 1.6 1.7 1.3 FY14f 1.5 1.5 1.4 1.2 FY12f 13.8 12.6 2.4 3.0 RoE(%) FY13f 13.4 12.1 20.9 11.3 FY14f 14.1 8.6 19.4 13.2

Source:Company,Bloomberg,AvendusResearch.

Note:*forJSWFY12numbersareactual

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TableofContents

Investmentsummary......................................................................................................................... 2
CompellingcasefornextphaseofreformsinFY13 ..............................................................................2 Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ...................................................2 Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears ........................................................2 ChangesunderwaytoexpandprofitabilityfromFY14f........................................................................3 HigherearningsgrowthmaypreservepremiumoverNifty..................................................................3

CompellingcasefornextphaseofreformsinFY13 .......................................................................... 5
DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902 ..................................................................5 32%ofkeylendersexposuretopowersectorfacesarisk...................................................................5 FY99FY02crisislikelytohaveledtosetofreformsearlier ..............................................................6 nextsetofreformsmaycomeinascrisisreachestippingpoint........................................................6 Signsarevisibleforlikelyinitiationofnextsetofreforms ...................................................................7

Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ............................................... 8
KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10 .................................................................8 TariffCAGRof31%overFY13fFY14fneededtobridgegap ................................................................8 Turnaroundmaygetdelayedduetolowerthanrequiredtariffhikes .................................................9 Somestateshaveincreasedtariffsupto49%sinceApr10.................................................................10 StepsinitiatedtocompelDISCOMstostreamlineoperations ............................................................10

Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears .................................................. 12
59%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise.................................................12 Captivecoalminingtosupport41GWofWIPcapacity.......................................................................12 Approvalsmaypickuppace;butbenefitstokickinfromFY15f.........................................................13

ChangesunderwaytoexpandprofitabilityfromFY14f .................................................................. 14
MultiplefactorshaveledtolossesforpowerproducersinFY12f ......................................................14 Increaseindomesticcoalavailabilityislikelytoimproveearnings ....................................................16 MerchanttariffsmayproviderespiteinFY14f....................................................................................17 EarningsgrowthlikelytoreviveinFY14f.............................................................................................19 ReformledrevivalinearningsmaystartafterFY14f..........................................................................20 Avendusforecastsvarybetween31%and20%fromconsensus.......................................................20

HigherearningsgrowthmaypreservepremiumoverNifty............................................................ 21
UnderperformanceofpowerindextoNiftycontinuesin2012 ..........................................................21 Earningsgrowthlikelytohavebottomedout .....................................................................................21 PowerindexmaycontinuetotradeatpremiumtoNifty ...................................................................22 Mar14fcapacityunderfixedtariffslikelytobehighestforADANI.....................................................22 RoEsofADANIandJSWexposedtomerchantratesandcoallinkages ..............................................23 TargetpricebasedonDCFandSOTP ..................................................................................................23 InitiatecoverageonNTPC,TPWR,ADANI,JSW...................................................................................24 Riskfactors ..........................................................................................................................................25

Annexures........................................................................................................................................ 26
Assumptionsforcalculatingbanksexposuretopowersegments .....................................................26 ExposureofpowerproducerstokeyDISCOMs...................................................................................27 ClassificationofWIPcapacity..............................................................................................................28 Hierarchyofpreferredfuelsupplyandofftakecombinations...........................................................28 Approvalsrequiredbeforecoalproductionbeginsatcaptivemine ...................................................28

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CompellingcasefornextphaseofreformsinFY13
Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,asapercentageof thenominalGDP,likelytoreach1.2%byMar14f,ifnoreformsareimplemented.Suchhighlevellosses,asapercentage oftheGDP,wereearlierreportedinFY99FY02,whenkeyreformspertainingtothebailoutofstateelectricityboards (SEBs)andformationoftheElectricityActwereinitiated.Also,thepowersectorcrisismayimpactothersectorssuchas banks.Ofthetotalloans,50%loanstotheWIPcapacityand90%toDISCOMsarelikelytobeatrisk.AsofDec11,this amount was likely to be cINR1,627bn, i.e., 32% of the banks, Power Finance Corporation (POWF IN, Buy) and Rural ElectrificationCorporation(RECLIN,Buy)sexposuretothepowersectorthatfacesrisk.Asthecrisisreachesatipping point,thenextsetofreformsmaybeinitiatedthatmayinclude:(1)permittingapassthroughofimportedcoalcosts; (2)increaseintariffsbyDISCOMs;and(3)approvalsforalreadyallocatedcaptivecoalblocks.Signsofalikelyinitiation ofthenextsetofreformsarevisiblewiththefollowing:(1)submissionoftheShunglucommitteesreportaddressing measures to improve the financial health of DISCOMs; (2) removal of basic customs duty on imported coal; and (3) directing Coal India (COAL IN, Add) to sign fuel supply agreements (FSAs) for the power plants commissioned before 31Dec11.

DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902
Ifreformsarenot implemented,thetipping pointislikelytobe reachedbyMar14f.

DISCOMlosses,asapercentageofthenominalGDP,haveincreasedfromalowof0.6%inFY06to0.9% in FY10. Our estimates indicate that DISCOM losses are likely to have gone up to 1% of the nominal GDPinFY12f.Ifnoreformsarecarriedout,DISCOMlosses,asapercentageofthenominalGDP,may riseto1.2%,asof Mar14f.BetweenFY99andFY02,SEBlosses,asapercentageofthenominalGDP surgedhighto1.2%1.5%.Duringthesameperiod,SEBswerebailedout;subsequently,theElectricity Act2003andTariffPolicywereformulated.Ifreformsarenotimplemented,thetippingpointislikely tobereachedbyMar14f. Exhibit4: DISCOMlossesforeachfiscalyear,as%ofnominalGDP,forrespectivefiscalyear(%)
CLasa%ofNGDP 1.5 1.2 0.9 0.6 0.3 0.0 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E CLasa%ofNGDPiftariffsnothiked CLasa%NGDPiftariffhiked

Source:RBI,PlanningCommission,FinanceCommission,AvendusResearch

32%ofkeylendersexposuretopowersectorfacesarisk
50%oftheloanstothe WIPcapacityand90%to DISCOMsarelikelytobe atrisk.

Banks, POWF, and RECL had outstanding loans of INR5,031bn to the power sector, as of Dec11. Of these, cINR981bn in loans are likely to be for the working capital needs of generation companies as well as to transmission companies for their capital expenditure and working capital needs. Installed capacity is likely to owe cINR1,548bn in loans to banks, POWF and RECL. Out of the remaining INR2,502bn, 50% of the loans to the WIP capacity and 90% to DISCOMs are likely to be at risk. This amountiscINR1,627bn,i.e.,32%ofthebanks,POWFandRECLsexposuretothepowersector.Forthe methodologyandassumptionspertainingtotheexposureofbankstovariouspowersegments,please refertotheAnnexureonpage26.

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Exhibit5: Shareofvariouspowersegmentsinkeylendersexposuretopowersector(MW,%)
WCloans,130,3% Distribution,939,19% InstalledGeneration, 1,548,30%

Transmission,850, 17%

WIPGeneration, 1,564,31%

Source:Company,RBI,POWF,RECL,AvendusResearch.

FY99FY02crisislikelytohaveledtosetofreformsearlier
Currently,62%oftheWIP capacityisbeingexecuted byprivatecompanies.

TheFY99FY02crisisledtotheearliersetofreforms,includingthefollowing:(1)formulationofpolicy onultramegapowerproject(UMPP)andcompetitivebidding;and(2)allocationofcaptivecoalblocks totheprivatesector.Thishasboostedprivateinvestments,leadingtogrowthintheshareofprivate independentpowerproducers(IPPs)ininstalledcapacityfrom10%,asofMar02,to20%,asofFeb12. TherehasbeenasignificantriseintheWIPcapacityledbytheprivatesector.Currently,62%ofthe WIPcapacityisbeingexecutedbyprivatecompanies.Keyreforms forthe improvementoftheSEBs financialhealthwere: UnbundlingofSEBsanddivisionoftheiractivitiesintogeneration,transmissionanddistribution Constitutionofaregulatoryregimetodeterminetariffs Upgrades and reforms for the urban distribution network through the introduction of the RestructuredAcceleratedPowerDevelopmentandReformsProgramme(RAPDRP) Introduction of the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) along with measures to addresstheneedsoftheruralsector ComprehensivefinancingthroughPOWFandRECLtomeettheaboverequirements Statusofreforms Unbundling accomplished in most states; the constitution of Central Electricity Regulatory Commission(CERC)andstateelectricityregulatorycommissions(SERCs)havebeenundertaken Regulatoryregimeinplacetodeterminetariffs;however,irregularfilingoftariffpetitionshadledto moredelayedandlowerincreaseintariffsthanrequired PartBoftheRAPDRPschemetargetedtowarddistributioncompaniesisyettobeimplemented

nextsetofreformsmaycomeinascrisisreachestippingpoint
Asthecrisisreachestippingpoint,thenextsetofreformsislikelytobeimplemented;amongothers, thesemayincludethefollowing: Allowing passthrough of imported coal costs: Most private power producers have secured exclusive stakes in coal mines in Indonesia and Australia to supply fuel to power plants. The electricitygeneratedfromthesepowerplantsistiedupunderpowerpurchaseagreements(PPAs) Utilities 6

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withvariousDISCOMsanddonothavepassthroughofincreaseincosts.However,thechangein theIndonesianmininglawandadditionaltaxesimposedonminersinAustraliahasledtoarisein costs, making PPAs economically unviable. Reforms allowing passthrough of rises in fuel costs is likelytorestoretheeconomicviabilityofprivateinvestmentsintosuchprojects.Currently,c24GW oftheWIPcapacityistiedupunderPPAsthatmayturnunviable.

IncreaseintariffsbyDISCOMs:BetterprofitabilityofDISCOMs,ledbytariffhikes,islikelytoboost powerdemand.Thismayleadtoanimprovementinmerchanttariffs.The untiedcapacity,which variesbetween8%and65%,maygeneratehigherreturns.Thus,theviabilityofprivateinvestments wouldberestored. Approvals for captive coal blocks: Faster processing of regulatory approvals for captive mining is likelytoleadtoanearlystartofproductionatcaptivemines.Thismayleadtohigheravailabilityof lowercostdomesticcoal.Higherproductionfromcaptivecoalblocksmayfreeupdemandforcoal produced by COAL. Thus, power plant capacity tied up under PPAs and fuelled through imported coalmayreducetheoperationalcostthroughoptimalblendingofdomesticandimportedcoal.

Signsarevisibleforlikelyinitiationofnextsetofreforms
Shunglucommittees reportissubmittedthat addressesmeasuresto improvethefinancial healthofDISCOMs

Thenextsetofreformsarelikelytobeinitiated,indicatedbythefollowing:(1)thesubmissionofthe Shunglu committees report addressing measures to improve the financial health of DISCOMs; (2) removal of basic customs duty on imported coal; and (3) directing COAL to sign FSAs for the power plantscommissionedbefore31Dec11.KeyhighlightsoftheShunglucommitteesreportonDISCOMs areasfollows: Tosetupaspecialpurposevehicle(SPV)to buyoutdistresseddebtsofbankstoDISCOMs;about 76%ofthesharecapitalintheSPVwouldbeownedbytheReserveBankofIndia(RBI),andtherest by POWF and RECL. The RBI would provide a line of credit to the SPV for buying distressed debt from banks. Repayment of loans would be rescheduled, after the state governments/DISCOMs agreetopreconditionsontariffhikes,operationalparameters,interestrates,periodofrepayment and amount of repayment on distressed loans. DISCOMs would then repay the debt to the SPV. StategovernmentswouldalsohavetogiveanundertakingtotheRBIfordebitingaccounts,incase ofadefaultonanSPV. To streamline the processes for updating and auditing accounts at the earliest; the SERC is responsible for assigning responsibility of regular tariff revisions. Thus, in an event of incomplete accountsofDISCOMs,SERCsshouldundertaketheexerciseoftariffrevisionsuomoto. Regionwiselossesshouldbecomputedwithinastate.Whilefixingtariffs,alosssurchargebasedon theconsumersofaregionwithT&DlossesmorethanthebenchmarkissuggestedbySERC. Independence of regulators should be achieved through minimizing budgetary support. Also, individualsthathaveworkedwiththestategovernmentintheprecedingfiveyearsshouldnotbe eligibleforappointmentsinSERCs. TheRAPDRPschemeshouldbeextendedtotownswithapopulationofmorethan30,000,asper thecensusreportin2011.Thewidespreadinstallationofelectronicmeters,meterreadingthrough automatichandheldmeteringdevices,automaticbillingprocesses,suitabletariffsacrosscategories of consumers and proper collection are suggested for the sustainable maintenance of assets createdthroughincrementalinvestments. The distribution franchisee model would be extended to c255 towns with cumulative power consumptionofmorethan40%.

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Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore
To bridge the widened net gap, DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13fFY14f. However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of 1.9%7.0% in FY08FY12f. ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,weexpectDISCOMstobe able to raise their ARR by a CAGR of 11% in the next three years. While this may help reduce losses to 0.8% of the nominalGDPinFY14ffrom1.0%inFY12f,thebreakevenmayneedmore.WithaCAGRof11%inARR,itmaytakenine years to achieve PAT breakeven. The 11% increase in power costs may impact the profits of companies in various sectorssuchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupofBSE500 companies. Some steps were taken by nonstate entities to compel DISCOMs to improve financial health such as preconditionsforrestructuringloansandaproposaltoincludeDISCOMlossesintostategovernmentdeficitsaswellas askingSERCsforasuomotoriseintariffs.

KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10
Thewidestgapwas Rajasthans,which increasedtoINR2.6/kwh inFY10fromINR0.2/kwh inFY07.

Netgap,i.e.,thedifferencebetweenrevenueperunitpurchasedandcostperunitpurchased,roseup to INR2.6/kwh in key states, which contributed 103% of losses in FY07FY10. These states include Rajasthan, Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Haryana, Uttar Pradesh, Punjab and Maharashtra. The gap comprises subsidy realized and revenue realized (due to increase in debtors). ThewidestgapwasRajasthans,whichincreasedtoINR2.6/kwhinFY10fromINR0.2/kwhinFY07.The least gap was Maharashtras at INR0.2/kwh. In FY07FY10, the gap widened most for Rajasthan by INR2.4/kwh,followedbyTamilNaduatINR1.3/kwh.PunjabsgapnarrowedINR0.2/kwhinFY07FY10. Exhibit6: NetgapforkeystatesoverFY07FY10(INR/kwh)
3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.0 0.5 Haryana Punjab Rajasthan Uttar Pradesh Andhra Pradesh TamilNadu Madhya Pradesh Maharashtra 0.3 0.1 0.5 0.5 0.5 0.3 0.30.3 0.2 0.7 0.0 1.8 1.5 1.1 1.1 1.2 1.3 0.9 0.7 0.3 0.6 0.5 0.7 0.2 0.2 1.2 1.3 1.1 0.5 0.2 2.6 FY07 FY08 FY09 FY10

Source:POWF,AvendusResearch

TariffCAGRof31%overFY13fFY14fneededtobridgegap
Thenetgapinkeystates canbebridgedby increasinganaverage tariffataCAGRof13% 58%inFY13fFY14f

The net gap in key states can be bridged by increasing an average tariff at a CAGR of 13%58% in FY13fFY14f, and reducing aggregate technical and commercial (AT&C) losses. Lowering AT&C losses mayraiserevenuesduetogrowthinbillableunits.WeestimatedtherequiredCAGRintariffswiththe followingassumptionsforDISCOMsfromeightkeystates: IncreaseinunitspurchasedataCAGRof7.5%overFY11fFY14f ReductioninAT&Clossesby1%perannumoverFY11fFY14f RiseinpowerpurchasecostsataCAGRof7.5%overFY11fFY14f HikeinotheroperatingandadministrativecostsataCAGRof12%overFY11fFY14f

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Capital expenditure per year over FY11fFY14f similar to that incurred in FY10; loss estimates excludeanysubsidyrealizationsfromstategovernments Exhibit7: CurrentARR(INR/kwh),requiredARR(INR/kwh)inkeystates,asofFY10
5.0 CurrentARR 4.0 RequiredARR

3.0

2.0

1.0

0.0 Haryana Punjab Rajasthan Uttar Pradesh Andhra Pradesh TamilNadu Madhya Pradesh Maharashtra

Source:POWF,AvendusResearch

Turnaroundmaygetdelayedduetolowerthanrequiredtariffhikes
FortheDISCOMsofthe eightkeystates,ARRis likelytohaverisenata CAGRof1.9%7.0%over FY08fFY12f.

FortheDISCOMsoftheeightkeystates,ARRislikelytohaverisenataCAGRof1.9%7.0%overFY08f FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,we expectDISCOMstobeabletoraisetheirARRbyaCAGRof11%overthenextthreeyears.Whilethis may help reduce losses, the PAT breakeven may further get delayed. With a CAGR of 11% in ARR, it maytakenineyearstoachievethePATbreakeven. Exhibit8: ARRofkeystates,andthreeyearandfiveyearCAGRinARRforthesekeystates
Haryana Punjab Rajasthan UttarPradesh AndhraPradesh TamilNadu MadhyaPradesh Maharashtra Averagerevenuerealized(INR/kWh) FY07 2.0 2.0 2.2 1.8 2.2 2.4 2.1 2.6 FY08 2.1 2.0 2.2 1.9 2.4 2.5 2.0 2.7 FY09 2.4 2.3 2.4 2.0 2.3 2.4 2.1 3.1 CAGR FY10 FY11e FY12e FY08FY12(%) 2.6 2.2 2.2 2.3 2.4 2.4 2.4 3.4 2.6 2.2 2.2 2.6 2.6 2.7 2.4 3.4 2.6 2.4 2.8 2.6 2.6 2.7 2.5 3.5 6.3 3.9 4.9 7.0 3.5 1.9 4.3 6.2 Maximum threeyear CAGR(%) 10 4 5 11 4 3 7 9 Periodfor maximum threeyear CAGR FY08FY10 FY08FY10 FY10FY12 FY09FY11 FY08FY10 FY10FY12 FY09FY11 FY08FY10

Source:POWF,SERCs,Mediareports,AvendusResearch

11%annualincreaseintariffsmaydentindustryprofitsbyupto2.5%
Exhibit9: Impactofincreaseinelectricitytariffsby11%onfinancialsofasectionofBSE500companies
Sales Powerandfuelcosts EBITDA Interestcosts PAT PATmargin Source:Prowess,AvendusResearch FY11Actual(INRbn) FY11Posttariffhikeof11%(INRbn) 24,876 539 3,749 682 1,726 6.9% 24,876 598 3,690 682 1,682 6.8% Variance(%) 0 11.0 1.6 0.0 2.5 18bp

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Tariffhikesof11%by DISCOMsfortheindustry islikelytodentprofitsby upto2.5%.

Tariff hikes of 11% by DISCOMs for the industry is likely to dent profits by up to 2.5%. We have analyzed the power and fuel costs of BSE500 companies, excluding companies operating in sectors such as financial, oil & gas, IT services and power. Power and fuel costs for the selected set are cINR539bn,whichis2.2%ofsales.An11%increaseinpowerandfuelcostsislikelytoleadtoarisein power and fuel expenses by INR59bn as well as a reduction in profits by INR44bn, implying a 2.5% impactonprofitability.However,anycutsintheinterestratesmayhelpoffsettheincreaseinpower andfuelcosts.Interestcostswere2.7%ofsalesinFY11.

Somestateshaveincreasedtariffsupto49%sinceApr10
Manystateshavehikedelectricitytariffsbetween1%and49%sinceApr10.Whilethequantumofthe riseintariffsislowerthanneededinsomecases,respectiveSERCsinthetarifforderofsomeDISCOMs have taken cognizance of the gap; the gap is likely to be bridged in a phased manner. One such exampleisRajasthan.TheRajasthanElectricityRegulatoryCommission(RERC)agreedthattherevenue gapisc50%.However,thetariffwasraised23%andislikelytobehikedinaphasedmannertobridge thegapsothatconsumersarenotburdenedwithsuddentariffhikes. Exhibit10: StatewisetariffhikesimplementedsinceApr10
State AndhraPradesh Bihar Bihar Chhattisgarh Delhi Gujarat Haryana HimachalPradesh Jharkhand MadhyaPradesh MadhyaPradesh Maharashtra Punjab Rajasthan TamilNadu TamilNadu UttarPradesh Uttarakhand WestBengal Source:SERCs,DISCOMs,Mediareports,AvendusResearch Tariffhike(%) 7 11 12 14 22 4 1 9 19 6 7 5 9 23 9 37 13 5 9 Effectivedate Aug10 Jun11 Apr12 Apr11 Aug11 Sep11 Aug11 Aug11 Aug11

May11 FY12 1Aug10 Apr12 1Apr10

StepsinitiatedtocompelDISCOMstostreamlineoperations
Thecentre,alongwith variousministries,theRBI andlenders,haveeither takeninitiativesor proposedtotakesometo compelDISCOMsto streamlineoperationsand improvefinancialhealth.

Thecentre,alongwithvariousministries,theRBIandlenders,haveeithertakeninitiativesorproposed to take some to compel DISCOMs to streamline operations and improve financial health. The steps such as restricting lending, preconditions for restructuring loans and proposals to include DISCOM lossesintostategovernmentdeficitsarelikelytocompelthestategovernmenttoimplementDISCOM relatedreforms.Otherinitiativessuchasappointingdistributionfranchisees,passthroughoffuelcost risetoconsumers,timelyfilingoftariffpetitionsandasuomotoincreaseoftariffsbySERCsarelikely to enhance the profitability of DISCOMs. Some key initiatives and their likely impact are outlined in Exhibit 8 below. Additionally, the Shunglu committee has submitted a detailed plan to address the financialhealthofDISCOMs(detailsonpage7).

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Exhibit11: Controllingmeasuresthroughstateandnonstateentities,andtheirlikelyimpact
Controllingmeasure Staterelatedfactors Resolutionbystatepowerministers Regularfilingoftariffpetitions AT&Clossestobereducedtounder15% Appointmentofdistributionfranchisee Automaticpassthroughoffuelcostriseintothetariffs Stategovernmenttoclearalloutstandingsubsidiesandensure advancepaymentofsubsidiesinthefuture Loans,extendedbystategovernments,tobeconvertedintoequity Nonstatefactors RestrictinglendingtoDISCOMs Preconditionsoffilingtariffpetitionsforrestructuringloans ProposaltoincludeDISCOMlossesinstatefiscaldeficits TribunalorderonSERCtoincreasetariffonsuomotobasis Source:PublicInformationBoard,Mediareports,AvendusResearch Likelyimpact Timelytariffhikes Improvedprofitability Enhancedprofitability Sustainableprofitability Improvementincashflowsleadingtolower requirementofworkingcapitalloans Bettercapitalstructure,enhancingborrowing capacity Increasedfocusonimprovingoperatingcashflows Timelytariffhikes Limitingtheborrowingofthestategovernment, therebyenhancingpoliticalwilltoimplementreforms Timelytariffhikes

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Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears
Thermal capacity of close to 45GW was approved during 200610 with fuel linkage to undeveloped coal reserves. Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdlehasbeenthego,nogo policy,whichhelduptheMinistryofEnvironmentsapproval.Overthelastsixmonths,therehavebeensignsthatthis policyislikelytoberemoved.Evenwiththechange,coalextractionmayonlybeginaftertwoyears.Ofthenewcapacity linked to captive mines, we estimate c7GW may be completed in FY13 and FY14; companies may be compelled to operatebybuyingcoalatmarketprices.SomeutilitiessuchasNTPCandTPWRarelikelytocommenceminingfrom captiveminesinFY15f.Ourestimatessuggestthatnewcapacityof41GWmayeventuallybesupportedbycoalfrom suchcaptivemines.

59%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise
OutofthecoalbasedWIP capacityof95GW,31%is beingexecutedbycentral andstateutilities.

Out of the coalbased WIP capacity of 95GW, 31% is being executed by central and state utilities. Power generated by central and state utilities is sold on a costplus basis to DISCOMs. Out of the remaining69%capacityexecutedbyprivatecompanies,59%doesnothaveacostpassthrough.This includescapacitytiedupunderPPAsandpowertobesoldonmerchantbasis. Exhibit12: ShareofWIPcapacityonownershipbasisandoptionofcostpassthrough(%)
Central 14%

PrivatenoCPT* 59%

State 17%

PrivateCPT* 10%

Source:Company,CEA,SERC,AvendusResearch. Note:*Costpassthrough

Captivecoalminingtosupport41GWofWIPcapacity
Exhibit13: SchemewiseWIPcoalbasedcapacitybasedondifferentsourcesofcoal(MW)
(MW) Central State Private Total COAL 3,107 1,015 24,082 28,204 Captive 8,000 15,625 0 17,045 40,670 23,582 26,225 Imported 2,643 Total 13,750 16,640 64,708 95,098

Source:Company,CEA,AvendusResearch

Outofthetotalcaptive minesallocated,state utilitiesareallocatedwith amajorityofmines.

Captiveminingcansupport41GWoftheWIPcapacity.Wehaveconsideredcoalproductionin50%of theallocatedcaptivemines.Furthermore,ourassumptionincludesproductionperannumat80years forthecurrentreservesuntiltheyexhaust.Outofthetotalcaptiveminesallocated,stateutilitiesare allocated with a majority of mines. These mines are likely to support the WIP capacity of c16GW. Amongcentralentities,NTPCislikelytostartproductionatPakriBarwadihin24months.Anothermine ChhatiBariatuhasgotregulatoryapprovalsuntilforestclearancestageI.Thecoalminesallocatedto NTPCandDVCconstitutetotalreservesofc7bntonnes.

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Approvalsmaypickuppace;butbenefitstokickinfromFY15f
NTPCscaptiveminePakri BarwadihandTPWRs captivemineTubedare likelytocommence productioninFY15f.

BenefitsfromanincreaseincoalproductionfromcaptiveminesarelikelytokickinfromFY15f.NTPCs captive mine Pakri Barwadih and TPWRs captive mine Tubed are likely to commence production in FY15f.Fortheremainingcaptiveminesofpowerproducers,thepaceofregulatoryapprovalsarelikely topickupwiththegovernmentsfocusonraisingproductionfromcaptivemines.Afterthechangein theMinisterofEnvironmentandForest(MoEF)fromMr.JairamRameshtoMs.JayanthiNatarajan,the nogopolicywasremoved.Thefirstsuch indication isthe mediareportofthelettertoEssarEnergy from the Ministry of Power to seek forest clearances from MoEF for the Mahan coal block. The coal blockwasearliermarkedunderthenogoarea.Followingallregulatoryapprovals,itislikelytotakeat least two years to begin production from captive mines. Land acquisition may take c12 months, whereas it would take another 12 months to commence production. Hence, we expect production fromcaptiveminestostartfromFY15f.

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ChangesunderwaytoexpandprofitabilityfromFY14f
TheFY13fearningsofprivateutilitieswithlargecapacityinthepipelinearelikelytoremainunderpressureduetoINR depreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts.Largerandoldercompaniessuchas NTPC and TPWR are relatively protected as a large part of their revenues from PPAs are shielded from cost rises. However,theFY14fearningsofprivateutilitieswithlargepipelinesmayimproveduetothelikelygrowthinlowercost domesticcoalsupplyandincreaseinmerchanttariffsforasmallperiodowingtotheelectionsscheduledin1H2014. SupplyfromCOALwouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobe the firming up of merchant tariffs preceding the general elections due in 1H2014. The structural improvement in profitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f

MultiplefactorshaveledtolossesforpowerproducersinFY12f
Power producers have incurred losses due to multiple factors such as muted merchant tariffs, high importedcoalcosts,currencyfluctuationsandhighinterestrates.

Operationrelatedfactorsposingthreattoneartermearnings
A10%decreasein merchanttariffs(for100% merchantcapacity) impactsearningsofa 1,000MWimportedcoal basedpowerplant operatingat80%PLFby 27%.

Muted merchant tariffs: Average merchant tariffs have declined from a high of INR7.8/kwh in Apr10toINR3.9/kwhinSep11.BetweenApr10andSep11,merchanttariffstouchedaminimumof INR2/kwh.Forthelastoneyear,merchanttariffshavestabilizedatcINR4/kwhforbilateraltrades and cINR3/kwh at the power exchanges, i.e., Indian Energy Exchange (IEX) and Power Exchange India LImited (PXIL). A 10% decrease in merchant tariffs (for 100% merchant capacity) impacts earningsofa1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby27%. Exhibit14: Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXIL(INR/kwh)
8 Bilateral 6 IEX PXIL

0 Apr10

Aug10

Nov10

Mar11

Jul11

Oct11

Feb12

Source:CERC,AvendusResearch

Globallycoalpriceshave increased65%sinceApr09

Highimportedcoalcosts:Globallycoalpriceshaveincreased65%sinceApr09.SouthAfricancoal priceshavefollowedasimilartrendasAustraliancoalprices.Australiancoalpriceshavereflecteda sharp rise during Jan07May08 and Feb09Mar11. Increased dependence on imported coal and rising coal prices worldwide are likely to lead to higher fuel costs. A 10% increase in the price of importedcoalimpactsearningsofa1,000MWimportedcoalbasedpowerplantoperatingat80% PLFby7.5%.

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Exhibit15: Globalmonthlyaveragecoalprices(FOBbasis)forSouthAfricaandAustralia(USDperton)
200 Australia 150 SouthAfrica*

100

50 Jan07

Nov07

Sep08

Aug09

Jun10

Apr11

Mar12

Source:InternationalMonetaryFund,Bloomberg,AvendusResearch.Note:*MonthlyaverageforSouthAfricancoalprice

Between2006and2009, thecaseIbidswere baggedatanaverage levelizedtariffof INR2.83/kwh

UnviablePPAs:MostcaseIbiddingthatwasexecuteduntilDec09werebelowINR3.25/kwh.Under case I bidding, risks pertaining to execution of projects, fuel availability and more lies with the project developer. Between 2006 and 2009, the case I bids were bagged at an average levelized tariff of INR2.83/kwh, excluding UMPP. A majority of these PPAs are expected to begin between Feb12andAug14.Duetounavailabilityofcheapfuel,PPAsarelikelytohavebecomeunviable. Exhibit16: CapacitytiedupthroughPPAbyrespectivestatesandthelevelizedtariff
3400 Capacity(MW;LHS) 2550 LevelisedTariff(INR/kwh) 3.50 4.00

1700

3.00

850

2.50

0 GJ2006 HR2007 MP2007 MH2008 MH2009 BH2009 RJ2009 KK2010

2.00

Source:Company,SERCs,Mediasources,AvendusResearch

Macroeconomicfactorsposingrisktoneartermearnings
Fora1,000MWimported coalbasedpowerplant operatingat80%PLF,a 1%depreciationofthe INRagainstCNYandUSD couldleadtoa1% decreaseinprofits.

Currencymovements:Theincreaseincostspertainingtocapexandfuelrelatedpayablesc21% depreciation of the INR against the CNY and c19% depreciation of the INR against USD between Jul11 and Dec11 is likely to raise the cash outgo for BTG equipment and coal imports. For a 1,000MW imported coalbased power plant operating at 80% PLF, a 1% depreciation of the INR againstCNYandUSDcouldleadtoa1%decreaseinprofits.

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Exhibit18: CrosscurrencyrateforINR/CNY(x)
8.5 INR/USD 51 8.0 INR/CNY

Exhibit17: CrosscurrencyrateforINR/USD(x)
54

48

7.5

45

7.0

42 Apr11

Jul11

Oct11

Jan12

Apr12

6.5 Apr11

Jul11

Oct11

Jan12

Apr12

Source:Bloomberg

Source:Bloomberg

Ariseof100bpininterest costsislikelytoimpact profitsfora1,000MW importedcoalbased powerplantoperatingat 80%PLFby1%.

Higherinterestcosts:RBIhascutthereporateby50bpinApr12afterraisingitby350bpbetween Apr10 and Mar12. Since Mar10, State Bank of India (SBIN, Buy) benchmark prime lending rate (BPLR)washikedfrom11.75%to14.75%,a300bpincreaseAriseof100bpininterestcostsislikely toimpactprofitsfora1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby1%. Exhibit19: RBIreporateandSBIBPLR(%)
9.0 RBIReporate(%) 7.8 SBIBPLR(%;RHS) 15 16

6.6

14

5.4

13

4.2

12

3.0 Apr09

Oct09

Mar10

Aug10

Jan11

Jun11

Nov11

11 Apr12

Source:Bloomberg

Increaseindomesticcoalavailabilityislikelytoimproveearnings
Production of COAL may rise 5% yoy in FY13f and FY14f. This would imply an incremental thermal coalavailabilityofc36MToverFY13fFY14f.PresidentialdirectivehadbeenissuedtoCOALforsigning FSAswithpowerproducers.Followingarethekeydirectivesissued: COALwillsignFSAswithpowerplantsthathaveenteredintolongtermPPAswithDISCOMsandare commissionedbefore31Mar15 FSAshouldbesignedforthefullquantityofcoalmentionedintheletterofassurance(LoA)fora periodof20years Trigger levels for disincentives would be 80% of the FSA quantity and would be 90% of the FSA quantityforincentives Any shortfall in fulfilling commitments as per the FSA has to be met through either imports or suppliesfromothercentralorstatePSUsthathavebeenallocatedcoalblocks Utilities 16

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Incrementalproductionby COALislikelytosupport c7GWofpowerplant capacity.

PPAsaresignedwithDISCOMsforacapacityofc28GW.ThesepowerproducershavesignedLoAs/FSAs with COAL for the same generation capacity, which is likely to be operational by 31Mar14f. Incremental production by COAL is likely to support c7GW of power plant capacity. While the proportionofthecoalbasedcapacityfuelledbyCOALislikelytoreducefrom83%inFY11to70%in FY15f,theinstalledcapacityfuelledbyCOALislikelytoincreasec25GWoverFY11FY14f.Thus,with more domestic coal available, the earnings of power producers are likely to improve. ADANI has approved coal linkages of c12MT for its power plants out of c9GW; part of this is already commissioned. Exhibit20: AbsoluteandproportionofcoalbasedcapacityfuelledbyCOAL
120 GWofcoalbasedcapacityfuelledbyCoalIndia %ofcoalbasedcapacityfuelledbyCoalIndia 90

80

80

40

70

0 FY10 FY11 FY12f FY13f FY14f FY15f

60

Source:Company,AvendusResearch

MerchanttariffsmayproviderespiteinFY14f
Thetopsixbuyersof merchantpowerhave beenDISCOMsinTamil Nadu,Punjab,Rajasthan, UttarPradesh,Haryana andMaharashtra.

The topsix buyers of merchant power have been DISCOMs in Tamil Nadu, Punjab, Rajasthan, Uttar Pradesh,HaryanaandMaharashtra.Fiveofthesebuyershavehadhighercashlossescomparedtothe respectivegrossstatedomesticproduct(GSDP)inMar10f.Reductioninannuallossesledbytariffhikes mayenableDISCOMsbuyingmoremerchantpoweratcompetitivetariffs. Exhibit21: Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXI(INR/kwh)
12

Bilateral 8

IEX

PXI

0 Oct08

May09

Dec09

Jun10

Jan11

Jul11

Feb12

Source:CERC,AvendusResearch

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Totalsalesthroughshort termtradesincreased13% yoyinMar11and64%y oyinDec11.

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Strongdemandinthemonthsprecedingelections
State assembly elections were held in Apr11May11 and Jan12Feb12. Merchant tariffs preceding elections had either led to a decrease in the yoy fall in merchant tariffs (in Mar11) or yoy rise in merchanttariffsbyupto18%(inDec11).Totalsalesthroughshorttermtradesincreased13%yoyin Mar11and64%yoyinDec11. Exhibit22: Averagemerchanttariff,volumesandsalesandyoychangepreceding1H2011elections
Oct10 Nov10 Dec10 Jan11 Feb11 Mar11 Apr11 May11 Jun11 Averagemerchanttariff (INR/kwh) Yoychange(%) 3.60 3.44 3.51 3.84 4.16 4.35 4.44 4.11 3.59 28 28 25 21 11 14 27 30 31 Totalmerchantvolumes (MU) Yoychange(%) 3,776 3,687 4,063 4,702 4,622 5,011 5,304 5,215 5,513 11 17 16 26 32 31 59 35 14 Totalmerchantsales (INRmn) Yoychange(%) 13,608 12,701 14,254 18,057 19,248 21,814 23,575 21,424 19,806 21 16 13 0 18 13 15 6 21

Source:CERC,AvendusResearch

Exhibit23: Averagemerchanttariff,volumesandsales,andyoychangepreceding1H2012elections
Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 Averagemerchanttariff (INR/kwh) Yoychange(%) 4.44 4.11 3.59 3.75 3.71 3.74 4.57 4.24 4.14 4.20 27 30 31 20 18 10 27 23 18 10 Totalmerchantvolumes (MU) Yoychange(%) 5,304 5,215 5,513 7,574 7,451 6,210 4,526 4,689 5,639 5,521 59 35 14 40 34 36 20 27 39 17 Totalmerchantsales (INRmn)) Yoychange(%) 23,575 21,424 19,806 28,402 27,659 23,218 20,675 19,881 23,370 23,243 15 6 21 13 9 22 52 57 64 29

Source:CERC,AvendusResearch

PLFsofmerchantpowerplantsimprovedbeforeelections
Theplantloadfactors (PLFs)ofkeypowerplants thatselltheirelectricity producedthrough merchanttradehave improvedduringthe monthsprecedingthe elections.

Theplantloadfactors(PLFs)ofkeypowerplantsthatselltheirelectricityproducedthroughmerchant trade have improved during the months preceding the elections. The yoy improvement has been a maximum of 10bp for the aggregate capacity in Mar11. Plantwise, JSWs Ratnagiri plant reflected a 92bp rise in Apr11. The proportion of units generated by power plants, as a percentage of total merchanttradevolumes,wasc52%inDec11. Exhibit24: YoychangeinPLFsofcoalbasedmerchantpowerplants(bp)
Plantname PATHADITPP Company Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12 0 3 8 78 77 5 3 22 1 78 93 6 9 21 3 49 78 10 3 5 1 16 92 3 6 5 2 16 44 13 3 14 16 56 68 3 15 24 6 58 78 2 9 16 4 17 60 8 4 6 19 30 23 5 2 6 32 1 1 7 2 15 11 41 18 9 2 14 8 6 18 2 12 3 2 25 5 6 LANCI OPJINDALTPS JSP TORANGALLU JSW TPS(SBUI) ROSATPPPhI RPWR JSWRATNAGIRI JSW TPP Total

Source:CEA,AvendusResearch

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Elections: The general assembly elections due in 2014 and a significant number of state assembly electionsover20122014arelikelytokeeptheshorttermdemandforpowerbuoyant.Aswitnessed in1H2009,merchanttariffstendtorisebeforeelections. Exhibit25: Likelyscheduleofstateassemblyelectionsover20122014
2012 Goa Gujarat HimachalPradesh Manipur Punjab UttarPradesh Uttarakhand 2013 Chhattisgarh JammuandKashmir Karnataka MadhyaPradesh Meghalaya Mizoram Nagaland NCTofDelhi Rajasthan Tripura 2014 AndhraPradesh ArunachalPradesh Haryana Jharkhand Maharashtra Orissa Sikkim

Source:www.indianelection.com,AvendusResearch.

EarningsgrowthlikelytoreviveinFY14f
EarningsgrowthislikelytoreviveinFY14fduetothelikelygrowthinlowercostdomesticcoalsupply and increase in merchant tariffs for a small period owing to the elections scheduled in 1H2014. The Dec11consensusforecastsforADANIandJSWindicatea44%and18%yoygrowth,respectively,in FY14fearnings. Exhibit26: ConsensusEPSforecastsofFY13andFY14forADANI Exhibit27: ConsensusEPSforecastsofFY13andFY14forJSW
FY13EPS 25 FY14EPS FY14/FY13chg(%;RHS) 45 FY13EPS 15 FY14EPS FY14/FY13chg(%;RHS) 20

20

35

12

15

25

10

15

16

28

0 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12

0 4QFY10 2QFY11 4QFY11 2QFY12 4QFY12

40

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch

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ReformledrevivalinearningsmaystartafterFY14f
Thereformsarelikelyto enhanceprofitabilityand RoEs

Keyreformsthatmaybeexecutedintheneartermareasfollows:(1)regulatoryapprovalsforalready allocatedcaptivemining;(2)tariffhikesbyDISCOMsleadingtoimprovementintheirfinancialhealth; and(3)permittingpassthroughofhigherfuelcostsduetouseofimportedcoal(forplantspoweredby importedcoal).ThereformsarelikelytoenhanceprofitabilityandRoEs.However,thesereformsmay take more than 18 months to influence earnings. Hence, revival in earnings growth is likely to begin afterFY14f. Exhibit28: Reformsrequired,timetakenforpositivechangeandimpact
Segment Reforms Timetakenforpositivechange Impact Increaseindemandforpowerat competitivetariffs Betteravailabilityofcheaperfuel leadingtobetteroperatingmargins

DISCOM

Tariffhikesleadingtoimprovement Morethan18months inprofitability Regulatoryapprovalsforcaptive coalmines Morethan24months

Domesticcoal

Importedcoal

Dependinguponthe Highervisibilitytoreturnon Allowingpassthroughofchangein implementationtoearlierPPAsor investments importedcoalprices justthefuturePPAs

Source:AvendusResearch

Avendusforecastsvarybetween31%and20%fromconsensus
AvendusestimatestheFY13fandFY14fPATforNTPC,TPWR,ADANIandJSWtovaryfromconsensus forecasts between 31% and 20%. Our PAT projections are higher than consensus forecasts for JSW. However,theseforecastsaresignificantlylowerthantheconsensusforecastsforTPWR. Exhibit29: AvendusandconsensusPATforecastsandvariance
(INRmn) Avendusforecasts Consensusforecasts Variance(%) NTPC FY13f 103,389 104738 1 FY14f 117,465 120291 2 TPWR FY13f 18,177 20,498 11 FY14f 14,047 20,435 31 ADANI FY13f 15,011 12,470 20 FY14f 17,084 20,952 18 JSW FY13f 6,719 6,320 6 FY14f 8,573 7,630 12

Source:Company,Bloomberg,AvendusResearch

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HigherearningsgrowthmaypreservepremiumoverNifty
ConsensusforecastsforthepowercompaniesFY13fandFY14fearningsgrowthexceedthatoftheNifty.Thisislikelyto preservetherecentpremiumofthepowerindexovertheNifty.Thepowerindexsrelativeunderperformancetothe NiftyreducedpaceinthequarterendingMar12comparedtothefiveconsecutivequarters,precedingthelastquarter. ThepowerindexunderperformedNiftyinApr12.Earlierunderperformancemayhavebeenledbythesignificantdrop intheyoygrowthinconsensusPATforecastsofthepowerindexinFY12.Thisbroughtgrowthforecastslowerthan thatoftheNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL,theRoEs mayreflectsignificantvariancefromADANIandJSWsbasecaseforecasts.However,NTPCandTPWRsRoEsareless exposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsduetoalargeproportionofinstalledcapacity undertariffsthatenablepassthroughoffuelcosts.WeinitiatecoverageonNTPC(Buy,INR208),TPWR(Add,INR118), ADANI (Buy, INR81) and JSW (Hold, INR46). Risk factors include higherthanexpected domestic coal production and projectdelays.

UnderperformanceofpowerindextoNiftycontinuesin2012
Exhibit30: Absoluteandrelativeperformanceofpowerindex*
(%) Powerindex* Nifty PowerindexrelativetoNifty Source:Bloomberg,AvendusResearch 1m 4.7 1.5 3.3 3m 5.0 0.8 5.7 6m 8.7 0.4 8.3 1y 23.8 8.1 15.6 2y 33.5 0.7 32.8 3y 15.6 50.8 35.2

Overthelastthree months,theindexhas underperformedtheNifty by5.7%

Note:* Power index is calculated using the free float adjusted market capitalization of NTPC, TPWR, ADANI,ReliancePower(RPWRIN,NR),LancoInfratech(LANCIIN,NR),KSKEnergyVentures(KSKIN, NR),JSWandTorrentPower(TPWIN,NR). ThepowerindexhasunderperformedtheNiftyby35%overthelastthreeyears.Similarly,overthelast threemonths,theindexhasunderperformedtheNiftyby5.7%.Thepowerindexoutperformedthe NiftyinJan12andFeb12,likelytobeduetotheexpectationsofreformrelatedannouncementsinthe FY13budget.However,withthelackofannouncements onbig reformsinthebudget,theindexhas underperformedNiftyoverthelastonemonth.

Earningsgrowthlikelytohavebottomedout
Consensusforecastsfor thepowerindexindicatea 22%yoygrowthinFY13f earningsafteran8%yoy declineinFY12fearnings.

Consensusforecastsforthepowerindexindicatea22%yoygrowthinFY13fearningsafteran8%yo y decline in FY12f earnings. There has been a significant drop in yoy growth in FY12f PAT as per consensusforecastsinthepowerindex,leadingtoagrowthlowerthanthatoftheNifty,asofMar12. However,asperconsensusforecasts,earningsgrowthfortheindexsPATinFY13fandFY14fishigher thanthatoftheNifty. Exhibit31: YoygrowthinconsensusforecastsforPAT*forpowerindexandNifty(%)
(%) Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 YoygrowthinFFadjustedPATforpowerindex FY12 34 32 23 15 7 8 FY13 13 18 17 15 13 22 7 12 13 17 FY14 YoygrowthinFFadjustedPATforNifty FY12 22 19 15 12 8 7 FY13 18 18 17 16 15 17 15 13 14 12 FY14

Source:Bloomberg,AvendusResearch.

Note:*PATisthefreefloatadjustedforbothNiftyandthepowerindex

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Exhibit32: PowerindexspremiumtoNiftys1yrforwardP/E(%) Exhibit33: RelativeperformanceofpowerindextoNifty(%)

31
14.0

22

7.0

13

0.0

7.0

(5) Jun09

14.0

Nov09

May10

Nov10

May11

Nov11

Apr12

Jun10(3m)

Dec10(3m)

Jun11(3m)

Dec11(3m)

Apr12

Source:Bloomberg,AvendusResearch

Source:Bloomberg,AvendusResearch.

PowerindexmaytradeatapremiumtoNifty
Thepremiumofthe powerindexsoneyear forwardP/EtotheNiftys oneyearforwardP/Ehas narrowedto4%inMar12 from30%inJul10.

The premium of the power indexs oneyear forward P/E to the Niftys oneyear forward P/E has narrowedto4%inMar12from30%inJul10.TheindexhastradedatapremiumbetweenSep07and Apr12. A decline in the premium is likely to have been driven by the deteriorating outlook on yoy earningsgrowthforFY12f.However,withabetteroutlookonearningsgrowthinFY13fandFY14f,the powerindexmaytradeatapremiumtotheNifty.

Mar14fcapacityunderfixedtariffslikelytobehighestforADANI
Exhibit34: Yearendcapacityundervariousofftakemodels
NTPC TPWR ADANI JSW SubTotal Industry

AsoftheendofMar12f Totalcapacity(MW) Asa%oftotalcapacity PPA Fuelcostpassthrough(1) Fixedtariffs(2) Merchant(3) Total(1)+(2)+(3) AsoftheendofMar14f Totalcapacity(MW) Asa%oftotalcapacity PPA
Fuelcostpassthrough(4) Fixedtariffs(5) 98 0 71 26 26 51

37,014 5,137 4,620 2,600 97 0 3 100 42,084 88 9 4 100 8,407 0 74 26 100 9,240 44 0 56 100 3,140
54 0 81 11 87 8

49,371

191,602

84 8 8 100 62,870

94 2 4 100 217,757

Merchant(6) Total(4)+(5)+(6) Source:Company,AvendusResearch 2 100 2 100 23 100

46 100 8 100 5 100

We have segmented the installed capacities of NTPC, TPWR, ADANI, JSW and the industry, as of the endofMar12fandMar14f,underthreemodelsofofftake,whichare:(1)PPAfuelcostpassthrough; (2)PPAfixedtariffs;and(3)merchanttariffs.Theearningsofcompanieswithahigherproportionof Utilities 22

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installed capacity under fuel cost passthrough are likely to face lesser headwinds compared to companies with a higher proportion under fixed tariffs. NTPC is likely to have 98% of the installed capacityof42GW,asoftheendofMar14f,underthefuelcostpassthroughmodel.However,ADANIis likelytohave51%oftheinstalledcapacityof9GW,asoftheendofMar14f,underfixedtariffs.

RoEsofADANIandJSWexposedtomerchantratesandcoallinkages
WehaveanalyzedthreescenariosoftheFY14fRoEforNTPC,TPWR, ADANIandJSW(1)basecase current forecasts; (2) best case 20% increase in merchant tariffs in FY14f over FY13f, and COAL honoring 100% FSAs signed with the respective companies; and (3) worst case 20% decrease in merchant tariffs in FY14f over FY13f and no coal availability from COAL for the additional coal requirements.Wehavenotconsideredanyriseinthecoalpricesforthecoalpurchasedthroughthe spotmarket.RoEsofADANIispronetomaximumvariancefromthebasecasewithabasecaseFY14f RoEof19%,bestcaseRoEof33%andworstcaseRoEof20%.Similarly,JSWsRoEmayswingfroma best case RoE of 23% to worst case RoE of 3%. However, NTPC and TPWRs RoEs are not likely to changeduetoverylowexposuretomerchanttariffsandcoallinkages. Exhibit35: RoEsforpowerproducersundervariousscenarios
FY12f FY14f FY14f FY14f

NTPC TPWR ADANI JSW Mean Source:Company,AvendusResearch

13.8 12.6 2.4 3.0 12.2

Basecase 14.1 8.6 19.4 13.2 13.7

Bestcase 14.1 8.6 33.3 22.7 15.5

WorstCase 14.1 8.6 19.8 3.3 10.8

TargetpricebasedonDCFandSOTP
Wehavecalculatedthe targetprice(TP)forNTPC, ADANIandJSWthrougha DCFbasedmethodology. ForTPWR,theTPis calculatedthroughan averageofDCFandSOTP basedmethodologies.

Wehavecalculatedthetargetprice(TP)forNTPC,ADANIandJSWthroughaDCFbasedmethodology. For TPWR, the TP is calculated through an average of DCF and SOTPbased methodologies. During Stage II, i.e., during FY15fFY26f, the CAGR of sales is likely to be higher for TPWR and ADANI compared to JSW and NTPC due to project pipeline, captive coal mines and strong execution capabilitiesevidentfromrecentcapacityadditions.EBITmarginsarelikelytoremainstableforNTPC andTPWRowingtoalargeproportionofbusinessunderregulatedequity,fuelledbydomesticcoaland captivemines.HoweverADANIsmarginsarelikelytoreducelargelyontheuseofimportedcoaland largeofftakeunderfixedtariffs.
TP Upside P/E(x) P/B(x) RoE(%)

Exhibit36: Valuationssummary
CMP

NTPC TPWR ADANI JSW*

(INR) 160 103 63 50

(INR) 208 118 81 46

(%) 30 14 28 9

FY12f 13.4 13.7 91.3 48.5

FY13f 12.8 13.5 9.2 12.3

FY14f 11.2 17.4 8.1 9.6

FY12f 1.8 1.7 2.1 1.4

FY13f 1.6 1.6 1.7 1.3

FY14f 1.5 1.5 1.4 1.2

FY12f 13.8 12.6 2.4 3.0

FY13f 13.4 12.1 20.9 11.3

FY14f 14.1 8.6 19.4 13.2

Source:Company,Bloomberg,AvendusResearch.

Note:*forJSWFY12numbersareactual

Exhibit37: Keyassumptionsforforecastsandtargetprice
RoE(%) SalesCAGR(%) EBITmargins(%) Grossblockturnover(x) WCdays

NTPC TPWR* ADANI JSW*

FY12f 14 13 2 3

FY13f 13 12 21 11

FY14f 14 9 19 13

StageII* 10 12 12 9

StageIII* 5 5 5 5

StageII* 18 18 29 20

StageIII* 18 18 20 20

StageII* 0.80 0.75 0.45 0.55

StageIII* 0.80 0.75 0.65 0.70

StageII* 34 35 50 50

StageIII* 30 37 50 50

Source:Company,Bloomberg,AvendusResearch.

Note:*forJSWFY12numbersareactual.TPWRsTPiscalculatedusingtheaverageofDCFandSOTPbasedmethodologies Utilities 23

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InitiatecoverageonNTPC,TPWR,ADANI,JSW
NTPC
Capacityadditionislikely toaccelerateto2.6GW perannumduringFY13 FY15,wellabovethe 2.3GWperannuminthe lastthreeyears.

Capacityadditionislikelytoaccelerateto2.6GWperannumduringFY13FY15,wellabovethe2.3GW perannuminthelastthreeyears.ByFY14f,CWIP,asaproportionoftotalassets,islikelytofallto35%. Over98%oftherevenueswouldbefromassetswithregulatedtariffthatprovidefullpassthroughof higherfuelcosts;thisalongwithgrowthintheproportionofoperatingassets,islikelytoexpandthe consolidatedRoEby30bpto14%inFY14f,despiteafallintheEBITDAmarginonariseinconsumption ofhighercostcoal.NTPCislikelytobethepreferredpowersuppliertoDISCOMsduetolowertariffs comparedtopeers.StrongoperatingcashflowsinFY13fFY15fwouldsupportcapitalexpenditure.We valueNTPCusingtheDCFmethodandinitiatecoveragewithaBuyratingandaMar13TPofINR208.

TPWR
TPWRsRoEislikelyto bottomoutbyFY14f.

TPWRsRoEislikelytobottomoutbyFY14f.LossesattheMundraUMPParelikelytopulldownthe consolidated RoE from 12.6% in FY12f to 8.6% in FY14f. However, from FY15f, losses at the Mundra UMPParelikelytoreduceleadingtoanimprovementintheconsolidatedRoEevenifthecurrentPPA remainsunchanged.TPWRs30%stakeintheIndonesiancoalJVimpliesapositivecorrelationbetween consolidatedRoEandglobalcoalprices.Wehavenotassumedanyriseinworldwidecoalprices.Cash profits of INR68bn are likely to be generated over FY13fFY14f to support c4GW of projects under planning.WithlikelydeclineintheRoEoverFY12fFY14f,thediscountinthecompanysP/Bcompared topeersmayextend.Thestockamplyreflectstheseweaknesses.WeinitiatecoveragewithaMar13TP ofINR118andanAddrating.Riskfactorsincludeadeclineinglobalcoalprices.

ADANI
Withloweruncertainties onthepowerofftakeas wellasfuelsecurity impartedbyparentand coallinkages,ADANIsRoE islikelytoexpand17% overFY13fFY14f

ADANIislikelytoincreaseitsinstalledpowergenerationcapacityby2xoverFY13fFY14f.Withlower uncertaintiesonthepowerofftakeaswellasfuelsecurityimpartedbycoallinkagesandparentADE, ADANIs RoE is likely to expand 17% over FY13fFY14f. A potential rise in merchant sale realizations drivenbytheelectionsin1H2014,pickupinopenaccess,andexposuretostatessuchasMaharashtra andGujarat,arelikelytoenhanceRoEs.Higherproportionofinstalledcapacity,asofMar14f,islikely tobetiedupunderfixedtariffs.Hence,earningsandRoEsaresensitivetopriceoffuelsourcedfrom COALandADE.OurDCFbasedmethodpegsADANIsMar13TPatINR81.WeinitiatewithaBuyrating. RiskfactorsincludeupwardrevisioninpricesofcoalsourcedfromADEandCOAL.

JSW
JSWsRoEislikelyto changesignificantlywitha changeinmerchant tariffs.

JSWsRoEislikelytochangesignificantlywithachangeinmerchanttariffs.Whilethecompanyssales mixislikelytochangeinfavorofitsPPAswithJSWIandDISCOMs,46%oftheinstalledcapacity,asof FY14,islikelytobesoldatmerchanttariffs.Theproportionoffuelrequirementexposedtovariations is likely to reduce from 83% in FY12 to 39% in FY14f. A large proportion of installed capacity under merchant and spot purchases for most of its fuel requirement leads to lower earnings visibility. This maycaptheupsidetovaluations.WehaveusedtheDCFmethodthatpegstheMar13TPforJSWat INR46.WeinitiatecoveragewithaHoldrating.

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Riskfactors
Upsiderisks Significantincreaseindomesticcoalproduction:Weexpectdomesticcoalproductiontoincreaseat a CAGR of 5% over FY12fFY14f. A higherthanexpected increase in coal production is likely to reducecostsforpowerproducersandleadtobetterRoEs. NotableriseintariffbyDISCOMs:TheapprovaloftariffhikesbymostDISCOMsislikelytoimprove theirabilitytobuyhighcostpower.Thismayraisemerchanttariffs,leadingtobetterrealizationsby powerproducers. Downsiderisks Delay in project execution: A delay in project execution is likely to impact the consolidated RoEs, leadingtoadentinvaluations. Significant increase in global coal price: A notable rise in global coal prices may increase royalty expensesandtaxes.ThismayimpacttheoperatingprofitsofADANIandJSW.

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Annexures
Assumptionsforcalculatingbanksexposuretopowersegments
The exposure of banks to the power sector, as of Dec11, was INR3.154bn (source: RBI Data on sectoraldeploymentofbankcreditJan12) ExposureofPOWFandRECLtothepowersector,asofDec11,wasINR2,130bn(source:Company) Asperthefinancialstabilityreport,issueno.4,publishedbyRBI,oftheexposureofthe67banksto thepowersector,55%wastothegenerationsegment,9%totransmission,28%todistribution,and 8%toPOWFandRECL Inourcalculation,weexcludedtheexposureofbankstoPOWFandRECL Weassumedtheshareofvarioussegmentsfortheexposureofthe67bankstobeapplicabletothe overallbankingsystem Weconsidered2%ofthebankloansdisbursedtogeneratingcompaniesasworkingcapitalloans Toestimatetheloanstoinstalledpowergeneratingplants,weassumedthatthecapacityaddedin thelast15yearshadbeenfinancedthrough70%debtand30%equity;theloanrepaymentperiodis takenas10years;Ofthetotalloans,75%arelikelytoberaisedthroughIndianbanksorthePOWF orRECL CapacityunderconstructionisestimatedwithdetailsoftheWIPcapacityoflistedpowergenerating companiesanddocumentspublishedbyCentralElectricityAuthority(CEA) 50%oftheWIPcapacityislikelytobetiedupunderPPAandisbasedonimportedcoal;wehave assumedthatprofitableoperationofthis50%capacityislikelytobedifficult For exposure to DISCOMs, 90% loans are likely to be disbursed to DISCOMs incurring operational losses;hence,this90%exposureofbanks,POWFandRECLisalsolikelytobeatrisk Exhibit38: Banks,POWFandRECL'sexposuretovariouspowersegments,asofDec11
(INRbn) POWF RECL* Banks Total %share

Generation InstalledGeneration WIPGeneration Transmission Distribution WCloans Total

999 90 56 36 1,180

413 477 0 60 950

1,700

284 883 35 2,902

3,112 1,548 1,564 850 939 130 5,031

72 36 36 20 22 3 100

Source:Company,AvendusResearch.

Note:*RECLreportstheexposuretoT&Dsegmentandnotseparately

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ExposureofpowerproducerstokeyDISCOMs
TPWR:ShareofpowersalesfromMundraandMaithonunderPPA
Exhibit39: ExposuretoDISCOMsasofMar12fend Exhibit40: ExposuretoDISCOMsasofMar14fend
Others 15% Gujarat 37%

Others 16%

Rajasthan 8%

Gujarat 84%

Haryana 8%

Punjab 16%

Maharasht ra 16%

Source:Company,AvendusResearch

Source:Company,AvendusResearch

Note:WehaveconsideredMundraandMaithonscapacitytiedupunderPPAtoarriveattheexposure tovariousstateDISCOMs

ADANI:ShareofpowersalesfromMundra,TIrodaandKawaiunderPPA
Exhibit41: ExposuretoDISCOMsasofMar12fend Exhibit42: ExposuretoDISCOMsasofMar14fend
Rajasthan 20%

Gujarat 34%

Gujarat 100%

Haryana 24%

Maharasht ra 22%

Source:Company,AvendusResearch

Source:Company,AvendusResearch

JSW:ShareofpowersalesfromBarmerandRatnagiriunderPPA
Exhibit43: ExposuretoDISCOMsasofMar12fend Exhibit44: ExposuretoDISCOMsasofMar14fend
Maharasht ra 24% Maharasht ra 22%

Rajasthan 76%

Rajasthan 78%

Source:Company,AvendusResearch

Source:Company,AvendusResearch

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ClassificationofWIPcapacity
Exhibit45: YearwiseclassificationofLoAsforcoalbasedWIPcapacityonthebasisofofftake(MW)
(MW) Merchant Costplus Fixedtariffs Total

FY06 FY07 FY08 FY09 FY10 FY11 Total Source:Company,CEA,AvendusResearch

63 2,387 2,999 5,194 2,993 1,915 15,551

2,480 4,677 16,650 14,609 1,100 0 39,516

0 3,931 9,382 11,377 11,977 3,365 40,032

2,543 10,995 29,031 31,180 16,070 5,280 95,099

Exhibit46: YearwiseclassificationofLoAsforcoalbasedWIPcapacity(MW)
(MW) COAL Captive Imported Total

FY06 FY07 FY08 FY09 FY10 FY11 Total Source:Company,CEA,AvendusResearch

1,980 1,457 5,621 7,355 6,510 5,280 28,203

500 6,670 20,760 12,470 5,010 0 45,410

63 2,868 2,649 11,355 4,550 0 21,485

2,543 10,995 29,030 31,180 16,070 5,280 95,098

Hierarchyofpreferredfuelsupplyandofftakecombinations
Exhibit47: Proportionofcapacityunderdifferentfuelsupplyandofftakearrangements(%)
Category
IntheincreasingorderofrisktoRoE

Fuelsupply

Offtake

NTPC FY12f FY14f

TPWR FY12f FY14f

ADANI FY12f FY14f

JSW FY12f FY14f

88 3 9 88 2 11 81 4 7 9 50 2 21 26

12 31 14 43 13 6 30 13 17 22 21 23 56 34 19 46

A B C D E F G

Captive Linkage Linkage Linkage Imported Imported Imported

Costplus Costplus Merchant Fixedtariffs Costplus Merchant Fixedtariffs

Source:Company,AvendusResearch

Approvalsrequiredbeforecoalproductionbeginsatcaptivemine
Exhibit48: Approvalsandrelatedauthoritiestopermitproductionatcaptivecoalblock
Approvalsrequired Approvingauthority

Geologicalreport Mininglease Miningplan Forestclearance Coastalclearance Environmentclearance Landacquisition

Statutorybody/centralgovernmentministriesanddepartments Centralandstategovernmentministriesanddepartments MinistryofCoal MoEFandstategovernmentdepartments Coastalregulatoryzone MoEFandstategovernmentdepartments Staterevenuedepartmentandlocalauthorities

Source:Company,AvendusResearch

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AnalystCertification

Utilities

Thefollowinganalyst(s)is(are)primarilyresponsibleforthisreportand,certifies(y)thattheopinion(s)onthesubjectcompany(ies)anditssecurity(ies)andanyotherviewsor forecastsexpressedhereinaccuratelyreflecttheirpersonalview(s).Theyfurthercertifythatnopartoftheircompensationwas,isorwillbedirectlyorindirectlyrelatedtothe specificrecommendation(s)orviewscontainedinthisresearchreport:AbhayMoghe.

Disclosures
MeaningofAvendusSecuritiesPrivateLimitedsequityresearchratings
Theratingrepresentstheexpectedchangeinthepriceofthestockoverahorizonof12months. Buy:morethan+20% AttheendofMarch2012 Proportionofratingsineachcategory Proportionofcompaniestowhommaterialinvestmentbankingserviceswereofferedduringtheprevious12months Add:+10%to+20% Hold:10%to+10% Reduce:10%to20% Buy 29.1 0.0 Add 33.3 8.7 Sell:lessthan20% Hold Reduce 17.4 8.3 11.6 0.0 Sell 1.4 0.0 NR 7.2 20.0 Total 100.0 5.8

Proportionofratingsineachcategoryandinvestmentbankingrelationships(%)

Analystdisclosures
None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the company(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreportormembersofhis/herhouseholdholdany financialinterestinthesecuritiesofthecompany(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreporthave receivedorpurchasedsharesofthesubjectcompanypriortothepublicofferingofthoseshares.

DisclosuresonpotentialconflictsofinterestforAvendusSecuritiesPrivateLimitedand/oritsassociatecompanies(Avendus)ason02May2012
Companies:NTPC(NTPCIN),TataPower(TPWRIN),AdaniPower(ADANIIN),JSWEnergy(JSWIN) Asontheabovementioneddate,theshareholdingsofAvendusdoesnotexceed5%ofthetotalissuedsharecapitalofthecompaniesmentionedabove.Avendusdoesnothold anyotherfinancialinterestintheabovementionedcompaniesthatissignificantwithregardtotheresearchrecommendation.Asontheabovementioneddate,theshareholdings oftheabovementionedcompaniesdoesnotexceed5%ofthetotalissuedsharecapitalofAvendus.Avendusisnotamarketmakerorliquidityproviderinthesecuritiesofthe relevantissuerorinanyrelatedderivatives.Avendushasnotbeenaleadmanagerorcoleadmanagerofapubliclydisclosedofferofsecuritiesoftheabovementionedcompanies orinanyrelatedderivativesoverthepast12months.Overthepast12months,Avendushasnotbeenpartytoanagreementwiththeabovementionedcompanieswithregardto theprovisionofotherinvestmentbankingservicesthatdonotentailthedisclosureofanyconfidentialcommercialinformation.Avendusisnotpartytoanagreementwiththe subjectcompany(ies)ofthisresearchreportwithregardtotheproductionofthisresearchreport.

Sharepricehistoryandratingchanges

215 NTPC(InitiatedonMay02,12) Rating,Date,TP(INR) Buy,02May,208 190

165

140 May11

Jun11

Aug11

Oct11

Nov11

Jan12

Mar12

May12

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ADANI(InitiatedonMay02,12)

Rating,Date,TP(INR)

105

80

Buy,02May,81

55 May11
145

Jun11

Aug11

Oct11

Nov11

Jan12

Mar12

May12

TPWR(InitiatedonMay02,12)

Rating,Date,TP(INR)

120 Add,02May,118

95

70 May11

Jun11

Aug11

Oct11

Nov11

Jan12

Mar12

May12

90 JSW(InitiatedonMay02,12) Rating,Date,TP(INR)

70

50 Hold,02May,46

30 May11

Jun11

Aug11

Oct11

Nov11

Jan12

Mar12

May12

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Disclaimer

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ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(ASPL).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdisseminationtoall intendedrecipientsissimultaneous,notallintendedrecipientsmayreceivethisdocumentatthesametime.Thisdocumentisneitheranoffernorsolicitationforanoffertobuy and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation.Eachrecipientofthisdocumentshouldmakesuch investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors.This documenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.ASPLhasnotindependentlyverifiedalltheinformationgivenin thisdocument.Accordingly,norepresentationorwarranty,expressorimplied,ismadeastoaccuracy,completenessorfairnessoftheinformationandopinioncontainedinthis document.Theinformationgiveninthis documentisasofthedateofthisdocumentandthere can benoassurancethat futureresultsoreventswillbeconsistentwiththis information. Though ASPL endeavors to update the information contained herein on reasonable basis, ASPL, its associate companies, their directors, employees, agents or representatives(ASPLanditsaffiliates)areundernoobligationtoupdateorkeeptheinformationcurrent.Also,theremayberegulatory,complianceorotherreasonsthatmay preventusfromdoingso.ASPLanditsaffiliatesexpresslydisclaimanyandallliabilitiesthatmayarisefrominformation,errororomissioninthisconnection.ASPLanditsaffiliates shallnotbeliableforanydamageswhetherdirect,indirect,specialorconsequential,includinglostrevenueorlostprofits,whichmayarisefromorinconnectionwiththeuseof thisdocument.Thisdocumentisstrictlyconfidentialandisbeingfurnishedtoyousolelyforyourinformation.Thisdocumentand/oranyportionthereofmaynotbeduplicatedin anyformand/orreproducedorredistributedwithoutthepriorwrittenconsentofASPL.Thisdocumentisnotdirectedorintendedfordistributionto,oruseby,anypersonor entity who is a citizen or resident of the United States or Canada or is located in any other locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law or regulation or which would subject ASPL and its affiliates to any registration or licensing requirements within such jurisdiction. Personsinwhosepossessionthisdocumentcomesshouldinformthemselvesaboutandobserveanysuchrestrictions.ASPLanditsaffiliatesmaybeperformingorseekingto performinvestmentbankingandotherservicesforanycompanyreferredtointhisdocument.AffiliatesofASPLmayhaveissuedotherreportsthatareinconsistentwithandreach adifferentconclusionfromtheinformationpresentedinthisdocument. Thiscommunicationisexemptfromthefinancialpromotionrestriction(inSection21oftheFinancialServicesAndMarketsAct,2000(FSMA))relatingtothecommunicationofan invitationorinducementtoengageininvestmentactivityonthegroundsthatitismadetoaninvestmentprofessional.Anyinvestmenttowhichthiscommunicationrelatesisonly availabletoinvestmentprofessionals.Anypersonswhodonothaveprofessionalexperienceinsuchinvestmentsshouldnotrelyonthiscommunication. ASPLanditsaffiliatesmayhaveinterest/positions,financialorotherwise,inthecompaniesmentionedinthisdocument.Inordertoprovidecompletetransparencytoourclients, wehaveincorporateddisclosuresaboutinterestsofanalystsandaboutpotentialconflictsofinterestofASPLanditsassociatecompaniesinthisdocument.Thisshould,however, notbetreatedasanendorsementoftheviewexpressedinthedocument.ASPLiscommittedtoprovidinghighquality,objectiveandunbiasedresearchtoourinvestors.Tothis end,wehavepoliciesinplacetoidentify,considerandmanagepotentialconflictsofinterestandprotecttheintegrityofourrelationshipswithinvestingandcorporateclients. Employeecompliancewiththesepoliciesismandatory.AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofASPL.

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