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Most stocks rallying more on hope vs actual beneficiaries


Power and Oil & gas sector stocks are upbeat and rallying on reforms post
formation of a stable government in May-14. We believe it is essential to
segregate stocks rallying on hope and actual beneficiaries as the former will
fizzle out once fundamentals catch up. The stock rally does not seem to be
taking cognizance of subdued earnings in an optimistic scenario and rich
valuations while being overly hopeful of reforms which will impact only a
few companies.
Sector outlook Power: We are enthused by a spate of structural reforms
initiated and implemented since FY12 in the power sector with thrust on
increasing power generation capacity. We are thus not optimistic on power
generation besides speedy MoEF approval for stranded projects, but believe
the next leg of reforms would kick-in in transmission and distribution,
rationalisation in logistics cost linked to coal transportation, improvement in
rail infrastructure, speedy auctions in coal blocks, etc. The impact of the next
leg of reforms is seen to have a Neutral impact on NTPC, PTC India and Tata
Power within our coverage universe and hence the rally in stock by +30%
since May-14 is certainly based on hope as there is no case for multiple re-
rating considering the optimism already built-in by us and the harsh
regulatory environment prevailing.
Sector outlook Oil & Gas: A stable central government is positive for ONGC
(NR), OIL India (NR), GAIL and OMCs (NR). Our positive bias for upstream and
downstream sectors is based on the extension of reforms on diesel price de-
regulation, tax rationalization, imminent increase in domestic gas prices and
a stable rupee leading to lower under-recoveries. However, certainty on net
benefits to the companies will be essential for further rerating of the sector
and PSU stocks. A play on RIL and Cairn India would be purely tactical,
whereas we re-rate our PT on GSPL on the back of favourable PNGRB tariff
order in the making. A sharp +22% rise in share price of Petronet LNG and
expensive valuations prompt us to downgrade it to SELL.
Budget expectations: Key budget expectations include extension of tax
holiday, redefining of mineral oil to include gas and CBM and hence avail of
tax holiday benefits, exemption of customs duty on coal and LNG, clarity on
GST roll-out with re-instatement of fiscal benefits currently availed, assigning
declared good status on RLNG, enhancing ECB limit, 100% refinancing of loan
with ECB, issue of power sector bonds and prompting LIC to subscribe to
these bonds and seek MAT exemption for companies under tax holiday.
Recommendation and key risks: Expensive valuations prompt us to
downgrade Petronet LNG to Sell with a revised PT of Rs145 (Rs130 earlier)
and also downgrade NTPC to Sell with a revised PT of Rs125 (Rs120 earlier).
The revision in PT is led by rolling-forward of valuation to Jun-16. We have
revised our PT on GAIL and GSPL upwards to factor-in moderation in subsidy
and favourable PNGRB tariff order on the anvil. We retain BUY on MRPL, SELL
on PTC India and Tata Power. Key risks to our thesis are (1) regulatory
changes; and (2) changes in estimated volumes and realizations.

Stock Price Performance (%)*
Company Name 1 Mth 3 Mth 6 Mth 1 Yr
GAIL India 22.6 23.1 37.8 52.5
GSPL 24.0 30.4 50.3 60.0
Petronet LNG 13.2 28.3 44.3 40.9
MRPL 7.7 51.0 69.7 100.1
NTPC (2.7) 30.3 17.5 12.8
PTC India 10.3 39.4 42.7 100.1
Tata Power 3.9 26.6 24.6 31.1
NIFTY 5.3 13.5 20.6 30.3
Source: Bloomberg; *as on 01 July 2014

Revision in target prices
Companies Rating
Old TP
(Rs)
New TP
(Rs)
Upside
(%)
GAIL India Hold 385 410 (11.0)
GSPL Hold 72 90 (7.5)
Petronet LNG Sell 130 145 (16.8)
MRPL Buy 81 86 15.3
NTPC Sell 120 125 (19.1)
PTC India Sell 49 49 (48.6)
Tata Power Sell 85 85 (21.6)
Source: Bloomberg, Centrum Research Estimates

One Year Indexed Price Performance

Power utilities

Gas utilities



Sachin Mehta,sachin.mehta@centrum.co.in; 91 22 4215 9854

Summary Estimates
Net Sales (Rsmn) EBITDA (Rsmn) EBITDA Margin (%) Adj. PAT (Rsmn)
Y/E March (Rsmn) Q1FY15E YoY (%) QoQ (%) FY15E Q1Y15E YoY (%) QoQ (%) FY15E Q1FY15E Q1FY14 Q4FY14 Q1FY15E YoY (%) QoQ (%) FY15E
MRPL 1,37,192 (10.1) (28.3) 7,01,095 2,541* (39.8) (55.4) 27,660 2.0** 2.9 3.2 (2,642) NM NM 2,844
GAIL 1,24,304 (3.3) (14.1) 6,22,065 18,271 21.1 26.9 73,706 14.7 11.7 10.0 9,486 17.4 (2.4) 42,131
GSPL 2,373 (16.5) 4.9 13,008 2,283 (15.4) 13.7 11,435 96.2 94.9 88.8 1,067 (15.5) 16.7 5,540
Petronet LNG 86,443 3.2 (17.0) 3,75,445 3,842 (3.4) (0.7) 14,984 4.4 4.7 3.7 1,460 (35.2) (13.7) 7,119
Total - Gas 2,13,120 (1.0) (15.1) 10,10,518 24,396 12.1 20.3 1,00,125 11.4 10.1 8.1 12,014 3.6 (2.5) 54,790
NTPC 1,86,715 19.6 (10.8) 7,34,648 49,791 15.4 9.6 1,71,674 26.7 27.6 21.7 27,266 1.1 (7.7) 96,249
PTC India 33,377 20.5 19.4 1,49,964 505 48.4 13.0 1,976 1.5 1.2 1.6 400 34.8 (42.0) 1,896
Tata Power 94,997 2.2 7.9 3,77,316 19,834 (4.0) 8.9 84,626 20.9 22.2 20.7 2,910 NM NM 18,359
Total - Power 3,15,088 13.9 (3.2) 12,61,928 70,130 9.3 9.4 2,58,276 22.3 23.2 19.7 30,576 19.1 7.9 1,16,503
Source: Companies, Centrum Research Estimates*Represent GRM, **Represents GRM is USD/bbl
70
90
110
130
150
170
190
210
Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14
NTPC IN EQUITY PTCIN IN EQUITY
TPWR IN EQUITY NIFTY INDEX
70
90
110
130
150
170
190
210
Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14
GAIL IN EQUITY GUJS IN EQUITY
PLNG IN EQUITY NIFTY INDEX
MRPL IN EQUITY
02 July 2014
Sector Update
INDIA
Power and Gas


2
Power and Gas

Sector Oulook Power Utilities
We disagree with consensus view that a stable central government will re-rate the entire power
sector. It is misplaced optimism. It is imperative to segregate stocks that are rallying on hope vs.
actual beneficiaries of reforms. We reiterate that power sector is plagued by over-capacity in
generation, persistent challenges in securing domestic fuel, harsh regulations and subdued
demand. Our hypothesis suggest that even in a scenario of a jump in GDP to +9% in the medium
term, we see ample existing capacity in place to meet the demand and hence as new capacities
come on-stream, utilisation rates would only decline. We believe structural reforms in the
generation segment have already been implemented with limited room to improve thereon and
hence focus should be on beneficiaries in the transmission and distribution space. (Refer Exhibit
1 for details)
Limited role of Central Government: Of the Rs27.4 tn worth power projects under
implementation, 175 projects worth Rs9.7 tn (35% of the total) reached the Cabinet Committee on
Investment for speedy clearance and the balance 65% is stuck with State Governments or for
regulatory clearances. (Refer Exhibit 2 and 3 for details)
Ample generation capacity in place to meet even a bull case scenario of +9% GDP: Empirical
trend analysis suggests that utilisation rate will decline as power absorbed into the system will
continue to grow at 6-7% CAGR indifferent to GDP growth of 5% or 9%. In FY14, peak power
deficit slumped to 6 GW and India could have become power surplus, but it was constrained with
unavailability of transmission corridors. So even if we assume GDP of +9% in the medium term,
peak power deficit may bounce up to 14-15 GW (in line with past trend). However existing low
utilisation rates and ample idle capacity now available (thermal capacity addition by 57GW over
FY12-14 and additional 50GW scheduled for commissioning over FY15-17E), we believe demand
would be easily met to meet a bull case GDP scenario. (Refer Exhibit 4 to 7 for details)
Policy initiatives to be sentiment positive, but implementation will be challenging as Power
is a State subject: We expect NDA led government to announce policy initiatives on pooling of
coal and gas prices, speedy auction of coal blocks, emphasis of T&D infrastructure, speedy push to
rail infrastructure, extension of fiscal/tax benefits, tax rationalization, other incentives, etc. Though
we see it as sentiment positive, implementation will be challenging as concurrence of all States is
needed, which is unlikely. Until structural issues of adequate availability of domestic fuel and
revival in demand are jointly resolved, we see no possibility of a positive turnaround.
Sector earnings governed by regulations: The power sector is highly regulated by CERC/SERC
and hence the formation of a stable government is unlikely to impact the earnings of companies.
CERC/SERC tariff regulations are valid until FY19/end of multi-year tariff period and it is immune to
the formation of any government. Hence we see the impact as neutral.
Recommendation Book profits amidst the sharp rally: With the sharp +30% jump in stock
price without a case for re-rating makes it compelling to book profits. Overall, we recommend a
sober stock picking strategy with;-
Overall defensive bias and emphasis on attractive valuations;
Play on improvement in core business led by stable earnings growth and resolution of unviable
PPA;
Business model with long-term fuel security, PPA and cost competitiveness to outperform
peers










3
Power and Gas

Exhibit 1: Key sector reforms and key beneficiaries Priced in
Policy Measure
Implementation
Status
Probability of
smooth
implementation
Case in point
Time frame to
realize Policy
Impact
Key
Beneficiaries
Factored-in
CMP
Increase in coal based
generation capacity
Implemented High
Thermal capacity addition of 57GW
over FY12-14 and additional 50GW
scheduled for commissioning in next 3
years
NA
NTPC
Adani Power
KSK Energy
Yes
FSA sign-up with Coal
India
Implemented Medium
160 FSA with 222.2MT signed for a
capacity of 73GW
NA
NTPC
KSK Energy
CESC
Yes
Resolution of unviable
PPA
Implemented Low to Medium
CERC historical compensatory tariff
order, although it is challenged
0-1 year
Tata Power
Adani Power
Yes
Improvement in SEB
financial health
Implemented High
FRP package underway and timely
revision in tariffs by all SEBS
N.A All utilities Yes
Speedy MoEF approvals
to power projects
Pending High
Online single window clearance to be
implemented from Jul-14
0-1 year All utilities
To a large
extent
Speedy coal block
auctions
Pending Low to Medium MoP thrust to improve coal supplies 1-3 years Subjective NA
Rationalization of freight
cost on coal through
swapping arrangements
Pending Low
GSEB and NTPC to soon announce swap
arrangements, but unlikely to be
implemented across al utilities
1-2 years NTPC Yes
Extension of tax holiday Pending High
Industry demands and government
emphasis on capacity addition
0-1 year
NTPC
Adani Power
Yes
Revival in demand Implemented High
SEB currently have excess PPA capacity
vs actual demand and hence power
purchase is on merit order
NA NA NA
Improvement in rail
infrastructure for coal
evacuation
Pending Medium
All critical railway lines have been stuck
owing to land acquisition issues and
law and order problems
2-4 years
All Utilities
Coal India
To a large
extent
Speedy MoEF approvals
for coal blocks
Pending Medium to High Lack of rail infra to hinder evacuation 0-1 year
All Utilities
Coal India
To a large
extent
Introduce 24x7 power
supply
Pending Low to Medium
Lack of adequate transmission and
distribution to hinder implementation
2-4 years
All Utilities

Partly
PPP model in
distribution on pan India
basis
Pending Low to Medium
SEB resistance and political
unwillingness
3-5 years All utilities No
Lower AT&C losses Pending Medium
SEB resistance and political
unwillingness
3-5 years
All utilities
(Negative)
No
Revival of stranded gas
based plants
Pending Medium
Without subsidy to SEB by MoP, it is
unlikely to take-off. Past effort of UPA
government have failed
0-1 years
Torrent Power
R- Power
GMR Infra
GVK Infra
Lanco Infra
To a large
extent
Improve transmission
and distribution capacity
manifold
Pending High
Mis-match between capex incurred on
generation vis--vis T&D spend
2-4 years
PGCIL
SEBs
No
Encourage SEB-SEB
power trading
Pending High
Gujarat model does not encourage
power traders and instead moots SEB
owned power trading arm
1-2 years
PTC India
(Negative)
No
Case 1 / Case 2 standard
bidding guidelines (SBD)
Implemented High
Despite fuel cost pass-through for new
projects, leading IPP have refrained
from bidding as it is perceived pro-
consumer. MoP has ruled-out changes
in SBD
0-1 year SEBs NA
Source:Centrum Research
The sharp rally in all utilities is unjustified and rally
may continue on hope until fundamentals catch-up


4
Power and Gas

Spate of reforms since FY12 have been encouraging leading to surge in capacity
addition
We are enthused by a spate of structural reforms initiated by the MoP/Regulator since FY12 with a
thrust on timely revision in tariffs by SEBs, re-structuring of SEBs loans, thrust on FSA sign-up with Coal
India, fuel cost pass-through for all new projects, new SBDs and resolution of unviable PPAs. The
impact of these reforms is reflected in the surge in thermal capacity addition by 57GW (1.04x total
capacity added in the XI Plan and additional 50GW scheduled for commissioning over FY15-17E)
resulting in a decline in peak power deficit and utilisation rates. Hence there is limited scope for the
new government to push for further policy reforms in the power generation segment.
Exhibit 2: Profile of projects - Rs83tn under implementation Exhibit 3: Profile of projects Rs21.5tn under review by CCI


Source: CCI, Centrum Research Estimates Source: CCI, Centrum Research Estimates
Exhibit 4: India to be power surplus in FY16E Exhibit 5: Correlation of GDP and YoY increase in thermal
power capacity and overall power absorbed into the system


Source: CEA, MoP, Centrum Research Estimates Source: CEA, MoP, Centrum Research Estimates
Exhibit 6: Correlation of GDP and YoY increase in power
supply
Exhibit 7: Correlation of thermal PLF, YoY increase in
thermal capacity and peak power deficit


Source: CEA, MoP, Centrum Research Estimates Source: CEA, MoP, Centrum Research Estimates


33%
4%
63%
Power
Oil and Gas (including
Chemicals)
Others
45%
11%
44%
Power
Oil and Gas
Others
0
2
4
6
8
10
12
-24
-20
-16
-12
-8
-4
0
4
8
12
F
Y
8
5
F
Y
8
7
F
Y
8
9
F
Y
9
1
F
Y
9
3
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
F
Y
1
1
F
Y
1
3
F
Y
1
5
E
F
Y
1
7
E
(
%
)
(
)
%
)
Surplus/(Deficit) in MU terms
Peak Surplus/(Deficit) in MW terms
GDP (RHS)
0
5
10
15
20
0
50
100
150
200
FY08 FY09 FY10 FY11 FY12 FY13 FY14
(
%
)
(
G
W
)
Power supply - pan India (GW)
Capacity - Thermal (GW)
Peak power shortage (GW)
YoY Increase in Power supply pan India
YoY increase in thermal power capacity
GDP growth (at factor cost) RHS (%)
3
4
5
6
7
8
9
10
FY08 FY09 FY10 FY11 FY12 FY13 FY14
(
%
)
GDP growth (at factor cost) (%)
YoY Increase in Power supply pan India
60
65
70
75
80
0
5
10
15
20
FY08 FY09 FY10 FY11 FY12 FY13 FY14
(
%
)
(
%
)
YoY increase in thermal power capacity
Peak power deficit
All India PLF - Thermal (RHS)
Only Rs9.7tn power projects (35% of the
total projects under implementation)
are under CCI/GoI review


5
Power and Gas

Exhibit 8: Status of projects pending with CCI as on 1 July 2014
Sector
No. of projects with CCI Amount (Rs tn.)
As % of Total
Cleared Pending Total
Cleared
Projects
Pending
projects
Total
Power 92 83 175 4.1 5.6 9.7 45
As % of Grand Total 59 29 40 76 35 45

Oil & Gas 8 35 43 0.2 2.2 2.4 11
As % of Grand Total 5 12 10 3 14 11

Others 55 167 222 1.1 8.2 9.3 44
As % of Grand Total 35 59 50 21 51 43

Grand Total 155 285 440 5.4 16.1 21.5 100
Source: CCI, Centrum Research Estimates


Exhibit 9: Coal India : Coal supply assumptions
Coal India - Total (MT) FY07 FY08 FY09 FY10 FY11 FY12 FY13
FY14
FY15E FY16E FY17E
Production 360.9 379.5 403.7 431.3 431.3 435.8 452.2 462.5 490.3 5195.7 550.8
Dispatch 350.3 374.6 400.8 416 424.5 433.1 465.2 471.5 498.9 528.8 560.5
Source: Company, Centrum Research Estimates
Exhibit 10: Correlation of GDP vs pan-India power supply
and PTC Volumes
Exhibit 11: Quarterly correlation of GDP and PTCs volumes
Source: Company, Centrum Research Estimates Source: Company, Centrum Research Estimates

4
5
6
7
8
9
10
-
200
400
600
800
1,000
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
(
%
)
PTC Volumes (BU) Power supply pan India (BU)
GDP (at factor cost) RHS
200
2,200
4,200
6,200
8,200
10,200
12,200
-
2.0
4.0
6.0
8.0
10.0
12.0
Q
1
F
Y
0
9

Q
2
F
Y
0
9

Q
3
F
Y
0
9

Q
4
F
Y
0
9

Q
1
F
Y
1
0

Q
2
F
Y
1
0

Q
3
F
Y
1
0

Q
4
F
Y
1
0

Q
1
F
Y
1
1

Q
2
F
Y
1
1

Q
3
F
Y
1
1

Q
4
F
Y
1
1

Q
1
F
Y
1
2
Q
2
F
Y
1
2
Q
3
F
Y
1
2
Q
4
F
Y
1
2
Q
1
F
Y
1
3
Q
2
F
Y
1
3
Q
3
F
Y
1
3
Q
4
F
Y
1
3
Q
1
F
Y
1
4
Q
2
F
Y
1
4
Q
3
F
Y
1
4
Q
4
F
Y
1
4
GDP at factor cost (LHS) PTC's volumes (MU)
We remain optimistic
and factor-in 6% CAGR
over FY14-17E on coal
supplies vs 3 % CAGR
over FY09 to FY14
The status quo remains nearly the same as
we compare with the Apr-14 statistics (Refer
our report dated 17-May-14 for details)


6
Power and Gas

Positive on Upstream / Downstream, Neutral on Gas Utilities
A stable central government is positive for ONGC, OIL India and OMCs but Neutral for gas
utilities. Our positive bias for upstream and downstream sectors is based on extension of
reforms on diesel price de-regulation, tax rationalization, a stronger rupee on the anvil leading
to lower under-recoveries and an imminent increase in domestic gas prices. However, certainty
on net benefits to the companies will be essential for further rerating of the sector and PSU
stocks, as stocks have already rallied. A play on RIL and Cairn India would be purely tactical,
whereas a re-rating in gas utilities would depend on radical positive changes in regulations,
zero subsidy burden for GAIL and a quantum increase in gas supplies. However, with low
probability, we are Neutral.
Under-recoveries on a decline: Over FY14-16E, under-recoveries are likely to reduce by 40% to
Rs840 bn (@crude price of USD105/bbl and INR/USD at 60). As product crack spreads increase over
9MFY15 in line with historical trend, diesel and LPG/Kerosene under-recoveries would increase
going forward and CMP of stocks are assuming that GoI would keep increasing the diesel price
which may be challenging in a scenario of inflationary environment. Although we built-in absolute
subsidy burden for ONGC (Not Rated) and OIL India (Not Rated) to moderate marginally, OMCs
(Not Rated) are certain beneficiaries of lower under-recoveries (CMP largely factor-in benefit of
lower under-recoveries). Clarity on gas price hike to near USD 7-8/MMBTU would boost earnings
for upstream companies (but factored-in CMP of ONGC and partly for OIL India). Possible decline
in Government compensation reflecting lower fuel subsidies and higher revenues (in the form of
royalty, tax, dividends and dividend distribution tax) from potential higher realizations on oil and
gas, provide enough headroom for the Government to pass on benefits (albeit partially) to
upstream PSUs and hence is positive.
Re-rating of Gas utilities depends on radical regulatory changes and jump in gas supplies
Probability is low: We see Neutral impact on outlook for GAIL, GSPL and Petronet LNG noting
that earnings are driven by (1) PNGRB regulations which remain harsh; (2) price sensitivity to
higher gas prices by 75% of end consumers (power and fertiliser sectors); (3) litigations over laying
pipelines to transmit gas/RLNG; (4) ongoing tariff litigations with APTEL/SC and (5) optimism in
increased gas volumes already built-in for Petronet LNG, GAIL and GSPL, makes us Neutral.
Impact of reforms and policy initiatives to firm-up over next 2-3 years: The impact of the
recent price hike and approvals for a number of upstream projects by the Cabinet Committee on
Investments (CCI) in the past few months are expected to provide a fillip to exploration activity,
though quantum increase in terms of gas production would be seen only after 2-4 years
considering the long gestation period of upstream projects. The outlook on domestic gas supplies
remains bleak and hence utilisation levels will be subdued.
Stock Recommendations
We retain HOLD on GAIL and GSPL and recommend SELL on Peronet LNG. We maintain BUY on MRPL
with a revised PT of Rs86 (Rs81 earlier). Among non-coverage companies, we prefer Oil India, BPCL,
and IOCL. Earnings growth in RIL (Not Rated) will largely be led by non-core business whereas for Cairn
India (Not Rated), it will depend on speedy clearances and consequent increase in production. Hence
we see RIL and Cairn India as tactical plays.


7
Power and Gas

MRPL (Rating: BUY; Target Price: Rs86)
Exhibit 12: Quarterly Estimates
(Rsmn) Q1FY145E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Product Sales (MT) 2.9 3.2 3.4 (9.6) (16.1) 13.9
Sales 1,37,192 1,52,659 1,91,275 (10.1) (28.3) 7,01,095
GRM 2,541 4,220 5,701 (39.8) (55.4) 27,660
PAT (2,642) (4,539) 10,671 NM NM 2,844
Source: Company, Centrum Research Estimates
The first quarter is seasonally weak historically as product crack spreads are subdued and pick-up
in balance 9MFY15. We expect MRPL to report a GRM of USD2.0/bbl vs USD2.9/bbl in Q1FY14 and
USD3.2/bbl in Q4FY14. For FY15E, MRPL is expected to report an average GRM of USD4.5/bbl.
In line with our IC report, Phase-III commissioning is on track and PFCC unit and Petchem units are
scheduled to be commissioned over next 1 month, leading to high GRM accretive product slate.
We reiterate that pending commissioning of Phase-III in its entirety, earnings will remain volatile
owing to erratic fuel consumption and skewed product slate. Further, inventory gains may be off-
set with sequential appreciation in rupee in Q1FY15.
Also, without resort to borrowings, company has paid significant amount of its outstanding dues
towards oil payments to Iran in Q1FY15, which should moderate street concerns. MoPNG is
considering a possible merger of ONGC Mangalore Petchem (MRPL stake at 3%) with MRPL which
provides further potential upside to our PT, which we have not factored-in.
Ratings and price target Maintain BUY
We maintain BUY on the stock with a revised PT of Rs86 (Rs81 earlier). Our revision in PT is owing to
roll-forward to Jun-16 earnings and has been derived as the average value using DCF and fair multiple
assigned to EV/EBITDA, EPS and BV.

GAIL (Standalone) (Rating: HOLD; Target Price: Rs410)
Exhibit 13: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Sales 1,24,304 1,28,556 1,44,643 (3.3) (14.1) 6,22,065
EBITDA 18,271 15,084 14,399 21.1 26.9 73,706
EBITDA Margins (%) 14.7 11.7 10.0 297 bps 474 bps 11.9
PAT 9,486 8,082 9,720 17.4 (2.4) 42,131
Source: Company, Centrum Research Estimates
In the quarter, sequential 3% appreciation in INR/USD coupled with decline in LPG/LHC
realizations and likely subsidy pay-out of Rs5bn would weigh down on earnings. We expect
transmission volumes to remain flat QoQ and its earnings under pressure owing to zero take-pay
charges and impact of PNGRB tariff order, although it is marginally negative. .
We expect the company to post higher EBITDA of Rs 18.2 bn (+21% YoY +27% QoQ) on the back
of (1) higher petchem and LPG/LHC volumes as shut-down was minimal at 10 days vs 15-20 days
in Q4FY14 (2) subsidy burden at Rs5bn vs Rs7 bn in Q1FY14 and flat QoQ. GAIL is expected to
report a profit of Rs13.7 bn (+122% YoY and -18% QoQ). Earnings from trading/marketing would
be a key variable, we have however built-in modest jump in its earnings.
Petchem expansion under-way at Pata has been delayed further and is likely to commence
production in Q4FY15.
Earnings revised
We are revising our EBITDA/PAT in FY15E/FY16E on the back of lower subsidy burden factored-in at
Rs10.5bn vs Rs14bn considered earlier and changes in petchem and LPG utilisation and realisations.
We roll-forward our earnings to Jun-16 and maintain our HOLD rating with a revised target price of
Rs410 (Rs 385 earlier).
Exhibit 14: Earnings revision
Particulars
FY15E FY16E
Current Earlier Chg (%) Current Earlier Chg (%)
Revenue 622,065 617,332 0.8 677,404 672,363 0.7
EBITDA 73,706 71,191 3.5 73,932 77,024 -4.0
EBITDA margin (%) 11.9 11.6 30 bps 10.9 11.5 (60 bps)
PAT 42,131 40,421 4.2 42,499 44,552 -4.6
Source: Company, Centrum Research Estimates


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Power and Gas

GSPL (Standalone) (Rating: Hold; Target Price: Rs90)
Exhibit 15: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Volume (MMSCMD) 23.0 21.9 20.3 5.0 13.2 25
Sales 2,373 2,843 2,262 (16.5) 4.9 13,008
EBITDA 2,283 2,698 2,008 (15.4) 13.7 11,435
EBITDA Margins (%) 96.2 94.9 88.8 128 bps 741 bps 91.9
PAT 1,067 1,263 915 (15.5) 16.7 5,540
Source: Company, Centrum Research Estimates
Our channel checks reveal that PNGRB (following APTEL directive in Feb-14) would shortly release
final tariff order for HP network paving the way for GSPL to charge higher tariffs. Hence in
anticipation, we revise our earnings and PT to reflect the emerging scenario. We highlight that
PNGRB has already disputed it and litigated with SC, however pending the outcome, GSPL in the
interim would charge higher tariffs.
During the quarter, we expect volumes to bounce up sequentially at an average 23 MMSMCD. We
highlight that the provisional tariff order dt. 19-Feb-2014 on HP network (increasing its levelised
tariff from Rs23.99/MMBTU to Rs26.58/MMBTU) has not been accounted in Q1FY15.
We expect EBITDA to bounce back sequentially on the back of higher volumes despite factoring-in
moderation of take-pay charges.
Ratings and price target Maintain HOLD
We maintain HOLD on the stock with a revised PT of Rs90 (Rs72 earlier) as we factor-in likely PNGRB
tariff order entailing prior period revenue of Rs1.4bn and recurring higher tariffs at Rs26.58/MMBTU vs
current Rs23.99/MMBTU for HP network. We roll-forward our valuation to Jun-16E. The current re-
structuring of CGD companies may unlock some value and add a potential Rs4 to our SoTP based PT,
however pending outcome, we await tangible developments. Contrary to media reports flash on 1 Jul
2014, Gujarat Gas Management has clarified that there are no plans of merger with GSPC.
Exhibit 16: Exhibit 16: Exhibit 16: Exhibit 16: Earnings revision:
Particulars
FY15E FY16E
Current Earlier Chg (%) Current Earlier Chg (%)
Revenue 13,008 10,737 21.2 14,434 13,170 9.6
EBITDA 11,435 9,321 22.7 12,526 11,442 9.5
EBITDA margin (%) 91.9 91.7 20 bps 91.0 90.8 20 bps
PAT 5,540 4,123 34.4 6,006 5,280 13.8
Source: Company, Centrum Research Estimates

Petronet LNG (Rating: Downgrade toSELL; Target Price: Rs145)
Exhibit 17: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Sales 86,443 83,770 1,04,085 3.2 (17.0) 3,75,445
EBITDA 3,842 3,978 3,868 (3.4) (0.7) 14,984
EBITDA Margins (%) 4.4 4.7 3.7 (30 bps) 73 bps 4.0
PAT 1,460 2,253 1,693 (35.2) (13.7) 7,119
Source: Company, Centrum Research Estimates
During the quarter, despite sharp dip in spot RLNG prices to USD12/MMBTU, demand remained
weak. We however factor-in optimistic capacity utilizations. We expect the company to report
capacity utilization of 94% at Dahej terminal vs. 102%/91% in Q1FY14 / Q4FY14 respectively. At
Kochi terminal, utilization rates remain at sub 2% as FACT citing high RLNG prices has stopped
drawal of RLNG since 10-Jan-2014. Capacity under-utilization and lack of visibility on pipeline
connectivity at Kochi-Mangalore and Kochi-Bangalore would continue to hurt earnings.


9
Power and Gas

We have built-in annual 5% escalation in regas charges and continue to build-in an sustainable
trading/marketing margin of USD0.08/MMBTU for the forecast period.
We have factored in an optimistic 105%/108% capacity utilization for Dahej in FY15/16E and
5%/16% capacity utilization for Kochi terminal for the same forecast period. We do not expect
material revenue generation from possible lease of storage tanks at Kochi.
Ratings and price target Downgrade to SELL
We downgrade the stock to SELL with a revised PT of Rs145 (Rs130 earlier) as it trades above Mean+SD
on a one year forward PE(x). The revision in PT is owing to roll-forward to Jun-16E. We have valued
Petronet LNG as average of fair value derived on DCFF and PE(x).

NTPC (Standalone) (Rating: Downgrade to SELL; Target Price: Rs125)
Exhibit 18: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Units sold (BU) 59.3 53.1 58.4 11.6 1.5 232.2
Sales 1,86,715 1,56,129 2,09,381 19.6 (10.8) 7,34,648
EBITDA 49,791 43,142 45,426 15.4 9.6 1,71,674
EBITDA Margins (%) 26.7 27.6 21.7 (97) bps 497 bps 23.4
PAT 27,266 25,270 30,935 7.9 (11.9) 96,249
APAT 27,266 26,975 29,530 1.1 (7.7) 96,249
Source: Company, Centrum Research Estimates
During the quarter, we expect NTPC to report 59.3 BU (+12% YoY and +2% QoQ) of energy sales.
Despite weak demand for gas based power, we expect NTPC to report 41% PLF for gas and 89%
for coal stations. PLF for coal stations have been declining MoM from 87% in Apr 14 to 81% in Jun
14 as demand slows down and NTPC stares at acute shortage of coal inventory for most of its
stations.
NTPC has availed of the grace period until Sep 14 to transit to the new CERC tariff norms and
hence earnings will be bloated in the interim and revised downwards from 2HFY15. Captive coal
mining from Pakhri block is delayed as MDO contract has been terminated whereas the company
has guided for production from Chatti-Bariatu and Kerandari mines to commence from Q1FY17.
NTPC has appealed in HC against CERC tariff norms for FY15-19. As per industry sources, there is
low probability of any revision in CERC tariff regulations as it has been framed within the
framework of Electricity Act and is legally binding. We continue to follow the CERC regulations for
the forecast period and await tangible developments.
Ratings and price target Downgrade to SELL
We downgrade the stock to SELL and revise our PT to Rs125 (Rs 120 earlier). We have valued NTPC on
DCFF. NTPC has traded at more premium multiples historically, but an altered return profile for next 5
years with curtailed incentives certainly does not merit a re-rating as being reflected in the +30% rally
in stock. Hence, we downgrade it to SELL as the rally is based on hope and we have already built-in
demand revival and hence higher PLF for NTPC for the forecast period.












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PTC India (Standalone) (Rating: SELL; Target Price: Rs49)
Exhibit 19: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Units traded (MU) 10,430 8418 7656 23.9 36.2 41,405
Sales 33,377 27,704 27,952 20.5 19.4 1,49,964
EBITDA 505 340 447 48.4 13.0 1,976
EBITDA Margins (%) 1.5 1.2 1.6 29 bps (9 bps) 1.3
PAT 400 297 689 34.8 (42.0) 1,896
Source: Company, Centrum Research Estimates
PTC India (PTC) has not recovered balance overdues of Rs2.5 bn from TNSEB as it remains
disputed.
During the quarter, we expect PTC to clock a volume of 10.4 BU (+55% YoY and +27% QoQ).
However, the sales volume mix is skewed towards sale on IEX/PXIL and its share is estimated to be
about 34% in Q1FY15E vs. 27%/24% in Q4FY14/Q1FY14. A higher share of trade on IEX/PXIL
implies (1) higher proportion of working capital being blocked; (2) lower trading margins and (3)
an inability to identify buyer/seller under bilateral trade and hence negative.
We built-in robust trading margin of Rs0.3/kWh for its erstwhile tolling projects and Rs0.08/kWh
from export of 250 MW to Bangladesh. Net rebate/surcharge which measures efficiency of
working capital will be a key variable. We have factored in earnings of Rs100mn.
Ratings and price target Maintain SELL
We continue to maintain our negative stance on PTC India and see stock fundamentals as weak. We
retain our SELL rating on PTC India and our PT of Rs49. We have valued PTC as the average of fair value
derived on PE(x) and PB(x) and based on Jun-16.

Tata Power (Rating: Maintain SELL; Target Price: Rs85)
Exhibit 20: Quarterly Estimates
(Rsmn) Q1FY15 E Q1FY 14 Q4FY 14 YoY (%) QoQ (%) FY15E
Sales 94,997 92,918 88,052 2.2 7.9 3,77,316
EBITDA 19,834 20,668 18,215 (4.0) 8.9 84,626
EBITDA Margins (%) 20.9 22.2 20.7 (137 bps) 19 bps 22.4
Net Income 2,910 (1,590) (1,884) NM NM 18,359
Source: Company, Centrum Research Estimates
Although the company has raised supplementary bills to factor-in CERCs compensatory tariff, our
channel checks reveal that SEBs have not paid the compensatory tariff. We see challenges in
implementation of CERC tariff order as SEBs are likely to challenge it with the SC, if APTEL decides
to uphold CERCs tariff order. We however continue to be optimistic and follow CERCs
compensatory tariff order.
Profit from coal business segment remains the key variable. Until the first tranche of stake sale
receipts over Arutmin mine is not received, Tata Power is likely to continue to account for Arutmin
coal sales. We have accordingly factored-in coal sales volume from KPC and Arutmin at 20 MMTPA,
as the first tranche from Arutmin stake sale is not received and the entire proceeds are likely to be
concluded by Q4FY15.
We expect the company to post a net income of Rs2.9bn on the back of inclusion of compensatory
tariff for Mundra UMPP and modest coal realizations. We also factor-in higher dividend receipts
from coal business and hence expect earnings to be buoyant.
Ratings and price target Maintain SELL
We reiterate that equity dilution by 14% in Apr-14 is negative as interest cost savings have a neutral
impact to 75% of our SoTP price target, it being regulated and hence a drag on fair equity value. In a
scenario of stay on CERC compensatory tariff order, it would de-rate Tata Power as it faces the risk of
earnings downgrades and our price target then would be Rs59.


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Appendix A
Disclaimer
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this report is accurate or complete.


12
Power and Gas
nterprises
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Rating Criteria

Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn
Buy Upside > 25% Upside > 20% Upside > 15%
Hold Upside between -25% to +25% Upside between -20% to +20% Upside between -15% to +15%
Sell Downside > 25% Downside > 20% Downside > 15%

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager
Registration Nos.
CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233
DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)
CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-661-2012
PMS REGISTRATION NO.: INP000004383
MCX SX (Currency Derivative segment) REGN. NO.: INE261454230
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