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Executive summary
Having hit the bottom, the power sector we argue is on a recovery path,
which may be jagged but upward-sloping.
India’s available coal-based thermal power capacity for peak demand will hit 85–90%
utilisation by FY22E at current growth run rate of peak power demand (which only
thermal can feed).
Given attractive valuations of stressed assets ‘up for grabs’, incipient thermal
consolidation offers a windfall for stronger players.
Fuel security/supply is a key concern for thermal players over the next 9–12 months; a
surge in coal imports looks imperative.
Current stock prices of power companies are factoring in overly pessimistic RoE dilution
of 450bps owing to the upcoming CERC 2019–24 norms. Such pessimism is
unwarranted in our view.
All in all, we believe the power sector’s valuation has bottomed out. It is currently trading at
a 12% discount to its ten-year average EV/EBITDA of 9.1x. That said, an upswing in sectoral
fortunes is on the cards in our view. We prefer NTPC (TP: INR190), CESC (TP: INR840) and
TPCL (TP: INR101) in this order.
The Government of India’s push for ‘24x7 Power for All’ has stirred up new hopes in the
sector with the focus shifting towards uninterrupted power supply. Besides, unlocking of
latent demand with 100% electrification could add 3%, i.e. about 40bn units to the existing
demand base. Peak demand (8% YTD) has outpaced base load demand (7% YTD), and the
ramp rate is a staggering 3MW/sec during peak hours (18:00–20:00 hours).
Out of the peak demand of 177GW, coal power meets 70–75% of the requirement while
RE’s contribution is negligible (< 5%) as India is an evening peak-load country. We estimate
the available coal-based power capacity in the country to meet peak demand would be
about 220GW at utilisation of 85–90% by FY22E.
All in all, PLFs of coal-based units would rise 400/800bp by FY22E assuming a demand CAGR
of 6%/7%. We expect the RE share in generation mix to rise to 13% by FY22E (from 8%
currently) fostered by a favourable policy framework and its cost effectiveness.
Our base-case analysis (demand CAGR of 6.2%, RE capacity addition CAGR of 15%) indicates
power sector coal consumption could touch 739MTPA by FY22E (versus 608MTPA in FY18).
Coal India Limited (CIL) will have to build up additional dispatches by about 126MT through
Some reforms could be: a) segregation of carriage and content; b) formation of a national
discom; and c) subsidy disbursal through Direct Benefit Transfer (DBT). If 2007–13/2012–18
was about generation/transmission capex, the next five years are going to be marked by
reforms/capex in the power distribution space.
For the upcoming 2019–24 norms, a consultation paper has been floated, which did not go
down well with investors because of the proposed two-/three-part tariffs in
transmission/generation that would be a little difficult to implement in our view. Power
companies’ stock prices are factoring in RoE dilution of about 450bps (base RoE of 15%).
However, we believe the RoE structure is unlikely to be tinkered with given the challenges
afflicting the sector, not to mention high interest rates. All in all, we do not expect more
than a 50/100bps reduction in RoE for generation/transmission.
Table of contents
Companies
CESC ....................................................................................................................... 63
NTPC ....................................................................................................................... 81
l
NTPC Reverse DCF suggests extreme pessimism built in the stock Potential dilution of RoE/incentive
price, which is unfounded; attractive valuation (1.05x P/BV- structure in upcoming CERC norms
FY20E)
l
Fixed cost under-recovery to continue in
the near term
l
l
Best-placed to benefit from inorganic growth opportunities Government stake dilution through OFS
etc.
l
l
Upcoming capacities unlikely to be high cost. Furthermore, Government’s stake sale in SJVN to NTPC
RE bundling will push down variable charge at high valuation (ONGC- HPC demerger)
l
l
CESC Kolkata regulated business offers stable FCF profile Untied capacity at Dhariwal
l
l
Demerger offers a more specific investment opportunity Further demerger of generation and
distribution businesses
l
l
Tata Power Resolution of Mundra is in sight. Apart from a potential Successful Mundra resolution a key
valuation uptick, it will free up management bandwidth trigger
l
l
Further disinvestment of non-core assets to drive debt IPO of Tata Projects could be a key trigger
reduction
l
l
Growth avenue from scaling up renewable and distribution Debt/Equity still slightly on higher side
franchise
l
Power Grid Healthy order book imparts earnings visibility for next Potential dilution of RoE/incentive
two–three years structure by regulator
l
Renewable opportunity to keep growth ticking Incremental order-wins could slow down
with a shift towards competitive bidding
l
JSW Energy Strong balance sheet position supports potential inorganic Clarity on EV business plan
growth
l
PPA tie-ups (80% capacity) imply stable cash flows International coal price volatility
l
Adani Power Mundra resolution, which is in sight, would contain losses Successful resolution of Mundra plant
and management bandwidth
l
(kWh)
(%)
(%)
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
World
China
India
Japan
Europe
US
Brazil
ME
However, latent demand seems to be kicking in… …led by electrification drive and 24x7 power supply…
10.0
8.0
6.0
(%)
4.0
2.0
0.0
FY16
FY17
FY18
YTDFY19
…which would narrow demand-supply gap… …and thus improve coal PLF by 400bp
20.0 90.0
16.0 82.0
12.0 74.0
(%)
(%)
8.0 66.0
4.0 58.0
0.0 50.0
FY19E
FY20E
FY21E
FY22E
FY14
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY10
FY17
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY18
Coal based capacity growth YoY Implied coal based plants PLF's
Source: Enerdata, CEA, Saubhagya, Edelweiss research
250 700
200 620
(million tonnes)
150 540
(GW)
100 460
169
130 380
50
0 300
H2FY19 FY22E FY18 5% 6% 7% 8% 9%
Coal Hydro Gas Nuclear Non-Conventional Power demand CAGR over FY18-FY22E
Source: CEA, Edelweiss research
Stressed assets offer a windfall for stronger players Valuations have bottomed, provide a good play
15.0
14 W
No FSA.
No PPA
12.0
( EV/EBITDA)
Dec-14
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-15
Dec-16
Dec-17
Dec-18
7GW
No FSA,
PPA Sector 12m fwd EV/EBITDA 10Y average
+1SD -1SD
Electricity consumption is a key parameter of a nation’s development, and India has a long
road ahead on this count. Global electricity consumption increased at a CAGR of 3.1% over
2000–17 while emerging markets (EMs) clocked double the global average powered by
China’s 9.9% CAGR and India’s 6.8% CAGR.
India is the third largest electricity consumer, but its per capita consumption (1,149kWh in
FY18) is lower than most EMs’ (average: 2,050kWh). This is stark because India, home to
one-fifth of the world’s population, consumes less than 5% of the global electricity
consumption.
Chart 1: India: 20% of global population consumes 5% of electricity consumption: EMs outpaced global growth in last 15 years
World Electricity Consumption 9.9
10.0
China 8.0
26% 6.8
Rest of the
World 6.0 5.4
32%
(%)
China
India
Japan
Europe
US
Brazil
ME
India
5% US
17% Electricity consumption CAGR 2000—17
Source: Enerdata, Edelweiss research
Half a billion people in India have gained access to electricity since 2000. With special focus
on last-mile connectivity through various government schemes (DDUGJY, Saubhagya, etc),
India is on course to achieving 100% electricity access over the next one year. This along
with the improved industrialisation and deeper penetration of household appliances is
likely to double India’s per capita electricity consumption over the next 10–15 years. In the
long run, electricity consumption should mirror India’s GDP growth rate.
(BU)
(%)
3,000
900 5.2
2,000
700 4.6
1,000
500 4.0
FY08
FY06
FY07
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
0
1990
1992
1994
1998
2000
2002
2004
2006
2008
2012
2014
2016
1996
2010
India's per capita consumption CAGR Electricity Consumption China Electricity consumption India
Source: CEA, Enerdata, Edelweiss research
3) Power oversupply would balance out due to strong power demand and limited
thermal capacity addition (net 27GW) over the next four years.
4) India cannot fall back on hydro/gas power. We estimate India’s coal based
thermal capacity available to meet peak demand would continue to be about
200GW, but with different dynamics.
(BU)
(%)
(%)
140 40.0 600 8.0
0 0.0 0 0.0
FY09
FY11
FY08
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY1956
FY1961
FY1966
FY1974
FY1979
FY1985
FY1997
FY2002
FY2007
FY2012
FY2017
FY1990
Currently, close to 15% of coal-based thermal capacity is stressed. Large capacity addition,
tepid demand growth, delayed project execution with significant cost and time overruns,
opening up of power exchanges allowing open access, RE gaining grid parity and distressed
discoms’ health among other reasons pushed thermal IPPs to the edge. PPAs dried up as
distressed discoms wanted to avoid incremental fixed-cost liability. On top of it,
cancellation of coal blocks hit the sector as projects failed to secure coal linkages. This has
put thermal IPPs in stress and consequently thermal PLFs plunged, particularly at IPPs that
suffered from both lack of PPAs and coal unavailability.
Chart 6: Peak demand deficit corrected sharply over FY08–18 Chart 7: Coal IPPs’ PLFs suffer the most
180 20.0 90.0
140 12.0
74.0
(GW)
(PLF%)
(%)
120 8.0
66.0
100 4.0
58.0
80 0.0
FY11
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
50.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
The MoP, having connected the last remaining village to the grid, is now focusing on full
electrification of villages (with work in progress at 38% of villages in October 2018). As a
result, electricity demand is gathering steam, evident from 6% growth in the past six
months. Given that the most of these hitherto underserved electricity consumers are
subsidised and billing recoveries are dismal, discoms have been traditionally reluctant to
supply power.
Fig 1: The stark difference in last three months highlights acceleration in electrification drive
9.0
(%)
5.0
1.0
(3.0)
Sep-18
Sep-17
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Energy demand growth Peak demand growth
Note: Figure 1 as on October 2018
Source: Saubhagya Portal, CEA, Edelweiss research
While all-India energy demand posted a CAGR of 4.4% over FY15–18, select states such as
Uttar Pradesh (UP), Telangana and Bihar reported higher growth due to a push from
respective state governments to provide ‘24x7 Power for All’, which led to addition of
new domestic users and spurred electricity consumption in agriculture. Similarly, Delhi
surprised with peak demand surpassing 7GW, mainly due to the state government’s
decision to penalise load-shedding.
Chart 9: High energy demand growth in select states indicates latent demand is kicking in
30.0 40.0
Energy requirement YoY growth rate Peak demand YoY growth rate
22.0 30.0
14.0 20.0
(%)
(%)
10.0
6.0
0.0
(2.0)
Andhra Pradesh
Uttar Pradesh
Telangana
Odisha
All India
Bihar
Andhra Pradesh
Odisha
Rajasthan
Uttar Pradesh
Telangana
All India
Rajasthan
Bihar
(10.0)
(10.0)
FY15 FY16 FY17 FY18 YTD FY19 FY15 FY16 FY17 FY18 YTD FY19
Source: CEA, Edelweiss research
The domestic sector accounts for about 26% consumption in electrical energy
requirement—with approximately 180mn connected households, a household on
average consumes just 140 units a month in India. On aggregate, per capita consumption
at 1,149 units is far below the global average as well as that for many EMs.
Chart 10: Load-shedding and household electrification to lift existing demand 3–4%
12.5 1,400
10.0 1,280
(Hrs/month)
7.5 1,160
(BU)
5.0 1,040
2.5
920
0.0
800
Apr-17
Sep-17
Feb-18
Mar-18
Jun-17
Dec-17
Jul-17
Aug-17
Oct-17
Nov-17
May-17
Jan-18
Fig. 3: Demand gaining steam on the back of new users while impact of energy
efficiency measures moderates
Demand Drivers
Demand Curtailment
1. Saubhagya
1. Energy efficiency measures
2. DDUGJY, IPDS
2. Reduction in AT&C losses
3. Increasing consumer
durables penetration
4. Public transport sytem
The slowdown in thermal capacity addition is likely to be driven by: a) a structural shift
towards RE—even major thermal IPPs are now focusing on strengthening their renewables
portfolio; b) phase-out of very old capacity following the FGD norm implementation; c) high
costs for setting up thermal capacity (INR70–80mn/MW); and d) approximately 19GW of
private coal capacity that is currently stranded for lack of PPAs, which would deter capacity
additions by private players.
Thermal We expect coal-based capacity additions of about 38GW over FY18–22E(net capacity
overcapacity is addition-27GW) given the large under-construction capacity (69GW of thermal in April 2018
narrowing with according to a CEA report). NTPC, which has a strong PPA pipeline in place, accounts for the
latent demand bulk of this capacity addition.
coming to the fore
We estimate approximately 38GW of coal-based capacity will be added over FY18–22E
with the central sector contributing 21.5GW. IPP capacity will take a hit as about 19GW
of coal-based capacity is currently stranded due to lack of PPAs.
Capacity retirement is likely to pick up as 11–12GW may have to be phased out by
FY22E because of stricter environmental norms and introduction of FGD norms. About
34GW of capacity is more than 25 years old (at end-FY18) and another 8.3GW will cross
this threshold by FY22E, implying a total of more than 42GW.
Thermal capacity addition is likely to lag demand growth going ahead as renewables
will remain the focus area. Net addition of ~27GW over FY18–22E (3.3% CAGR) will lag
power demand growth of 6.2% CAGR, thereby moderating the thermal capacity-to-
peak demand ratio.
Chart 11: About 27GW of net incremental capacity to be added over FY18–22E
28,000
23,000
18,000
(MW)
13,000
8,000
3,000
FY19E FY20E FY21E FY22E
Cummulative net capacity addition
Source: CEA, Edelweiss research
Chart 12: Another 8GW of capacity will age beyond 25 years by FY22E
45
42
39
(GW)
36
33
30
FY18 FY19 FY20 FY21 FY22
Capacity with age > 25 years
16.0
12.0
(%)
8.0
4.0
0.0
FY19E
FY20E
FY22E
FY21E
FY08
FY09
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY14
Ramp up rate at
3MW/sec Ramp up rate at
3MW/sec
Chart 14: Peak demand tops 175GW in September 2018 Chart 15: Peak demand has flared up in recent months
200 15.0 13.0
180 12.0
9.0
160 9.0
(GW)
(%)
(%)
5.0
140 6.0
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Sep-18
Sep-17
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Peak demand YoY growth Energy demand growth Peak demand growth
YTD19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
52 77 102 127 152 177
(GW)
Peak demand Base demand
Source: CEA, Edelweiss research
With peak capacity of 164–177GW, maximum net power capacity from coal has averaged
127GW over the past one year while maximum gross power capacity averaged 138GW. Hydro
contributed 25–30GW, gas 7–8GW. Renewable peaks around noon and dwindles during the
peak-demand hours. So, while we shift towards RE, it will be naïve to undermine the
significance of thermal coal based capacities, considering India’s demand dynamics – size and
peak demand timing – and lack of preparedness to fall back on cleaner fuels (hydro/gas/RE).
Chart 17: Maximum net power generated from coal averaged 120–130GW and hydro 25–30GW
150
120
90
(GW)
60
30
0
Dec-17
Oct-17
Aug-18
Aug-18
Apr-18
Nov-17
Nov-17
May-18
Sep-17
Sep-17
Jan-18
Jan-18
Feb-18
Mar-18
Mar-18
Jun-18
Jun-18
Jul-18
Coal-Lignite Hydro Gas-Liquid Nuclear
Out of about 196GW of installed base, 136GW capacity was on stream while the rest is
explained by capacity under maintenance (8GW) and on forced outage (52GW) in last one
year, which could be either due to low schedule, coal availability issues, stressed capacity,
operational issues, etc.
Chart 18: About 60GW of coal capacity outage on average over the past year
250.0
200.0
150.0
(GW)
100.0
50.0
0.0
Monitored
Outage-FO
Outage-PM
Outage-
Capacity on
Others
Capacity
Line
RE contribution < 5% in
peak hours
We estimate coal based thermal capacity would be 223GW in FY22E; factoring in 10GW
would be on outage and auxiliary consumption, the utilisation level during peak demand
hours could hit 85–90%. Higher outages/stressed capacity/coal issues or a spurt in demand
further aggravate the peak demand-supply mismatch, which would be difficult to address.
Chart 19 Peak hour coal capacity utilisation could hit 85–90% by FY22E
250
200
150
(GW)
100
169
130
50
0
H2FY19 FY22E
Coal Hydro Gas Nuclear Non-Conventional
Source: CEA, Edelweiss research
1.2
0.9
(x)
0.6
0.3
0.0
FY22E
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY18
FY09
FY17
Peak demand/Coal based capacity
Source: CEA, Edelweiss research
1) India’s favourable demographics (middle class population set to double over FY16–26E
to 547mn);
2) rising disposable incomes;
4) The GoI’s push for public infrastructure, primarily housing, power and railroad
infrastructure, among others.
Chart 21: AC volumes have doubled every five–six years; this would sustain
50
40
(mn units)
30
20
10
0
2003—07 2008—12 2014—18 2019—23E
AC units sold
Source: Companies, Edelweiss research
India’s peak demand kicks in the evening (18:00–20:00 hours), jumping 10–15GW. While
industrial demand is fairly stable throughout the day, residential demand surges during the
aforementioned peak hours. To put this in greater perspective, power demand in India got
created without concomitant peak supply, and this will be evident in some time.
We estimate India’s coal based thermal capacity available to meet peak demand (thermal:
135GW to 175GW) would hit a peak utilisation of about 85-90% by FY22E. Though a little
premature to assess, if the peak demand continues to grow at this pace, then thermal order
debate would resurface. It is anybody’s guess who will participate and how thermal orders
will be funded.
Narrowing demand-supply mismatch at peak levels as power surplus balances out along
with skyrocketing merchant markets could nudge discoms to enter into short-/medium-term
PPAs. We estimate that discoms would start inking PPAs (preferably medium term) over the
next six–nine months. However, this is likely to be only a temporary relief as reduction in
discom losses becomes crucial. It will be interesting to see the rates at which PPAs could be
signed. We believe that near-term PPA rates (if signed) could still be higher around
INR4/unit primarily due to higher fuel cost.
The government launched a pilot scheme for PPA tie-ups in April 2018, totaling 2.5GW of
capacity on a competitive bidding basis for a three-year contract. Any single entity could be
allotted a maximum capacity of 600MW and assured a minimum 55% off-take of the
contracted capacity. This does not entail any tariff escalation clause for the period of
contract. Bidders subscribed to 1,900MW of capacity, and the tariff discovered was
INR4.24/kwh. The government is now considering a second round of medium-term PPAs.
This will be particularly beneficial for revival of stressed capacity vying for PPAs (19GW out
of total coal stressed capacity of 39GW sans PPAs).
Furthermore, climate change is in focus globally and thus adoption of cleaner energy
sources would accelerate this transition. Technological advancements will further cut RE
generation cost as well as facilitate smoother grid integration.
Global RE capacity (solar and wind) jumped to 900GW in CY17, a 24% CAGR between 2009
and 2017 with China being the major driver.
(%)
400 14.0
200 7.0
India
0 0.0 6% Japan
2011
2012
2008
2009
2010
2013
2014
2015
2016
2017
6%
Germany USA
World (Solar+Wind) installed capacity YoY growth 11% 14%
Source: IEA, Edelweiss research
RE is at the forefront of this shift with India running one of the largest RE capacity expansion
plans in the world. The GoI has set up an ambitious target of installing 175GW of RE capacity
by 2022. There is going to be a marked shift in India’s power generation mix over the next
decade, and the government is laying down the roadmap through various schemes such as
the National Solar Mission and the Green Energy Corridor for this transition.
Chart 24: India: CO2 emissions have risen at 6% CAGR over past 15 years, third-largest contributor to global CO2 emissions
10,000 2015 CO2 emission breakdown
8,000 China
Others
(tonnes of CO2)
29%
40%
6,000
4,000
2,000
0
Federation
China
India
United States
Japan
United
Russian
Japan
States
4%
16%
Russian
Federation India
CO2 emissions -2000 CO2 emissions - 2015 5% 6%
Source: IEA, Edelweiss research
Furthermore, the National Institute of Wind Energy has estimated the wind power potential
at 302GW (at 100 metres height). The journey to realise this potential has accelerated with
RE gaining grid parity, strong government-push with favourable policy support and
technological advancement marked by declining module prices and more-efficient
equipment.
800 100
600 75
(GW)
400 (GW)
50
200
25
0
0
Pradesh
Pradesh
Maharashtra
Madhya
Gujarat
J&K
Total
Rajasthan
Andhra
Karnataka
Gujarat
Maharashtra
Pradesh
Total
Jammu &
Tamil Nadu
Andhra
Kashmir
Solar power potential Wind power potential
Source: MNRE, MoP, Edelweiss research
Moreover, our interactions with grid operators and policymakers suggest that
accommodating RE on the existing grid is not a challenge—it can accommodate 25% RE
versus less than 10% currently.
32.0 Renewable
34%
24.0
(GW)
16.0
Thermal
8.0 59%
0.0 Hydro
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
5%
Nuclear
Thermal Nuclear Hydro Renewable 2%
Source: CEA, Edelweiss research
Chart 27: Solar module prices plunged 43% over FY16–18, which accelerated RE capacity addition
2.0 75.0
1.6
60.0
(USD/Watt)
1.2
45.0
(GW)
0.8
30.0
0.4
15.0
0.0
31/3/10
31/3/11
31/3/12
31/3/14
31/3/15
31/3/16
31/3/17
31/3/18
31/3/13
0.0
FY 14 FY 15 FY 16 FY 17 FY 18
Silicon solar module spot price Small Hydro Wind BioPower Solar
Source: Bloomberg, CEA, Edelweiss research
Chart 28: RPO target revised to 21% by FY22
25.0
20.0
RPO trajectory (%)
15.0
10.0
5.0
0.0
FY20 FY21 FY22
Non solar Solar
Source: MoP, Edelweiss research
Over and above this, capital would be required to fund evacuation projects and working
capital. In the backdrop of NPA scare in the thermal space, lenders would be skeptical about
lending to power sector projects, not to mention the poor financial health of discoms, which
raises questions on their ability to honour RPO obligations and timely payments.
Recent liquidity
crisis in India and
It’s worth noting that RE projects in India are largely funded by non-banking financial
adverse currency
movement coupled companies (NBFCs) and external money (both debt and equity); with the bank funding on
with stiff interest the lower side as it generally takes them more than six months to disburse loans, whereas
rates are likely to project development ranges from 12–18 months.
cause a short-term
squeeze PFC, REC and IREDA (NBFCs) have been the top financiers for RE projects among public
entities while L&T Finance Holdings (an NBFC) and Yes Bank have been the major lenders for
RE projects on private side. Currently, 18–20GW of RE capacity is under construction, which
would entail capital advances of about INR1tn (18GW@INR60mn/MW), implying debt
funding of about INR700bn (70% debt levels). Indicative RE exposure for major financers
stands as follows: PFC (INR160bn); REC (INR85bn); IREDA (INR152bn – H2FY18 loan book);
L&T Finance Holdings (INR180bn); and Yes Bank (INR11bn).
200
160
120
(INR bn)
80
40
0
PFC REC IREDA L&T Finance Yes Bank
Indicative RE exposure
Source: Industry, Edelweiss research
We take note of our strategy team’s recent update (Impact of liquidity tightening), which
cautions that India’s recovery is still nascent while interest rates are moving ahead of the
growth cycle; this may jeopardise recovery and thus potentially tighter liquidity conditions
are here to stay in the near term.
To make matters worse, the recent default by IL&FS, which spooked India’s bond and equity
markets, is the manifestation of tightening domestic liquidity that has been in the works for
The recent market volatility put a spanner in the works of leading renewable power
companies’ plans to go public. Raising capital for projects is at risk, and we believe this could
pose a challenge to upcoming projects. The steep fall in tariffs in conjunction with a rising
interest rate scenario and a depreciating rupee (foreign borrowings) does not help either.
Consequently, a capital squeeze over the next six–nine months in the renewables space is
likely as tariffs are likely to stabilise only over the medium term.
Tariffs discovered in recent bids have been largely in the range of INR2.5-3/kwh, which is
lower than average cost of supply by conventional sources of INR3.25/kwh-plus, and are
likely to go up with implementation of flue gas desulphurisation (FGD) norms. The weighted
average tariff for the last three months for 5.7GW of tendered capacity is INR2.72/kwh.
3.4
(INR/kwh)
2.8
2.2
1.6
1.0
Apr-18
Feb-18
Sep-18
Sep-18
Sep-18
Mar-18
Mar-18
Jun-18
Jun-18
Jul-18
Jul-18
Jul-18
Jul-18
Jul-18
Oct-18
Oct-18
Oct-18
Aug-18
Aug-18
May-18
May-18
May-18
May-18
Increasing freight rate and coal prices (CIL price up 4%, e-auction up 28%, imported coal
price up 77% over FY16–18) coupled with declining module prices (down 43% over FY16–18)
are propelling renewable cost competitiveness against conventional sources. Setting up of
dedicated green energy corridors for renewable evacuation and favourable policy support in
Solar module prices have come off to less than 0.3 USD/MW (down 43% over FY16–18
and 80% over FY11–18) owing to technological progress and large capacity build-up.
Wind capacity addition should pick up after the temporary setback in FY18 (1.7GW
versus 5.5GW in FY17) as the industry adjusts to reduced counterparty risk with the
Solar Energy Corporation of India (SECI) as the auctioning authority.
Wind-Solar Hybrid has seen muted response so far.
Chart 31: We expect RE capacity to increase at 15% CAGR to 121GW by FY22 (28% of total installed capacity)
500
FY22E
420 Renewable
28%
340
(GW)
Thermal
260 coal
Nuclear 51%
180 3%
Hydro
100 12% Thermal
FY18 FY19E FY20E FY21E FY22E
gas
Thermal coal Thermal gas Hydro Nuclear Renewable 6%
Chart 32: Power demand likely to touch 1,660 BUs by FY22E with RE catering to ~13% of demand
2,000 15.0
1,600 12.0
1,200 9.0
(BU)
(%)
800 6.0
400 3.0
0 0.0
FY18 FY19E FY20E FY21E FY22E FY18 FY19E FY20E FY21E FY22E
Total conventional Renewable Renewable contribution in energy mix
Source: CEA, Edelweiss research
Thermal Thermal
gas gas
4% 3%
Thermal
Thermal coal
coal 72%
75%
Source: CEA, Edelweiss research
D) The big change – Coal PLFs to settle lower than historical levels
Coal PLFs to settle at lower than historical levels
After a declining trend for ten years, PLFs of coal-based plants improved 80bps to 60.7% in
FY18. Based on our demand-supply model, we estimate coal-based PLFs would improve to
65% in our base case (6.2% CAGR power demand growth and 15% CAGR RE capacity
addition) by FY22E.
While coal PLF will improve, we do not expect it to scale its historical peak of 78 % (FY10)
Integration of large-
with demand growth of 6–7%. The industry is likely to adjust to lower coal PLFs as RE
scale renewables
integration into the energy mix will require thermal to recede. With RE tariffs dropping
into grid would
require scaling substantially to levels comparable to conventional power, higher variable charge thermal
down thermal plants are likely to be priced out in scheduling.
units, implying
lower coal PLFs as Chart 34: Coal PLFs to improve as capacity addition tapers off
the new normal 90.0
82.0
74.0
(%)
66.0
58.0
50.0
FY19E
FY20E
FY21E
FY22E
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY16
Chart 35: Coal PLF rises 400bps with 1% incremental demand CAGR over FY18-22E
700
620
(million tonnes)
540
460
380
300
FY18 5% 6% 7% 8% 9%
Table 4: Higher renewable capacity by FY22 could pull down coal PLFs
FY19E FY20E FY21E FY22E
15% 62% 64% 65% 65%
17% 62% 64% 64% 64%
Renewable
20% 62% 63% 63% 63%
Capacity
22% 62% 63% 63% 62%
Growth
25% 61% 62% 62% 60%
27% 61% 62% 61% 59%
Source: CEA, Edelweiss research
One must be mindful that demand growth has been inconsistent over the years. Over the
past decade, power demand was muted (5.1% CAGR) while capacity addition exceeded
demand growth by a margin of 4ppt, which led to a power surplus. The GoI is pushing
‘24x7 Power for All’, but we believe effective reform implementation for improving
discoms’ health is critical to achieving the aforesaid objective.
(%)
(BU)
(%)
600 8.0 820 4.0
0 0.0
500 0.0
FY09
FY11
FY08
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY08
FY10
FY12
FY14
FY16
FY18
FY09
FY11
FY13
FY15
FY17
Energy requirement Energy availability Deficit
Energy requirement Energy demand growth
Source: CEA, Edelweiss research
2) Reasons for higher international coal prices and why importing coal is imperative
3) Impact of higher coal prices on the thermal power sector
3) For CIL, the required off-take could touch 581/611MTPA by FY22E in a 6.2%/7%
demand scenario (454MT in FY18). A spike in coal imports is thus imperative.
Chart 37: Coal requirement may touch 739MTPA by FY22E Chart 38: FY22E CIL coal dispatch requirement 581MTPA
750 10.0 600 12.0
(mn tonnes)
Coal requirement (MT) Y-o-Y growth CIL required production Y-o-Y growth
Source: CEA, Edelweiss research
Chart 39: CIL’s required FY22E dispatch based on power demand growth
700
620
(million tonnes)
540
460
380
300
FY18 5% 6% 7% 8% 9%
Secondly, coal evacuation has been a challenge for the Indian Railways with network
congestion in major freight corridors, contrary to the popular perception of lower rake
availability. According to the Ministry of Railways data, out of the 265 high-density
networks, 185 sections are operating at capacity utilisation of more than 100%. This
particularly creates bottlenecks for non-pithead thermal IPPs vis-a-vis centre- or state-
owned power plants, which might be preferred for coal evacuation.
Chart 40: Plants with critical coal stock levels alarmingly high Chart 41: Thermal plants grappling with low coal inventory
30.0
40.0
24.0
32.0
(million tonnee))
18.0
24.0
(days)
12.0
16.0
6.0
8.0
0.0
03-Feb-18
03-Aug-17
03-Aug-18
03-Oct-17
03-Oct-18
03-Apr-17
03-Apr-18
03-Jun-17
03-Jun-18
03-Dec-17
0.0
Sep-17
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Plants with critical stock (<7 days)
Plants with super critical stock (<4 days) Thermal plants closing coal stock
Source: Bloomberg, CEA, Edelweiss research
Chart 42: CIL’s Q2FY19 closing inventory at multi-year low… Chart 43: …amid elevated demand spells trouble
75 35.0 120 12.0
45 5.0 96 6.0
(BU)
(%)
(%)
30 (10.0) 84 3.0
15 (25.0) 72 0.0
0 (40.0) 60 (3.0)
Sep-17
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
CIL closing coal inventory YoY growth Energy requirement YoY growth
Source: CIL, CEA, Edelweiss research
110 2,400
(INR/tonne)
(USD/tonne)
90 1,800
70 1,200
50 600
0
30
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
Chart 46: Last 12 years’ global coal production trend – 1.6% CAGR Chart 47: Top seven countries produce/consume 85% coal
6,000
Others USA
1.6% CAGR over the last
South 12% 10%
5,500 12 years Russia
Africa
4% 5%
(mn tonnes)
5,000
Indonesia
7%
4,500
India
4,000 8%
3,500
FY09
FY07
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Australia
8% China
Coal production 46%
Source: Bloomberg, Industry, Edelweiss research
2) robust use in India, Japan, South Korea (together 15% consumption) on the back of
strong demand and domestic supply issues, among others; and
3) supply in South Africa has been diverted to domestic power-generation facilities.
While thermal coal prices have lately come off from the peak of USD120/tonne to about
USD100/tonne, they are quite high. The current landed price of imported coal is broadly at
the level of coal e-auctioned by CIL.
There is a possibility that the international coal prices to decline as supply in China is
expected to rise due to mine upgrades and expansions in CY18. China’s thermal coal output
is expected to increase 3.3% YoY to 3.1bn tonnes (bt) and 4.0% YoY to 3.2bt in CY19 and
CY20, respectively. Further, coal capacity closure is also expected to dip sharply to 100mt in
CY19 and 50mt in CY20 compared to 150mt in CY18. Please refer to (Coal: Reviving China
supply could singe e-auction premium, sector update).
That said, despite the auctions having taken place in September 2017, actual coal
evacuation faces time overruns. The consequent increase in off-take commitment could put
further pressure on CIL.
3) NTPC, JSW Energy, Vedanta, Tata Power and Adani Power (the latter though
leveraged) are, likely to be the key beneficiaries.
In this backdrop, NTPC, JSW Energy, Tata Power and Adani Power are likely to be the key
beneficiaries in our view. The recently announced deals indicate valuations of
INR30–35mn/MW, which is at steep discount to greenfield capex, implying attractive
inorganic opportunities for bigger players.
To resolve issues such as the lack of PPAs and FSAs, the government launched a pilot
scheme for medium-term PPAs (2.5GW) for stranded capacity in April 2018 and the SHAKTI
coal allocation scheme (27MTPA allocated in round 1). The government is mulling another
round of medium-term PPAs and the SHAKTI scheme to alleviate the pressure on stressed
assets. Besides, the stressed assets could be good candidates for PPA tie-ups, particularly
factoring in a lower capacity charge after debt reduction as lenders absorb haircuts.
Since the Supreme Court’s cancellation of coal blocks in 2014, IPPs have failed to secure
fresh linkages and have been relying on costlier e-auction and imported coal. Consequently,
about 19GW of capacity is stranded for lack of long-term PPAs and about 21GW for want of
fuel linkages (ex-SHAKTI allocation).
7GW
No FSA,
PPA
INR1.77tn debt
Overall
39GW (34 projects)
Chart 48: >80% of INR1.77tn outstanding debt of stressed coal capacity to be resolved
INR 1.77tn debt outstanding
Resolved
20%
Admitted/
Referred in NCLT
14%
To be resolved
66%
Fig. 9: Resolution under NCLT process will happen in due course and can be time-consuming
NO YES
In our note (Zero-sum game), we argue a management reshuffle would be of little help
at stressed capacity/plants unless fundamental issues plaguing the assets/sector are
resolved. The government has been mulling medium-term PPAs/coal allocation schemes to
relieve the stressed capacity. Thus, 10MTPA coal was allocated under round 1 of SHAKTI,
which provided coal linkages to plants with PPAs.
On the PPA front, a pilot scheme was launched in April 2018 for contracting medium-term
PPAs totaling 2.5GW. The government is also contemplating further rounds of medium-term
PPAs/SHAKTI for the stressed assets. Reduced debt implying lower capacity charge could
make such assets prime candidates for fresh PPAs in our view.
Chart 49: Core issues need to be tackled as 19GW capacity lacks PPAs
12.0
9.6
7.2
(GW)
4.8
2.4
0.0
Completed Partially completed Under construction
No FSA,No PPA FSA,No PPA No FSA, PPA FSA, PPA
Source: MoP, Edelweiss research
Note: This does not include coal allocation under SHAKTI
6.0x
4.5x
(D/E)
3.0x
1.5x
0.0x
Lanco Anpara
Lanco Babandh
Jindal Derang
KSK Mahanadi
RKM Uchpinda
Deveri TPP
Vidarbha
Malibrahmani
Amarkantak
Bhavanpadu
Singhitarai TPP
Mutiara TPP
SKS Binjkote
Lanco
Lanco
TPP
TPP
Source: CEA, MoP, Edelweiss research
The two deals with valuations of INR30–35mn/MW have been cut at a steep discount to the
cost of setting up a new coal plant of about INR70mn/MW. In such a scenario, bigger
players are likely to scout for assets given their attractive valuations, particularly the
operational ones with PPAs and FSAs. We expect haircuts of 55–65% on the overall stressed
capacity, implying an average rate of ~INR30mn/MW.
The consolidation phase is a windfall in our view for bigger players with strong balance
sheets. Therefore, NTPC, JSW Energy, Vedanta, Tata Power and Adani Power (though the
latter is highly geared) are likely to be the key beneficiaries. That said, fresh funding for
asset buyout may be a hurdle for bidders. Lenders and the MoP have been contemplating
various schemes such as ‘Samadhan’ (SBI) and ‘Parivartan’ (REC) to avoid hefty haircuts and
to salvage the assets that are unlikely to find any buyers.
The major reasons are: a) delays in land acquisition and regulatory clearances; b) law and
order problems; and c) financial constraints as funding dried up amid mounting IDC and
slow progress.
Deveri TPP
Malibrahmani TPP
Lanco Vidarbha
Bhavanpadu TPP
Singhitarai TPP
Lanco Babandh
Bhavanpadu TPP
9.6
7.2
(GW)
4.8
2.4
0.0
Completed Partially completed Under construction
No FSA, No PPA FSA, No PPA No FSA, PPA FSA, PPA
Source: CEA, MoP, Edelweiss Research
Notes: 1) 'Partially completed’ implies at least one unit has been commissioned and 'Under-
construction’ means no unit has been commissioned for the project.
2) Note: This does not include coal allocation under SHAKTI.
2) We believe it would be difficult to narrow the ACS-ARR gap further in the face
of stricter environmental norms and higher fuel costs.
3) It is an apt time to implement big and bold reforms like separation of carriage
and content, formation of national discom, subsidy disbursal through DBT etc.
This also provides discoms necessary leeway for supplying affordable electricity to the
underserved households and curb the practice of load-shedding, thereby boosting latent
demand in the system.
Discom losses have curtailed by more than 60% to INR148bn for 9MFY18 (down from
INR515bn in FY16) largely driven by lower interest cost and the declining ACS-ARR gap.
While the targeted zero ACS-ARR gap by FY19 under UDAY does not seem feasible, it
has considerably narrowed (to INR0.28/Kwh in 9MFY18 from INR0.59/Kwh in FY16).
Chart 53: Lower interest outgo and operational efficiency driving down losses
0.8 0
0.6
(120)
(INR bn)
0.5
(INR/kwh)
(240)
0.3
(360)
0.2
(480)
0.0
FY16 FY17 9MFY18 (600)
ACS-ARR gap Book loses
Source: UDAY Portal
While reduced debt provided some leeway, many states have not been able to stick to their
UDAY targets. The performance varies across discoms with many running elevated AT&C
losses. It would be some time before they are able to meet the 15% AT&C loss target set for
FY19. It is worthwhile mentioning that some states are running a negative ACS-ARR gap,
implying operating profitability. All in all, the sector has made headway from the pre-UDAY
era (which is starker for some states), but much still needs to be done.
Chart 54: State discoms’ AT&C losses are still far from FY19 target of 15%; only few states below target
75.0
60.0
(At&C loss %)
45.0
30.0
15.0
0.0 HP
Chattisgarh
UP
J&K
Rajasthan
TN
MP
Gujarat
Assam
Pradesh
Telangana
Punjab
Maharashtra
Kerela
Jharkhand
Karnataka
All India
Bihar
Andhra
Haryana
Uttrakhand
Some of the measures being considered in ‘Electricity Amendment Act’ could aid in this
turnaround via: a) directly subsidy disbursal to consumers under the DBT scheme, which will
•UDAY envisages 100% Feder sepration and DT installation for better monitoting. This should reduce pilferage, abate
power theft, and improve billing efficiency.
Improving
operational • The GoI mulling a 15% cap on AT&C loss for tariff calculation for consumers to incentivise disoms and state to curtail it.
efficiency
•All Uday states have undertaken tariff revision in different capacities; however, the GoI is mulling capping the cross-subsidy
at 20%. This could force discoms to undertake tariff revisions more aggressively.
Tariff revision
•Direct benefit transfer of subsidy will ease working capital as state goverenments signficantly delay subsidy transfers.
Improving •Debt transfer from discoms have notably reduced disoms' interest burden.
financial Health
Merchant prices too have been also on the rise with growing demand as dicoms have been
looking to source power from exchanges to meet peak demand. There is also a high
possibility that sales migration through open access and captive routes (essentially for
renewable) could be a trend for the bigger purchasers, implying potential loss of cross-
subsidising consumers to discoms.
Prepaid meters and Energy audit systems are being adopted to improve discom operations
further. Proposed changes in the Electricity Act, if implemented, could go a long way in
improving the financial efficiency of discoms. Experts suggest 2019-24 will be period of big
and bold distribution reforms.
Some discoms are currently running negative ACS-ARR gaps, implying profitable operations.
More discoms turning profitable could very well be an inflection point for the power sector..
0.4 0.4
0.28
0.2
0.0
FY14 FY15 FY16 FY17 9mFY18
ACS-ARR gap on subsisdy booked basis
Source: MoP, Industry, Edelweiss research
2) Regulated entities (NTPC, PGCIL) have been trading at the lower end of their
respective historical valuation bands. The situation has started looking up though.
3) NTPC is our top pick (beneficiary of consolidation and sustained rise in power
demand), followed by CESC (re-rating candidate and strong FCF profile) and Tata
Power (streamlining operations).
A) Sectoral woes underlie persistent underperformance
Power sector companies have largely underperformed the broader market over the past
decade. We have highlighted various challenges that led to the accumulation of stressed
assets in the system. The recent bids at INR30–35mn/MW for stressed coal-based capacity
imply a steep discount to greenfield capex (upwards of INR70mn/MW). On a ten-year CAGR,
all companies under our coverage, barring CESC, have lagged the broader market (Nifty).
Table 9: All power companies, except CESC, have largely underperformed Nifty over
past decade
1m 3m 6m 1y 3y-CAGR 5y-CAGR 10y-CAGR
NIFTY 0.7 (8.5) (1.5) 5.5 10.9 11.4 9.0
BSEPOWR (2.7) (9.4) (7.4) (14.9) 0.6 3.5 (3.4)
NTPC (9.3) (17.5) (12.2) (17.9) 5.3 1.2 0.2
PWGR (2.4) (4.9) (5.9) (5.9) 14.2 16.4 8.5
TPWR 5.0 5.6 3.7 (7.5) 9.2 1.7 (1.4)
CESC 2.3 (11.1) (10.1) (6.8) 19.2 19.5 12.2
JSW (1.0) (4.1) (9.9) (14.0) (6.0) 9.2 NA
APL 5.7 60.1 169.3 59.1 19.6 8.7 NA
Source: Bloomberg, Edelweiss research
Chart 56: Fully regulated entities (NTCP, PGCIL) trading at -1SD their historical one-year forward EV/EBITDA
12.0 12.0
10.8 10.8
9.6 9.6
( EV/EBITDA)
( EV/EBITDA)
8.4 8.4
7.2
7.2
6.0
6.0
Apr-15
Sep-15
Feb-16
Mar-18
Jun-14
Dec-16
Jul-16
Oct-17
Aug-18
Nov-14
May-17
Jan-14
Apr-17
Sep-17
Feb-18
Jun-16
Mar-15
Dec-13
Dec-18
Jul-18
Aug-15
Oct-14
Nov-16
May-14
Jan-16
NTPC 12m fwd EV/EBITDA 5 Year average PGCIL 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Chart 57: Regulated players have historically reacted sharply to norms announcements
150 100 140 100
140 90 128 90
130 80 116 80
(INR)
(INR)
(INR)
(INR)
120 70 104 70
110 60 92 60
100 50 80 50
09-Feb-09
23-Feb-09
09-Feb-14
23-Feb-14
12-Jan-09
26-Jan-09
12-Jan-14
26-Jan-14
01-Dec-08
15-Dec-08
29-Dec-08
01-Dec-13
15-Dec-13
29-Dec-13
The next set of CERC norms for 2019–24 is due shortly. While the discussion paper was
released in mid-2018, the implementation of the proposed changes might be challenging in
our view. It is worthwhile noting that this discussion paper explored different avenues of
tariff norms. The actual norms due in February 2019 might be starkly different from the one
proposed in the discussion paper. We touch upon some of the proposed changes to RoE and
incentive structures outlined in the discussion paper and its impact on RoEs/earnings.
1.0% 137 144 151 159 166 173 181 188 195
2.0% 138 146 154 162 170 178 186 194 202
3.0% 139 148 157 166 175 184 193 202 211
4.0% 141 151 161 171 182 192 202 212 222
5.0% 144 155 167 178 190 201 213 224 236
Source: Edelweiss research
Chart 58: Non-regulated/semi-regulated regulated players barring CESC are trading above/close to historical valuation
13.0 10.0
11.0 9.0
( EV/EBITDA)
( EV/EBITDA)
9.0 8.0
7.0 7.0
5.0 6.0
3.0 5.0
Apr-17
Feb-18
Sep-17
Jun-16
Mar-15
Dec-13
Dec-18
Jul-18
Aug-15
Oct-14
May-14
Nov-16
Jan-16
Apr-17
Sep-17
Feb-18
Mar-15
Jun-16
Dec-13
Dec-18
Jul-18
Oct-14
Aug-15
Nov-16
May-14
Jan-16
TPCL 12m fwd EV/EBITDA 5 Year average CESC 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Source:Bloomberg, Edelweiss research
9.0 11.0
7.8 10.0
( EV/EBITDA)
( EV/EBITDA)
6.6 9.0
5.4 8.0
4.2 7.0
3.0 6.0
Dec-13
Dec-18
Oct-14
Aug-15
Apr-17
Nov-16
May-14
Jan-16
Feb-18
Sep-17
Mar-15
Jun-16
Jul-18
Apr-17
Sep-17
Feb-18
Mar-15
Jun-16
Dec-13
Dec-18
Jul-18
Oct-14
Aug-15
Nov-16
May-14
Jan-16
JSW 12m fwd EV/EBITDA 5 Year average APL 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Source:Bloomberg, Edelweiss research
All in all, we stick to our thesis that the demand-supply mismatch would balance out and, in
the process, would not only lift PLFs but also nudge discoms to sign PPAs. Among our
coverage, NTPC is our top pick (beneficiary of rise in power demand and consolidation)
followed by CESC (re-rating candidate and strong FCF profile) and Tata Power (streamlining
operations). We remain cautious on JSW Energy (unrelated diversification) and Adani Power
(ballooning debt), and positive on PGCIL (but prefer NTPC due to its better prospects).
PWGR PWGR
15.0 15.0
NTPC NTPC
CESC TPWR TPWR
(RoAE, %)
( RoAE, %)
10.0 10.0
JSW JSW
5.0 5.0
0.0 0.0
0.0 0.5 1.0 1.5 2.0 6.0 8.0 10.0 12.0
(P/B, x) (EV/EBITDA, x)
Source: Edelweiss research
COMPANIES
ADANI POWER
Valuations outpacing fundamentals
India Equity Research| Power
COMPANYNAME
Adani Power (APL) has been treading on thin ice with sustained losses EDELWEISS 4D RATINGS
eroding its equity value. However: a) Supreme Court’s recent judgement Absolute Rating REDUCE
raises hope of successful Mundra resolution—a potent booster; Rating Relative to Sector Underperform
b) cash realisation from compensatory tariffs (CT; INR125bn under Risk Rating Relative to Sector High
litigation) could help deleverage the highly stretched balance sheet (9x Sector Relative to Market Underweight
D/E); and c) coal ramp up under SHAKTI for Tiroda & Kawai plants is
supporting higher PLFs (we estimate 80% plus for both). On the basis of
MARKET DATA (R: ADAN.BO, B: ADANI IN)
our probability scenario analysis (refer table 3) for various events, we
CMP : INR 52
revise our TP to INR38 (earlier INR25). However, the stock has zoomed
Target Price : INR 38
125% in two months and we believe fundamentals do not support the 52-week range (INR) : 58 / 15
current valuation. Hence, we downgrade to ‘REDUCE’. Share in issue (mn) : 3,856.9
M cap (INR bn/USD mn) : 201 / 2,836
Mundra resolution could be a big leg up Avg. Daily Vol.BSE/NSE(‘000) : 26,573.1
The Supreme Court’s judgment raises hope for Mundra’s resolution, also considering
that APL has PPAs with just two states (Gujarat – 2.0GW and Haryana – 1.4GW), we SHARE HOLDING PATTERN (%)
believe Mundra resolution is highly probable. HPC’s recommendations, if Current Q1FY19 Q4FY18
implemented, could lead to a tariff hike of INR0.70-0.80/kwh (in current coal Promoters * 75.0 75.0 73.1
environment)factoring INR0.2/kwh reduction in capacity charge on account of haircut MF's, FI's & BK’s 9.8 8.5 9.2
by lenders and INR0.05/kwh from profit sharing from coal mining. FII's 8.7 9.0 11.3
Others 6.5 7.5 6.5
Compensatory tariffs cash flow could help pare debt * Promoters pledged shares : 24.0
(% of share in issue)
APL has ~INR125bn under litigation as compensation to be received from discoms,
primarily in lieu of non-availability of domestic coal. The actual amount realised is
PRICE PERFORMANCE (%)
subject to approval from regulators/discoms. APL has so far received INR21.5bn from
EW Power
MSEDCL and RVUNL which will be used to reduce its internal debt. Stock Nifty
Index
International coal prices touched multi-year high (>USD120/tonne) in FY18, prompting APL
to shutdown the plant. However, it has resumed operations and this is only going to add to
APL’s woes if a successful resolution is not worked out soon. But, the Supreme Court’s latest
judgement raises hope, paving way for PPA renegotiation and the matter now lies in CERC’s
court. The Mundra plant has PPAs with two states—Gujarat (2.0GW) and Haryana
(1.4GW)—which should make it relatively easier for APL. The Gujarat Government has
recently given the nod to raise the tariffs and final decision will be taken by CERC.
CERC is currently considering the matter, though the verdict will be binding unless
challenged in appellate tribunal/court of law. Any favourable resolution will provide much
required relief for the financially stretched APL and remains a key trigger.
We do not build a case of a positive bottom line for the Mundra plant yet and await details
of renegotiated PPAs if resolved.
Kawai
Revenue 16,965 30,406 41,843 38,855
EBITDA 2,561 5,350 14,666 11,508
PAT (2,851) (5,381) 2,556 145
Source: Company, Edelweiss research
Chart 1 : PLFs of Tirodaand Kawai have imroved in recent months with pick up in coal off take under SHAKTI
100.0 100.0
80.0 80.0
60.0 60.0
(%)
(%)
40.0 40.0
20.0 20.0
0.0
0.0 Nov-17
May-17
May-18
Jan-17
Sep-17
Jan-18
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Sep-17
Jan-18
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Chart 2: Sustained losses have eroded APL’s equity while debt sustains, consequently gearing has spiraled upwards
600 75.0
480 60.0 62
360 45.0
(Number)
(INR bn)
240 30.0
120 18
15.0
10 8 7 9
6 7
0 2 4
0.0
FY15
FY11
FY12
FY13
FY14
FY16
FY17
FY18
H1FY19
H1FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Total Borrowings Shareholders' funds Gross Debt/Equity
Source: Edelweiss research
Note: In H1FY19, Adani Power has converted 50 bn Group loans into Perpetual Security (considered as equity), hence the D/E got revised to ~9x
Valuations
We have factored INR11bn revenue recognized by APL in Tiroda case in our financials. On
the basis of our probability scenario analysis (refer table below) for various events, we
revise our TP to INR38 (earlier INR25). We have factored 80% plus PLFs for Tiroda and Kawai
plants supported by coal off take ramp up under the SHAKTI scheme. However, the stock
has zoomed 125% in two months and we believe fundamentals do not support the current
valuation. Hence, we downgrade to ‘REDUCE’.
Impact on TP (INR) 14
Source: Edelweiss research
Table 4 : SOTP
NPV @ Ke 13%
Unit MW Stake INR / share
(INR mn)
Mundra I & II 1,320 100% (405) (0)
Mundra III 1,320 100% (17,866) (5)
Mundra IV 1,980 100% 12,131 3
Tirora 1,980 100% 24,072 6
Tirora II 1,320 100% 25,067 8
Kawai 1,320 100% 27,852 7
Udupi 1,200 100% 15,553 4
Option value from Mundra
14
resolution/CT realization
Total 10,440 86,403 38
Source: Edelweiss research
Company Description
APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up plans
to build India’s largest and one of the world’s top 5 single location thermal power plants
with a capacity of 10,480 MW. The company has also made inroads into power generation
in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of being a 20,000
MW company by 2020. It commissioned the first supercritical 660 MW unit in the country
and also the world’s first supercritical technology project to have received ‘clean
development mechanism (CDM) project’ certification from United Nations Framework
Convention on Climate Change (UNFCCC).
Investment Theme
APL has operational capacity of ~10.4GW (at Mundra (Gujarat), Tiroda (Maharashtra), Kawai
(Rajasthan) and Udupi (Karnataka). The company has a good blend of projects in terms of
diverse locations, imported and domestic coal, long-term PPAs and merchant sales. APL’s
entire capacity (~10.4 GW) is coal based with a blend of imported (AEL) and domestic (CIL)
coal procured through linkages. Though linkages are in place (except 2.6GW-Tiroda
ext/Kawai where coal has been allocated under SHAKTI) coal availability could be a
challenge. Resolution of Mundra plant could be a turning point for APL. APL has filed for
compensation (under litigation) with various discoms primarily in lieu of non-availability of
coal. Realizations from filed compensation could positively impact APL.
Key Risks
Higher Imported Coal Prices: Rise in coal process remains a key risk for Mundra plant
operations and an increase in international coal process will widen the losses for Mundra
power plant.
High Leverage: APL has a highly stretched balance sheet (D/E:60x) and needs to bring down
debt to a more sustainable level.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Macro Net revenue 206,110 231,962 227,329 241,909
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Cost of Operations 128,576 135,535 134,461 144,948
Inflation (Avg) 3.6 4.5 4.5 5.0 Other operating expenses 17,085 16,712 17,507 18,223
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Employee costs 3,537 3,655 3,795 3,922
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 149,198 155,901 155,762 167,093
Sector EBITDA 56,912 76,061 71,567 74,816
Merchant prices(INR/kWh) 4.0 5.0 5.0 5.0 Depreciation 26,987 26,269 26,618 26,558
NewCastle FoB(USD/t) 59 59 59 59 EBIT 29,925 49,792 44,949 48,258
Company Less: Interest Expense 55,702 59,818 53,252 53,825
Closing capacity (MW) 10,480.0 10,480.0 10,480.0 10,480.0 Add: Other income 4,823.89 1,711.89 1,797.48 2,067.1
Average PLF (%) 56.0 70.0 70.0 78.0 Profit Before Tax (20,953) (8,314) (6,506) (3,499)
Avg.Realisation(INR/kwh) 4.2 3.7 4.1 4.0 Less: Provision for Tax (52) - - -
Avg. Energy cost(INR/kwh) 2.7 2.2 2.4 2.4 Associate profit share (292) - - -
Reported Profit (21,194) (8,314) (6,506) (3,499)
Adjusted Profit (21,194) (8,314) (6,506) (3,499)
Shares o /s (mn) 3,857 3,857 3,857 3,857
Adjusted Basic EPS (5.5) (2.2) (1.7) (0.9)
Diluted shares o/s (mn) 3,857 3,857 3,857 3,857
Adjusted Diluted EPS (5.5) (2.2) (1.7) (0.9)
Adjusted Cash EPS 1.5 4.7 5.2 6.0
Additional Data
Directors Data
Mr. Gautam S. Adani Chairman, Promoter Non Executive Mr. Rajesh S. Adani Managing Director, Promoter Executive
Mr. Raminder Singh Gujral Non Executive (Independent) Mr. Vneet S Jain Executive Director
Mr. Mukesh Shah Non Executive (Independent) Ms Gauri Trivedi Non Executive (Independent)
Holding – Top10
Perc. Holding Perc. Holding
Adani gautam s 36.86 Adani tradeline 9.78
Universal trading co 7.55 Afro asia ind ltd 6.88
Opal investment pvt 5.53 Worldwide emerge mkt 5
Emerging market inv 4.99 Pan asia trade & inv 3.92
Elara india opportun 3.1 Emerging india focus 2.34
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
10 May 2018 Pan Asia Trade & Investment Pvt Ltd Buy 11500000.00
08 May 2018 Pan Asia Trade & Investment Pvt Ltd Buy 4500000.00
23 Apr 2018 Pan Asia Trade & Investment Pvt Ltd Buy 4500000.00
20 Apr 2018 Pan Asia Trade & Investment Pvt Ltd Buy 7500000.00
19 Apr 2018 Pan Asia Trade & Investment Pvt Ltd Buy 9000000.00
*in last one year
CESC
Safest bet; spin-off to continue to drive re-rating
India Equity Research| Power
We believe CESC will reap multiple benefits from the demerger of its EDELWEISS RATINGS
power business as it offers shareholders a more specific investment/play Absolute Rating BUY
and some value/multiple enhancement. Going forward we expect the Investment Characteristics Value
company to have strong FCF as: a) losses at Chandrapur have ebbed;
b) the practice of funding Spencer’s & FMCG’s FCF from regulated
operations will end; and c) it is not pursuing any capex-heavy projects & MARKET DATA (R: CESC.BO, B: CESC IN)
CMP : INR 698
is focusing on low-intensity franchisee distribution business. In such a
Target Price : INR 840
scenario, we believe CESC is one of the safest bets in the sector with
52-week range (INR) : 923 / 621
potential upside of 20% and is a re-rating candidate post-demerger. We
Share in issue (mn) : 132.6
revise our TP to INR840 (earlier INR818) factoring in 180MW renewable
M cap (INR bn/USD mn) : 93 / 1,305
capacity. Maintain ‘BUY’.
Avg. Daily Vol. BSE/NSE (‘000) : 761.3
Financials (Consolidated)
Year to March FY18 FY19E FY20E FY21E Swarnim Maheshwari
Revenues (INR mn) 1,02,750 1,07,246 1,11,447 1,16,785 +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
EBITDA (INR mn) 29,310 30,611 31,322 32,540
Reported Profit (INR mn) 9,750 10,195 11,075 12,260 Varun Mittal
+91 22 6623 3392
EV/EBITDA (x) 7.1 6.5 6.3 5.7 varun.mittal@edelweissfin.com
P/B (x) 1.1 1.0 0.9 0.8
ROAE (%) 8.1 11.5 11.4 11.5 December 6, 2018
Given CESC has demerged the non-power business into a separate entities, FCF of the
regulated business could be used to scale up/turn around the distribution franchise business
in Rajasthan.
Chart 1: Implied RoE for Kolkata business continues at sustain above 19%
25.0
21.8
22.0 21.2
19.8 20.0 19.7
19.0
(%)
16.0
13.0
10.0
FY14 FY15 FY16 FY17 FY18
Implied ROE
Source: Company, Edelweiss research
(0.57)
(1.5)
(1.99)
(INR bn)
(3.0)
(4.5)
(4.58)
(4.84)
(6.0) (5.57)
FY14 FY15 FY16 FY17 FY18
Dhariwal Reported PAT
Source: Company, Edelweiss research
Company Description
CESC is an RP-Sanjiv Goenka Group company. It started operations in 1899; since then, the
company has been offering power to consumers in its Kolkata license area, which has
expanded from 14.6 square kilometres to 567 square kilometres over the years. The number
of consumers has grown from 6,000 to 2.5mn over time. CESC has total installed capacity of
2,425MW from six generating units at Budge Budge (750MW), Southern (135MW), Titagarh
(240MW),Haldia (600MW), Chandrapur (600MW) and 180MW operational renewable
capacity.
Investment Theme
CESC has de-merged its non-power assets which offers a more specific investment play and
this can lead to a re-rating of the companies and the group overall.
The regulated distribution and generation business is fairly large with ~INR38bn equity
(~45% of total net worth), implying little risk.
The company’s renewed focus on the distribution business (low capex) can significantly
bolster profitability in coming years in our view.
Strong financials with debt/equity of 1.5x provide leeway to expand operations without
much strain.
Key Risks
Regulated returns
Our earnings estimates assume incentives on account of PLF and other normative
parameters; if the company fails to earn such incentives, then the RoE would decrease,
which in turn would impact valuations.
Delay in projects/PPAs
Slowdown in regulated business capex and untied capacity at generating stations could
impact earnings.
Unrelated diversification
The company in the past has made red-herring investments (outside its core business of
power GTD) with no synergies, but they dilute management bandwidth and hence pose a
key risk.
Additional Data
Directors Data
Mr S Goenka Chairman, Promoter Non Executive Mr P K Khaitan Independent
Mr Rabi Chowdhury Managing Director (Generation) Rekha Sethi Independent
Mr Debasish Banerjee Managing Director (Distribution) Mr. C. K. Dhanuka Independent
Mr K Jairaj Independent Mr P Chaudhri Independent
Holding – Top10
Perc. Holding Perc. Holding
Rainbow investments 44.36 Hdfc asset managemen 9
Bnk capital markets 1.89 Stel holdings ltd 1.88
Franklin resources i 1.81 Life insurance corp 1.67
Sun life financial i 1.65 Icici prudential ass 1.63
Dsp investment manag 1.4 Goodluck dealcom pvt 1.27
*as per last available data
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*as per last available data
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*as per last available data
JSW ENERGY
Strongest balance sheet; cautious on unrelated diversification
COMPANYNAME
India Equity Research| Power
JSW Energy (JSW), with a net debt to equity of <1x (versus peers’ 2.5x), EDELWEISS 4D RATINGS
has the strongest balance sheet in India’s power generation sector. This is Absolute Rating HOLD
particularly relevant now given attractive inorganic growth opportunities Rating Relative to Sector Performer
in the conventional generation market for distressed assets. That said, we Risk Rating Relative to Sector Medium
expect the ongoing business operations aggregating 4.4GW (80% tied up) Sector Relative to Market Underweight
to continue to generate average FCF of INR10bn plus with merchant rates
moving up to INR4.0–4.1/unit. However, the announcement of unrelated
MARKET DATA (R: JSWE.BO, B: JSW IN)
diversification into globally evolving EV business with a capital
CMP : INR 67
commitment of ~INR65bn is likely to smother profitable growth
Target Price : INR 72
prospects; hence, we maintain a cautious view. Any meaningful 52-week range (INR) : 98 / 56
distressed power asset acquisition is a key monitorable though. Maintain Share in issue (mn) : 1,640.9
‘HOLD’ given limited upside potential. M cap (INR bn/USD mn) : 111 / 1,562
Avg. Daily Vol.BSE/NSE(‘000) : 3,192.4
Maintaining balance between open and contracted capacity
With 80% capacity tied up under long-term contracts, JSW offers earnings visibility. SHARE HOLDING PATTERN (%)
However, the company is now deliberating a balance between open and merchant Current Q1FY19 Q4FY18
capacity to benefit from stable cash flow while leveraging firming merchant prices (up Promoters * 75.0 75.0 75.0
35% YTD), which are expected to remain elevated in the near term. However, elevated MF's, FI's & BK’s 9.4 9.4 8.1
international coal price (USD100/tonne) could impact profitability. FII's 6.2 6.2 6.0
Others 9.5 9.5 10.9
* Promoters pledged shares : NIL
Potential beneficiary of consolidation (% of share in issue)
We expect consolidation to gather steam over the ensuing two–three quarters and
JSW with a strong balance sheet could be a key beneficiary of distressed assets. PRICE PERFORMANCE (%)
EW Power
Stock Nifty
Index
Unrelated EV diversification a potent risk
1 month 13.2 2.0 3.0
JSW’s entry in the auto business with INR65bn investment (debt/equity of 60:40) poses
3 months 3.7 (7.4) (1.7)
a potent risk as making a profit a venture that does not have a proven business model
12 months (16.8) 0.7 (16.6)
is uncertain and synergies, if any, are difficult to fathom. The entry does give JSW an
entry into a nascent industry on an equal footing with auto peers, but EV is a long-
gestation and low RoE business in the initial few years, thereby dragging returns.
Chart 1 : With debt/equity at 1x, JSW has strongest balance sheet among peers
200 1.9
160 1.7
120 1.5
(INR bn)
(x)
80 1.4
40 1.2
0 1.0
FY19E
FY20E
FY21E
FY17
FY11
FY12
FY13
FY14
FY15
FY16
FY18
FY19E
FY20E
FY21E
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Chart 2 : Merchant rates have been firming up… Chart 3: …but volatile short-term prices impacts merchant players
5.0 7.5
4.13
3.82 6.0
4.0 3.54 3.49
3.23
(INR/kwh)
2.76 4.5
(INR/kwh)
3.0 2.54
2.0 3.0
1.0 1.5
0.0 0.0
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Dec-17
Aug-17
Aug-18
Oct-17
Oct-18
Apr-17
Apr-18
Feb-17
Feb-18
Jun-17
Jun-18
Though higher short-term rates are comforting, JSW’s financial performance is impacted by
higher coal prices (currently at USD100/tonne, which impacts realisations.
110
(USD/tonne)
90
70
50
30
Apr-14
Apr-15
Apr-16
Apr-18
Apr-17
Jul-14
Jul-15
Jul-16
Jul-18
Jul-17
Oct-14
Oct-15
Oct-16
Oct-18
Oct-17
Jan-15
Jan-16
Jan-17
Jan-18
Newcastle Thermal 6000kcal/kg FOB Spot Price(USD/tonne)
Source: Bloomberg, Edelweiss research
Given the scale of ambitions underlying the shift, our auto analyst envisages India will be at
the forefront of the global shift towards electric mobility, and global majors are already
sitting up and taking notice.
Fig. 1: EV sales to surge post 2022 as they achieve price parity with ICE
We expect battery costs to fall by about 50% (implying a greater decline on per kwh basis)
by 2025 driven by sustained improvement in battery in terms of density, size, technology,
chemistry, etc. We also assume 3% inflation for an internal combustion engine (ICE) vehicle
primarily due to stricter environmental compliance.
Cars: The current breakeven for ICE cars is six years assuming annual mileage of 20,000km.
For every 5,000km change in mileage, the breakeven changes by two years. An electric
variant will be cheaper than an ICE if the battery cost plummets 50% from current levels.
Bus: Breakeven plunges from around 11 to three years assuming annual mileage of
67,500km. A 75% fall in battery cost will make it cheaper than ICE.
2) Diversification from B2B to B2C comes with its own set of risks: JSW Group has
successfully diversified into power, cement and ports from the steel business. But so
far, the group has primarily catered to B2B segments. The proposed venture is however
in the B2C segment. Stepping into auto manufacturing requires: 1) a strong brand,
which could take years to build; and 2) a solid distribution network and franchisee.
While we do not doubt JSW’s ability to successfully to step into a consumer segment,
synergies from this unrelated diversification are difficult to ascertain at this point in
time. Without any competitive advantage, the company might take longer than
expected to gain a foothold in the EV business.
3) Low RoE’s in initial few years would impact returns profile: Car manufacturing is a
long-gestation business marked by low profits or even losses in the initial few years.
This may hit JSWE’s returns profile and would increase the risk profile too.
Company Description
JSW Energy was incorporated in 1994 as the energy vertical of the JSW Group. The company
has been in the power generation business since 2000 and later ventured into the trading
business as well. It has 3,140 MW of operational generating thermal capacity and has
ventured into hydro power by acquiring 1,391MW of capacity from Jai Prakash Power in
FY16. The company plans to increase its installed capacity to 10,000 MW. The company has
recently announced its foray into Electric vehicle manufacturing business and related infra
like battery. It envisages a total CAPEX of INR65bn for EV business.
Investment Theme
The company’s plan to sell ~20% on merchant basis to take advantage of higher realisations
which it believes will be high over near term. However, higher potential for realisations is
accompanied by the risk of volatility in merchant prices, which raises uncertainty in the
company’s earnings. PPA tie-ups (80% capacity) imply stable cash flows.
With a D/E of ~1x , the company can flex its financial muscle and can look for profitable
inorganic growth in near future
While still early, JSE Energy’s bet on diversification into electric vehicles is not very positive
and we highlight following risks: 1) unproven business model? 2) Existing OEMs are
struggling as EV battery costs are still 2.5-3.0x the cost of a conventional car battery and
charging infrastructure is entirely missing in the country; and 3) Synergies in this unrelated
diversification are difficult to understand.
Key Risks
Merchant prices moderating
Our hypothesis is that merchant prices will stay elevated in the south at INR 4.0+/kWh in the
short-medium term. Merchant prices at moderating downwards due to declining SEB’s
demand or buying capacity is a risk to our call that merchant players will start showing
healthy merchant realizations.
Unrelated diversification
Uunrelated businesses raise risks of uncertainty around profitability of the new venture. EV
capex will impact the FCF profile for the company.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Macro Net revenue 80,490 89,375 97,281 100,300
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Cost of Operations 44,135 48,799 54,084 56,081
Inflation (Avg) 3.6 4.5 4.5 5.0 Other operating expenses 6,579 7,225 7,447 7,646
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Employee costs 2,151 2,287 2,361 2,425
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 52,864 58,310 63,892 66,152
Sector EBITDA 27,625 31,064 33,389 34,148
Merchant prices(INR/kWh) 4.3 5.0 5.0 5.0 Depreciation 9,661 10,377 10,403 10,377
NewCastle FoB(USD/t) 56 56 56 56 EBIT 17,965 20,688 22,986 23,771
Melawan FoB(USD/t) 46 46 46 46 Less: Interest Expense 14,559 14,971 14,861 13,701
Company Add: Other income 4,650.2 4,765.87 5,159.18 5,346.27
Year end capacity (MW) 4,531 4,531 4,531 4,531 Profit Before Tax 3,876 10,482 13,285 15,417
Net Gen./Sold (mn kwh) 21,816 23,815 26,086 26,675 Less: Provision for Tax 2,532 3,250 4,251 4,779
Avg.Realisation(INR/kwh) 3.6 3.7 3.7 3.7 Less: Minority Interest 69 62 62 62
Add: Exceptional items (4,179) - - -
Associate profit share (495) 40 40 40
Reported Profit 780 7,211 9,011 10,615
Exceptional Items (4,179) - - -
Adjusted Profit 4,959 7,211 9,011 10,615
Shares o /s (mn) 1,640 1,640 1,640 1,640
Adjusted Basic EPS 3.0 4.4 5.5 6.5
Diluted shares o/s (mn) 1,640 1,640 1,640 1,640
Adjusted Diluted EPS 3.0 4.4 5.5 6.5
Adjusted Cash EPS 8.9 10.7 11.8 12.8
Dividend per share (DPS) - 2.0 2.0 2.0
Dividend Payout Ratio(%) - 54.6 43.7 37.1
Additional Data
Directors Data
Mr. Sajjan Jindal Chairman & Managing Director, Executive Mr. Nirmal Kumar Jain Non Executive
Mr. Chandan Bhattacharya Independent Mr. Prashant Jain Jt. Managing Director and CEO
Mr. J.K. Agarwal Director-Finance Shailaja Chandra Independent
Ms. Sheila Sangwan Independent Mr. Rakesh Nath Independent
Mr. S. S. Rao Independent Director
Holding – Top10
Perc. Holding Perc. Holding
Jsw investments pvt 20.26 Indusglobe multivent 15.65
Glebe trading privat 8.86 Jindal stainless ltd 8.86
Virtuous tradecorp p 5.22 Danta enterprises pv 5.22
Life insurance corp 4.9 Jsw ltd 3.76
Reliance capital tru 1.65 Shete tanvi 1.52
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
06 Jun 2018 Jsw Steel Limited Sell 6111000.00
06 Jun 2018 Jsw Steel Coated Products Limited Buy 4655000.00
06 Jun 2018 Amba River Coke Limited Buy 1456000.00
*in last one year
NTPC
Pricking the pessimist’s balloon
India Equity Research| Power
COMPANYNAME
Why buy now? We cite three key reasons: 1) our reverse DCF analysis EDELWEISS 4D RATINGS
indicates the CMP is factoring 450bps RoE dilution, which we believe is Absolute Rating BUY
not justified; 2) we do not expect any major changes in CERC 2019-24 Rating Relative to Sector Outperformer
norms which could impact NTPC’s profitability given the state of affairs of Risk Rating Relative to Sector Low
generation companies; and 3) NTPC is best placed to ride the Sector Relative to Market Underweight
consolidation phase in generation. Yes, the fuel risk is for real and likely
to persist for another one-two quarters. Our risk-reward scenario analysis
MARKET DATA (R: NTPC.BO, B: NTPC IN)
indicates potential 35-50% upside (even assuming sedate sector outlook)
CMP : INR 140
with downside risk of 5-10%, indicating that the odds are in our favour. Target Price : INR 190
Maintain ‘BUY’ with target price of INR190. NTPC is the top pick in our 52-week range (INR) : 182 / 138
power coverage universe. Share in issue (mn) : 8,245.5
M cap (INR bn/USD mn) : 1,153 / 16,267
Market factoring negligible growth till FY25 Avg. Daily Vol.BSE/NSE(‘000) : 6,403.5
Our reverse DCF calculation indicates that the market is factoring either 450bps
dilution or 4% growth till FY25. We argue that with 19GW assets under construction, SHARE HOLDING PATTERN (%)
consolidation opportunities and other key potential earnings boosters, perhaps the Current Q1FY19 Q4FY18
market is being too harsh on NTPC. Promoters * 61.7 61.7 62.3
MF's, FI's & BK’s 23.6 23.6 22.8
Coal shortage related under-recoveries to continue in near term FII's 11.3 11.3 11.5
NTPC has posted INR20bn fixed cost under-recoveries cumulatively over the past two Others 3.4 3.4 3.4
* Promoters pledged shares : NIL
years. Of these, INR8bn were due to coal shortage, resulting in lower-than-mandated (% of share in issue)
PAF availability. This could have been avoided had it been permitted to import coal. It
has recently invited two tenders for 2.5MT each for import. We factor in INR20bn PRICE PERFORMANCE (%)
under-recoveries over FY19-21. Ramp up of its captive coal mines could be a booster. EW Power
Stock Nifty
Index
Outlook and valuations: Triggers aplenty; maintain ‘BUY’ 1 month (5.8) 2.0 3.0
3 months (1.9) (7.4) (1.7)
At CMP of INR140, the stock is available at 1.05x FY20E P/BV, at a five-year low. We are
12 months (15.6) 0.7 (16.6)
confident of NTPC’s commercialisation trajectory over FY19-21, which will boost the
regulated equity. Triggers are far higher: 1) favourable outcome of GCV issue (will
boost PAT by 7-8%); 2) successful implementation of National Merit Order dispatch
(will lower variable charges & lead to gains); 3) bundling of renewable power with
thermal at its high cost producing stations will support profitability; and 4) inorganic
growth. We introduce FY21 estimates. We maintain ‘BUY/SO’ with TP of INR190.
Financials
Year to March FY18 FY19E FY20E FY21E Swarnim Maheshwari
+91 22 4040 7418
Revenues (INR mn) 834,527 898,996 1,020,886 1,144,954 swarnim.maheshwari@edelweissfin.com
EBITDA (INR mn) 216,673 253,290 295,732 332,801
Varun Mittal
Adjusted Profit (INR mn) 103,432 108,679 128,626 144,949 +91 22 6623 3392
Diluted P/E (x) 11.2 10.6 9.0 8.0 varun.mittal@edelweissfin.com
P/B(x) 1.1 1.1 1.0 0.9
ROAE (%) 10.4 10.4 11.6 12.3
December 6, 2018
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Power
Chart 1: Past five years’ EPS has been in negative territory Chart 2: Bridging the gap between actual and regulated equity
164 27.5 1,250
(INR bn)
(%)
93 17.5 250
75 15.0 0
Regualted Equity in Inventory Equity in Total
FY19E
FY20E
FY21E
FY16
FY18
FY14
FY15
FY17
Chart 3: 4-5GW to be commercialised each year till FY21… Chart 4: …releasing equity blocked in CWIP
60 2,500 60.0
48 2,000 50.0
36 1,500 40.0
(INR bn)
(GW)
(%)
24 1,000 30.0
12 500 20.0
0 0 10.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY19E
FY20E
FY21E
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
2) NTPC’s latest and upcoming plants have a high variable cost, which would get lower
schedules and impact earnings
Our take: More than 4GW of NTPC’s existing 45GW capacity faces the problem of
higher variable cost of INR3.5/unit plus and is uncompetitive as it comes in the fourth
quadrant of scheduling. The concern that the upcoming plants will have a high variable
cost is not really true. We found that of the upcoming 18GW plus capacities over the
next two-three years, 60% will source coal from captive coal blocks. But, while the
mining ramp up is still not evident (3mt in FY18 versus 8mt targeted in FY19), NTPC has
tied up for bridge linkage with CIL. Our analysis indicates that the upcoming capacities
are on an average 150-200km from coal mines and hence the variable cost is likely to
be lower. Moreover, NTPC is developing solar capacities, which will be bundled with
these high cost producing plants to cut overall cost.
Chart 5: Higher variable charge plants to get lower scheduling (low PLF in FY18)
100.0 5.0
80.0 4.0
60.0 3.0
40.0 2.0
(INR/kwh)
(%)
20.0 1.0
0.0 0.0
SINGRAULI STPS
VINDHYACHAL STPS
KUDGI STPP
DADRI (NCTPP)
SOLAPUR
KORBA STPS
BADARPUR TPS
FARAKKA STPS
SIPAT STPS
SIMHADRI
RAMAGUNDEM STPS
UNCHAHAR TPS
RIHAND STPS
LARA TPP
KAHALGAON TPS
BONGAIGAON TPP
TALCHER STPS
TALCHER (OLD) TPS
BARH II
MAUDA TPS
TANDA TPS
Chart 6: Breakdown of NTPC’s plant capacity Chart 7: Even though non-pit head mix increases, VC will not rise
Non Pit
head
plants
Pit Head
41% Non Pit
Plants
head 48%
Pit Head plants
Plants 52%
59%
Also, media reports have hinted at the NTPC-SJVN takeover paving way for
consolidation in the generation space. This remains a dark horse and valuations remain
paramount if such a deal does indeed goes through. Management too has echoed these
views, highlighting that valuation will be top criteria for any possible takeover.
Chart 8: Government’s NTPC stake sale have often been at a lower price thus creating
pressure
120 175
168
102 163
84 151
(INR bn)
(INR)
146
66 137 139
48 127
120
30 115
Dec-18
Aug-17
Feb-13
Feb 2016
Among other considerations moving from the prevalent two part tariff to a three part tariff
system where regulated RoE is depended on actual quantum of power generated. This could
be a negative for NTPC if plants are not able to run at more than normative PLF for whatever
reason (low schedule, coal issues, etc). This is as opposed to the current system where core
ROE is contingent on availability (PAF) and not actual generation.
However, one needs to be cognizant of the fact that the idea for the discussion paper was to
lay out all the possible options and one needs to await the draft paper to get more clarity on
CERC’s stance. We believe NTPC has not much to lose in the upcoming CERC
2019-24 regulatory norms given the challenging state of affairs of power
generation in India.
1.0% 137 144 151 159 166 173 181 188 195
2.0% 138 146 154 162 170 178 186 194 202
3.0% 139 148 157 166 175 184 193 202 211
4.0% 141 151 161 171 182 192 202 212 222
5.0% 144 155 167 178 190 201 213 224 236
Source: Edelweiss research
Table 2: CERC regulatory norms discussion paper key points
2014–19 norms 2019–24 discussion paper Potential impact
RoE
Coa l power pl a nts - Regul a ted RoE 15.50% 3 pa rt ta ri ff - a ) fi xed cha rge (i nteres t, Depends on PLF. If PLF i s <
depreci a ti on, pa rt of O&M) + RoE res tri cted ta rget PAF i mpa cts RoE
to ri s k-free ra te; b) va ri a bl e cha rge (res t of nega ti vel y, whi l e If PLF>
RoE, a nd O&M); c) energy cha rges for a ctua l ta rget PAF i mpa ct i s neutra l
fuel cos ts ba s ed on pl a nt l oa d fa ctor (PLF).
The recovery of fi xed cha rges i s l i nked to
ta rget pl a nt a va i l a bi l i ty (PAF), wherea s
va ri a bl e cha rges a re l i nked to the
di fference between a va i l a bi l i ty a nd
di s pa tch.
Normative availibility
Coa l power pl a nts -PAF 85.00% 1) Poi nts to di fferenti a l a va i l a bi l i ty norms Di fferenti a l a va i l a bi l i ty
for exi s ti ng a nd new pl a nts a s wi th better ba s ed on l ower peri odi ci ty
technol ogy new pl a nts coul d ha ve hi gher coul d ha ve nega ti ve i mpa ct
a va i l a bi l i ty; 2)s hi fti ng of fi xed cos t recovery
from a nnua l cumul a ti ve a va i l a bi l i ty ba s i s
to a l ower peri odi ci ty, s uch a s monthl y or
qua rterl y or ha l f yea rl y; 3) i ncorpora te fuel
s horta ge i s s ues
The sunny side: Targeting 5GW of solar addition and its implication
The giant has big plans to go green and aims to develop 10GW of solar capacity by FY22 and
eventually move to 30% non-fossil fuel basket by FY2032 (32GW-RE). Currently, NTPC has
900MW RE commissioned capacity and 5GW is under development both as a developer (NIT
issued: 2GW-solar, 1.2GW-wind) and EPC (NIT issued: 586MW, pipeline: 2,385MW). Further,
the company has been entrusted the development of 15GW solar PV capacity under the
National Solar Mission in three tranches (2,750MW of 3,000MW capacity under tranche I
has already been commissioned).
NTPC’s 5GW solar drive entails several benefits: 1) solar being a must run status will always
get scheduling; and 2) importantly, it will help bundling of solar power with high cost
thermal power at certain plants. For example, solar power can be clubbed with PPAs of
Solapur, Mauda and Kudgi power plants which have a variable cost of ~INR4/unit and are in
the fourth quartile of merit order dispatch. In such a scenario, bundling of renewable power
will help bring the overall procurement cost for a discom to ~INR3.0-3.25/unit, making the
high cost power plants getting better scheduling.
Chart 9: Renewable bundling to improve scheduling for high variable charge capacity
4.0
3.2
(INR/kwh)
2.4
1.6
0.8
0.0
2 8 11 19 20 24 27 32 35 39 40
Standalone Cummulative Capacity (GW)
Increasing Variable charge by capacity
Source: Industry, MoP, Edelweiss research
National Merit Order dispatch works almost like fixed price pooling
The idea behind the National Merit Order is to lower India’s overall generation cost. In the
current system, some costlier plants having variable charge could get schedule ahead of
lower energy charge plants as generators cannot sell their power to discoms with which
they do not have a PPA. Consequently, in the prevalent system, Merit Order Dispatch is
done at each discom level, forcing them to choose from their contracted basket or resort to
open access.
The National Merit Order offers flexibility to generators to fully utilise lower cost plants and
permits sale of idle capacity (after meeting contractual obligations) to discoms with which
they may not have PPA tie ups. In such a scenario, pit head plants, which typically have
lower variable cost, will be heavily utilised. If implemented successfully, this will be positive
for NTPC as the savings are likely to be shared amongst generating companies and
purchasing disocms.
Moreover, the haircuts for such NCLT assets could be North of 70%, providing fire sale
opportunities for players with capability to lap up these assets—NTPC best placed to
leverage. Also, there are strong incentives to acquire existing projects (INR10-25mn/MW)
given that it costs upwards of INR70mn/MW for greenfield expansion along with land
acquisition issues. The market is not pricing in any inorganic growth opportunities which are
aplenty and NTPC is best placed for acquisition through NCLT.
Fig. 1: Consolidation in thermal space through NCLT route could provide inorganic growth opportunities
Overall
39GW (34 projects)
NTPC is planning to import 5MTin FY19; two tenders has been called for 2.5MT each. Ramp up
of coal mining operations could aid fuel security and lower the variable charge for its
upcoming plants, enabling better scheduling. FY19 coal production target at 8MT along with 8-
10MT of coal imports will help the company meet FY19/20E(189/208MT) its coal requirement,
paring fixed cost under-recovery on account of fuel shortage.
Production has commenced from two coal blocks and three additional blocks are targeted in
FY20. Apart from this, five other mines with GR of ~3.42BT and mining capacity of ~55MMTPA
are under various phases of development.
We believe management’s guidance of INR6bn under recovery looks very optimistic and we
are expecting INR10bn+ under recoveries
3.0
(INR bn)
2.5
2.0
1 1
1.0 0.75 0.75
0.0
Unchachar - Mauda I & II Solapur Badarpur Simhadri Others
IV
Fixed cost under recoveries
Source: Company, Edelweiss research
Chart 11: Developing coal mines a booster but near term coal imports to rise
20
16
12
(MMT)
8
FY19E
FY20E
FY07
FY09
FY10
FY11
FY13
FY14
FY15
FY17
FY18
FY08
FY12
FY16
Coal imported by NTPC
Source: CEA, Company, Edelweiss research
Strategies to bring down fuel cost under recovery: NTPC is taking steps to reduce fixed cost
under recovery.
Striving to increase coal availability through engagement with Indian Railways (INR
20bn advanced towards Indian Railways). Railways plan to expand wagon capacity by
1000 wagons every month. This should help improve coal availability situation.
Proposal to CERC to reduce the normative PAF for non-pit head plants to 70% as they
face the major brunt of coal availability and this is outside the control of the company.
Ramp up of production from captive mines (FY19E-7-8MT, FY20E-10MT).
The NTPC stock has been under pressure—down 20% in past two months—on account of:
1) Poor operational performance recently owing to lower PLFs and PAF resulting in under-
recoveries.
2) Government’s stake sale of 2.9% via CPSE III along with likely OFS of 3.3% stake.
3) CERC 2019-24 draft norms around the corner.
2) Government selling 3.3% stake along with the green shoe option of another 3% sale to
meet its disinvestment target.
3) Government’s stake sale in SJVN to NTPC at obnoxious valuation (ONGC- HPC
demerger).
3) Successful implementation of the National Merit Order dispatch (will improve incentive
income substantially).
4) Bundling of renewable power with thermal at its high cost producing stations will
support profitability.
5) Inorganic growth.
Our risk-reward scenario analysis indicates potential 15-40% upside (even assuming sedate
sector outlook) with downside risk of 5-10%, indicating that the odds are in our favour. We
maintain ‘BUY/SO’ with target price of INR190. NTPC is the top pick in our power coverage
universe.
Table 5: SOTP
Value Comments Multiple Comments Value Per share
Regulated equity 656,621 FY20E reg equity 1.82 (RoE-g)/(CoE-g) 1,193,856 145
Equity infused in CWIP 234,353 PV of FY19E CWIP 1.00 At equity value 234,353 28
Investments & Cash 140,259 FY18 book 1.00 At book value 140,259 17
Total 1,568,468 190
Source: Edelweiss research
Company Description
NTPC, set up in 1975, is India’s largest power generation company with 53.6GW installed
capacity (including 7GW from JVs). With 21GW of under construction projects, NTPC is
looking to commercialize 4-5GW of capacity each year for the next two years. In near term
NTPC is committed to set up 10GW renewable portfolio by 2022. Over the long term NTPC
plans to expand its generation portfolio to 130GW by 2032 with 30% of the basket from
non-fossil fuel based capacity. Further NTPC has forayed into coal mining operations with
multiple mines under various phases of development.
Investment Theme
Regulated returns: NTPC currently has ~45GW of operational capacity (standalone)
under the regulated model with pipeline capacity of ~30-35GW plus signed under the
regulated model. This enables it to pass on increase in costs, limiting the impact on
profitability.
• High efficiency gains: While the current regulation permits post tax RoE of 15.5% (along
with PAF based incentive), on regulated equity the company has been able to earn RoE
of ~19-20% on the regulated book due to highly efficient plants and economies of scale.
• Inorganic growth opportunities: Ensuing consolidation in thermal space at attractive
valuations provides growth opportunities for NTPC given its scale and PPA pipeline in
PPA.
• Fuel security: The company has secured fuel supplies through FSAs with CIL in the past;
incrementally, the coal blocks being developed should improve NTPC’s fuel security.
Key Risks
CERC norms overhang : Any RoE dilutive norms in forthcoming tariff regulations are a
key risk to earnings impacting valuations.
• Delay in execution of capex: Any delay in execution of pipeline projects could result in
downside from the estimated earnings/valuations.
• SEB delays: While NTPC makes due efforts to maintain adequate LCs for sale of power
to SEBs, failure to secure timely payments is a risk to the working capital cycle and
hence earnings.
• Fuel supplies: Fuel non-availability could impact PLF’s/PAF’s resulting into higher than
estimated fixed cost under-recoveries impacting RoE’s.
Additional Data
Directors Data
Shri Gurdeep Singh Chairman and Managing Director Shri K. Biswal Director (Finance)
Shri S.K. Roy Director (Projects) Shri P.K. Mohapatra Director (Technical)
Shri S. Roy Director (Human Resources) Shri Prakash Tiwari Director (Operations)
MS. Archana Agarwal Government Nominee Director Dr. Gauri Trivedi Independent Director
Shri S Chander Independent Director Shri M. P. Singh Independent Director
Shri P. K. Deb Independent Director
Auditors - M/s T R Chadha & Co LLP; M/s PSD & Associates; M/s Sagar & Associates; M/s Kalani & Co., M/s P A & Associates; M/s S.K. Kapoor
& Co., ; M/s B M Chatrath & Co LLP
*as per last annual report
Holding – Top10
Perc. Holding Perc. Holding
Republic of india 61.77 Life insurance corp 13.01
Icici prudential ass 4.35 Hdfc asset managemen 3.04
Blackrock inc 1.59 T rowe price group i 1.23
Vanguard group inc/t 0.85 Sbi funds management 0.83
Reliance capital tru 0.66 Icici prudential lif 0.63
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
10 Jul 2018 President Of India (Acting Through Ministry Of Power) Sell 41567567.00
*in last one year
Besides, transmission capacity was significantly enhanced during the 12th Five-Year Plan
(2012–17), particularly with the focus on the Northern and Southern regions with inter-
region transmission capacity jumping from 30GW to 86GW over FY13–18 (PGCIL had an 88%
share of projects). Given significant capacity augmentation, there are concerns that
incremental orders would moderate; however, PGCIL has a healthy order book to be
executed over the next two–three years and large scale renewable integration would
require additional transmission capacity.
Chart 1: We expect INR 250bn capitalisation on average… Chart 2: …driving regulated equity growth
350 1.5 1,000
70 0.3 200
0 0.0 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19e
FY20e
FY21e
FY19E
FY20E
FY21E
Capex Capitalisation Capt/Capex Ratio Regulared equity
Source: Company, Edelweiss research
Projects in hand-INR1000bn
GoI consultancy
works,
INR150bn
TBCB projects,
INR150bn
New projects,
INR20bn
On going
projects,
INR715bn
However, given RE’s erratic/unpredictable production and large-scale measures needed for
grid integration entail a significant build-up of infrastructure for grid improvement. It is
noteworthy that seven states accounted for over 80% of RE generated in India in FY18.
Given RE potential is concentrated in just seven states, discoms must develop inter-state
transmission capability to fulfill their RPO targets.
Chart 4: Huge RE potential, but concentrated in certain states, which necessitate building up transmission infrastructure
1,000 FY18 RE generation breakdown (101 BU)
800 Others TN
17% 16%
600
(GW)
400 Telangana
5% Karnataka
200 MP 13%
6%
0
Maharashtra
Pradesh
Pradesh
Madhya
Gujarat
J&K
Total
Rajasthan
Andhra
Rajasthan
9% Maharashtr
a
AP Gujarat 12%
Solar power potential 10% 12%
Source: CEA, MOP, Edelweiss research
The green energy corridor projects are being implemented to facilitate large-scale grid
integration by developing transmission capability and developing RE management centres.
34 solar parks with over 20GW capacities are currently being developed cross 21 states.
Power Grid is implementing evacuation system for eight solar parks in five states at an
estimated cost of INR43bn.
Given coal resources are concentrated in the eastern belt, plants in northern and southern
regions are at a natural geographical disadvantage. Transmitting power is much cheaper
than evacuating coal over long distances and, considering more competitive RE entering the
picture, far-flung plants relative to resource locations are likely to be priced out in
scheduling. As a result, incremental capacities is likely to come up in the eastern and
western belts, which would necessitate enhancement of northern and southern
transmission capability.
15,000 12,790
(MW)
10,000 7,830
6,000
5,000 2,860
0
East - West - North East East - East - East - West -
North North - North West North East South South
FY22E I-R transmission capacity
Source: CEA, Edelweiss research
Chart 6: NR and SR would require inter-region capacity augmentation in the long term
100.0
(Maximum Surplus/Deficit (GW))
67
60.0 41
34
21 22
20.0 10 14 11
2 2 3 4
(20.0) (7)
(18) (16)
(33) (30)
(60.0) (48)
(55)
(100.0) (80)
Noth West East South North-East
FY22 FY27 FY32 FY36
Source: CEA, Edelweiss research
The government’s ‘24x7 Power for All’ initiative probably indicates its focus on providing
reliable power supply. Unlocking latent demand with 100% electrification could possibly add
4%, i.e. about 40bn units to India’s existing demand base. Out of the peak demand of
177GW, 75% is fed by coal while RE is sidelined because India is an evening peak-load
country. Therefore, we believe India’s thermal capacity available to meet peak demand
would continue to be about 200GW (same as of today, but with changed dynamics), which
would hit a peak of about 90% by FY22.
Chart 7: Peak hour coal capacity utilisation could hit 85-90% by FY22E
250
200
150
(GW) 100
169
130
50
0
H2FY19 FY22E
Coal Hydro Gas Nuclear Non-Conventional
Source: CEA, Edelweiss research
Table 4: SOTP
Value Comments Multiple Comments Value Per share
Regulated equity 712,695 FY20E req equity 1.50 (RoE-g)/(CoE-g) 1,069,043 203
CWIP equity 33,610 FY19E CWIP 1.00 Equity value 33,610 6
Investments 14,220 FY19E Invst 1.00 At book value 14,220 3
Value of telecom business 8,000 Current equity 1.00 BV 8,000 2
Value of consultancy business 3,724 FY20E earnings 15.0 12x P/E 55,860 11
Total 1,180,733 225
Source: Edelweiss research
Company Description
PGCIL commenced operations in 1992 by consolidating transmission assets of NTPC, NHPC,
NEEPC, NPCIL, Tehri Hydro Development Corporation, and Neyveli Lignite. In 1994, the
assets and communication systems of regional load dispatch centre (RLDC) were also
transferred to the company with an objective to enhance grid management. Due to the
central transmission utility status, PGCIL is mandated to undertake and operate inter-state
transmission systems efficiently, provide for open access, and undertake various functions
of RLDC. Currently PGCIL is developing various transmission assets under the Green Energy
Corridor scheme.
Investment Theme
Growth visibility: With INR1000bn orders in hand, PGCIL has a strong visibility over next
two-three years. This can keep the capitalisation ratio at more than 1.0x comfortably. But,
visibility beyond FY21 is a tad challenging as generation capacity and inter regional
transmission corridors seems topping out. Nevertheless, FY18-20E regulated equity is slated
to grow by 13% CAGR, which is comforting.
Key Risks
Moderation in incremental order book: In last five years (FY13-18) transmission capacity
has increased meaningfully with Inter-Regional (I-R) capacity tripling to 86GW from 29GW.
Going forward there could be moderation in incremental project awarding.
Shift towards TBCB route: Higher project awarding through competitive bidding vs
nomination basis earlier will increase competition. Also private participation could drive
down the IRRs.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Macro Income from operations 299,597 349,864 383,462 416,907
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Direct costs 22,089 24,298 26,728 29,400
Inflation (Avg) 3.6 4.5 4.5 5.0 Employee costs 16,059 17,665 19,431 21,374
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Total operating expenses 38,148 41,963 46,159 50,775
USD/INR (Avg) 64.5 70.0 72.0 72.0 EBITDA 261,449 307,902 337,303 366,132
Company Depreciation 90,913 108,326 115,848 127,833
Capex (INR mn) 257,900 250,000 235,000 235,000 EBIT 170,537 199,576 221,455 238,299
Commissioning (INR mn) 274,000 270,000 246,750 235,000 Less: Interest Expense 75,907 81,037 87,729 92,141
Closing Reg. Eqty(INRmn) 557,670 638,670 712,695 783,195 Add: Other income 10,138.6 9,566.48 10,802.13 12,460.88
RoE on Reg. Eqty (%) 13 15 15 15 Profit Before Tax 104,769 128,106 144,528 158,619
Less: Provision for Tax 22,379 27,364 30,872 34,896
Reported Profit 82,390 100,742 113,656 123,722
Exceptional Items - - 1 2
Adjusted Profit 82,390 100,742 113,655 123,720
Shares o /s (mn) 5,232 5,232 5,232 5,232
Adjusted Basic EPS 15.7 19.3 21.7 23.6
Diluted shares o/s (mn) 5,232 5,232 5,232 5,232
Adjusted Diluted EPS 15.7 19.3 21.7 23.6
Adjusted Cash EPS 33.2 40.0 43.9 48.1
Dividend per share (DPS) 5.3 6.4 7.2 7.9
Dividend Payout Ratio(%) 38.3 38.3 38.3 38.3
Additional Data
Directors Data
Shri I.S.Jha Chairman & Managing Director Shri K Shreekant Director (Finance)
Shri Ravi P. Singh Director (Personnel) SMt Seema Gupta Director (Operations)
Shri V. K. Dewagan Govt. Nominee Shri Jagdish I. Patel Director (Independent)
Shri Jagdeesh Patel Independent Director Shri Tse Ten Dorji Independent Director
Shri Manoj Kumar Mittal Independent Director Smt A. R. Mahalashmi Independent Director
Shri S. K. Sharma Independent Director M/s Bharati Govt. Nominee
Auditors - S. K. Mittal & Co; R. G. N. Price & Co; M/s. Kothari & Co.; M/s. Parakh & Co
*as per last annual report
Holding – Top10
Perc. Holding Perc. Holding
Republic of india 57.9 Hdfc asset managemen 3.07
Icici prudential ass 2.63 Life insurance corp 2.32
Comgest sa 1.36 Virtus investment pa 1.18
Fil ltd 1.17 Blackrock inc 1.13
Vanguard group inc/t 1.01 Vontobel holding ag 0.95
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
15 Jan 2018 Okoworld Growing Markets 2.0 Buy 600000 196.00
15 Jan 2018 Hauck & Aufhauser Privatbankiers Kgaa Niederlassung Luxemb Sell 600000 196.00
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
TATA POWER CO
Mundra resolution around the corner; growth on cards
India Equity Research| Power
We highlight three key reasons underpinning our ‘BUY’ conviction on Tata EDELWEISS 4D RATINGS
Power (TPCL): 1) holding company Tata Sons’ renewed focus on Absolute Rating BUY
restructuring (internal team rejig & divestment of non-core assets— Rating Relative to Sector Performer
INR40bn plus already sold) will set the house in order; 2) focus on Risk Rating Relative to Sector Medium
scalable businesses—RE, distribution franchisee, transmission assets—to Sector Relative to Market Underweight
drive future growth; and 3) resolution of Mundra is in sight. On the basis
of our probability scenario analysis on Mundra resolution (refer table4),
MARKET DATA (R: TTPW.BO, B: TPWR IN)
we revise our SOTP-based TP to INR101 (INR87 earlier). Maintain ‘BUY’
CMP : INR 79
and reiterate it as one of our top picks.
Target Price : INR 101
52-week range (INR) : 102 / 60
Mundra resolution on cards: Key trigger Share in issue (mn) : 2,704.8
The Supreme Court’s order raises the hope of a successful resolution of the Mundra M cap (INR bn/USD mn) : 215 / 3,030
issue (INR85bn+ losses so far) by allowing amending the PPAs to raise tariffs with Avg. Daily Vol.BSE/NSE(‘000) : 6,572.7
CERC’s approval. Post Gujarat government’s approval for tariff hikes, we await final
judgment by CERC as to the quantum of tariff hike and other states’ nod to PPA SHARE HOLDING PATTERN (%)
amendment. There is an outer chance that 850MW PPA could not be amended. A Current Q1FY19 Q4FY18
successful resolution will lift TPCL’s EBITDA by 7-8%, which is material enough. Promoters * 33.0 33.0 33.0
MF's, FI's & BK’s 24.6 24.6 23.6
Stricken by low regulated growth; can RE compensate? FII's 27.5 27.5 28.1
Growth in regulated businesses has been lackluster over the past three years with an Others 15.0 15.0 15.2
uptick of mere 2% in regulated equity (INR71bn in FY18). And, this is not changing any * Promoters pledged shares : 12.2
(% of share in issue)
time soon as the roll out is slower in Delhi and Mumbai. TPCL aims to enhance the
share of non-fossil fuel based capacity to 40–50% by 2025 led by RE enhancement. The
PRICE PERFORMANCE (%)
distribution franchisee business and transmission business are other focus areas.
EW Power
Stock Nifty
Index
Ongoing disinvestment catalyses debt reduction
1 month 19.8 2.0 3.0
TPCL has, so far, garnered over INR40bn plus from the sale of non-core assets and this
3 months 4.1 (7.4) (1.7)
is likely to continue with 48% stake sale in Tata Projects; Tate Ceramics is next in line.
12 months (10.9) 0.7 (16.6)
Monetisation of non-core assets too could aid deleveraging.
While trying incessantly for a Mundra resolution, TPCL has been exploring options to contain
losses through coal blending, by increasing the mix towards lower GCV coal (current mix:
MCV – 77%; LCV –13%; and HCV – 10% versus the proposed mix: MCV – 43%; LCV – 37%;
and HCV – 20%). According to management, in a high coal price scenario, the price of lower
GCV coal does not increase proportionately to the price of high GCV coal and 2–3MT of the
former variety can be procured at a discount of 7%. Besides, the company is:
in discussion with procurers to sell power beyond contractual obligation (80% PLF) at
higher tariff than PPAs to arrest losses. However, this seems to be on the backburner
for now and the CERC verdict is awaited to renegotiate PPAs;
exploring coal evacuation from Russia to swap Indonesian coal supplies, which comes at
a lower landed cost; this is being evaluated and it’s too early to expect any meaningful
change in coal sourcing; and
lowering the financing cost by trying to refinance the ECB loan. INR-denominated loan
refinancing has so far led to a 200bps reduction in interest cost.
Moreover, CGPL and Indonesian coal production act as natural hedges against rising coal
prices with CGPL losses (INR14bn) being offset by coal mining gains (INR14bn in FY18).
Chart 1: CGPL and coal mining act as natural hedges Chart 2: CGPL mix to shift towards LCV coal
20.0 100%
14.2 10%
20%
12.0 80%
8.0
(Coal Mix)
77%
(4.0) 40%
However, the biggest unlocking could happen from the sale of the Tata Project stake sale
(48%). Tata Projects is the EPC arm of Tata Group and it is benefitting from the group’s
renewed focus. Our channel checks indicate Tata Projects has an order book of more than
INR300bn and is growing at a healthy pace of 20%. It may be taken public over the next
three–six quarters, and we believe TPCL could generate ~INR25bn from divestment of its
stake (48% stake) in Tata Projects.
60.0 4,000
45.0 3,000
(INR mn)
(INR bn)
30.0 2,000
15.0 1,000
0
0.0
FY12 FY13 FY14 FY15 FY16 FY17
FY12 FY13 FY14 FY15 FY16 FY17
Revenue EBITDA PAT
Source: VCCEDGE, Edelweiss research
Tata Ceramic’s divestment would fetch a lower amount (less than INR2.5bn). Additionally,
TPL is yet to receive USD250mn from the sale of Artumin coal mine in Indonesia. The
remaining proceeds are likely to be received over the next three–four quarters. We believe
another INR25–30bn could materialise over the next couple of quarters, which could be
either used for debt repayment or growth opportunities. We reckon the company will use
the proceeds maintaining a balance between the two..
More importantly, the O&M contract will be taken up by TPCL on normative basis, which is
normally benchmarked as per CERC norms of ~INR2mn/MW annually. As per our
understanding, the actual O&M cost works out to ~INR0.7-0.8mn/MW. So there could be
potential savings of INR1mn/MW, which translates into profit (post tax) of ~INR1.4bn. We
have still not factored this in our assumptions.
On TPCL’s equity contribution (26% stake) to fund the transaction, the company plans to
raise debt of INR2.5-3.0bn overseas at cost of debt of ~5%.
We expect some rationalisation in RE tariffs over the medium term; that said, near term
pressure amid aggressive bidding could delay TPCL’s RE expansion plans.
Chart 4: TPCL is among leading RE players in India Chart 5: EBITDA margin close to 90% (consolidated RE portfolio)
20.0 100.0
2.1GW Renewable Capacity
16.0 96.0
WIND
ASSETS(SA)
376 MW TPREL 624 12.0 92.0
(INR bn)
MW
(%)
8.0 88.0
4.0 84.0
0.0 80.0
FY17 FY18 H1FY19
WALWHAN
1153 MW Revenue EBITDA EBITDA margin
Source: Company, Edelweiss research
Another point to note here is that RoE on RE projects can be seemingly lower in the initial
four–five years due to higher non-cash charges such as deferred tax and accelerated
depreciation. RoE would, however, improve over the medium term with debt and interest
costs coming down.
2) Distribution franchise business: TPCL has had tremendous success with its Delhi
distribution operations with among the lowest AT&C losses across discoms in the
country. The government is increasingly looking to privatise distribution through PPP
or the franchise model. Given its success in Delhi and Ajmer, TPCL is well placed to
take advantage of this opportunity. The Delhi distribution business runs at an AT&C
loss of 8.3% and Ajmer 16–17%. Discoms’ failure to stick to AT&C targets could make
a solid case for privatisation in select circles.
40.0 33.8
30.0 26.5
23.7
(%)
18.6 16.7
20.0 15.2 14.2
11.5 10.7 10.4 9.9
8.8 8.6 8.4
10.0
0.0
FY03
FY04
FY05
FY07
FY08
FY09
FY10
FY11
FY12
FY14
FY15
FY16
FY18
FY06
FY13
FY17
AT&C Losses
Source: Company, Edelweiss research
3) Building capability for future technologies: Moving away from thermal generation,
TPCL is keen on exploring opportunities such as EV charging stations, smart metres
and grid systems, and house automation systems. It is also looking to explore solar
rooftop technology, wherein no major player has a presence in the country.
EV
Smart
charging
meters
1 mm
270mm
stations
New
Oppurtunities
LED street
Solar
lighting
rooftop
9mm
40GW
points
1. Smart metering: The key drivers are the focus on distribution space and UDAY with a
potential of 270mn meters. TPCL is providing smart metering solutions as well.
2. Rooftop solar: The National Solar Policy will drive this; it is a potential 40GW (currently
1.5GW) opportunity. No big player present currently.
3. LED street light system, ESCO: Energy efficiency and UDAY are the key drivers offering a
9mn points opportunity.
4. EV charging: Driven by the National Electric Mobility Mission, TPCL in partnership with
Tata Motors has big plans for EV charging across India, which is likely to be a total
opportunity of 20mn 4W EV and 1mn charging stations.
5. Home automation: The Smart City Mission is a key driver with 80mn homes as the
target opportunity.
6. Micro grids: TPCL is trying to develop a service with a packaged solution. The pilot
project was successful in Bihar with 100% collection.
Company Description
TPCL is a pioneer in India's power sector with presence in all spheres of the power industry,
encompassing generation, transmission, trading, and distribution. The company has posted
exceptional performance in its transmission and distribution JVs. It was also awarded the
first UMPP at Mundra (Gujarat) due to its lowest levelised tariff bid at INR2.26 per unit.
Investment Theme
We believe, TPCL is poised to play a pivotal role in India’s power sector. The company, in the
past, has proved its expertise in project execution. It has an installed capacity of 10GW plus
at FY18 end. It has 30% stake in two coal mines of Bumi Resources with proven reserves of
~1.9bt. With rising coal prices, we believe, TPCL will earn significant profits from these
assets as seen in FY18 which saw coal mines contributing ~INR10bn to the profit. Further,
management has stated its intentions to simplify its various unrelated businesses and
intention to divest in six different businesses which could prune debt/equity from 2.4x to
~2.0x over the next few quarters. The renewable bet has been playing well with the
business contributing ~INR4bn to FY18 profit. Successful resolution of Mundra plant could
boost TPCL’s profitability.
Key Risks
TPCL has fully commissioned two key projects at Mundra—4,000MW and Maithon—
1,050MW. Dynamics of the Indian electricity market have undergone a sea change due to
higher imported coal prices, weak customer finances, changing fiscal norms at coal
exporting countries and now, a depreciating INR. Hence, balancing between contractual
supplies (volume and price) and maximising earnings has become a key determinant/risk.
Renewable expansion plans could be dampened in near term amid aggressive bidding in RE
space.
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Macro Income from operations 293,312 309,261 315,098 321,839
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Direct costs 180,141 196,381 197,585 200,567
Inflation (Avg) 3.6 4.5 4.5 5.0 Employee costs 13,819 14,690 14,967 15,287
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Other Expenses 35,782 34,019 36,236 37,012
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 229,743 245,090 248,789 252,866
Sector EBITDA 63,570 64,171 66,309 68,974
Merchant prices(INR/kWh) 4.0 5.0 5.0 5.0 Depreciation 23,981 21,167 21,594 21,681
NewCastle FoB(USD/t) 57 57 57 57 EBIT 39,589 43,003 44,714 47,292
Melawan FoB(USD/t) 47 47 47 47 Less: Interest Expense 37,230 35,725 34,926 33,803
Company Add: Other income 4,326.89 4,972.74 5,045.01 5,607.26
Mundra units sale (MUs) 29,328 29,328 29,328 29,328 Profit Before Tax 13,613 12,251 14,833 19,097
Mundra Cap.charge(INRmn) 24,670 24,650 24,673 24,587 Less: Provision for Tax 1,643 6,376 6,480 7,218
Mundra avg tariff(INR) 2.4 2.6 2.6 2.6 Add: Exceptional items 6,927 - - -
Mundra fuelcost(INR/kwh) 1.8 1.8 1.8 1.8 Minority interest - 2,142 2,232 2,326
Mundra PAT/kwh (INR/kwh) (0.6) (0.5) (0.4) (0.4) Associate profit share 15,539 12,879 14,647 13,011
BUMI coal sales (MT) 57.0 59.0 61.0 66.0 Reported Profit 27,509 16,611 20,768 22,563
BUMI avg realz (USD/t) 67.9 65.5 69.4 69.4 Adjusted Profit 27,509 16,611 20,768 22,563
BUMI PAT/t (USD) 13.8 12.6 13.4 11.1 Shares o /s (mn) 2,705 2,705 2,705 2,705
Consol Reg. Eqty (INRmn) 76,696 78,825 80,670 41,512 Adjusted Basic EPS 10.2 6.1 7.7 8.3
Consol Regulated RoE 18 19 19 17.4 Diluted shares o/s (mn) 2,705 2,705 2,705 2,705
Adjusted Diluted EPS 10.2 6.1 7.7 8.3
Adjusted Cash EPS 14.5 14.0 15.7 16.4
Dividend per share (DPS) 1.3 0.8 1.0 1.1
Dividend Payout Ratio(%) 14.6 14.6 14.6 14.6
Additional Data
Directors Data
Mr. N. Chandrasekaran Chairman, Non-Independent, Non-Executive Mr Praveer Sinha CEO and Managing Director
Ms Anjali Bansal Independent, Non-Executive Mr N H Mirza Independent, Non-Executive
Mr D M Satwalekar Independent, Non-Executive Miss Vibha Padalkar Independent, Non-Executive
Mr S. V. Bhandarkar Independent, Non-Executive Mr. K. M. Chandrasekhar Independent, Non-Executive
Mr A. S. Sethi COO, Executive Director Ms. Saurabh Agarwal Non-Executive
Mr. Banmali Agarwala Non-Executive
Holding – Top10
Perc. Holding Perc. Holding
Tata sons ltd 31.05 Life insurance corp 12.08
Matthews internation 7.36 Tata power co ltd/th 5.07
Icici prudential lif 5.03 Commonwealth bank of 4.85
Icici prudential ass 4.61 General insurance co 2.5
New india assurance 2.48 Blackrock inc 1.5
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
No Data Available
*in last one year
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Sector return is market cap weighted average return for the coverage universe
within the sector
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990
f20bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f9
f4d9b8311cf0678cd975097fc645327865,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.12.07 16:47:12 +05'30'
Recent Research
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
446
(INR)
297
149
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Tata Power Co
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NOTES:
NOTES:
NOTES:
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