Jswenerg 20110610

Detailed Report | June 2011
Utilities | Detailed Report | June 2011
Utilities
Just an eclipse ...

Nalin Bhatt (NalinBhatt@MotilalOswal.com) +91 22 3982 5429 Satyam Agarwal (AgarwalS@MotilalOswal.com) / Vishal Periwal (Vishal.Periwal@MotilalOswal.com)
... brighter days ahead!
Indian Power Sector

Evolution story in pictures
Having emerged from darkness in the past, the Indian Power Sector will re-emerge from the current eclipse
Over the years, the Indian power sector has had its own share of ups and downs. Electricity Act 2003 was a watershed event, a panacea for the sector's economic viability. With appropriate government interventions, the cash crunch was eased and the sector got back on track. Between 2007 and 2009, several events acted as tipping points that fuelled a fresh wave of private investments and led to euphoria. However, 'reversion to mean' has happened rather fast, given several challenges and constraints, impacting project economics. We believe the next five years will be the redefining period for the sector. A V-recovery looks unlikely, but over time, we believe the sector will regain its lost reputation of steady long-term growth with reasonable return.
Dire "state" (Pre-2001)

In dire state! SEBs nearly bankrupt thanks to high power theft, free power, low tariffs, . Severe cash crunch across the chain, so forget fresh investments! Perhaps the only solution bail out the SEBs!
Rise of reforms (2001-2006)

Rays of reform! SEBs bailed out! Electricity Act 2003 rolls out the reforms process (albeit heavy on generation side). Government gung-ho on capacity addition plans, virtually rolling the red carpet for the private sector. Rapid growth ahead!
Euphoria!! (2007-2009)
Phase of excesses! Perennial power deficit! Sky-rocketing prices! Supernormal RoEs! Moneybags chasing mega power plans! Global ambitions! Of course, execution is a cakewalk! Sector tempo on a new high ground reality inevitable!
Self-correction (2010-2011)
Reality hits and darkness sets in! SEBs curtail high-cost power purchases given mounting losses (again!) Execution challenges come to haunt (clearances, labor, ), stretched systemic resources hurt (fuel, land, wagons, ) - project economics eclipsed! Funding off exits and M&A on!
Redefining period (2012 onwards)

Aall izz well almost! Survival of the fittest! Sound capacity plans see light of day. Weaker ones will exit or end up in stronger hands. Resource equilibrium will be reached over time. Sanctity to set in - expect steady growth and reasonable returns on investment. An eclipse always ends!
MACRO POSITION
Power demand lower than GDP growth rate
CAPACITY ADDITION
Expect accelerated pace of capacity addition (GW)
CAGR 8%
FUEL SUPPLY, OPERATING RATES

Coal based PLF has seen some moderation in FY11 (%)
DEMAND & DEFICIT

Power demand growth muted (%)
SHORT-TERM POWER MARKET

Trading volumes inching up
SEBs (State Electricity Boards)

FY09 SEB losses without subsidy unsustainable (Rs b)
Improvement over FY02-04 is led by reforms after the implementation of The
CAGR 7%
Electricity Act, 2003
Capacity addition stagnant for nearly two decades
Private sector contribution more than 40%+ (GW)
Coal sourcing to broaden going forward (m tons)
Residential + Agriculture = 46% of power consumption
ST market size declines led by fall in the tariff (Rs b)
Deterioration in finances led by few states

States Tamil Nadu Andhra Pradesh Rajasthan Uttar Pradesh Haryana Madhya Pradesh Others Total Top 5 States Commercial Losses (Rs b) (90) (79) (77) (58) (41) (37) (124) (506) (345) Net input energy (BUs) 62 60 36 52 20 33 343 606 231
68%
38%
1997-02
1961-66
1969-74
1980-85
1985-90
1951-56
1956-61
1974-79
1992-97
2002-07
India: Long way to go

Per capita consumption (BUs)
Increasing share of thermal (GW)
Power generation increasing despite fuel scarcity (BUs)
Lower demand led to fall in the deficit (%)
Availability in ST market to improve (BUs)

FY11E Adani Power JSW Energy 1 6 3 1 1 0 7 1 19 61 31 FY12E 13 9 3 9 6 0 7 2 49 61 81 FY13E 20 11 3 13 1 2 8 4 63 61 103
Expected installed capacity of SEB's increasing (MW)
Long-period average
Lanco Infratech Sterlite Energy Tata Power Jaiprakash Power Jindal Power Reliance Power Total FY10 Trading Incremental supply (%)
June 2011
Indian Power Sector: Story in Pictures
Installed capacity build-up (GW)

2.3 2.6 1.5 1.8
Hydro capacity build-up (GW)

13 17
Power demand as per 17th Electric Power Survey (BUs)
2.3 7.0 6.0 8.3 7.8 2.5
5.8 3.0 7.5 0.2 3.0 1.3 1.3 3.2
1.7 2.0
5.2 45 7.0 0.1 2.9 35 46 58
8 10
10 13 0.5 0.7
9.0
11.6
10.5
16.1 1.9 6.2
1.0
1.8
1.5
1.5
1.7
1.7 0.1 0.1
0.4
0.4
46
59
77
99 13 20
15.7
24.9
8.4
17.4 8.3 5.4 10.4 2.0 5.1 11.2
0.8
0.8
3.2
3.6 1.1 2.2 2.2 0.2 0.2 1.5
72
92
48
63 37 22 31 6 9 49
22.6
37.1 4.9 15.0 23.3 10.8
3.3
3.3 0.1 3.7 3.9 0.1
128
157 10 79 109 14
11.5
13.5
FY11 FY15E
3.6
3.8
FY11 FY15E
50
68
FY11 FY15E
15.5
24.1
2.1
2.2
80
112
Indian Power Sector: Operational Matrix

Growth (%)
Coal Fields in India

Jammu & Kashmir
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY05-11
FY11-15E
[A] INSTALLED CAPACITY (GW)

Ownership-wise - Central - State - Private 39 66 14 118 68 0 12 31 3 5 118 424 62 85 17 3 590 40 68 17 124 69 0 13 32 3 7 124 435 61 99 17 2 615 25 4.3 45 70 18 132 71 0 14 35 4 9 132 462 0 64 114 19 3 661 46 7.4 48 73 22 143 76 0 15 36 4 12 143 490 69 123 17 699 38 5.8 49 74 25 148 77 0 15 37 4 14 148 473 17 28 73 113 15 719 19 2.8 51 77 32 159 83 2 17 37 5 17 159 495 16 33 97 107 19 766 47 6.6 55 79 38 173 91 4 18 38 5 18 173 493 34 37 16 91 111 25 806 41 5.3 67 88 49 204 108 7 20 42 7 20 204 514 41 39 30 98 114 29 866 60 7.4 75 96 63 233 128 11 21 45 7 21 233 547 52 86 55 108 128 39 1015 149 17.2 84 104 77 264 147 15 21 52 7 23 264 586 71 118 80 112 141 38 1147 132 13.0 85 106 89 279 155 20 21 53 7 24 279 628 93 152 109 114 155 38 1289 142 12.4 17 13 25 55 23 4 6 7 2 13 55 68 34 37 16 30 26 8 (3) 216 5.3 29 26 51 106 64 16 3 15 3 6 106 136
Regional Transmission line build-up (MW)
Himachal Pradesh Punjab Uttaranchal Haryana Arunachal Pradesh Sikkim Rajasthan Uttar Pradesh Bihar Meghalaya Gujarat Madhya Pradesh Chhattisgarh Orissa Maharashtra Tripura Jharkhand West Bengal Mizoram Assam Nagaland Manipur
Total Fuel-wise - Coal (Domestic) - Coal (Imported) - Gas - Hydro - Nuclear - Others Total
Northern Region North-Eastern Region

12, 130
4,420 10,200
[B] GENERATION (BUs)

- Coal (Domestic Linkages) - Coal (Imported, Blending) - Coal (Captive Mines) - Coal (Imported, Coastal) - Gas - Hydro - Nuclear - Others Total Incremental % YoY 60 115 93 22 44 12 482 12.4
2,860 NIL Eastern Region
5,9 00
6,490 Western Region 10,500
[C] FUEL SOURCING

Coal sourcing (m tons)
6,300
Andhra Pradesh Goa Karnataka
CIL / State Mining Companies Captive Mines Import (Blending) - Domestic Eq. Import (Coastal) - Domestic Eq. Total Gas supply (mmscmd)
357 22 13 0 392 35 591 5.0 2.20 632 6.8 6.3 2.95 691 9.3 7.5 3.80 1,319 1,529 -211 -240 -209 -271 739 7.1 9.9 3.89 1,492 6.0 1,764 -272 -319 777 5.1 11.9 6.63 1,704 11.0 2,143 -440 -526
369 25 12 0 407 59 831 6.9 12.2 4.77 1,814 1.0 2,307 -493 -588
369 28 26 12 435 66 856 4.4 8.0 4.14 1,880 2.0 2,445 -565 -669
383 30 32 22 467 67 920 7.5 10.5 4.00 2,139 8.0 2,621 -482 -596
403 66 40 41 550 80 1,012 10.0 4.8 3.50 2,422 5.0 2,756 -334 -459
428 91 54 59 633 94 1,113 10.0 2.4 3.50 2,744 5.0 3,012 -268 -405
455 117 72 80 724 103 1,224 10.0 0.4 3.50 1.9 59 264 6.3
86 89 46 68 317 44 393 9.4 -0.6
[D] BASE DEFICIT

Demand (BUs)
Southern Region
Tamil Nadu Kerala
Growth (% YoY) Base Deficit (%) Merchant Prices (Rs/unit) Revenues Tariff Hike (%) Power Procurement Costs Gross Profit Commercial Losses
[E] SEB FINANCES (Rs B)
2,720
6,3 4, 00 20 0
Transmission Capacity by FY12E Addition expected over FY12E-FY17E
June 2011
Utilities | Just an eclipse ... brighter days ahead
Contents
Page No.
Summary: Just an eclipse ... brighter days ahead ..................................................... 1-4 Euphoria (2007-09) .......................................................................................................... 5-8 Self-correction (2010-11) .............................................................................................. 9-13 Redefining period (2012 onwards) .............................................................................14-39 #1 Gradual but fundamental changes will lead recovery ............................. 14 #2 Fuel scarcity impacts project economics, not power availability ........... 18 #3 Demand growth likely to be robust, per capita availability to improve .... 24 #4 SEB finances: Alarming, but the worst seems to be over ...................... 27 #5 FY12-13 a transitory phase for ST power market .................................. 35 #6 Funding constraints given sectoral caps ............................................... 37 Investment strategy .....................................................................................................39-42 Annexures I to V: Key maps for the sector ...............................................................43-47 Companies ................................................................................................................. 48-129 NTPC ......................................................................................................... 49 Coal India .................................................................................................. 57 Powergrid .................................................................................................. 67 NHPC ........................................................................................................ 74 Tata Power ................................................................................................. 82 Adani Power .............................................................................................. 89 JSW Energy .............................................................................................. 97 Reliance Infrastructure ............................................................................. 103 CESC ...................................................................................................... 109 PTC India ................................................................................................. 115 Lanco Infratech ........................................................................................ 120
Stock prices and indices as on 30 May 2011. All tables and charts sources: CEA, CERC, Ministry of Power, Ministry of Coal, RBI, companies and MOSL
Utilities
Just an eclipse ... brighter days ahead
Expect gradual recovery from 2012; prefer CPSUs
The euphoria in the Indian power sector (2007-09) has now led to selfcorrection (2010-11). Investment plans are facing multiple execution challenges, affecting project economics and cash flows. We believe the next five years, beginning 2012, will be a redefining period for the sector. Over time, we believe the sector will regain its lost reputation of steady long-term growth with reasonable returns. CPSUs are our preferred sectoral theme, given acceleration in their earnings growth and valuations at historic lows. We are Neutral on private IPPs. Lanco Infratech, CESC and PTC India are our top mid-cap picks.
Euphoria (2007-09): Fresh wave of private investments

The Electricity Act 2003 brought revolutionary changes to the power sector, including de-licensing of generation, opening of short-term power markets, enabling open access and power procurement through competitive bidding. During 2007 and 2008, base deficits were at historic highs of 12% due to strong demand growth coupled with delays in capacity additions. Then, in 2009, the General Elections led to further buoyancy in demand for power. As a result, short-term prices hit new highs, and merchant power projects were expected to generate super-normal returns. Thus, 2007-09 was a period of euphoria; perceived robust business dynamics and supportive equity markets combined to fuel a fresh wave of private investment in the sector: (1) Jindal Power commissioned a 1GW plant, the first merchant IPP project; (2) Reliance Power floated an initial public offer, the first large IPO from a private IPP; (3) Coal mines were allocated to private IPPs (peak production capacity of 350mt).
Self-correction (2010-11): Project economics hit; survival of the fittest

Euphoric investment plans are now facing ground realities. Several challenges have significantly affected project economics: (i) deterioration in SEB finances have lowered power demand, (ii) low demand coupled with accelerated capacity addition has hit merchant profitability, (iii) physical constraints are slowing project execution (land acquisition, regulatory clearances, fuel availability, etc) and (iv) raising funds has become critical due to tight bank finance and lack of investor appetite. Such factors have pushed the sector to "self correction". Capacity addition plans have slowed and the focus is on execution. We believe only the fittest will survive, and there will be several M&A opportunities.
Redefining period (2012 onwards): Gradual but fundamental changes will lead recovery
We believe the next five years beginning 2012 will be a redefining period for the sector. Although constraints and challenges exist, many have been magnified; and gradual but fundamental changes are being ignored: 1. Capacity addition pace is accelerating: We expect capacity addition of over 100GW over FY12-16, an annual run rate of ~25GW, a meaningful acceleration.
June 2011
2. Fuel scarcity impacts project economics, but generation growth to accelerate: Given 100GW capacity addition, by FY15-16, we see a 60% increase in power generation despite fuel availability constraints. This is possible as coast-based projects, run on imported and captive coal, contribute 41% to incremental generation. Our estimates factor in blending at just 12% in FY15. 3. SEB losses - alarming, but worst seems to be over: A key concern is the financial health of SEBs. However, almost all the cash losses of Rs206b incurred in FY09 were driven by a ~Rs198b YoY increase in the short-term market size. This sudden spurt came as a shock, and the system would take time to transition to the new reality. Between then and FY11, the market size stagnated despite a 60% volume increase. We believe the worst is over in FY11, and going forward, SEB finances will gradually improve due to (1) increased power availability from long-term contracts, (2) tariff hikes and (3) lower T&D losses. 4. Short-term power prices to correct, but still remain viable: We expect a ~3x increase in short-term power volumes by FY13. We further believe merchant power may not remain a viable option for base load demand, given transmission constraints. Thus, we expect merchant prices to correct to Rs3.5/unit in FY13 (v/s Rs4.1/unit in FY11). Still, they will continue to be at levels that allow break-even for projects even in the highest cost quartile (i.e. imported coal based, ~500km from the coast). A V-shaped recovery looks unlikely, but over time, we believe the sector will regain its lost reputation of steady long-term growth with reasonable returns.
Investment strategy: Prefer CPSUs; neutral on private IPPs; Lanco, CESC, PTC India top mid-cap picks
The BSE Power Sector Index corrected 18% over the past 18 months (relative underperformance of 26%) given headwinds impacting project economics. The current phase of self-correction is marked by significant challenges of execution; which we believe will lead to M&As, especially of new IPPs. Given this backdrop, we recommend an investment strategy which focuses on the "essentials", namely, (1) upfront capacity addition, (2) relatively secure fuel supply, (3) dynamic PPA structure (with cost escalation) and low dependence on the merchant market, and (4) strong balance sheet/cash flow and earnings visibility. CPSUs are our preferred sectoral theme, given acceleration in their earnings growth and valuations at historic lows. NTPC, Powergrid and Coal India are our top picks. We are Neutral on private IPPs. After their recent underperformance, further meaningful downsides may well be limited. However, re-rating is contingent on improvement in operational and financial parameters. Among mid-caps, we prefer Lanco Infratech, CESC and PTC India given improvement in their business fundamentals and valuation comfort.
June 2011
Comparative valuation
Company Recom MCap CMP Target (USD b) (Rs) Price 229 125 447 27 1,272 109 74 55 879 439 127 Upside EPS (Rs) (%) FY12 FY13 31.6 26.5 13.2 9.0 3.7 -4.4 6.6 65.9 47.5 59.3 56.6 11.7 6.6 22.1 1.6 110.1 11.5 6.9 2.5 44.3 38.8 8.4 14.0 7.6 27.7 1.9 102.2 13.6 6.7 3.5 53.7 39.6 10.8 EPS Gr. (%) FY12 FY13 21.5 20.2 27.9 10.6 40.0 388.7 41.6 34.5 11.3 2.8 47.2 19.1 15.0 25.2 19.1 -7.1 18.4 -3.2 40.0 19.8 2.0 28.4 RoE (%) FY12 FY13 13.7 13.6 26.3* 6.5 9.0 34.1 18.9 19.7 6.8 12.2 6.2 15.1 14.2 26.2* 7.5 7.2 30.8 15.9 19.2 7.7 11.2 7.0 P/BV (x) FY12 FY13 2.0 2.0 5.8 1.1 2.3 3.0 1.8 1.5 0.8 0.9 1.0 1.8 1.8 4.6 1.0 2.2 2.3 1.5 1.3 0.8 0.8 1.0 P/E (x) FY12 FY13 15.0 15.4 17.8 15.4 11.0 9.9 10.1 13.1 12.4 7.1 9.7 12.6 13.4 14.3 12.9 11.8 8.4 10.4 9.3 10.3 7.0 7.5
CPSUs NTPC Buy 30.7 174 PGCIL Buy 10.2 99 Coal India Buy 55.4 395 NHPC Neutral 6.7 25 Private Sector Tata Power Neutral 6.4 1,227 Adani Power Neutral 5.5 114 JSW Energy Neutral 2.5 69 Lanco Infra Buy 1.8 33 Reliance Infra Buy 3.3 596 CESC Buy 0.8 276 PTC Buy 0.5 81 * Adjusted for OB reserves provisions
CPSU's Earnings Yield and Bond Yield Comparison (%)

NTPC earnings yield 10.0 PGCIL earnings yield Bond yield
Gap between CPSU's earnings yield and 10 year bond yield has narrowed down to 100bp; vs 400bp in 2007. This provides significant downside protection, and acceleration in earnings growth till FY13 will drive outperformance.
8.0
6.0 4.0
2.0 Oct-07 Oct-08 Oct-09 Dec-07 Dec-08 Dec-09 Oct-10 Dec-10 Feb-08 Jun-08 Feb-09 Jun-09 Feb-10 Jun-10 Feb-11
FY12E
Apr-08
Apr-09
Apr-10
Aug-08
Aug-09
CPSUs' recent underperformance is likely to be reversed led by revival in earnings growth

NTPC Pow er Grid Underperformance of Outperformance of CPSUs, driven CPSUs, led by poor 240 by strong earnings growth in earnings growth in FY05-08: CAGR of 19% FY09-11: CAGR of 5% 180 Sensex NHPC
CPSU's Earnings Grow th (%) 27.0
Prem/ Disc to Sensex PER 44.3 21.5
Aug-10
17.9 8.9 8.0 8.9 13.8 9.7 6.5 -5.9 -1.9 -1.9 FY11E FY08 FY09 FY10 0.2 4.7 11.4
120 60 0 Jan-07 Jan-08 Jan-09 Jan-10 May-06 May-07 May-08 May-09 May-10 Jan-11 May-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
FY13E
FY05
FY06
FY07
Apr-11
19.1
June 2011
Indian Power Sector: Operational Matrix

FY05 [A] INSTALLED CAPACITY (GW) Ownership-wise - Central 39 - State 66 - Private 14 Total 118 Fuel-wise - Coal (Domestic) 68 - Coal (Imported) 0 - Gas 12 - Hydro 31 - Nuclear 3 - Others 5 Total 118 [B] GENERATION (BUs) - Coal (Domestic Linkages) 424 - Coal (Imported, Blending) - Coal (Captive Mines) - Coal (Imported, Coastal) - Gas 62 - Hydro 85 - Nuclear 17 - Others 3 Total 590 Incremental % YoY [C] FUEL SOURCING Coal sourcing (m tons) CIL / State Mining Companies Captive Mines Import (Blending) - Domestic Eq. Import (Coastal) - Domestic Eq. Total Gas supply (mmscmd) [D] BASE DEFICIT Demand (BUs) 591 Growth (% YoY) Base Deficit (%) 5.0 Merchant Prices (Rs/unit) 2.20 [E] SEB FINANCES (Rs B) Revenues Tariff Hike (%) Power Procurement Costs Gross Profit Commercial Losses -240 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E Growth (%) FY15E FY05-11 FY11-15E
40 68 17 124 69 0 13 32 3 7 124 435 61 99 17 2 615 25 4.3
45 70 18 132 71 0 14 35 4 9 132 462 0 64 114 19 3 661 46 7.4
48 73 22 143 76 0 15 36 4 12 143 490 69 123 17 699 38 5.8
49 74 25 148 77 0 15 37 4 14 148 473 17 28 73 113 15 719 19 2.8
51 77 32 159 83 2 17 37 5 17 159 495 16 33 97 107 19 766 47 6.6
55 79 38 173 91 4 18 38 5 18 173 493 34 37 16 91 111 25 806 41 5.3
67 88 49 204 108 7 20 42 7 20 204 514 41 39 30 98 114 29 866 60 7.4
75 96 63 233 128 11 21 45 7 21 233 547 52 86 55 108 128 39 1,015 149 17.2
84 104 77 264 147 15 21 52 7 23 264 586 71 118 80 112 141 38 1,147 132 13.0
85 106 89 279 155 20 21 53 7 24 279 628 93 152 109 114 155 38 1,289 142 12.4
17 13 25 55 23 4 6 7 2 13 55 68 34 37 16 30 26 8 (3) 216 5.3
29 26 51 106 64 16 3 15 3 6 106 136 60 115 93 22 44 12 482 12.4
357 22 13 0 392 35 632 6.8 6.3 2.95 691 9.3 7.5 3.80 1,319 1,529 -211 -271 739 7.1 9.9 3.89 1,492 6.0 1,764 -272 -319 777 5.1 11.9 6.63 1,704 11.0 2,143 -440 -526
369 25 12 0 407 59 831 6.9 12.2 4.77 1,814 1.0 2,307 -493 -588
369 28 26 12 435 66 856 4.4 8.0 4.14 1,880 2.0 2,445 -565 -669
383 30 32 22 467 67 920 7.5 10.5 4.00 2,139 8.0 2,621 -482 -596
403 66 40 41 550 80 1,012 10.0 4.8 3.50 2,422 5.0 2,756 -334 -459
428 91 54 59 633 94 1,113 10.0 2.4 3.50 2,744 5.0 3,012 -268 -405
455 117 72 80 724 103 1,224 10.0 0.4 3.50
59 264 6.3 1.9
86 89 46 68 317 44 393 9.4 -0.6
-209
June 2011
Euphoria (2007-09)
Several events act as tipping points, fuelling a fresh wave of private investments
The Electricity Act 2003 brought revolutionary changes to the power sector, including delicensing of generation, opening of short-term power markets, enabling open access and power procurement through competitive bidding. During 2007 and 2008, base deficits were at historic highs of 12% due to strong demand growth coupled with delays in capacity additions. Then, in 2009, the General Elections led to further buoyancy in demand for power. As a result, short-term prices hit new highs, and merchant power projects were expected to generate super-normal returns. Thus, 2007-09 was a period of euphoria; perceived robust business dynamics and supportive equity markets combined to fuel a fresh wave of private investment in the sector: (1)Jindal Power commissioned a 1GW plant, the first merchant IPP project; (2) Reliance Power floated an initial public offer, the first large IPO from a private IPP; (3) Coal mines were allocated to private IPPs (peak production capacity of 350mt).
#1 Demand ahead of supply leads to record high base deficits
The average capacity addition from the Seventh Plan (1985-89) until the Tenth Plan (2003-07) was largely similar at 16-21GW every five years; resulting in underinvestment. The actual achievement was 48-54% of the plans, impacting power availability. The gap between power availability and requirement widened meaningfully after 2005 and over FY05-10, power requirement CAGR of 5.6% was higher than generation growth (availability) of 4.5%, widening the demand-supply gap. Low supply (drought in FY09 impacted hydro generation) and high demand (General Elections in 2009), accentuated power shortages. The base deficit increased to 12% in FY08 since 1989 and sustained at higher levels. This led to a perception of continued robust business dynamics. After 2005 the demand-supply gap widened
CAGR (%) Requirement FY81-01 FY01-05 FY05-10 7.9 3.1 5.6 Availability 8.3 3.5 4.2
Capacity addition was stagnant since

the Seventh Plan (FY85-90)
Capacity Planned (GW) % Achieved 85 64 64 49 54 48 82 72 52 Capacity Added (GW) 96
507
523
546
559
591
632
691
739
777 666 FY09 684
< < >
Requirement (BUs) Availability (BUs) 831 FY10 729
First 1951-56
Second 1956-61
Third 1961-66
Fourth 1969-74
Fifth 1974-79
Sixth 1980-85
Seventh 1985-90
Eighth 1992-97
Ninth 1997-02
Tenth 2002-07
FY81
120 104
FY91
268 247
12 10
20 14
22 21
31 16
40 19
41 21
1 1
4 2
7 5
9 5
FY01
472
FY02
483
FY03
503
FY04
535
FY05
562
FY06
592
FY07
639
FY08
June 2011
Drought and General Elections accentuate the impact

of power shortage in FY09 (% of normal rainfall)
Actual Rainfall Actual Rainfall
Central government election also in FY09
Base deficit moves up, a result of the demand-supply

mismatch (%)
8.1
79
77
7.6 7.7 7.7 6.9 8.3 7.3 7.1 9.2
87
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
#2 ST prices at new highs, "merchant" model = "super normal" returns
Between FY08 and mid-FY10, short term prices were over Rs5/unit, enforcing a belief in the merchant business model and sustained superior profitability. Power shortages led to 'high' profitability. The ST trading market expanded, partly mandated by "political will" and trading as a percentage of generation nearly doubled from 4.8% in FY07 to 10.1% in FY11. The ST trading market size increased more than 7x over FY04-09, driven mainly by price increases, and FY09 was the inflexion point (being an election year). RoEs in the power chain were robust and companies with 'first mover' advantage were key beneficiaries. This was a tipping point, attracting new investment from the private sector.
Sustained high short-term power prices (Rs/unit)

Rs5 was the base in 2008
16.0
2010
ST trading as a percentage of generation over FY08-10

Trading (BUs) % of net generation 7.7 9.1
12.0
0.0 Mar-09 May-09 Nov-08 Sep-08 Nov-09 Sep-09 Mar-10 Jul-08 Jul-09 Jan-09 Jan-10
FY04
20.6
FY05
23.1
FY06
27.4
FY07
30.6
FY08
39.3
4.0
FY09
52.9
3.9
4.1
FY10
66.6
8.0
FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
5.9 6.2
4.6
4.8
7.8 7.5 8.8 7.1 7.3 8.4 9.6
92
93
102
99
99
105
98
102
5.9
12.0 11.0 9.7
11.5
June 2011
"Political will" supports the short term market size,

which grows to new highs
Mkt size (Rs b) ST price (Rs/unit) 6.6
Attractive merchant project RoEs lure new players

(RoE %)
320 JSW Energy (260MW Karnataka) Jindal Pow er (1000MW Tanmar) 240
4.8 3.8 3.0 2.1 2.2 153.1

0
3.9
160
350.6
317.8
80
42.4 FY04
50.8 FY05
81.0 FY06
116.4
FY07
FY08
FY09
FY10
FY05
FY06
FY07
FY08
FY09
FY10
#3 "Euphoric" scenario evinces high private IPP interest, equity markets

support it
Robust ST market prices and "perceived" superior profitability fuelled fresh capacity additions. Excluding NTPC, IPPs with installed capacity of ~5GW planned to commission over 48GW capacity. BHEL's order intake increased ~4x to 16GW a year over FY08-10 against less than 4GW in FY06. Chinese players entered the market and we understand that the order award in the system probably increased to 25-30GW a year over FY08-10. Growth plans of several private sector IPPs were supported by equity market issuances. In FY10 the power sector raised Rs263b, or 2x the amount raised in FY08. Captive coal block allocations to the private sector supported/escalated momentum in capacity addition.
Rush for capacity addition: Installed capacity v/s plans

(MW) NTPC Tata Power CESC GMR Infra JPVL Lanco Infratech JSW Energy GVK Power Adani Power Indiabulls Power Rpower Jindal Power Sterlite Esaar Energy Total Total Ex NTPC Installed Cap FY07 27,404 2,306 975 823 700 488 260 216 33,172 5,768 Cap. Addition FY08-14E 20,960 5,300 850 3,000 1,500 5,408 3,150 870 7,920 4,020 6,420 4,720 4,380 2,600 69,598 48,638
BHEL order intake rises significantly, inflection

point FY07-09
GW Rs b 605 472 411 277 15 109 3 FY06 FY07 FY08 FY09 FY10 FY11E 9 17
420 16
15
June 2011
Equity markets supportive, fund raisings support

growth plans
Securitization GDR/ADR FCCB Pre IPO /IPO/FPO QIP / PE Rs133.3b 184.1 121.6 Rs13.0b 13.0 FY08 FY09 FY10 Rs263.1b
Coal mine allocations at peak, aiding capacity

addition euphoria (Nos)
163 129
58 23 4 1993 2 1994 2 1995 2 1996 0 1997 10 1998 0 1999 0 2000 7 2001 2 2002 7 2003 2004 2005 2006 2007 2008
Aug-10
Oct-10
32
42
#4 Valuations at record highs...

Reliance Power (Mkt Cap, Rs b)
1,200
Lanco Infratech (Mkt Cap, Rs b)

200
900
150
600
100
Current
300
Current
50
0 Feb-10 Dec-08 Dec-09 Feb-09 Feb-08 Oct-08 Jun-08 Oct-09 Jun-09 Oct-10 Jun-10 Aug-09 Aug-08 Aug-10 Apr-08 Apr-09 Apr-10
0 Jun-10 Dec-08 Aug-09 Dec-09 Feb-08 Feb-09 Feb-10 Jun-09 Jun-08 Oct-08 Oct-09 Aug-08 Apr-08 Apr-09 Apr-10 Oct-10
Adani Power (Mkt Cap, Rs b)

340
JSW Energy (Mkt Cap, Rs b)

250
300
220
260
Current
190
220
160
Current
180 Oct-09 Feb-10 May-10 Nov-09 Dec-09 Mar-10 Jan-10 Jun-10 Oct-10 Jul-10 Sep-09 Sep-10 Aug-09 Aug-10 Apr-10
130 Jan-10 Feb-10 Jun-10 May-10 Mar-10 Jul-10 Aug-10 Sep-10 Apr-10
2009
June 2011
Self-correction (2010-11)
Constraints hit project economics; survival of the fittest
Euphoric investment plans are now facing ground realities. Several challenges have significantly affected project economics: (i) deterioration in SEB finances have lowered power demand, (ii) low demand coupled with accelerated capacity addition has hit merchant profitability, (iii) physical constraints are slowing project execution (land acquisition, regulatory clearances, fuel availability, etc) and (iv) raising funds has become critical due to tight bank finance and lack of investor appetite. Such factors have pushed the sector to "self correction". Capacity addition plans have slowed and the focus is on execution. We believe only the fittest will survive, and there will be several M&A opportunities.
#1 Deterioration in SEB finances impact power demand; blackouts,

low PLFs co-exist
SEBs' commercial losses reached an all-time high of Rs526b in FY09. Costs increased due to "mandated" power procurement, high staff costs (Sixth Pay Commission) and tariff increases were marginal. More important, commercial cash losses rose as the system took time to transition to the new reality. State governments' subsidy payments were lower than provided for, resulting in higher cash losses on a revenue realized basis. The deterioration in SEB finances impacted buying ability and in turn, power demand. Blackouts and lower PLFs now co-exist. Base deficit declined to 8.5% in FY11 from 11% in FY09 due to lower demand (impact of SEB finances) and increased supply (better monsoons). ...cash losses (on subsidy received basis) at unsustainable
levels (Rs b)
-526
SEB finances deteriorate (Rs b), and...

-580
Improvement over FY02-04 led by reforms after the implementation of The Electricity Act, 2003
14.5
21.5
32.3
22.5
-460
(18.6)
-319 -271 -240 -212 -197 -209
(27.8)
-340
-293
(107.5)
-220
-100 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
(212.6) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09
June 2011
Power demand curve declines/remains flat (BUs):

lower demand (impact of SEB finances) and increased supply (better monsoons)
Pow er demand Grow th (% YoY) 16 73 73 69 64 69 70 65 76 75 75 71 70 71 68 74 64 71 76 70 80 4 28
FY11 demand growth lowest in the past five years
In the past 15 years electricity demand growth has been below 5% for only four years. In FY11 it was 4.4%, lowest in the past five years
Pow er Demand (BUs) Gr (%)
10.6 7.6 6.1 5.2 2.7 447 480 5.6 3.0 507 523 4.5 2.4 546 559 591 5.7 6.1 628
10.4 6.0 6.7 4.4 5.5 693 731 774 826 FY10
8.5 FY11
64 61 64 62 63 60 64 62 60 64 61 64 66 60 67 65 68 66 68
-8
390 413
425
-20 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
#2 Accelerated capacity addition, low demand hits merchant profitability
Capacity addition picked up from 2-4GW in 2009 to ~12GW (based on a trailing 12 months) leading to improved power availability. Base/peak deficit contracts to earlier levels as generation picks up and demand for high cost power/one-off demand (led by drought, the elections) tapers off. SEB aversion to high cost ST power and improved availability led to merchant power price correction (~50% from historic highs of Rs8-9/unit). ST market trading size declined significantly given a decline in ST prices and even a sharp price correction did not lead to increased volumes. ...and lower demand leads to improved base/peak
deficit scenario (%)
12 12 12 11
Base Deficit (%) Peak Deficit (%)
Increased capacity addition (ttm, GW)...
8 8 8 8 8
6 6
7 7 7 7 7
9 9 9 9 9 9 9 10 10
4 4
16.6 13.5 12.9 13.8 12.0 13.3 10.3 9.7 FY10
3 3
Jan-11
May-10
Mar-10
May-09
Nov-09
May-08
Nov-08
Sep-08
Sep-09
Nov-10
Mar-09
Sep-10
Mar-11
Jan-09
Jan-10
Jul-08
Jul-09
Jul-10
7.3 FY05
8.4 FY06
9.6 FY07
9.2 FY08
11.0 FY09
June 2011
FY11
862
10
Short term prices taper off (Rs/unit)

Bi-lateral prices 12.0 9.0 6.0 3.0 0.0 7.2 7.8 Nov-08 8.0 7.9 Jan-09 7.2 6.6 Mar-09 7.4 7.2 May-09 6.8 4.8 Jul-09 4.8 4.6 Sep-09 4.7 5.1 Nov-09 5.3 5.0 Jan-10 5.3 5.1 Mar-10 4.9 5.7 May-10 6.2 5.6 Jul-10 5.0 4.9 Sep-10 4.7 4.0 Nov-10 3.9 4.0 Jan-11 4.0 4.2 Mar-11 4.7 UI prices Exchange price
Short term market size declines (Rs b)

Trading mkt size (Rs B) (LHS) Trading as a % of generation (RHS) Wtd. Avg. Price (Rs/unit) (LHS)
40 30 20 10 0 Nov-08 Jan-09
16 12 8 4 0
Sep-08
May-09
Mar-09
Jul-09
Nov-09
Jan-10
May-10
Mar-10
Jul-10
Nov-10
Jan-11
Sep-09
#3 Physical constraints: A self correcting mechanism
Projects were delayed due to issues such as local protests, the lack of environment and forest clearances as large capacity addition strained the system/resources. Equipment supply issues, clearances and issues related to Chinese visas impacted many projects, in terms of time and costs. This is a function of excessive strain on limited resources and the delays impacted project cash flows. Fuel supply emerged as a challenging issue, as evacuation bottlenecks led to increased inventory for Coal India (up ~3x in the past four years). Environmental issues impacted production growth (FY11 production flat). These factors led to several newly commissioned projects operating at sub-optimal PLFs.
Project progress impacted/delayed due to adherence to environment norms (indicative list)

Company Adani Power Uttarakhand Jal Vidyut Nigam Uttarakhand Jal Vidyut Nigam Essar Power AES IFFCO Wardha Power Company Jindal Power Nagarjuna Construction NTPC Sterlite Energy Project Impacted 1980MW Tiroda, Maharashtra 480MW, Pala Maneri 381MW, Bhaironghati 1200MW, Mahan 1, Madhya Pradesh 1200MW, Chhattisgarh 1320MW, Chhattisgarh 1800MW, Chhattisgarh 2400MW, Chhattisgarh 1320MW, Andhra Pradesh 600MW, Loharinag Pala, Uttarakhand 600MW, Jharsuguda Remarks Withdrawal of TOR for mining in Lohara block, due to proximity to tiger reserve Scrapped by Environment Ministry, due to religious sentiment Scrapped by Environment Ministry, due to religious sentiment To source coal from Mahan coal block in Madhya Pradesh, now declared No Go area Sayang coal block allotted, could not obtain forest clearance Put on hold by MoEF, due to non availability of coal linkage Morga II coal block in Chhatisgarh could not obtain forest clearance Revoked TOR claiming that work started without obtaining clearances, later restored Suspension of environment clerance due to local protests Group of Ministers cancelled the project; NTPC invested Rs6b in project Operations initially suspended temporarily due to local agitation due to fly ash emissions, now operational
Sep-10
Mar-11
June 2011
11
Time and cost overruns have been substantial, impacting project cashflows
Project delays
Capacity Schedule CoD/ (MW) Expected CoD Apr-09 Feb-10 Sep-10 Nov-10 Jun-09 Aug-09 Nov-09 Feb-10 Jan-10 Apr-10 Sep-09 Oct-09 Dec-09 Oct-10 May-08 Nov-08 Feb-10 Apr-10 Jul-10 Dec-09 Mar-10 Sep-10 Apr-12 Jan-11 Feb-11 Jun-12 Sep-09 May-10 Nov-10 Jan-11 Sep-10 Dec-10 Nov-09 Oct-10 May-11 Dec-11 Jun-09 Mar-10 Dec-10 Sep-11 Jan-12 Mar-10 Jun-10 Jan-13 Delays (month)
Cost increase (Rs m)

Actual Cost NTPC Koldam Korba-III Farakka-III Barh - I Adani Power - Mundra Phase 4 - Kawai Project JSW Energy - Ratnagiri project - Rajwest project Lanco Infratech - Amarkantak Unit 1 - Amarkantak Unit 2 - Udupi 45,272 24,485 25,704 86,930 89,600 66,000 45,000 50,000 13,150 13,150 21,712 Revised Cost 53,401 26,773 28,828 95,677 105,360 70,300 56,500 60,850 15,000 15,000 23,000 % Increase 18.0 9.3 12.2 10.1 17.6 6.5 25.6 21.7 14.1 14.1 5.9
NTPC Koldam Korba-III Farakka-III Barh - I Adani Power - Mundra Unit 1 - Mundra Unit 2 - Mundra Unit 3 - Mundra Unit 4 JSW Energy - Ratnagiri Unit-1 - Ratnagiri Unit-2 - Rajwest Unit-1 - Rajwest Unit-2 - Rajwest Unit-3 - Rajwest Project Lanco Infratech - Amarkantak Unit 1 - Amarkantak Unit 2 - Udupi Unit 1 Reliance Power Butibori Unit-I Butibori Unit-II Rosa Unit-I Rosa Unit-II Sasan Unit-I
800 500 500 660 330 330 330 330 600 600 135 135 135 1350 300 300 600 300 300 300 300 660
37 11 5 19 3 9 12 11 8 9 2 11 16 15 13 16 10 17 18 3 3 28
Fuel: Availability, logistics equally challenging

a) Coal India: Production trend (m tons and % YoY) FY11 growth rates down meaningfully
500 Production (m ton) Grow th (% YoY) 9
b) Newly commissioned coal based projects PLF (%) constrained

* JSW Rajw est Sterlite Jharsuguda Lanco Amarkantak
R Pow er Rosa KSK Wardha
100
400 6
75
300 3
50 25 0 Jan-10 Nov-09 May-10 Nov-10 Mar-10 Jan-11 Jul-10 Mar-11 May-11 Sep-09 Sep-10
200 261 256 259 267 280 291 306 324 342 360 378 403 430 431 FY11
100
-3
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
* Though Raj West project was not operating due to technical reasons, the tapering linkages too were not available
June 2011
12
#4 Fund availability critical, M&A opportunities increase
Financial institutions' debt sanctions were impacted by increased concerns over asset quality and project economics. The cumulative exposure of banks and FIs to the power sector was over Rs4.5t. Structured transactions are being increasingly used to raise funds, especially since 2009, as equity markets have been less supportive. Valuations corrected by 40-50% from their peaks in July 2010. M&A activity started as several players face execution and funding constraints. We expect the trend to accelerate, going forward.
PFC/REC debt sanctions slow (Rs b)

PFC REC 94.6 Grow th (% YoY)
Increased fund raising through PE transactions (Rs m)

Company GMR Kamalganga Energy Ind-Barath Power Essar Power Adhunik Power GMR Energy Monnet Power Bhilwara Energy Avantha Power GVK Power Asian Genco Investment 2,270 7,150 3,500 2,500 13,950 2,750 2,300 2,170 15,000 18,000 Year 2009 FY08/FY10 2009 2009 2010 2010 2010 2010 2010 2010
44.8 18.3 286 163 186 FY05 188 225 FY06 311 FY07
468 407
454 13.3 -15.9
439
-4.5 655 FY10 619 FY11
695 FY08
570 FY09
Valuations correct (%)

Reliance Pow er Adani Pow er Indiabulls Pow er Lanco Infratech JSW Energy
M&As: Increasing consolidation, we expect the trend

to accelerate
Project/Acquiree Chandrapur (Dhariwal Infra) Warora (EMCO) Navbharat Power Krishnapatnam (Nelcast Energy) Acquirer CESC GMR Infra Essar Energy Nagarjuna Construction Acquisition Cost (Rs m) 3,000 1,274 1,690 1,500 Capacity (MW) 600 600 1,050 1,320
125 105 85 65 45
Oct-10 Nov-10
Nov-10
Dec-10
Dec-10 Jan-11
Feb-11 Mar-11
Mar-11
Feb-11
Jul-10
Jul-10
Apr-11 May-11
Aug-10 Sep-10
Aug-10
Sep-10
June 2011
13
Redefining period (2012 onwards)

Gradual but fundamental changes will lead recovery
We believe the next five years beginning 2012 will be a redefining period for the sector. Although constraints and challenges exist, many have been magnified; and gradual but fundamental changes are being ignored. A V-shaped recovery looks unlikely, but over time, we believe the sector will regain its lost reputation of steady long-term growth with reasonable returns.
1. Capacity addition pace is accelerating: We expect capacity addition of over 100GW over FY12-16, an annual run rate of ~25GW, a meaningful acceleration. 2. Fuel scarcity impacts project economics, but generation growth to accelerate: Given 100GW capacity addition, by FY15-16, we see a 60% increase in power generation despite fuel availability constraints. This is possible as coast-based projects, run on imported and captive coal, contribute 41% to incremental generation. Our estimates factor in blending at just 12% in FY15. 3. SEB losses - alarming, but worst seems to be over: A key concern is the financial health of SEBs. However, almost all the cash losses of Rs206b incurred in FY09 were driven by a ~Rs198b YoY increase in the short-term market size. This sudden spurt came as a shock, and the system would take time to transition to the new reality. Between then and FY11, the market size stagnated despite a 60% volume increase. We believe the worst is over in FY11, and going forward, SEB finances will gradually improve due to (1) increased power availability from long-term contracts, (2) tariff hikes and (3) lower T&D losses. 4. Short-term power prices to correct, but still remain viable: We expect a ~3x increase in short-term power volumes by FY13. We further believe merchant power may not remain a viable option for base load demand, given transmission constraints. Thus, we expect merchant prices to correct to Rs3.5/unit in FY13 (v/s Rs4.1/unit in FY11). Still, they will continue to be at levels that allow break-even for projects even in the highest cost quartile (i.e. imported coal based, ~500km from the coast).
#1 Capacity addition: Pace to accelerate, M&A possibilities exist

Capacity addition over FY83-06 has been largely stagnant, at 3-5GW a year. FY07 was an inflexion point, when capacity addition increased to 8GW a year. In the first four years of 11th Plan (FY08-FY11) power capacity addition stood at 34.4GW and average of 9GW per annum. We expect capacity addition of over 100GW over FY12-16E, entailing an annual run rate of ~25GW a year (a meaningful acceleration). There is reasonable confidence about near term capacity additions (until FY15-16), largely driven by CPSUs/state gencos (56GW) and established/emerging private sector utilities (44GW). Many of the capacities have been under construction since FY10 and achieved critical milestones. Several new IPPs have entered the power generation sector with generation capacity portfolio under construction of 30-40GW and much of these capacities are set to be commissioned by FY15. The project pipeline from established utilities looks robust, with ~100GW of projects in various stages of development and planning. Given sector headwinds and our back-tobasics approach, we prefer companies with upfront capacity additions. We believe there are M&A opportunities as several projects (particularly with new IPPs) face funding and fuel scarcity risks, impacting project execution. Companies with robust operating cash flows are at an advantage.
June 2011 14
1.1 Reasonable visibility on accelerated near term capacity additions
We expect installed capacity addition to reach over 270GW by FY15-16 (v/s 173GW in March 2011), based on projects that have been under construction since FY10. Capacity addition is expected to accelerate to 20-25GW a year over FY12-15. Over FY12-15, we expect capacity addition of ~100GW. Of this, CPSUs and state gencos are expected to contribute 56GW and the rest will be from established and emerging private sector utilities. This provides strong visibility of accelerated capacity addition in the interim.
Capacity addition set to accelerate (GW)*

320
CAGR 15%
240
CAGR 8% CAGR 5%
0 2011E 2011 2013E 2015E 2017E 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
* including renewables
15
18
28
FY07 an inflexion point with acceleration in capacity addition (GW)*

40 32 24 16 8 0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E
* including renewables Capacity addition over FY83-06 has largely been stagnant at 3-5GW a year but it reaches ~9GW a year from thereon
43
80 CAGR 5%
CAGR 12%
64
CAGR 11%
81
CAGR 10%
CAGR 6%
98
118
160
CAGR 5%
173
289
June 2011
15
Improved visibility of capacity addition until FY15-16; increased contribution

from emerging utilities expected from FY13 (MW)
FY08 Established Utilities - CPSUs / NTPC 1,740 NHPC 510 SJVN NPCIL 220 NLC DVC 250 Others 520 State Gencos 5,273 Total (A) 8,513 Established Utilities - Private CESC Lanco Infratech Tata Power Adani Power Jindal Power 750 JSW Energy Total (B) 750 Emerging Utilities - Private GVK GMR Essar Energy Indiabulls Power Jaiprakash Power Reliance Power Sterlite Energy Other Utilities Total (C) Total (A+B+C) 9,263 Pvt Sector (% of total) 8.1 FY09 FY10 FY11 2,490 120 220 250 1,000 200 2,759 7,039 733 1,320 735 2,788 300 1,200 428 2,333 12,160 42.1 FY12E 3,660 1,372 2,500 500 3,200 200 8,315 19,747 1,870 1,850 1,980 1,410 7,110 1,000 1,236 2,236 29,093 32.1 FY13E 3,930 1,800 500 500 1,326 7,843 15,899 500 1,600 2,640 4,740 870 1,350 500 2,580 1,200 1,205 7,705 28,344 43.9 FY14E 6,260 2,045 412 500 110 7,954 17,281 1,600 1,200 2,800 1,050 2,600 1,350 2,780 1,334 9,114 29,195 40.8 FY15E 551 2,353 2,904 1,200 1,200 Total 20,621 5,847 412 3,380 1,750 5,450 2,356 39,436 79,252 250 3,936 5,300 6,600 3,400 2,880 22,366 State Gencos 750 1,240 440 500 1,821 3,118 2,571 5,298 250 250 500 383 383 3,454 25.6 250 833 660 735 2,478 300 1,509 1,809 9,585 44.7
870 300 1,350 1,800 4,400 2,700 1,320 2,820 3,200 9,160 2,400 3,024 9,524 9,644 33,224 13,748 134,842 78.9 41.2
Highest capacity addition Second highest capacity addition Third highest capacity addition
1.2 Established players' pipeline strong, consolidation inevitable
Established and emerging utilities have a robust portfolio of projects in the development/ planning stage, which could contribute meaningfully to capacity addition beyond FY15. Several new IPPs have entered the power generation sector and many of their projects are slated for commissioning from FY15. Many of these companies are new entrants and are building expertise. Given sector headwinds and our back-to-basics approach, we prefer companies with upfront capacity additions. We believe there are possibilities for M&A opportunities as several projects with new IPPs face funding and fuel scarcity risks. Companies with robust operating cashflows can take advantage of the emerging scenario and build project pipelines.
June 2011
16
Development pipeline strong from established utilities (MW)

Company Capacity (FY11) Addition FY12-15 Under Development/ Planned 33,872 330 3,588 5,295 5,985 5,738 7,260 10,280 7,980 570 690 7,840 6,600 22,040 Total
Established utilities - CPSUs NTPC NHPC SJVN Established utilities - Private Tata Power CESC Lanco Infratech Adani Power Jindal Power JSW Energy Emerging Utilities - Private GMR Infra GVK Power JPVL Indiabulls Power Reliance Power Sterlite
34,194 5,287 1,500 3,195 1,225 2,074 1,980 1,000 1,730 823 911 700 600 1,200
15,740 4,176 412 7,453 1,200 5,162 7,260 4,380 1,680 3,160 870 5,180 5,340 12,420 3,180
83,806 9,793 5,500 15,943 8,410 12,974 16,500 15,660 11,390 4,553 2,471 13,720 11,940 35,060 4,380
Entry of several new IPPs, possible pipeline of 30-40GW under construction/development

Coal & Oil Group Abhijeet Group Welspun Energy Bajaj Energy Monnet Energy Thermal Powertech DB Power KVK Nilachal Patel Energy Madhucon Projects Gayatri Projects Adhunik Projects Videocon Sona Power Jas Infrastructure Kineta Power MB Power Gupta Energy Jindal Photo Navbharat Ventures IEL Energy project Dheeru Powergen RKM Powergen Dhariwal Infrastructure SKS Power & Ispat Avantha Power Indbharath Power Adhunik Power Visa Power Nagarjuna Athena Energy
Possibilities for M&A, consolidation not a choice (MW)

Company FY11 Installed Capacity Capacity Addition FY12-13 9,600 n.a. 1,626 5,050 1,870 4,620 1,680 1,200 1,850 870 1,500 1,860 810 1,200 Capacity Addition FY14-15 6,140 n.a. 2,550 412 2,404 1,200 3,292 2,640 3,180 1,310 2,980 10,560 4,530 1,980 FY15E Installed Capacity 49,934 n.a. 9,463 1,912 10,648 2,425 7,236 9,240 3,410 5,380 3,983 1,781 5,180 13,020 5,340 4,380 1 % Increase
Established utilities - CPSUs NTPC 34,194 PGCIL n.a. NHPC 5,287 SJVN 1,500 Established utilities - Private Tata Power 3,195 CESC 1,225 Lanco Infratech 2,074 Adani Power 1,980 JSW Energy 1,730 Jindal Power 1,000 Emerging utilities - Private GMR Infra 823 GVK Power 911 Jaiprakash Power 700 Reliance Power 600 Indiabulls Power Sterlite 1,200
46 n.a. 79 27 151 98 249 367 83 438 384 95 640 2,070 n.a. 265
June 2011
17
#2 Fuel scarcity impacts project economics, not power availability

Fuel scarcity is a challenge, impacting economics of power units under construction. We expect Indias fuel basket to change meaningfully, with the composition of imports and captive mines expected to increase from 15% in FY11 to 37% in FY15 and contribute 70% of the incremental coal consumption until FY15. Despite several constraints, we expect power generation to post 12.4% CAGR over FY11-15. Besides, increased use of imported coal will lead to an increase in fuel costs by just Rs0.28/unit until FY13 (up 25%), which is unlikely to put upward pressure on ST prices. Imports entail physical constraints, including logistics, demand-side management (given deterioration in SEB finances) and technical constraints. Out of the expected 152mt of imports in FY15, 80mt are slated for coastal power projects and would not be impacted by logistics constraints. Imports for blending are expected to be 72mt in FY15 and we expect the share of blending to increase from 6.1% in FY11 to 11.2% in FY15. FY13 is expected to be the inflexion point in terms of captive mining as NTPC/Reliance Power commence mining operations. We expect the share of captive mining in the fuel basket to increase from 6.4% in FY12 to 12% in FY13. Projects with production potential of 292mt were awarded in 2006 and 2007 and given a possible time lag of 7-8 years, we believe some of the mines could start production over FY13-15.
2.1 Fuel supply critical
Domestic coal production has been impacted by issues related to the environment,
law and order and land acquisition. In 2007 the production target for FY12 was 680mt, and the expected target now is 590mt. Given the accelerated pace of capacity addition over FY12-15, coal demand is expected at 10% CAGR. Low domestic production and increased demand impacts project economics. PLFs of coal based projects declined ~300bp in FY11. Coal India's actual supply against linkages towards power plants was 302mt v/s requirement of 355mt. Coal supply has been a bigger issue for projects commissioned after FY09, impacting operating rates. Linkages continue to be on best-efforts basis, impacting the chain. Several projects commissioned in FY10 and FY11 are operating at sub-80% PLF. FSAs for many of the capacities are not yet signed due to fuel scarcity. For capacities commissioned after FY09, we factor in lower PLFs for coal based projects at ~70% until FY13 and 50% supply from domestic source in the interim. Domestic coal production below target (m tons)
Original Revised Feasible (now )
Coal requirement for power sector increases (m tons)

CAGR of 10%
CAGR of 7.9%
680
CAGR of 5.4%
630
550
532
500
461
461
494
590
237
253
268
275
286
313
326
336
361
396
411
435
FY12E
467 FY15E
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY08
FY09
FY10
FY12E
FY11
724
June 2011
18
PLFs for coal based projects impacted (%)

FY11 PLF down by 300bp YoY, first since 1995 when PLF declined by 100bp
Coal availability an increasingly important issue (CIL's

coal supplies against linkages) (m tons)
Coal requirement Commissioned by March 09 Commissioning in -FY10 -FY11 -FY12 Total requirement CIL's commitment (ACQ) Percentage of requirement (%) Actual supplies Percentagte of ACQ met (%) FY10 306 FY11 306 27 17 340 313 92.1 296.5 94.7 355 335 94.4 302 90.1 FY12E 306 27 40 30 403 347 86.1 319 91.9
FY81
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
PLFs for coal based projects commissioned

after FY09 projects impacted (%)
JSW Rajw est Sterlite Jharsuguda Lanco Amarkantak R Pow er Rosa KSK Wardha
FY11
42 45 45 43 44 47 48 51 49 50 48 51 53 56 55 59 61 62 62 65 67 69 70 72 73 73 76 76 77 78 75
We assume lower PLFs, linkages at 50% until FY13

CIL linkages PLFs (%)
100 75
50 25 0 Nov-09 Jan-10 May-10 Mar-10 Nov-10 Jan-11 Jul-10 May-11 Sep-09 Sep-10 Mar-11
70.0 50.0 50.0
70.0 50.0
70.0 55.0
75.0
FY11E
FY12E
FY13E
FY14E
* Though Raj West project was not operating due to technical reasons, the tapering linkages too were not available for the project
2.2 Imports set to increase, face physical constraints
We expect the contribution of imports to increase from 8.7% of the fuel basket in FY11 to ~21% in FY15. Of the 152mt of coal imports (domestic equivalent) that we expect in FY15, 80mt are for coastal projects being set up, to be run on imported coal. Thus, we have factored in imports for blending (to adjust for the shortfall in domestic availability) at just 72mt in FY15 (v/s 38mt in FY11). This is given constraints including evacuation infrastructure, logistics, technical parameters for boilers and SEBs' financial health. We expect the share of blending to increase from 6.1% in FY11 to ~12% in FY15, which is manageable. Large parts of capacity addition based on imported coal (coast-based projects) are front ended and we expect capacity commissioning of ~20GW by FY15, largely by the private sector. The key players are Adani Power (4.6GW), Tata Power (4.3GW) and Reliance Power (4 GW).
June 2011
19
Several private developers have acquired mines overseas to ensure fuel supply for existing and expansion projects. We believe the key challenge is execution, as many of these mines are greenfield projects and involve logistics and related issues. Another challenge is planning and execution for back-end projects in India. but due to physical and technical constraints we
assume blending at 11% in FY15 (m tons)
Domestic project blending Coastal project Blending for Domestic shortage (%) 9.5
152
Imports (domestic equivalent) will rise (m tons)...

Imports (m tons) % of total consumption 14.7 11.6 114 8.8 5.7 54 38 38 23 8.7 81 18.0
21.0
11.2
7.2 6.1
7.9 72 80
54 59 26 32 12 40 41 22 FY13E FY14E
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY11
FY12E
FY15E
Imported coal based coastal projects will contribute 8% imported of generation in FY15 (v/s 2% in FY11)
Generation (coastal, imported coal) - BUs % of total generation 7.0 5.4 3.5 2.0 54.7 15.9 FY11 30.0 FY12E FY13E FY14E FY15E 80.2 109.2 8.5
Adani and Tata Power will be among key players with

coal based capacities by FY15 (MW)
Company Tata Power Adani Power JSW Energy Lanco Reliance Power GSECL Essar Power Videocon Coastal Energen Meenakshi Energy Total Capacity (MW) 4,250 4,620 1,800 1,200 4,000 500 1,200 600 1,200 900 20,270
Investment in overseas mines: Real contributor or venture capitalism

Acquirer Tata Power GMR Infrastructure Jindal Steel and Power GMR Infrastructure JSW Energy Essar Power Reliance Power Adani Enterprise Adani Enterprise CESC Lanco GVK Group Acquiree KPC/Artumin Homeland Energy Coal mine PT Barasentosa Lestari SACMH Aries Coal Mine PT Srivijaya Linc Energy MoU with Govt Resource Gen Griffin Coal Mines Hancock Mines Target Country Indonesia South Africa Mozambique Indonesia South Africa Indonesia Indonesia Australia Indonesia South Africa Australia Australia Acquired in 2007 2008 2008 2008 Mar-10 Mar-10 Jun-10 Aug-10 Aug-10 2010 Dec-10 Under negotiation Reserves (m tons) 1,402 300 n.a. 100 57 100 2,000 7,800 2,000 600 350 4,300
June 2011
20
2.3 Captive mines ramp-up expected from FY13
FY13 is expected to be the inflexion point for captive mining; we expect the share in the fuel basket to increase from 6.4% in FY12 to 12% in FY13. The contribution of captive mines to power generation is expected to increase from 4% in FY12 to 12% in FY15. Captive mines allocated to the power sector have potential production of 480mt. Of this, 292mt projects were awarded in 2006 and 2007. Given a time lag of 7-8 years, we believe many of these mines could become productive over FY13-15. We expect initial production from NTPC's captive mines and mines allocated for Sasan UMPP project to start in FY13 and FY14, and this will be the inflexion point for captive mining. Captive mines to contribute 12% of power generation in
FY15 (v/s 5% in FY11)
Captive coal based generation (BUs) % of total generation 10.3 8.5 11.8
Contribution from captive mines to improve (m tons)

Captive coal (m tons) % of fuel basket 12.1 113 15.9 15.8
5.4
5.9
95
6.7
6.7 66
151.5 4.6 36.8 4.5 85.8 38.8 FY12E FY13E FY14E FY15E 118.3
22
25
28
30
FY09
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY11
Captive mines: Huge potential to be tapped

a) Peak production 481mt (mtpa)
200 163 150 100 58 495 562 50 4 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2 2 2 0 10 0 0 7 2 7 0 1993 141 126 355 23 32 42 3,000 85 23 92 129 9,000 6,000 1,837 2,596 1,889 2007
~6,000 2,000 540 1,000 750 2,000 2,000 4,000 1,080 15,130 34,500
b) Reserves 29b tons (m tons)

9,730 1995 1997 1999 2001 2003 2,144 2005 12,000 8,871 2009
NTPC, Reliance Power to contribute 10GW+ of captive coal based capacities by FY15
Company NTPC Punjab SEB GVK Power West Bengal Power Dev. Corp. Damodar Valley Corp. Gujarat SEB Maharashtra SEB Reliance Power Raj West Power (JSW Enegry) Others Total Capacity (MW)
June 2011
21
2.4 Meaningful change in fuel mix, cost push unlikely to drive ST rates
We expect India's fuel basket to change meaningfully, given the increased share of imports and captive mines. These segments contributed 15% of the coal requirement in FY11 and we expect this contribution to increase to 37% in FY15. Of the incremental coal consumption until FY15, we expect contribution from Coal India/state mining companies of just 30% v/s their current share of 86%. Despite physical constraints, we expect power generation to post 12.4% CAGR over FY11-15, given increased share of generation from other fuel sources. Overall, the use of imported coal for domestic blending and imported coal projects will lead to increased fuel costs by just Rs0.33/unit until FY13, an increase of 29%. This is unlikely to lead to meaningful cost pressure on short term prices.
Imports, captive mines to contribute 70% of incremental Changes in the coal basket (m tons)
coal requirement until FY15 - a meaningful shift (BUs)
675 600 525 450 375 300 FY09 FY10 FY11E FY12E FY13E FY14E FY15E 13 22 357 12 25 369 12 15 28 369 22 12 30 383 Imports (Coastal projects) Imports (Blending) Captive mines CIL / State mining Cos 80 59 41 36 66 403 428 455 51 117 91 68
CIL / State mining Cos
Captive mines
Imports
FY15E
455
117
152
FY11
369
28 38
0%
20%
40%
60%
80%
100%
Power generation based on various fuels (%)

Linkages Hydro Gas Imported coal Captive mines Nuclear 29 39 108 86 98 39 128 114 107 71 514 FY12E 547 FY13E 38 112 118 141 203 151 586 FY14E 628 38 114 152 155
Change in fuel mix to escalate fuel costs by ~30% for

system, may not drive up ST price (Rs/unit)
1.75 1.57 1.39 1.25 0.97 0.81 1.07 1.12
15
19
25 91
97 37 73 28 107 33 111 113 49 16 17 495 493 473 FY09 FY10 FY11
FY15E
FY08
FY09
FY10
FY11
FY12E FY13E FY14E FY15E
June 2011
22
Key players' dependence on imports (MW)

Companywise Captive mines Established Utilities NTPC NHPC CESC Lanco Infratech Tata Power Adani Power Jindal Power 1,000 JSW Energy 1,080 Emerging Utilities GVK Power GMR Energy Essar Energy Indiabulls Power Jaiprakash Power Reliance Power Sterlite Energy Total 2,080 Thermal Link ages 8,480 250 1,800 1,050 660 600 1,200 14,040 Impor ted 1,200 1,050 3,300 1,800 7,350 Hydro Gas 11th Plan Thermal Total Captive Link mines ages 9,220 2,002 250 3,436 2,100 3,960 1,000 2,880 1,000 600 1,200 27,648 8,843 2,400 1980 3,300 11,220 24,443 15,057 2,100 2,640 3,904 2,400 270 540 2,700 5,340 6,285 1,980 43,216 Impor ted 180 3,200 716 3,960 7,496 Hydro 12th Plan Gas Total
2,002 70 1,000 3,072
740 366 1,106
1,581 4,457 652 690 1,190 2,525 8,604
25,481 4,457 2,520 3,292 5,600 4,620 4,380 270 1,230 3,890 5,340 9,125 15,180 1,980 93,675
2.5 Gas based capacities: The cart before the horse
On the gas supply front, challenges persist given a cut in KG-D6 production. Earlier gas production estimates from KG-D6 were 120mmscmd by FY13 and have since been revised down to 55mmscmd by FY13 and 100mmscmd by FY17. The contribution from gas projects under construction/planning is 9GW, of which ~4GW will become operational in FY12. Gas requirement for these 9GW projects at 90% PLF is 37mmscmd (40% of existing supply to the power sector).
Gas supplies: An alarming scenario

FY07 APM - ONGC & new 32.8 APM - OIL Private / JVs RIL KG-D6 (Power sector allocation) RIL NEC-25 GSPC (KG) ONGC (KG) Others - ONGC, Essar Total 32.8 Gas requirement at 90% PLF (mmscmd) 67.8 Effective operating rate (%) 48.3 FY08 21.8 2.3 9.0 FY09 21.7 2.1 10.7 FY10 22.6 2.4 11.3 22.3 FY11 22.5 2.7 11.3 30.0 FY12E 22.5 2.9 11.3 30.0 FY13E 22.5 3.2 11.3 38.0 0.0 2.0 0.0 3.2 80.1 102.5 78.2 FY14E 22.5 3.4 11.3 46.0 4.0 2.0 2.0 3.2 94.4 102.5 92.1 FY15E 22.5 3.7 11.3 48.0 8.0 2.0 4.0 3.2 102.7 102.5 100.2 FY16E 22.5 4.0 11.3 54.0 8.0 2.0 10.0 3.2 115.0 102.5 112.2 FY17E 22.5 4.3 11.3 54.0 8.0 2.0 10.0 3.2 115.3 102.5 112.5
33.0 72.6 45.4
34.5 73.7 46.8
58.5 84.5 69.3
66.5 97.2 68.4
66.7 98.9 67.4
Projects with generation capacity of 9GW under construction/development

L&T has won two EPC orders (PPN and GSECL) for construction of gasbased projects totaling 1.5GW GMR, Lanco, and Reliance Power have projects under construction, which will be commissioned in FY12
Projects Vemagiri Exp Kodapalli Phase 3 Samalkote JP II Gautami Kawas Gandhar Kayamkulam Total Developer GMR Infra Lanco Infratech Reliance Power GVK Power GVK Power NTPC NTPC NTPC Capacity (MW) 750 742 2,400 800 800 1,300 1,300 1,050 9,142 Requirement (mmscmd) 3.0 3.0 9.6 3.2 3.2 5.2 5.2 4.2 36.6
June 2011
23
#3 Demand growth likely to be robust, per capita availability to improve

India's power demand growth was a moderate ~6% CAGR over 2001-10 v/s real GDP growth of 7.2%. In FY11, power demand was up just 4.4%, impacted by the simultaneous occurrence of several factors such as (i) demand de-growth of 2.1% in 2QFY11, given extended monsoons and (ii) deterioration in SEB finances. We believe this dip was one-off in nature and driven by seasonal factors. This also led to lower base deficits of 8% in FY11, down from their peak of 12% in FY08. Peak deficit came off their highs of 17% in FY08 to 10% in FY11, which is near historical lows. Given the accelerated generation growth and optimistic assumptions of 7.5% demand growth in FY12 and 10% in FY13, we expect base deficits to decline to 5% in FY13, impacting short-term prices.
3.1 Demand growth: FY11 an aberration, deficits near historical lows
Demand growth for power has been muted despite huge latent demand. Electricity
demand in India posted moderate CAGR of ~6% over 2001-10 v/s real GDP growth of 7.2%. The demand slowdown is partly attributable to the power consumption pattern, in which agricultural consumers contribute 22% and growth rates have been muted. Increased share of services in the GDP to 65% (v/s 55% in FY00) has also led to low electricity intensity. Actual power demand growth has been lower than the Seventeenth EPS estimates. Going forward, we factor in demand growth of ~10% over FY12-13. Demand growth is expected to trend higher over FY12-13 as system availability improves and merchant prices trend lower. We have factored in aggressive demand growth assumptions of 9-10% each for FY12 and FY13 to estimate the base deficit. Moderation of the base and peak deficit in FY11 is attributable to improved monsoons (and thus, higher hydro generation) and low demand (deterioration in SEB financials). Peak deficit came off its highs of 17% in FY08 to 10% in FY11 and is near historical lows. All-India electricity demand growth declines (BUs)
Requirement 1,000 CAGR 5.6% 750 CAGR 6.7% 12%
240 180
Composition of power consumption (BUs)

16%
% of 37.6% 21.7% Total 24.4% 8.8% 3.5 2.4 1.6 Demand (BUs)* 10 YR CAGR (%) 10% 6.8% 4.3% 1.8% 6.9% 8% 5% 3% 0% Inds. Agri. Domestic Comm. Public Railw ays Other Serv
Grow th (% YoY)
Represents 83% of total consum ption in India 9.0% 6.1% 6.4%
500 CAGR 8.4% 250
8%
120
4%
60 0
0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
0%
June 2011
24
Demand growth lower than the Seventeenth EPS estimates (BUs)

17th EPS Survey Estimate 980 860 740 620 500 FY05 FY06 FY07 FY08 FY09 FY10 FY11E Actual Demand Var (%) 0.0% -1.5% -3.0% -4.5% -6.0%
Per capita availability to double by FY15 (kWh)...
...leading to higher demand growth (% YoY)

We factor in higher demand growth assuming supply will create its own demand, much higher than the last 10 years' average
Deficit moderates given lower demand, peak deficit at historical lows
June 2011
25
3.2 FY11 demand slowdown: Several factors occur concurrently
Monsoons in FY11 were above normal, which impacted power demand, given lower electricity consumption from agriculture. Hydro power generation improved due to its cost competitiveness compared with thermal generation and lower demand. Consequently several thermal projects operated at sub-optimal PLFs during this period. FY11 demand growth was ~4.4%, the lowest since FY02. In 2QFY11 demand declined by 2.1% due to improved monsoons. We believe FY11 was an aberration in demand growth and we expect demand to improve, going forward.
Monsoon above normal levels...

(achievement, percentage of normal rainfall)
120 Actual Rainfall Actual Rainfall 102 100 92 93 87 79 80 60 77 105 99 99 98 102
...leading to higher hydro power generation (BUs)

16 12 8 4 0
40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Good monsoons, low agricultural demand impact

demand growth in FY11
Pow er Demand YoY Gr (%) (RHS) Energy Deficit (%) (LHS) 9.7 10.3 10.9 11.1 8.8 9.6 9.3 10.9 11.8 7.3 7.2 15.0 2.4 5.3 1.5 2.6 8.0 6.8 9.5 11.4 4.0 -2.1 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 6.1 7.6
2QFY11 base/peak deficit declines (%)

16% Base deficit Peak deficit
13%
10%
7%
4% Feb-10 Dec-09 Aug-09 Aug-10 Dec-10 Apr-09 Apr-10 Feb-11 Oct-09 Jun-09 Oct-10 Jun-10
June 2011
Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11
26
#4 SEB finances: Alarming, but the worst seems to be over

SEBs' financial health deteriorated in FY09, with cash losses of Rs213b, up from Rs28b in FY08 (refer to our detailed report dated 27 October 2010). The deterioration in finances was driven mainly by increased short term power prices to Rs6.63/unit in FY09 (from Rs3.89/ unit in FY08). This resulted in a meaningful increase in the size of short-term power procurement to Rs351b in FY09 (up Rs198b) and accounted for a large part of incremental losses. In FY09, short term power procurement cost was 18% of the power purchase cost, up from 9% in FY08. This spurt in prices was unanticipated and due to lack of political will to not increase tariffs, the higher ST procurement impacted financial performance. Since then, power prices corrected, leading to a correction in the size of the short-term market from Rs351b in FY09 to Rs336b in FY11. We believe that going forward, increased availability of long term trading volumes, tariff increases and lower T&D losses will lead to improvements. We analyse SEBs' losses, power procurement trend and long-term power supply position, to understand the gravity of the situation and the way forward. The top five states accounted for 68% of commercial losses and contribute to 38% of power demand. Andhra Pradesh and Rajasthan accounted for ~85% of cash losses of the Rs198b in the system. Thus, many of the issues of poor SEB finances are concentrated.
Large short term power procurement states also have the highest losses. Since a large part of the short term market is in the hands of few states with high commercial losses, there is increased vulnerability and low appetite for high-cost power. The availability of long-term power at competitive rates is improving and for the top eight loss making states (i) cumulative generation capacity will increase from 48GW in FY10 to 60GW in FY13 (ii) have signed cumulative case-1 bids of 12-13GW and case-2 bids of 8GW and (iii) there is incremental share from upcoming CPSU projects and UMPPs. All these will lead to doubling of power availability at competitive rates, entailing reduced necessity to procure high cost short-term power for base demand.
Several positive developments went unnoticed: (i) the Delhi High Court in 2011 fined the Delhi state government for interfering in tariff fixing of the Delhi Electricity Regulatory Commission and stated that SERC can suo moto propose tariff hikes without waiting for SEBs to come up with proposals; (ii) In the past 12 months, nine out of 21 SEBs raised tariffs. We expect more SEBs to raise tariffs going forward with less state government interference and Appellate Tribunal for Electricity has even recommended to state regulator to order suo moto tariff increase even if it is not sought by distribution companies.
June 2011
27
4.1 SEB losses are not uniform in character, require different responses
SEB losses are due to three key factors (i) inefficiency/theft (higher AT&C losses), (ii) lower end user tariffs and (iii) increased cost of power procurement (merchant markets). However, the gravity of each factor varies across states and calls for different responses. Key observations are: States like Tamil Nadu, Andhra Pradesh and Punjab are most efficient, with lower T&D losses (compared with the national average of ~28%). Higher losses in these states are largely a function of low tariffs. The deterioration of SEB finances in Andhra Pradesh and Tamil Nadu in FY09 was due to higher power purchase costs. Madhya Pradesh and Jharkhand have high tariffs and relatively low purchase costs, but their losses are due to inefficiency with AT&C losses at 61% and 59% respectively. Thus, there is need for reforms to reduce AT&C losses. Uttar Pradesh has one of the highest power purchase costs, relatively higher AT&C losses and low tariffs, and requires reforms on all fronts. Losses in Rajasthan increased in FY09 due to high power purchase costs. Karnataka, Haryana and Bihar need more focus on AT&C losses as the gap between cost of procurement and tariffs is not alarming. Power purchase accounted for the highest increase in costs for all SEBs and shortterm power costs increased 70% in FY09 to Rs6.63/unit (v/s Rs3.89/unit in FY08).
SEB losses: Differentiation on key parameters, calls for varied responses

FY09 losses Commercial AT&C (Rs b) (%) (90) (79) (77) (58) (41) (37) (32) (31) (17) (13) 15.3 13.0 29.5 40.3 33.3 61.0 19.0 25.7 34.4 59.0 Power purchase cost (Rs/unit) FY07 FY08 FY09 1.7 2.1 2.3 4.7 3.8 2.0 1.3 2.2 2.0 2.0 2.0 2.5 2.8 4.9 4.5 2.2 1.6 2.4 2.3 2.3 2.3 3.2 3.6 5.4 3.3 2.7 1.4 2.8 2.3 2.4 CAGR (%) FY07-09 15.6 22.1 25.0 7.3 (6.7) 15.2 5.8 13.1 6.7 9.1 Average tariff (Rs/unit) FY07 FY08 2.84 2.28 2.92 2.48 2.53 3.11 2.44 2.86 2.75 3.16 2.89 2.55 2.83 2.43 2.75 3.09 2.39 3.04 2.92 3.25 CAGR (%) FY07-09 (0.4) 4.9 (2.2) 1.8 13.7 2.3 5.0 2.9 6.4 0.4
States Tamil Nadu Andhra Pradesh Rajasthan Uttar Pradesh Haryana Madhya Pradesh Punjab Karnataka Bihar Jharkhand
FY09 2.81 2.51 2.79 2.57 3.27 3.26 2.69 3.02 3.12 3.19
a. Power procurement costs highest in FY09

all discoms (Rs/unit)
Pow er purchase cost Employee cost Interest/Depreciation Total Generation cost Generation cost Increase O&M Cost (Rs/unit) Others
b. Increase in losses largely due to higher power purchase costs (Rs b)

FY08 total cost Staff cost Pow er purchase Other Generation cost
3,250
3,000
0.69 0.48 0.84 3.70 0.61 0.49 0.80 3.64 0.61 0.51 0.80 0.68 0.67 0.95
-0.02 0.19 0.11 0.52 Power purchase cost represents 56% of total cost increase for SEBs, vs 16% for staff cost (6th pay provision).
2,750
3.81
4.22
2,500
2,250
FY06 FY07 FY08 FY09
FY08
FY09
June 2011
28
4.2 Top five states: 68% of commercial loss, 38% of demand
An interesting fact about SEB losses is their distribution across the system. The top five states accounted for Rs345b of commercial losses in FY09 out of Rs506b, accounting for 68% of the losses in the system. These five states contribute only 38% to power demand in India. Thus, many of the issues related to poor SEB finances are concentrated. Sizeable subsidy payments were delayed mainly in Andhra Pradesh and Rajasthan while most other discoms received nearly all subsidy payments. Thus, while cash losses (subsidy, revenue realized basis) for the system increased to over Rs284b. The top three states, Rajasthan, Uttar Pradesh and Tamil Nadu account for ~74% of cash losses. Four states, Rajasthan, Uttar Pradesh, Tamil Nadu and Andhra Pradesh, contributed 80% to the increase in cash losses (on a revenue and subsidy realized basis) in the system. These states contributed to 77% of the cash losses in the system in FY09. The southern/western regions had cash losses in FY09 only, before which they were cash positive. The eastern region, which turned cash positive, had cash losses earlier. This is a reflection of merchant power being a game changer in the system.
Top five states account for 68% of losses (percentage of total) but for 38% of India's power demand (percentage of total)
Others 24% Tamil Nadu 18% Commercial
losses
Madhya Pradesh 7% Haryana 8% Uttar Pradesh 12%
Andhra Pradesh 16%
Uttar Pradesh 9% Rajasthan 6% Andhra Pradesh 10%
Haryana 3%
Madhya Pradesh 5%
Electricity demand
Others 57%
Rajasthan 15%
Tamil Nadu 10%
Most states reimburse subsidy payments (percentage of subsidy booked)

100 75
Andhra Pradesh and Rajasthan had state elections in 2009
50 25 0 Karanataka Haryana Uttar Pradesh Madhya Pradesh Tripura Punjab Meghalaya Gujarat Bihar
Tamil Nadu
Jharkhand
Andhra Pradesh
Rajasthan
June 2011
29
State-wise cash losses (subsidy, revenue realized

basis): The top four states account for ~80% of cash losses in the system, as also the increase in losses
States Increase in losses Rs b % of total 26 22 17 15 15 13 (7) 100 Total losses (FY09) Rs b % of total (73) (72) (66) (9) (26) (44) 7 (284) 26 25 23 3 9 16 (2) 100
Eastern region: From cash crunch to cash positive

- ST power sale a game changer
The southern region was always cash positive but the eastern region has seen dramatic improvement, indicating the ST market is a game changer
40 0 -40 -80 -120 -160
Rajasthan (55) Uttar Pradesh (45) Tamil Nadu (35) Andhra Pradesh (31) Maharashtra (31) Madhya Pradesh (27) Others 15 Total (208)
FY07 FY08 FY09
Eastern
N. Eastern
Northern
Southern
Western
4.3 ST power cost a shock in FY09 (up Rs198b), declines since
The price of short term power was a key factor that led to increased SEB losses in FY09. ST power procurement as a percentage of the system-input energy for all states was ~3% in FY09 (similar to FY08). However, the average cost of power purchase increased from Rs3.89/unit in FY08 to Rs6.63/unit in FY09, up 70%. Thus, the ST market size increased from Rs153b in FY08 to Rs351b in FY09, representing 18% of the power procurement cost for all discoms, up from 9% in FY08 and 6% in FY06. This spurt in prices was unanticipated and due to lack of political will to not increase tariffs, the higher ST procurement impacted financial performance. Since then, prices corrected, leading to the ST market size correcting from Rs351b in FY09 to Rs336b in FY11. These transactions contributed 15% to power procurement costs in FY11, down from 18% in FY09. b. ST volumes (MUs) and percentage of generation
Trading (BUs) % of net generation 7.7 5.9 10.1 9.1
a. ST market size: Price corrects since FY09,

volume growth robust (Rs b)
FY06 Total purchase of discoms ST market size ST power as % of purchases 1,317 81 6.2 FY07 1,477 116 7.9 FY08 1,685 153 9.1 FY09 1,976 351 17.7 FY10 FY11 2,123 2,223 318 336 15.0 15.1
3.9 20.6
4.1 23.1
4.6
4.8
27.4
30.6
39.3
52.9
66.6
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
81.5
June 2011
30
a. Trading market size near two-year low (Rs b)

Trading mkt size (Rs B) (LHS) Wtd. Avg. Price (Rs/unit) (LHS)
b. Short term tariffs (Rs/unit) correct
40 30 20 10 0 May-09
8 6 4 2 0
2.1 2.2 3.0 3.8 3.9 6.6 4.8 4.1
May-10
Mar-09
Mar-10
Nov-08
Nov-09
Nov-10
Sep-09
Sep-10
Mar-11
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
4.4 States with highest short term power purchases incur highest losses
The major power procurement states incurred the highest losses. In FY09, Tamil Nadu, Andhra Pradesh and Rajasthan were among the top three states with the highest commercial losses. They were also among the top five procurers of shortterm power (accounting for 45% of net power purchases). Since then, many states, especially Rajasthan, Maharashtra, Andhra Pradesh and Madhya Pradesh curtailed power purchases. States like Andhra Pradesh, Rajasthan and UP lowered their short term power procurement in 9MFY11 compared with FY10. States like Gujarat and Chhattisgarh turned net sellers in the market since then. Since a large part of the short term market is concentrated in a few states with high commercial losses, there is vulnerability and low appetite for high cost power.
Highest loss making states are among the top procurers of short term power (MUs)
States Aug 09Mar 10 Rajasthan 3,657 Maharashtra 3,460 Andhra Pradesh 3,139 Madhya Pradesh 1,652 Tamil Nadu 1,502 Total 18,435 % of total 19.8 18.8 17 9 8.1 72.7 States FY10 % of total 24.5 19.8 15.2 14.5 11.2 85.3 States Apr-Feb FY11 Rajasthan 3,657 Maharashtra 3,460 Andhra Pradesh 3,139 Madhya Pradesh 1,652 Tamil Nadu 1,502 Total 18,435 % of total 19.8 18.8 17 9 8.1 72.7 States Apr-Feb FY10 Rajasthan 3,657 Maharashtra 3,460 Andhra Pradesh 3,139 Madhya Pradesh 1,652 Tamil Nadu 1,502 Total 18,435 % of total 19.8 18.8 17 9 8.1 72.7
Rajasthan 10,022 Tamilnadu 8,117 Uttar Pradesh 6,238 Haryana 5,926 Maharashtra 4,601 Total 40,924
Change in short term power procurement pattern for key states

States Tamil Nadu Andhra Pradesh Rajasthan Uttar Pradesh Haryana Madhya Pradesh Punjab FY09 loss FY09 average (Rs b) (Rs/unit) tariff (Rs/unit) (90) (79) (77) (58) (41) (37) (32) (1.71) (1.51) (3.00) (1.87) (2.36) (2.91) (1.10) 2.80 2.50 2.80 2.60 3.30 3.30 2.70 Increase required (%) 61 61 107 72 72 88 41 Power purchasing states (by rank) FY09 FY10 9MFY11 5 3 1 6 7 4 2 8 1 3 4 6 1 6 5 4 2
June 2011
31
4.5 Increased power availability: LT costs competitive
Many of the highest loss making states meet most of their power requirements through ST power purchases. This is due to the limited capacity of state gencos and inadequate long-term (LT) PPAs. However, the trend is changing, with significant capacity additions by state gencos, improved power availability through CPSU projects and LT contracts (case-1 and case-2 bids). We estimate cumulative capacity of the top eight loss making states will rise from 48GW in FY10 to 60GW in FY13 and to 67GW by FY15. Besides, the top eight states have signed cumulative case-1 bids of 12-13GW and case-2 bids of 8GW (to be commissioned largely by the end of FY15). The capacity share from CPSU projects and UMPPs will augment power supplies. This combination will lead to almost twice the power available, at competitive rates, and lower the necessity to buy costly ST power for base demand.
Increased power availability: State gencos' capacity (MW)

18,000 FY06 FY10 FY13E FY15E
14,000 16,036 9,621
10,000 11,280
7,552
6,545
4,995
6,270
2,985
5,286
4,421
5,110
3,546
5,550
7,550
6,000
2,000 Andhra Pradesh
Karnataka
Madhya Maharashtra Pradesh
Punjab
Rajasthan Tamil Nadu
a. Capacity addition by state gencos and CPSUs to

accelerate over FY12-14, reducing dependence on spot power for discoms (MW)
12,000 9,000 CPSUs State Gencos
b. State gencos and CPSUs to improve

power generation (BUs)
75 60 45
CPSUs
State Gencos
6,000 3,000 0 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E
30 15 0 FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E FY2015E
4,400
Uttar Pradesh
8,538
June 2011
32
4.6 Tariff rationalization challenging
Low average tariff for SEBs have often been cited as a main reason for higher losses, and tariff rationalization as the panacea. This is easier said than done as the highest subsidized segments are agriculture and residential customers. Electricity in India continues to be a "good" of the political economy and reforms would entail "strong political will". To avoid tariff shock to consumers, state regulators favoured the creation of regulatory assets, which impacted cash flows. However, several positive developments have gone unnoticed. In 2011, the Delhi High Court fined the Delhi state government for interfering in tariff fixing of the Delhi Electricity Regulatory Commission (DERC). The High Court also stated that SERC could suo-moto propose tariff hikes without waiting for SEB proposals. Over the past 12 months, nine of 21 SEBs raised tariffs. We expect more SEBs to raise tariffs with less state government interference. There have been examples of falls in AT&C losses over the past 2-3 years: Delhi's AT&C losses, which were over 50%, have fallen to 15-18% now, and Bhiwandi's AT&C losses, which were 62%, have shrunk to about 20%.
High share of agricultural/residential consumers limits SEB scope to increase tariffs

FY06 Composition (percentage of total) - Agricultural - Residential - Commercial - Industrial - Utility - Others 24 23 7 35 5 5 FY07 24 23 8 35 5 4 0.7 2.3 4.9 4.1 3.7 4.2 3.8 -3.0 -1.4 1.2 0.3 -0.1 0.4 FY08 23 23 8 36 5 5 0.8 2.4 5.2 4.1 3.5 5.0 4.0 -3.2 -1.6 1.2 0.1 -0.5 1.1 FY09 23 24 7 35 5 5 0.9 2.5 5.7 4.2 3.7 5.2 4.6 -3.7 -2.1 1.1 -0.4 -0.9 0.6
Tariff (Rs/unit) - Agricultural 0.8 - Residential 2.4 - Commercial 5.0 - Industrial 4.1 - Utility 3.9 - Others 3.5 Avg Cost (Rs/unit) 3.8 Under recoveries across categories (Rs/unit) - Agricultural -3.0 - Residential -1.4 - Commercial 1.2 - Industrial 0.3 - Utility 0.1 - Others -0.2
June 2011
33
Several states have undertaken/proposed tariff hikes

States Andhra Pradesh Uttar Pradesh Madhya Pradesh Tamil Nadu Rajasthan Punjab Orissa Proposed Himachal Pradesh Madhya Pradesh Karnataka When Mar-11 Apr-10 May-10 Aug-10 Apr-11 Apr-11 Apr-11 Avg incr. (%) 10-13 13 11 7-8 20 5-10 5-10 After the gap of 1 year 3.5 years 1 year 7 years 2 years Remarks Consumers who use less than 300 units a month not impacted, as the state proposed higher subsidy than Rs0.48/unit increase proposed by state regulator Highest increase for urban domestic consumers (20%) v/s commercial (15%) and heavy consumers (15%) a step in the right direction Discoms asked for 24% increase, state regulator allowed 11%, domestic consumer tariff hiked 7.6%, unchanged in four years Higher tariff hike for domestic consumers than industrial consumer; consumers who use less than 300 units a month, spared Across consumers. No details available Opposition from industrial bodies Domestic consumer tariffs were hiked 40%, PIL filed against regulator, matter sub-judice Importantly, subsidy payment for state is capped at Rs1.63b for domestic consumers under an agreement with the World Bank for Rs9b loan
Apr-11 May-11 May-11
16 40 40
1 year 1 year 1 year
June 2011
34
#5 FY12-13 a transitory phase for ST power market

The ST merchant power market is expected to pass through a transitory phase in FY12 and FY13 given meaningful incremental generation and a higher proportion of short term volumes. In FY12 there will be incremental merchant generation of 30BUs from private IPPs, which corresponds to about half the short-term trading volumes in FY11. In FY13 and FY14 there will be large additions to ST volumes largely from state discoms, as they possibly trade from increased power supply from home state shares and allocations from CPSU projects. In FY13 and FY14 we expect incremental average generation of 140BUs a year (against an average of 49BUs a year over FY10-12). This phase could be a redefining period and the merchant market may not remain a viable option for base load demand. Given transmission constraints, the functioning may not be efficient. Hence, while we expect merchant prices to correct to Rs4/unit in FY12 and Rs3.5/ unit in FY13 (v/s Rs4.2 in FY10), they are at levels that permit breakeven for even projects in the highest cost curve quartile (imported coal based, ~500km from coast).
5.1 Higher ST supply, overall availability may put pressure on ST prices
Based on the bottom-up analysis, we expect incremental short-term trading volume from IPPs to be 30BUs in FY12, corresponding to ~50% of the short term trading volume in FY11. In FY13 and FY14, meaningful addition to volumes will be from state discoms as they possibly trade from increased power supply given home state shares and allocations from CPSU projects. In FY13 and FY14 we expect incremental generation of 130-148BUs (equivalent to combined incremental generation over FY10-12, leading to pressure on short term prices). Given the accelerated pace of generation growth across the central, state and private sector and optimistic assumptions of 7.5% demand growth in FY12 and 10% in FY13, we expect base deficits to decline meaningfully to 5% in FY13, impacting short term prices. Several states have either lowered their ST purchases or turned net sellers in 9MFY11, compared with FY10. Short term prices have corrected since 2008 and 4QFY11 prices of Rs3.6/unit are down 13% YoY. Trading volumes are range-bound and current volumes are similar to those in 2009 despite lower prices, leading to contraction in the size of the trading market.
June 2011
35
FY12 an inflexion point for ST volumes (BUs)

FY11 NTPC Adani Power JSW Energy Lanco Infratech Sterlite Energy Tata Power Jaiprakash Power Jindal Power Reliance Power Total FY10 Trading Incremental supply (%) 0 1 6 3 1 1 0 9 3 23 61 38 FY12E 1 13 9 3 9 6 0 7 2 49 61 81 FY13E 1 20 11 3 13 1 2 8 4 63 61 103
FY13-14 an inflexion point for incremental generation (BUs)

160 120 80 40 0 FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012E FY2013E FY2014E FY2015E CPSUs State Gencos Private
Several states turn net sellers/lower purchases, we

expect more to follow (BUs)
Aug - Mar 09 Rajasthan Andhra Pradesh Gujarat Madhya Pradesh Uttar Pradesh Karnataka J&K Chattisgarh 3,657 3,139 (118) 1,652 1,500 786 439 (5,399) FY10 10,022 992 (4,734) (949) 6,238 (2,878) (627) (8,017) FY11 5,941 150 (7,101) 569 3,467 657 (921) (5,780)
ST prices have been moderating (Rs/unit)

Bi-lateral prices 12.0 9.0 6.0 3.0 0.0 7.2 7.8 8.0 7.9 7.2 6.6 7.4 7.2 6.8 4.8 4.8 4.6 4.7 5.1 5.3 5.0 5.3 5.1 4.9 5.7 6.2 5.6 5.0 4.9 4.7 4.0 3.9 4.0 4.0 4.2 4.7 Nov-08 Jan-09 Mar-09 May-09 Nov-09 Jan-10 Jul-09 Mar-10 May-10 Jul-10 Nov-10 Jan-11 Sep-08 Sep-09 Sep-10 Mar-11 UI prices Exchange price
June 2011
36
#6 Funding constraints given sectoral caps

Lending to the infrastructure segment has increased to ~13% of overall bank credit from 1% in FY98. The power sector accounts for 40% of the outstanding credit to the infrastructure space, up from 20% in FY98. The infrastructure sector accounted for ~35% of incremental bank lending in FY10 and the sector posted 47% CAGR in lending over FY00-10. Many banks hit their overall sectoral exposure limits for lending to the power sector. Besides, sanctions and disbursements at PFC and REC have grown over the past 3-4 years. This, we believe, puts strain on the availability of debt funding for the sector. Besides, many developers have committed initial equity and placed orders for BTG, but debt drawals have not commenced. Given issues such as fuel scarcity and demand management, there are possibilities of restructuring, and a few such instances could impact the 'pragmatic' approach lenders have taken towards power projects.
6.1 Easy funding availability scenario unlikely
Infrastructure lending posted CAGR of more than 35% over the past five years and accounts for ~13% of overall bank credit v/s 1% in FY98. Infrastructure includes segments such as power, telecom, roads, ports and airports. Lending to the infrastructure sector posted 47% CAGR over FY00-10, with most of the growth being back ended. Incremental lending to the infrastructure sector increased from 5% in FY01 to 34% in FY10. The power sector has been the biggest contributor to growth in infrastructure lending, and the share of the telecom sector has progressively declined. Growth in infrastructure lending has been robust (Rs b %)
16
Infrastructure lending as a percentage of gross

bank lending has grown (Rs b %)
40,000 Infrastructure Lending Gross Lending Infra to Gross (%)
As on March 2011 infrastructure lending comprised 14.4% of gross lending up from 2% a decade earlier
Infrastructure Lending 7,200

CAGR in lending on rolling basis for 3 Yr and 5 Yr CAGR has been above 35%+
Last 3 Year CAGR 75 60 45 30 15
30,000
12
5,400
8
20,000
3,600
4
10,000
1,800 0
0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
June 2011
37
Incremental market share of the infrastructure

sector (percentage of total)
Incr. Gross Lending Share of Infra Incr. Infra Lending 32
The power sector accounts for the lion's share in

infrastructure lending (Rs b)
Pow er 100% Telecommunications Roads and ports Other
6,400
4,800
24
75% 50% 25% 0% FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
3,200
16
1,600
0 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
June 2011
38
Investment strategy
Prefer CPSUs; Neutral on private IPPs; Lanco, CESC, PTC India top mid-cap picks
The BSE Power Sector Index corrected 18% over the past 18 months (relative underperformance of 26%) given headwinds impacting project economics. The current phase of self-correction is marked by significant challenges of execution; which we believe will lead to M&As, especially of new IPPs. Given this backdrop, we recommend an investment strategy which focuses on the "essentials", namely, (1) upfront capacity addition, (2) relatively secure fuel supply, (3) dynamic PPA structure (with cost escalation) and low dependence on the merchant market, and (4) strong balance sheet/cash flow and earnings visibility. CPSUs are our preferred sectoral theme, given acceleration in their earnings growth and valuations at historic lows. NTPC, Powergrid and Coal India are our top picks. We are Neutral on private IPPs. After their recent underperformance, further meaningful downsides may well be limited. However, re-rating is contingent on improvement in operational and financial parameters. Among mid-caps, we prefer Lanco Infratech, CESC and PTC India given improvement in their business fundamentals and valuation comfort.
CPSUs preferred sectoral theme; earnings accelerate, valuations at lows

CSPUS, in our opinion, are enviably placed in the current environment with regulated business model, strong visibility on growth option, robust financial position and scale economics/ monopoly situation. More importantly, FY12/13E represents important growth milestones for most companies in terms of accelerated project commissioning, leading to earnings CAGR of 23% till FY13. Post the recent underperformance, valuations are compelling with FY13 PER of ~13x and P/BV of ~2x. CPSUs have significantly underperformed the broader indices over the past 18 months given disappointments of earnings growth due to project life cycle, execution delays and sectoral headwinds. CPSUs now quote at a zero premium to Sensex PER, vs average premium of 20%+ during FY09-10, on the back of robust earnings growth in the past. The period from FY05-08 has been characterized by robust earnings CAGR of 19%; and that has witnessed a meaningful deceleration since then at just 5% CAGR during FY09-11E. We believe that the current valuations factor in a large part of the possible headwinds; and accelerated earnings growth at 23% during FY11-13E will drive re-rating. Going forward too, the growth option for most companies is sizable, which is not truly reflected in the current valuations. We prefer CPSUs as our key sectoral theme.
CPSUs' recent underperformance is likely to be reversed led by revival in earnings growth
Sensex NHPC NTPC Pow er Grid Underperformance of CPSUs, led by poor earnings growth in FY09-11: CAGR of 5%
CPSU's Earnings Grow th (%) 27.0
Prem/ Disc to Sensex PER 44.3 21.5
Outperformance of CPSUs, driven 240 by strong earnings growth in FY05-08: CAGR of 19%
17.9 8.9 8.0 8.9 13.8 9.7 6.5 -5.9 -1.9 -1.9 FY11E FY08 FY09 FY10 0.2 FY12E 4.7 11.4
19.1
180 120 60 0
Jan-11
May-06
May-07
May-08
May-09
May-10
May-11
Jan-07
Jan-08
Jan-09
Jan-10
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
FY13E
FY05
FY06
FY07
June 2011
39
FY13E P/BV and RoE

RoE (%) P/BV (x) 4.6
FY11-13E earnings CAGR and FY13E PER

FY11-13E earnings CAGR (%) PER (x) 14.5
13.1
1.7 15.1
1.8 14.2 1.0 7.6
25.9
12.0 18.3 20.3
12.3
26.6
11.7
NTPC
PGCIL
NHPC
CIL
NTPC
PGCIL
NHPC
CIL
Amongst the CPSUs, we prefer NTPC and Coal India as our top picks, given possibilities of earnings upgrades. Despite earnings growth of 12% CAGR till FY13, NHPC is a Neutral, given limited visibility on growth option, high execution risk and limited RoE expansion possibilities.
Comparison of CPSUs on key parameters

CAGR, % FY07-10 3.5 14.2 8.4 21 450 116 2.5 2.8 1.2 7.2 24.4 18.1 18.0 19.0 19.0 28.0 30.0 27.0 FY11-13E 21.7 21.7 12.7 284 66 96 1.8 1.8 1.1 20.3 18.3 14.7 12.0 13.0 12.0 26.0 38.0 30.0
NTPCs RAB is expected to witness CAGR of 22% till FY13 given accelerated project commissioning. This will drive 20% earnings CAGR till FY13 and lead to 284bp RoE expansion. For NHPC, RAB CAGR at 13% and earnings CAGR at 12% till FY13 is muted. The stock quotes at valuations similar to other CPSUs. Average CWIP as % of CE continues to be maintained in both phases, entailing continued business momentum and growth option.
RAB growth - NTPC - PGCIL - NHPC Reported RoE Expansion (bp) - NTPC - PGCIL - NHPC P/BV (FY10, FY13E) - NTPC - PGCIL - NHPC EPS Growth - NTPC - PGCIL - NHPC PER (FY10, FY13E) - NTPC - PGCIL - NHPC Avg CWIP as a % of Cap Emp. - NTPC - PGCIL - NHPC
June 2011
40
Private players: margin of safety emerging post recent correction

The private sector is playing an increasingly dominant role in the Indian power sector; and is rightly reflected in the growth plans of the various companies. In our opinion, this quest for growth has led to complex business structures, indirect leverage on commodity earnings and business models that faces regulatory, market risks. We believe that this is a transition phase, with evolving business models. In our back to basics approach, we prefer players with (i) robust revenue model (healthy mix of regulated plus market return, flexible PPA structures vs fixed rate), (ii) ability to control fuel supply and costs (given that several headwinds exist), (iii) provide fair visibility on growth, (iv) have comfortable financial position (existing earnings stream, low leverage) and v) quote at reasonable valuations (to normalized earnings). We are Neutral on the private IPPs as our sector theme. While we believe that post the recent underperformance, while further meaningful downsides are limited; re-rating will be driven largely by improvement in operational and financial parameters. Amongst mid-caps, we prefer Lanco Infratech, CESC and PTC India given improvement in business fundamentals, and valuations comfort.
Private Sector: valuations have corrected ~50% from peak
Reliance Pow er JSW Energy 125 105 85 65 45 May-11 Jul-10 Jul-10 Oct-10 Feb-11 Feb-11 Mar-11 Nov-10 Nov-10 Dec-10 Aug-10 Aug-10 Dec-10 Sep-10 Sep-10 Mar-11 Jan-11 Apr-11 Lanco Infratech Indiabulls Pow er Adani Pow er
June 2011
41
Comparative valuation
Company Recom MCap CMP Target (USD b) (Rs) Price 229 125 447 27 1,272 109 74 55 879 439 127 Upside EPS (Rs) (%) FY12 FY13 31.6 26.5 13.2 9.0 3.7 -4.4 6.6 65.9 47.5 59.3 56.6 11.7 6.6 22.1 1.6 110.1 11.5 6.9 2.5 44.3 38.8 8.4 14.0 7.6 27.7 1.9 102.2 13.6 6.7 3.5 53.7 39.6 10.8 EPS Gr. (%) FY12 FY13 21.5 20.2 27.9 10.6 40.0 388.7 41.6 34.5 11.3 2.8 47.2 19.1 15.0 25.2 19.1 -7.1 18.4 -3.2 40.0 19.8 2.0 28.4 RoE (%) FY12 FY13 13.7 13.6 26.3* 6.5 9.0 34.1 18.9 19.7 6.8 12.2 6.2 15.1 14.2 26.2* 7.5 7.2 30.8 15.9 19.2 7.7 11.2 7.0 P/BV (x) FY12 FY13 2.0 2.0 5.8 1.1 2.3 3.0 1.8 1.5 0.8 0.9 1.0 1.8 1.8 4.6 1.0 2.2 2.3 1.5 1.3 0.8 0.8 1.0 P/E (x) FY12 FY13 15.0 15.4 17.8 15.4 11.0 9.9 10.1 13.1 12.4 7.1 9.7 12.6 13.4 14.3 12.9 11.8 8.4 10.4 9.3 10.3 7.0 7.5
CPSUs NTPC Buy 30.7 174 PGCIL Buy 10.2 99 Coal India Buy 55.4 395 NHPC Neutral 6.7 25 Private Sector Tata Power Neutral 6.4 1,227 Adani Power Neutral 5.5 114 JSW Energy Neutral 2.5 69 Lanco Infra Buy 1.8 33 Reliance Infra Buy 3.3 596 CESC Buy 0.8 276 PTC Buy 0.5 81 * Adjusted for OB reserves provisions
CPSU's Earnings Yield and Bond Yield Comparison

NTPC earnings yield 10.0 PGCIL earnings yield Bond yield
Gap between CPSU's earnings yield and 10 year bond yield has narrowed down to 100bp; vs 400bp in 2007. This provides significant downside protection, and acceleration in earnings growth till FY13 will drive outperformance.
8.0
6.0 4.0
2.0 Feb-08 Feb-09 Feb-10 Dec-07 Dec-08 Dec-09 Dec-10 Feb-11 Oct-07 Oct-08 Oct-09 Apr-08 Apr-09 Apr-10 Oct-10 Jun-08 Jun-09 Jun-10 Aug-08 Aug-09 Aug-10 Apr-11
June 2011
42
Annexure I: State-wise installed capacity build-up (GW)
2.3
2.6
2.3 7 6 8.3 7.8 2.5
5.8 7.5 0.2 3
11.6
10.5
16.1 1.9 6.2
1.8
15.7
24.9
8.4
17.4 8.3 5.4 10.4 2 5.1 11.2
22.6
37.1 4.9 15 23.3 10.8
11.5
13.5 FY11 FY15E 15.5 24.1
June 2011
43
Annexure II: State-wise Hydro capacity build-up (GW)
1.5
1.8
1.7 3 1.3 1.3 3.2 2
5.2 7 0.1 2.9
1.5
1.5
1.7
1.7 0.1 0.1
0.4
0.4
0.8
0.8
3.2
3.6 1.1 2.2 2.2 0.2 0.2 1.5
3.3
3.3 0.1 3.7 3.9 0.1
3.6
3.8 FY11 FY15E 2.1 2.2
June 2011
44
Annexure III: State-wise power demand as per 17th Electric Power Survey (BUs)
13
17
8 45 35 46 58 10
10 13 0.5 0.7
46
59
77
99 13 20
72
92
48
63 37 22 31 6 9 49
128
157 10 79 109 14
50
68 FY11 FY15E 80 112
June 2011
45
Annexure IV: Coal Fields in India - Positioned in Eastern Region
Jammu & Kashmir
Himachal Pradesh Punjab Uttaranchal Haryana Arunachal Pradesh Sikkim Rajasthan Uttar pradesh Bihar Meghalaya Gujarat Madhya Pradesh Chhattisgarh Orissa Maharashtra Assam Nagaland
Manipur
Jharkhand
West Bengal
Tripura Mizoram
Andhra Pradesh Goa Karnataka
Tamil nadu Kerala
June 2011
46
Annexure V: Regional Transmission line build-up (MW)
Northern Region
121 30 590 0
10200
4420
North-Eastern Region 2860 Eastern Region
NIL
6490 Western Region 10500

0 630
6300 2720
0 420
Southern Region
Transmission Capacity by FY12E Addition expected over FY12E-FY17E
June 2011
47
Companies covered
NTPC Coal India Powergrid NHPC Tata Power Adani Power JSW Energy Reliance Infrastructure CESC PTC India Lanco Infratech
Company reports
June 2011
48
Update
SECTOR: UTILITIES
NTPC
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs174
TP: Rs229
Buy
Bloomberg Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
NTPC IN 8,245.5 222/165 -3/0/-24 1,446.7 32.4
Strong business momentum in FY12/FY13

Efficiency-based incentives to drive earnings
FY12/FY13 are important milestones in NTPC's growth trajectory due to (i) targeted capacity addition of 15GW over FY12-14 (v/s 5GW over FY09-11), (ii) BTG awards of over 16GW in FY12 v/s 3GW over the past three years, (iii) commencement of mining operations in CY12 and (iv) expected recovery of dues/arrears of Rs60b, which will positively impact cash flows. Headwinds include delays in BTG awards, which would impact capacity addition visibility beyond FY14, and fuel sourcing. We reiterate Buy given 20% earnings CAGR over FY11-13 and attractive valuations, with a target price Rs229.
Y/E March Sales (Rs b) EBITDA (Rs b) NP* (Rs b) EPS (Rs)* EPS Gr. (%) BV/Sh. (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%)
2011 2012E 2013E 567.1 141.5 79.6 9.7 -5.9 82.3 18.2 2.1 11.6 0.3 12.2 13.3 572.3 650.2 152.5 191.2 96.7 115.1 11.7 14.0 21.5 19.1 88.9 96.7 15.0 2.0 10.9 0.4 13.7 12.8 12.6 1.8 9.5 0.6 15.1 13.6
* Reported Pre Exceptional Earnings
Capacity addition of 15GW over FY12-14 v/s 5GW over FY09-11 Capacity under construction is 14.7GW, and we expect a large part of these projects to be commissioned by FY14 (many of these capacities have been under construction since December 2007). Over the past three years, cumulative BTG awards were just 3GW, given delays in bulk tendering awards. Such delays will impact the pace of capacity addition in FY14 and FY15, as new BTG awards in FY12 will contribute to capacity additions only from the end of FY15 or FY16. Although some of the demandsupply gap can be attempted to be bridged through commissioning of gas-based capacities, it is contingent on gas allocations. In FY12, NTPC aims to award BTG contracts for over 16GW. This is critical and delays beyond FY12 will impact Twelfth Plan capacity addition targets. Fuel sourcing challenges unlikely to impact returns Of the incremental 91mt coal requirement until FY17, sourcing from Coal India and other companies will be 56mt and the rest of the requirement will be met through captive coal (36mt by FY17). Imported coal is becoming an unviable option for the base load given spot rates of US$120/t+ (due to deterioration in SEB finances). This exposes NTPC to risks of domestic coal scarcity and a recent ministry decision to de-allocate five captive mines is not comforting. However, NTPC is better positioned given its scale and PPA structures, which entail pass through of complete fuel costs, and thus plant availability is unlikely to be impacted. Efficiency based incentives to drive earnings, maintain returns Until FY11, NTPC's incentive profile was skewed towards generation-linked incentives (heat rate, unscheduled interchange, plant availability factor) supported by higher operating factors. There has been negligible contribution from capacity based incentives (interest on working capital, operations and maintenance cost savings). We calculate that higher capacity-based incentives, particularly staff cost savings, will offset a possible decline in generation linked incentives, enabling NTPC to maintain RoE and returns on its core business, even for the new capacities. Earnings CAGR of 20% over FY11-13, Buy with a target price of Rs229 We expect NTPC to deliver net earnings CAGR of 20% over FY11-13. Our earnings estimates factor in lower operating rates for NTPC's new capacities commissioned after March 2009 at 82-85% over FY12-13 and thus, lower overall RoEs v/s old projects with 90% ACQ coal availability contracts. Reiterate Buy with a target price of Rs229.
Shareholding pattern % (Mar-11)

Promoter Others, 3.6 Foreign, 3.6 Domestic Inst, 8.3 84.5
Stock performance (1 year)

NTPC Sensex - Rebased
260 230 200 170 May-10
May-11
Nov-10
Aug-10
Feb-11
140
June 2011
49
NTPC
Capacity addition witnesses meaningful acceleration

Capacity under construction is 14.7GW and we expect a large part of these projects to be commissioned by FY14 (many of these capacities have been under construction since December 2007). Over the past three years, cumulative BTG awards were just 3GW, given delays in bulk tendering awards. Such delays will impact the pace of capacity addition in FY14 and FY15, as most of the projects with the 14.7GW capacity, will be commissioned by FY14. New BTG awards in FY12 will contribute to capacity additions only from the end of FY15 or FY16. Although some of the demand-supply gap can be attempted to be bridged through commissioning of gas-based capacities, it is contingent on gas allocations. In FY12, NTPC aims to award BTG contracts for 16GW+. This is critical and delays beyond FY12 will impact Twelfth Plan capacity addition targets.
Capacity addition of 15GW over FY12-14 v/s 5GW over FY09-11 In FY11, NTPC commissioned 2.5GW of capacity, v/s 4.3GW over FY08-10. There has been a ramp up of capacity addition with synchronization of 1.7GW in 4QFY11 and 1GW in 3QFY11. Going forward, capacity addition is likely to accelerate with 4.3GW in FY12 (as per an MoU signed with the Ministry of Power). While the pace is encouraging, it is lower than the FY12 target of 5.6GW by the Ministry of Power, indicating headwinds to project execution. Our earnings estimates factor in capacity addition of 5GW in FY12, and we expect NTPC to over achieve the MoU targets. Expectations of accelerated capacity addition ramp-up for NTPC are due to the fact that capacity of 14.7GW has been under construction largely since December 2007. Typical project execution in the power sector takes 36-48 months and hence we expect a large part of the 14.7GW capacity under construction to be commissioned over the next three years.
Capacity under construction (GW)
16.9 17.9 17.8 14.7
Pace of capacity addition for NTPC is accelerating (GW)

5.5
4.1
10.9
NTPC is expected to add 15GW over FY12-14E, vs capacity addition of ~5GW during FY09-11
2.8
0.8 1.0 0.2 0.4 0.7 2.4 1.9 2.4 0.3 1.2 1.7 1.5 1.1 1.2
0.0
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
A large part of the 14.7GW under construction, has been under construction over the past three years. We expect commissioning of this capacity by FY14. NTPC has guided for capacity addition of 4.2GW (4.9GW including a 660MW Sipat unit, synchronized in FY11 but not commissioned), and the momentum in capacity addition will continue over FY13-14.
June 2011
FY13E
FY83
FY85
FY87
FY89
FY91
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
0.9 1.6 0.2 0.5 1.0 0.5 2.0 0.5 3.2 1.7 1.0 1.6 2.5 5.0
4.6
1.4
50
NTPC
NTPC's BTG awards (16GW+) in FY12 will enhance capacity addition beyond FY15 (GW)
BTG Awards (GW)
16.2
Capacity addition (GW)
8.8
5.9 5.0 4.6 5.1
2.5 1.7 1.0

2.0 0.4 FY09 FY10 0.0 FY11 FY12E
1.6
1.0
FY12E
FY13E
FY14E
FY15E
FY16E
Capacity addition beyond FY14 depends largely on faster project awards for 16GW projects for which bids have been invited. 6GW of projects under bulk tendering (660MW set boiler) is however sub-judice. BTG awards in FY12 will contribute to capacity additions from the end of FY15 or in FY16. We have not assumed gas based capacity addition (tenders called for 3.3GW), given the lack of adequate fuel supply. NTPC's capex witnesses slippage, but is expected to accelerate (Rs b)
280 Capex Grow th (% YoY) 120
Targeted FY12 capex comprises capex on ongoing projects (Rs140b), completed projects (Rs12b), new projects (Rs70b representing an advance towards BTG), mining (Rs9b) and equity investment in JV projects (Rs17b).
210
140
70 119 101 128 264 38 46 55 66 86 88
0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12BE
Fuel sourcing: Challenges exist, but unlikely to impact returns

Of the incremental 91mt coal requirement until FY17, the company will source 56mt from Coal India and other companies and it will meet the rest of the requirement through captive coal (36mt by FY17). Imported coal is becoming an unviable option for the base load given spot rates of US$120/t+ (due to deterioration in SEB finances). This exposes NTPC to risks of domestic coal scarcity and a recent ministry decision to de-allocate five captive mines is not comforting. However, NTPC is better positioned due to its scale and PPA structure, which entail pass through of complete fuel costs and thus plant availability is unlikely to be impacted.
A Fuel Supply Agreement (FSA) with Coal India for new capacities could be to the extent of 70% of the requirement, and would need to be blended with imported coal. Even in existing projects, blending possibilities exist of 10-15% currently. This exposes the company to risks of domestic coal scarcity. Coal India has not yet signed an FSA for projects commissioned after March 2009, and NTPC has been receiving coal under a Letter of Assurance (LoA). This is largely given the fact that NTPC is Coal India's largest customer (~25% of production) and has robust financials (advance payments against deliveries and non-controversial conduct of operations).
June 2011
FY17E
FY08
FY09
FY10
FY11
85
50
15
-20
51
NTPC
While coal availability in FY12 looks comfortable, we believe that there could be challenges in FY13 given an accelerated pace of capacity addition.
NTPC: Fuel basket evenly placed, imports unlikely to cross 10%

Domestic Captive 6 8 4 2 120 FY08 124 FY09 130 FY10 127 FY11 131 FY12E 140 FY13E 5 Imports 11 Imports as a % of coal 15 15 4 10 9
To strengthen internal competencies, NTPC recently created two new posts: Forest Officer and Coal Transportation Officer, which will be filled by executives on deputation from the Forest Ministry and the Indian Railways
The issues in terms of fuel availability are more project based (like Kahalgaon 2.3GW, Farakka 2.1GW), and the company is evaluating the transport of imported coal through inland waterways to lower operating rates. Given the initiatives taken, Farakka is near the incentive zone (FY11 PLF of 78-80%) and Kahalgaon is out of the major disincentive zone (PLF less than 70%).
Kahalgaon 2.3GW: PLF (%) improves
Few project specific issues addressed Farakka 1.6GW: PLF (%) stabilizes at 80%
87 99
Jul-09
May-09
May-10
Jul-10
May-11
Nov-09
Nov-10
Mar-10
Sep-09
Sep-10
Mar-11
Jan-10
Jan-11
May-09
Jul-09
May-10
Jul-10
Kahalgaon is in an incentive zone and Farakka is set to get into an incentive zone (out of a disincentive zone). PLFs for a few projects were impacted by a back down by SEBs and may not truly reflect the performance of projects Declared average availability above 90% provides comfort (%)
Thermal - PAF Gas - PAF
NTPC has consistently reported availability of 85% (almost similar PLFs) since FY08 despite concern over CIL's fuel supply
94
85 78 81 2QFY08
93
98
93
85 87 79 2QFY09
92
99
99
86 93 92 2QFY10
91
98
90 91 90 1QFY11
86 92 2QFY11
94
96
64 3QFY08
74 4QFY08
82 3QFY09
84 4QFY09
93 3QFY10
96 3QFY11
97 4QFY11
1QFY08
1QFY09
1QFY10
4QFY10
June 2011
May-11
Nov-09
Nov-10
Mar-10
Sep-09
Sep-10
Mar-11
Jan-10
Jan-11
54 44 35 40 47 56 64 66 74 59 65 60 57 62 66 76 73 78 75 64 86 71 69
65 56 51 52 63 80 93 81 65 51 86 83 87 79 75 79 76 83 91 78 61 45 52
76 77
52
NTPC
Captive mines have an important role in securing supplies Out of an incremental 91mt requirement until FY17, sourcing from captive mines will be 36m-50mt. Delays in the ramp-up could be a risk to capacity addition.
MDO Appointment PB Mine Dec 2010 Chatti Bariatu* Aug 2011 Kerandari* Feb 2012 Talaipalli *Recommended for de-allocation Coal Peak Capacity Production (m tons) Sept 12 March 13 Sept 13 Sept 13 15 7 6 18 Geological Coal Reserves (m tons) 1,436 194 285 1,267
NTPC's tariff trends up (Rs/unit)

Fuel cost Other cost
1.4 1.6 2Q
0.9
1.0
0.9
0.7
1.0
0.8
0.7
0.7
0.7
1Q 0.9 0.6
4Q 0.9 0.6
3Q 0.9 0.7
2Q 0.8 0.7
1Q 0.8 0.6
0.7
0.6
0.7
0.7
0.7
0.9
0.9
0.8
0.9
0.8
0.9
1.1 3Q 1.5
1.4
1.3
1.4
1.2
1.3
1.3
1.1
1.1
1.0
1.0
2Q 0.9
3Q 1.0
1.0
1.0
2Q 1.0
4Q
1Q
2Q
3Q
4Q
1Q
3Q
1.1
4Q
1Q
1.2
2Q
3Q
4Q
1Q
2Q
3Q
1.2
4Q
1.4
1Q
1.6
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Efficiency based incentives to drive earnings, maintain returns

Until FY11, NTPCs incentive profile was skewed towards generation-linked incentives (heat rate, unscheduled interchange income, plant availability factor) supported by higher operating factors. There has been negligible contribution from capacity based incentives (interest on working capital, operations and maintenance cost savings). We calculate higher capacitybased incentives, particularly staff cost savings, will offset a possible decline in generation linked incentives, enabling NTPC to maintain RoE and returns on its core business.
PLF has been impacted (%), to impact generation linked incentives

100 FY12 FY10 FY11
In FY11, generation lost given grid constraints was 13.2BUs, leading to PLF of 88.3%, down 250bp YoY for coal based projects. PLF for gas based projects was down 660bp YoY
95 90 85 80 75 Jul Oct Feb Jun Jan Nov May Aug Dec Sep Apr Mar 87 88
June 2011
4Q
1.7
1.2
53
NTPC
Capacity (efficiency) based incentives to improve
Incentive composition to be more broad-based (paisa/unit)
1.10 1.07 1.02 0.98 0.91 0.91 0.90
Employee ('000 nos) Man/MW ratio
Generation based
Capacity based 0.9 2.0 1.3
New streams
1.3
0.87 0.85 0.87 0.78 0.70 0.66 0.63

0.9 0.5
0.4
0.6
0.9
0.7 1.9
1.5 3.0
1.7 3.6
1.8 3.2
8.0
8.3
11.6 10.0 10.1 10.9 10.1 10.1
8.8
7.9
7.4
7.0
21 21 21 21 21 22 24 24 24 25 24 24 25 26 FY12E FY13E FY14E

FY12E FY13E FY14E FY15E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY10
FY11
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Until FY11, NTPC's incentive profile was skewed towards generation linked incentives, supported by higher operating factors
Earnings CAGR of 20% over FY11-13, Buy with a TP of Rs229

We expect NTPC to deliver net earnings CAGR of 20% over FY11-13. Our earnings estimates factor in lower operating rates for NTPCs new capacities commissioned after March 2009 at 82-85% over FY12-13 and thus, lower overall RoEs v/s old projects with 90% ACQ coal availability contracts. Reiterate Buy with a target price of Rs229.
Growth in RAB higher than capacity addition, as capex/MW for new capacity is higher
RAB (Rs b)
RAB will post CAGR of ~20% over FY11-14 and capacity will record CAGR of 13%
Capacity (GW) 43.8 39.2 30.1 31.7 34.2
FY11
48.9
NTPC's regulated equity base will grow faster than capacity addition growth due to higher capex/MW for new capacities
22.5
24.5
25.0
27.4
29.1
458 392 205 215 224 227 265 319
155
164
167
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
Core profit growth of 21%, in line with reported profits till FY13
Generation profit (Rs b) Other income (Rs b) 115.2 96.7 79.6 22.3 83.9 98.6 27.9 31.3 129.4 30.7
NTPC's earnings growth will be robust at 20% CAGR until FY13. NTPC's earnings profile will also improve, given higher contribution from the core segment (76% in FY14 v/s 71% in FY10)
52.6 14.6 38.0 FY04
Core profit ill grow at a CAGR of ~21% over FY11-13E, while reported PAT would 84.5 80.7 record 18% CAGR growth 75.7 72.3 63.3 27.4 23.3 58.1 20.4 23.9 20.1 19.1
38.9
43.2
48.3
55.3
57.4
57.2
57.3
68.8
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY14E
June 2011
54
NTPC
NTPC near historical valuation lows; business momentum looks up NTPC PE band (x) NTPC P/BV band (x)
P/E (x) 28 23 18.4 18 13 8 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 May-06 May-07 May-08 May-09 May-10 May-11 13.9 Avg(x) 26.1 Peak(x) Min(x) 4.3 3.7 3.6 2.8 2.1 1.3 Nov-06 Nov-07 Nov-08 Nov-09 May-06 May-07 May-08 May-09 May-10 Nov-10 May-11 P/B (x) Avg(x) Peak(x) Min(x)
2.5 1.8 1.8
13.1
NTPC trades at near trough valuations due to concerns about fuel supply and SEB losses in the system, which we believe are well covered in NTPCs regulated business model. Valuations offer a buying opportunity, especially given expected momentum in business over FY12-14.
June 2011
55
NTPC
Financials: NTPC
Income Statement
Y/E March Net Sales Change (%) Total Expenditure % of Sales EBITDA Margin (%) Depreciation EBIT Interest Other Income - Rec. Profit before Tax Current Tax Deferred Tax Tax Rate (%) Reported PAT EO Exp/(Inc) Adjusted PAT Change (%) Margin (%) 2010 463,226 10.5 339,122 73.2 124,104 26.8 26,501 97,603 18,089 29,341 108,855 21,573 0 19.8 87,282 2,742 84,540 4.7 18.3 2011 567,145 22.4 425,635 75.0 141,511 25.0 24,857 116,654 21,491 25,333 120,496 29,470 1 24.5 91,025 11,446 79,579 -5.9 14.0
(Rs Million)
2012E 572,291 0.9 419,810 73.4 152,482 26.6 29,476 123,006 27,648 30,777 126,134 29,481 2 23.4 96,651 0 96,651 21.5 16.9 2013E 650,224 13.6 458,991 70.6 191,233 29.4 39,282 151,951 36,490 35,368 150,828 35,677 2 23.7 115,149 0 115,149 19.1 17.7
Ratios
Y/E March Basic (Rs) EPS (Adjusted) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Return Ratios (%) RoE RoCE 2010 10.3 13.5 75.7 3.8 41.9 2011 9.7 12.7 82.3 4.2 44.2 2012E 11.7 15.3 88.9 4.5 44.2 2013E 14.0 18.7 96.7 5.3 44.2
18.2 13.9 2.1 0.3 11.6
15.0 11.5 2.0 0.4 10.9
12.6 9.4 1.8 0.6 9.5
14.1 13.0
12.2 13.3
13.7 12.8
15.1 13.6
Working Capital Ratios Fixed Asset Turnover (x) 0.7 Asset Turnover (x) 0.5 Debtor (Days) 52 Inventory (Days) 26 Working Cap. Turnover (Days) 44 Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity
0.8 0.5 51 23 40
0.6 0.4 30 25 -51
0.5 0.4 30 25 -28
Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Deferred liabilities Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. Account Payables Provisions Net Current Assets Appl. of Funds E: MOSL Estimates
(Rs Million)
2010 2011 2012E 2013E 82,455 82,455 82,455 82,455 541,719 596,468 650,439 714,740 624,174 678,923 732,894 797,195 -1560 3028 6030 6030 394,078 439,803 545,136 672,164 1,016,692 1,121,753 1,284,059 1,475,388 668,501 320,888 347,613 321,043 148,071 307,546 33,477 66,514 144,595 62,960 107,581 76,876 30,705 748,630 1,005,345 1,280,045 345,857 375,332 414,615 440,785 630,012 865,430 334,281 350,639 302,895 123,448 111,790 108,621 353,968 36,391 79,243 161,853 76,481 130,729 103,205 27,524 437,627 39,198 47,038 270,991 80,400 246,009 212,965 33,044 428,894 44,536 53,443 247,640 83,275 230,452 194,256 36,196
2.9 5.4 0.6
2.7 5.4 0.6
1.8 4.4 0.7
1.9 4.2 0.8
Cash Flow Statement

Y/E March OP/(Loss) before Tax Interest Depreciation Direct Taxes Paid (Inc)/Dec in WC CF from Operations CF fr. Oper. incl EO Exp. 2010 108,855 18,089 26,501 -21,573 -16,330 115,542 115,542 2011 120,496 21,491 24,857 -29,470 -5,405 131,968 131,968
(Rs Million)
2012E 126,134 27,648 29,476 -29,481 140,759 294,536 294,536 2013E 150,828 36,490 39,282 -35,677 -30,175 160,749 160,749
(inc)/dec in FA -101,965 -93,367 -273,073 -226,956 (Pur)/Sale of Investments 8,236 -24,623 -11,659 -3,169 CF from Investments -93,729 -117,990 -284,732 -230,125 (Inc)/Dec in Debt Dividend Paid Interest Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 32,292 -26,056 -18,089 -28,081 -39,934 -18,121 162,716 144,595 53,912 -29,438 -21,491 295 3,279 17,258 144,595 161,853 98,810 -31,258 -27,648 59,430 99,334 109,139 161,853 270,991 127,028 -37,240 -36,490 -7,272 46,025 -23,351 270,991 247,640
199,965 223,239 191,618 198,442 1,016,692 1,121,753 1,284,059 1,475,388
June 2011
56
Update
SECTOR: UTILITIES
Coal India
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs395
TP: Rs447
Buy
COAL IN 6,316.4 422/245 9/ 31/ 2,621.3 58.9
Market-linked volumes, lower tax to drive earnings

Operating leverage a double-edged sword, inflation remains high
We expect Coal India (CIL) to report robust earnings CAGR of 27% till FY13, driven by 'market-linked' sales and lower tax rates. CIL is strongly leveraged to international prices and 'market-linked' sales will contribute 22% of volumes, 40% of revenues and higher proportion of earnings in FY12. Accumulated losses in BCCL and ECL will lead to a decline in tax rate from 34% in FY11 to 30% in FY13. Operating leverage, however, is a double-edged sword, as staff costs and contractual expenses constitute ~64% of total costs. These are largely fixed and linked to inflation - any volume disappointments will impact earnings. While FY11 production has been flat, incremental developments have been positive. Buy with a DCF-based (11.5% WACC) target price of Rs447.
Y/E March Net Sales (Rs b) EBITDA (Rs b) NP* (Rs b) EPS (Rs)* EPS Gr. (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%)** RoCE (%)
2011 2012E 2013E 502 135 109 17.3 11.2 52.7 22.8 7.5 15.2 4.1 26.4 54.2 606 167 140 22.1 27.9 67.6 17.8 5.8 11.8 3.2 26.3 53.4 695 205 175 27.7 25.2 86.3 14.3 4.6 9.0 2.6 26.2 50.9
*Adjusted EPS, **RoE is adjusted for OB reserves accounts, as appplicable under IFRS

Others, Foreign, 2.2 6.1 Domestic Inst, 1.7
Expect earnings CAGR of 27% over FY11-13 We expect CIL to report robust earnings CAGR of 27% till FY13. Reported earnings for FY12 are contingent on the quantum and timing of price increases. We have factored in 30% wage increase for non-executive staff with effect from July 2011 and a commensurate offset through a price increase only in April 2012. If CIL is able to raise prices in July 2011, FY12E earnings will increase from Rs22.1/share to Rs25.1/share. An offsetting price increase in July 2011 will be a very strong signal, reinforcing CIL's underlying pricing power. The key drivers of CIL's earnings growth will be: Increase in coal sales at market-linked prices from ~92m tons in FY11 to ~104m tons in FY12. CIL is strongly leveraged to international coal prices and marketlinked sales will contribute 22% of volumes, 40% of revenues and higher proportion of earnings in FY12. Tax breaks available at BCCL and ECL due to accumulated losses. We expect consolidated tax/PBT ratio for CIL to decline from 34% in FY11 to 32% in FY12 and further to 30% in FY13. Volume growth challenges persist, but incremental developments positive In FY11, CIL's dispatches were 423m tons (up 2%) and production was flat at 431m tons. Growth in dispatches is being impacted partly by constraints in rail wagon availability and partly by impediments in production due to environmental issues, law and order problems, land acquisition constraints, etc. We understand that ~42% of production faces constraints in evacuation infrastructure. Steps have been taken to address these through the formation of the Group of Ministers and relaxation of the comprehensive environment pollution index (CEPI) for certain mines. Operating leverage - a double-edged sword Staff costs and contractual expenses contribute ~62% of CIL's total costs. In 1HFY11, while total costs were up 4.7% YoY, staff costs and contractual expenses grew 19.4% YoY, accounting for almost the entire cost increase. A large part of this increase has been due to higher dearness allowances, led by higher inflation. We believe that staff costs and contractual expenses are largely fixed in nature. Robust volume growth could lead to strong operating leverage. However, in FY11, volume growth was modest, with dispatches up 2%, necessitating a price increase in February 2011. Inflation remains above the comfort zone and any volume disappointment will need to be absorbed by internal accruals; the surplus of Rs30b-35b from the price hike in February 2011 will be adjusted against future cost increases.
57
Promoter 90.0
Stock performance (Since Nov-10)

Coal India Sensex - Rebased 420 360 300 240 180 Jan-11 Mar-11 May-11 Nov-10
June 2011
Coal India
Expect earnings CAGR of 27% over FY11-13, aided by 'market-linked' volumes, lower tax rate
We expect CIL to report robust earnings CAGR of 27% till FY13. Reported earnings for FY12 are contingent on the quantum and timing of price increases. We have factored in 30% wage increase for non-executive staff with effect from July 2011 and a commensurate offset through a price increase only in April 2012. If CIL is able to raise prices in July 2011, FY12E earnings will increase from Rs22.1/share (up 27.9%) to Rs25.1/share (up 45.1%). An offsetting price increase in July 2011 will be a very strong signal, reinforcing CIL's underlying pricing power.
Expect earnings CAGR of 27% over FY11-13 We expect CIL to report robust earnings CAGR of 29% till FY13, and earnings for FY12 are contingent on the quantum and timing of price increases to offset the wage increase. If CIL is able to raise prices in July 2011, FY12E earnings will increase from Rs22.1/ share (up 27.9%) to Rs25.1/share (up 45.1%). An offsetting price increase in July 2011 will be a very strong signal, reinforcing CIL's underlying pricing power.
Base case: Price hike in April 2012
EPS (Rs/sh) Grow th (% YoY) 27.9 25.2
Bull case: Price hike in July 2011

EPS (Rs/sh) Grow th (% YoY) 45.1
11.2 17.3 FY11 22.1 FY12E 27.7 FY13E
11.2 17.3 FY11 25.1 FY12E
10.7
27.8 FY13E
Staff cost to increase by 27% in FY12, by 7% in FY13 We have factored in 30% wage increase for the non-executive staff with effect from July 2011 and a commensurate offset through a price increase only in April 2012. In FY12, we estimate employee cost increase of Rs50b (up 27%).
Staff cost stable (as a percentage of revenue) over FY11-13
Staff cost 38.3 0.6 36.8 36.3 0.5 As a % of revenues
Employee rationalization partially help to mitigate the impact

Employees ('000s) Cost/employee (Rs m) 0.7
182 FY11
232 FY12E
256 FY13E
392,545 FY11
384,694 FY12E
377,000 FY13E
June 2011
58
Coal India
Market-linked sales of ~96m tons in FY12, up from 92m tons in FY11 We expect coal sales at market-linked prices to increase from ~92m tons in FY11 to ~104m tons in FY12. This is post the price hike in February 2011, when the entire quantum of Grade A /B sales was benchmarked to market prices.
CIL is strongly leveraged to international coal prices and market-linked sales will contribute 22% of volumes, 40% of revenues and higher proportion of earnings in FY12.
Market linked sales (Rs b) and as percentage of revenue
E-auction Grade A/B coal*
22.5
Composition of market linked sales (m tons)

E-auction Grade A/B coal Beneficiated coal % of total offtake 21.8 17.3 13.1 5.0 14.2 5.0 14.5 48.9 28.8 FY08 FY09 5.0 14.6 45.7 10.0 15.5 47.7 15.9 17.4 28.0 18.6
Beneficiated coal % of total revenues 95.7
41.4
28.4
40.2 35.9 37.4 92.4 60.5 50.1
38.9
36.4
21.6
54.5
54.4
56.8 31.2 72.4 FY10 39.3 88.1
60.9
52.5 27.3 38.8
49.2
33.8 72.4 FY09
101.3
113.6
FY10
FY11
FY12E
FY13E
FY08
FY11
FY12E
FY13E
Market-linked sales entail direct monthly adjustment for ~55% of volumes Of the 96m-ton market-linked sales in FY12, e-auction sales will contribute ~51% (price adjustment every month) and washed/grade A-B/coking coal will contribute 49% (price adjustment annually, largely in April).
This will entail a very direct linkage to international coal prices.
Market-linked sales entail direct monthly adjustment for ~55% of volumes

Category E-auction Washed coal Grade A/B coal Total FY12 Off take (m tons) 49.2 18.6 28.0 95.8 % of total 51 19 29 100.0 Revision Basis frequency Monthly Yearly Yearly Based on Demand-Supply dynamics, immediate contribution to CILs profitability given immediate co-relation with global prices Annual contracts based on Useful Heat Value based on equivalent coal import at port, less 15% discount. Price discovery with a lag - Do -
June 2011
59
Coal India
Tax set-off from loss-making subsidiaries to contribute to overall profitability ECL and BCCL have carried forward losses of Rs82b and Rs75b, respectively, and the tax breaks will contribute to increased profitability.
Post the price hike in February 2011, we expect improved performance from both ECL and BCCL. Also, while BCCL is already in the profit zone, we expect ECL to report turnaround in FY12.
Lower tax rate as ECL's/BCCL's earnings goes up (Rs b)
Profit/loss of ECL&BCCL Tax/PBT Ratio (%) 12.0 11.3
FY11 net worth of subsidiaries (Rs b)

81 61 33 1 65
61.9
30
41.7
-43 -59 WCL SECL NCL MCL ECL CMPIL CCL BCCL
(18.8) (25.5) FY08 FY09
34.0 30.5 FY10 FY11
Expect tax rate to moderate; 1% lower tax = ~1.5% profit increase We expect consolidated tax/PBT ratio for CIL to decline to 32% in FY12 (v/s 34% in FY11) and further to 30% in FY13.
PAT is highly sensitive to tax provisions; higher profit contribution from ECL/BCCL could lower the tax impact for CIL.
Tax/PBT ratio to trend lower (%)

61.9
1% lower tax means 1.5% PAT increase

FY12E Current Estimate Tax/PBT ratio (%) PAT (Rs b) Sensitivity to PAT Tax rate lower by 1% Tax rate lower by 2% Increase in profit for (%) 1% decrease in tax rate 2% decrease in tax rate 32.0 140 142 144 1.5 3.0 FY13E 30.0 175 178 180 5.0 3.0
41.7 30.5
34.0
32.0
30.0
FY08
FY09
FY10
FY11
FY12E
FY13E
June 2011
60
Coal India
Volume growth challenges persist, but incremental developments positive

In FY11, CIL's dispatches were 423m tons (up 2%) and production was flat at 431m tons. Growth in dispatches is being impacted partly by constraints in rail wagon availability and partly by impediments in production due to environmental issues, law and order problems, land acquisition constraints, etc. We understand that ~42% of production faces constraints in evacuation infrastructure. Steps have been taken to address these through the formation of the Group of Ministers and relaxation of the comprehensive environment pollution index (CEPI) for certain mines.
Production trend: FY11 growth rate has declined meaningfully CIL's FY11 production growth was flat v/s CAGR of 5.3% over the past 10 years. Production growth has been impacted by environmental issues (CEPI/Go-No Go), law and order problems, and land acquisition constraints.
Production trend (m tons, % YoY): FY11 growth rate similar to FY00
500 400 Production (m ton) Grow th (% YoY) 9 6
300 200 261 256 259 267 280 291 306 324 342 360 378 403 430 100 431
2.5% 420 FY11
3 0 -3
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Dispatches trend: impacted by evacuation infrastructure constraints Growth in dispatches has been impacted by constraints in evacuation infrastructure, largely wagon availability. We understand that ~42% of production faces constraints in evacuation infrastructure.
Dispatches trend (m tons, % YoY)
Despatch 7.2% 5.0% 3.9% Grow th (% YoY) 7.1%
327 FY06
343 FY07
368 FY08
394 FY09
410 FY10
FY11
June 2011
61
Coal India
Evacuation infrastructure impacts ~42% of dispatches, mainly in MCL, BCCL and CCL MCL, BCCL and CCL contribute ~40% of CIL's production, ~75% of the inventory and 73% of the inventory increase. FY11 overburden removal for CIL was 738.2m cubic meters, up 8.2%. However, for these subsidiaries, the increase in overburden removal was much higher - 35.4% for BCCL, 34.3% for MCL and 11.5% for CCL.
Inventory build-up (days)
FY08 ECL BCCL CCL NCL WCL SECL MCL NEC CIL Average 67.7 76.4 110.4 9.8 26.8 25.7 53.9 24.0 45.1 FY09 32.6 86.7 100.7 5.7 21.2 17.0 69.6 109.5 42.3 FY10 41.8 120.4 123.4 11.0 22.9 23.8 86.8 100.3 54.4
BCCL, CCL, MCL production impacted by offtake issues

MCL BCCL 15 249 15 48 28 109 Production 8 23 3 2 CCL Others 4
Inventory
Incr in Inventory
Production constraints largely at MCL, NCL and WCL Production at WCL was impacted by local agitation, and MCL's expansion projects were constrained by CEPI implementation and evacuation bottlenecks. Production at ECL, MCL and NCL, which contribute 49% of overall production, was down 3.39% in FY11. Other subsidiaries reported production increase of 3.5%. SECL, which contributes 26% of production, reported production growth of 4.4% in FY11.
Production constraints largely at MCL, NCL and WCL (m tons)
SECL MCL NCL WCL CCL BCCL 30.1 27.5 47.1 45.7 67.7 104.1 108.0 FY10 ECL 30.9 29.0 47.5 43.9 66.0 100.3 112.7 FY11
31.1 23.3 40.5 43.2 51.5 69.6 83 FY06
30.5 24.2 41.3 43.2 52.2 80.0 89 FY07
24.1 25.2 44.2 43.5 59.6 88.0 94 FY08
28.1 25.5 43.2 44.7 63.7 96.3 101.2 FY09
June 2011
62
Coal India
Operating leverage - a double-edged sword

Staff costs and contractual expenses contribute ~62% of CIL's total costs. In 1HFY11, while total costs were up 4.7% YoY, staff costs and contractual expenses were up 19.4% YoY, accounting for almost the entire cost increase. A large part of this increase has been due to higher dearness allowances, led by higher inflation. We believe that staff costs and contractual expenses are largely fixed in nature. Robust volume growth could lead to strong operating leverage. However, in FY11, volume growth was modest, with dispatches up 2%, necessitating a price increase in February 2011. Inflation remains above the comfort zone and any volume disappointment will need to be absorbed by internal accruals; the surplus of Rs30b-35b from the price hike in February 2011 will be adjusted against future cost increases.
Contractual expenses, salaries drive up operating costs Staff costs and contractual expenses contribute ~62% of CIL's total costs. In FY11, while total costs were up 7%, staff costs and contractual expenses were up 9.3% and 22.7%, respectively, accounting for almost the entire cost increase. A large part of this increase has been due to higher dearness allowances, led by higher inflation.
Increase in CIL's operating costs driven by contractual expenses, salaries (Rs b)
FY06 Contractual Expenses Salaries Stores and Spares Others Total 19.7 97.9 38.9 76.4 232.9 FY07 20.9 101.0 41.3 82.9 246.1 FY08 26.3 126.4 43.8 86.8 283.3 FY09 33.4 197.4 48.6 102.3 381.7 FY10 37.3 166.6 49.3 109.0 362.1 FY11 45.8 182.1 52.3 87.5 367.7 CAGR FY11 (%) YoY (%) 18.3 13.2 6.1 2.8 9.6 22.8 9.3 6.0 -19.7 1.5
Inflation remains above the comfort zone Inflation was above 8% in all months in FY11, beginning with four months of doubledigit inflation. FY11 inflation has stayed disquietingly high despite a good monsoon and heavy policy intervention. FY11 and FY12 could be two years of highest inflation in a decade. As inflation remains above the comfort zone, any volume disappointment will need to be absorbed by internal accruals; the surplus of Rs30b-35b from the price hike in February 2011 will be adjusted against future cost increases.
FY12 inflation expected to stay high
9.4% 8.0% 7.1% 6.5% 5.5% 4.4% 3.3% 3.6% 3.4% 6.5% 4.8% 3.6% 8.0%
March 2011 inflation was 9%, lower than 10.2% in March 2010
FY11 12% 9% 11.0% 10.3% 10.0% 6% 3% 0% -3% Jul Oct Feb Jun Jan Nov May Aug Dec Sep Apr Mar 10.6% 8.3% FY10 FY09
8.9%
9.1%
9.4%
8.8%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
8.1%
9.3%
June 2011
9.0%
63
Coal India
Manpower productivity improvement a key driver of sustained earnings growth Manpower productivity in FY11 was largely flat, as a large part of the production disappointment was from efficient subsidiaries, which have the lowest staff cost per ton of coal mined. MCL and NCL, which have the lowest staff costs/ton, reported production decline of 3.7% and 2.6%, respectively in FY11.
Manpower productivity improving, but was stagnant in FY11
Staff cost (Rs/ton) efficiency driven by three subsidiaries

1,340 1,122 CIL's productivity gain is driven by 3 efficient subsidiaries, who have seen issues in production ramp-up
663
623 455 335 156 115
ECL
BCCL
WCL
CCL
SECL
NCL
MCL
CIL
NCL and BCCL are CIL's most profitable subsidiaries In 9MFY11, profitability of all CIL's subsidiaries (except MCL and NCL) was impacted by higher staff costs. For NCL and MCL, employee costs contribute just 13% and 15% of revenue, respectively. This compares with CIL average of 37%. Given the relatively lower employee costs, NCL and MCL reported increased profitability/ton.
A comparison of the profitability of CIL's subsidiaries (Rs/ton)
Except MCL and NCL, other subsidiaries have reported dip in profitability owing to higher staff cost/ton
June 2011
64
Coal India
Lower contribution from efficient mines could impact profitability Environmental issues and operational challenges have lowered incremental output from efficient mines. Despite the challenges, these mines will account for half the incremental production. A slippage in their contribution to overall production could impact aggregate profitability.
NCL/MCL's production declined in FY11...
SECL m tons 30 20 10 0 -10 FY07 FY08 FY09 FY10 FY11 MCL NCL WCL CCL BCCL ECL NEC
BCCL 5%
but likely to make the highest contribution in FY11-13

ECL 12% NEC 1% SECL 13% MCL 9%
FY11 production increase w itnessed at SECL, w hile both NCL and MCL reported de-grow th in production
CCL 25% WCL 7% NCL 28%
Operational matrix
FY10 Coal Sales (m tons) Linkages E-Auction Beneficiated coal Grade A / B Total % YoY Realization (Rs/t) Raw Coal (FSA) E-auction coal Beneficiated Coal Grade A / B Blended % YoY Cost Composition (% of Revenue) Stores & Spares Staff cost Contractual Exp Overburden Removal Adj Others Total Costs EBIDTA Margins Financials (Rs/ton) Revenues EBIDTA PBT PAT 321 46 15 28.4 410 3.9 890 1,583 2,134 2,000 1,089 10.7 11.0 37.3 8.4 6.8 12.9 76.5 23.5 1,089 256 348 240 FY11 328 48 15 28.8 420 2.5 958 1,846 2,535 2,100 1,195 9.8 10.4 36.3 9.1 5.2 12.2 73.2 26.8 1,195 320 393 260 FY12E 343 49 19 28.0 438 4.3 1,054 2,058 2,701 3,300 1,383 15.7 9.5 38.3 8.5 4.3 11.9 72.5 27.5 1,383 380 469 319 FY13E 360 54 22 28.4 464 6.0 1,174 2,087 2,824 3,366 1,495 8.1 9.5 36.8 8.3 4.3 11.6 70.5 29.5 1,495 441 538 377
June 2011
65
Coal India
Financials and Valuations: Coal India

Income Statement
Y/E March Net Sales Change (%) Operating Expenses EBITDA % of Net Sales EBITDA/ton Depreciation Interest Other Income Extra Ordinary PBT Tax Rate (%) PAT before Min. Int. Reported PAT Change (%) Adjusted PAT Change (%) FY10 466,843 14.4 362,118 104,725 22.4 243.5 13,138 1,560 52,408 2,786 139,649 43,425 31.1 96,224 96,224 362.9 98,294 76.7 FY11 502,336 7.6 367,717 134,619 26.8 312.1 16,729 619 47,963 602 164,632 55,959 34.0 108,674 108,674 12.9 109,275 11.2
(Rs Million)
FY12E 606,288 20.7 439,558 166,730 27.5 372.7 17,487 1,633 57,995 0 205,605 65,794 32.0 139,812 139,812 28.7 139,812 27.9 FY13E 694,531 14.6 489,467 205,063 29.5 433.2 19,487 1,520 65,957 0 250,013 75,004 30.0 175,009 175,009 25.2 175,009 25.2
Ratios
Y/E March Basic (Rs) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales EV /m ton of Reserves Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE* RoCE FY10 15.2 15.6 76.7 17.6 40.9 4.7 30.4 FY11 17.2 17.3 11.2 19.9 52.7 5.8 33.5 FY12E 22.1 22.1 27.9 24.9 67.6 7.3 33.0 FY13E 27.7 27.7 25.2 30.8 86.3 9.0 32.5
25.4 22.4 20.3 4.6 97.7 9.7 1.2
22.8 19.8 15.2 4.1 94.4 7.5 1.5
17.8 15.9 11.8 3.2 90.5 5.8 1.8
14.3 12.8 9.0 2.6 84.6 4.6 2.3
31.6 59.8
26.4 54.2
26.3 53.4
26.2 50.9
Leverage Ratio Net Debt/Equity (x) -1.4 -1.3 -1.2 -1.2 *RoE is adjusted for OB reserves accounts, as appplicable under IFRS
Balance Sheet
Y/E March Share Capital Reserves Net Worth Minority Interest Loans Defferd tax Liabiity Capital Employed FY10 63,164 195,289 258,453 236 20,869 -9,658 269,900 FY11 63,164 270,008 333,172 326 15,536 -8,732 340,302 370,826 245,872 124,953 25,656 10,635 55,856 30,256 99,225 458,623 393,783 47,739 179,055 340,300
(Rs Million)
FY12E 63,164 363,682 426,846 326 17,385 -8,732 435,825 426,263 253,821 172,442 29,952 9,303 67,415 36,517 109,792 544,975 451,416 83,157 224,126 435,823 FY13E 63,164 481,813 544,977 326 16,399 -8,732 552,970 472,612 262,679 209,933 34,728 7,925 77,227 41,831 127,226 671,498 512,783 104,618 300,382 552,968
Cash Flow Statement

Y/E March FY10 PBT before EO Items 136,863 Add : Depreciation 13,138 Interest 1,560 Less : Direct Taxes Paid -43,425 (Inc)/Dec in WC 36,868 CF from Operations 145,004 (Inc)/Dec in FA -19,815 (Pur)/Sale of Investments 2,232 CF from Investments -17,583 (Inc)/Dec in Networth 2,018 (Inc)/Dec in Debt -616 (Inc)/Dec in Diff. Tax Liability-109 Less : Interest Paid -1,560 Dividend Paid -29,871 Others -3,453 CF from Fin. Activity -33,591 Inc/Dec of Cash 93,830 Add: Beginning Balance 296,950 Closing Balance 390,780 FY11 164,030 16,729 619 -55,959 3,453 128,872 -24,922 2,184 -22,738 2,616 -5,333 925 -619 -36,571 -8,906 -47,887 58,248 390,778 458,623
(Rs Million)
FY12E 205,605 17,487 1,633 -65,794 41,282 200,214 -59,733 1,332 -58,401 0 1,849 0 -1,633 -46,138 -9,538 -55,460 86,353 458,623 544,975 FY13E 250,013 19,487 1,520 -75,004 50,266 246,283 -51,125 1,379 -49,747 0 -986 0 -1,520 -56,878 -10,630 -70,014 126,522 544,975 671,497
Gross Fixed Assets 349,453 Less: Depreciation 229,144 Net Fixed Assets 120,309 Capital Work in Progress 22,107 Investments 12,819 Inventory 44,018 Debtors 21,688 Loans and Advances 86,762 Cash 390,778 Current Liabilities 346,187 Provisions 82,396 Net Curr. Assets 114,663 Application of Funds 269,898 E: MOSL Estimates
June 2011
66
Update
SECTOR: UTILITIES
Power Grid Corporation

BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs99
TP: Rs125
Buy
PWGR IN 4,629.7 120/92 -1/8/-12 470.1 10.4
Meaningful acceleration in capitalization to drive core earnings

Contribution from other segments increasing, reported RoE to improve
FY12/13 are inflexion points in Power Grid's (PGCIL) growth trajectory, with capitalization of Rs225b (v/s Rs110b over FY10-11) and projects under construction of Rs839b as at March 2011 (up from Rs400b as at March 2009). Over FY09-11 PGCILs capex was Rs323b and its targeted spending over FY12-13 is Rs342b. Nine high speed transmission corridors (HSTC) to route 42GW capacity, being set up by IPPs, will accelerate spending. This, in our view, will drive execution and lead to higher earnings growth. PGCIL has one of the best business models among utilities and is relatively insulated from concerns facing regulated gencos and IPPs.
Y/E March Net Sales (Rs b) NP (Rs b) EPS (Rs) EPS Gr. (%) BV/Share (Rs ) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
2011 2012E 2013E 83.9 107.1 127.4 25.4 30.5 35.1 5.5 6.6 7.6 0.3 20.2 15.0 46.1 50.7 55.9 18.5 15.4 13.4 2.2 2.0 1.8 11.9 10.2 9.6 10.0 8.8 8.3 13.6 13.6 14.2 9.3 9.8 9.8
Bunching up of capacity driving accelerated execution Accelerated pace of generation capacity additions, with ~100GW of projects to be commissioned by FY15, will drive investment in transmission. PGCIL is also setting up nine HSTCs to evacuate 42GW of capacity, generated by IPPs. These are due for commissioning over 3-4 years, and will necessitate accelerated execution by PGCIL. PGCIL's projects under construction increased from Rs400b in FY09 to Rs810b in FY10 and to Rs839b in March 2011. Capitalization of Rs225b over FY12-13 We expect PGCIL to achieve the targeted Eleventh Plan capex spending of Rs550b, given incremental capex towards HSTCs. Over FY09-11, PGCILs capex was Rs323b and the targeted spending over FY12-13 is Rs342b. During the Twelfth Plan (FY1317), targeted capex is Rs1t+, ~2x the Eleventh Plan capex. In comparison, addition to gross block has been an average of Rs33b a year over FY08-10 and is expected to be Rs225b over FY12-13 (Rs74b achieved in FY11 against a target of Rs90b), indicating a meaningful ramp-up. Contribution from other segments increases, telecom tower lease may provide upsides PGCIL benefits from three associated activities (1) consultancy income (FY11 EBIT of Rs1.7b), (2) ST open access charges (FY11 Rs2.1b), and (3) telecom bandwidth lease (currently marginal contributor, FY11 PBT Rs334m). These streams have accounted for 15% of PAT in FY11 (v/s 6% in FY08) and pose exciting growth opportunities ahead. Besides, PGCIL has invited tenders to lease telecom towers and bids are under evaluation for four circles, J&K, HP, Punjab and Haryana. All PGCIL's new initiatives are largely capital neutral and will aid reported RoE. We expect EPS CAGR of 18% until FY13E We expect PGCILs regulated asset base (RAB) to increase from Rs135b in March 2011 to Rs203b by FY13 (up ~50%), with projects of ~Rs225b being commissioned and capitalized during this period. We expect the company to post net profit of Rs31b in FY12 (up 20%) and Rs35b (up 15%). Maintain Buy, with a target price of Rs125.

Others, 9.8 Foreign, 13.2 Domestic Inst, 7.6 Promoter 69.4

Pow er Grid Corp. Sensex - Rebased 130 120 110 100 May-10 Jan-11 May-11 Sep-10 90
June 2011
67
Bunching up of capacity driving accelerated execution

Accelerated generation capacity addition, with ~100GW of projects to be commissioned until FY15, will drive investment in transmission. PGCIL is setting up nine HSTCs with capacity to evacuate 42GW, generated by IPPs. These are due to be commissioned over 3-4 years, and will necessitate accelerated execution by PGCIL. The total number of PGCIL's projects under construction increased from Rs400b in FY09 to Rs810b in FY10 and to Rs815b in December 2010.
We expect an accelerated pace of generation capacity addition, driving investment in the chain (five-year rolling capacity addition, GW) As compared to the historical five-year rolling capacity addition of 2030GW, 106GW+ are currently under construction and are scheduled for commissioning in the next five years. This, we believe will necessitate accelerated investment in transmission capacity
160
Capacity addition over FY83-06 has largely been stagnant at 3-5GW a year. It rose to ~9GW a year from thereon
120
80 41 49 21 18 0 5 10 14 17 21 40
2012E
72
91
Share of private sector in capacity addition inches up (percentage of total) Capacity under construction 106GW as at March 2011 Eleventh Plan trend in capacity ownership mix
Centre
Private 46%
State
Private
14
Central 29%
26
34
36
36
36
32
36 32 30 30 30 30 34
51
State 25%
42
36
34
34
34
34
Aug-07
Apr-09
Nov-09
Feb-10
Apr-10
Aug-10
Dec-10
The share of the private sector in projects under construction is 46% v/s 32% under the Eleventh Plan and 18% in installed capacity as at March 2011. PGCIL has been mandated to set up transmission capacity for ~42GW of IPP projects. Trend in projects under construction (Rs b) for PGCIL
810 839
PGCIL's projects under construction have quadrupled from Rs220b in FY07 to Rs839b in FY11. After the addition of Rs580b of IPP transmission projects, we expect the trend to accelerate
620
300 220 112 140 140
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
June 2011
68
2014E
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
117
PGCIL has largely met its budget estimates for capex

Capex (Rs b) 19.8 % to Capital Employed 20.8 19.8 20.5
(Rs b)
1,200
17.3
15.7
17.6
14.1
13.2
13.8
550 106 137 157
11.3
81
189 85 FY97-01 Ninth FY02-07 Tenth FY08-12 Eleventh FY13-17 Tw elfth
25
26
24
32
41
63
66
PGCIL has been consistently meeting its budget capex target and is set to achieve Rs550b capex target under the Eleventh Plan. The shortfall due to a slowdown in central and state sector generation projects was offset by increased spending on IPP projects. The Twelfth Plan capex estimate is Rs1t , or 2x the Eleventh Plan estimate, which offers robust growth visibility.
Capitalization set to accelerate

We expect PGCIL to achieve the targeted Eleventh Plan capex spending of Rs550b, given the incremental capex towards HSTCs. Over FY09-11, PGCILs capex was Rs323b and the targeted spending in FY12-13 is Rs342b. Under the Twelfth Plan (FY13-17), targeted capex is Rs1t+, ~2x the Eleventh Plan capex. In comparison, addition to gross block has been an average of Rs33b a year over FY08-10, and we expect it to be Rs225b over FY11-13 (Rs74b achieved in FY11 out of a target of Rs90b), indicating a meaningful ramp-up.
Expect capitalization to accelerate, ~3x the capitalization in each FY09/10 (Rs b)

125
FY12E
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
PGCIL will see a significant jump in capitalization over the next two years, driven by higher capex in earlier years and delays in project commissioning to the fag end of the Eleventh Plan
100 74 60 37 36
FY08
FY09
FY10
FY11
FY12E
FY13E
Eleventh Plan capacity addition has been back ended (GW)

Target (Sep-08) Dec-10 Revised Estimate
Slippages in anticipated capacity addition in FY08/ FY09 led to bunching up of capacity addition in FY11/12. Capacity addition targets are reduced to 63GW v/s an initial target of 79GW
9.3 9.3 11.1 3.5 FY09
78.7 63.6 29.1
18.0 9.6 FY10
18.9
12.2
21.4
FY08
FY11
FY12E
Total
June 2011
69
CWIP increased sizably over FY08-10

CWIP (Rs b) CWIP as a % to CE 38 40
Delays in commissioning and strong capex intensity led to a surge in PGCIL's CWIP. At Rs204b, CWIP was 38% of CE in FY10
30 24 22 18 64 FY06 95 23
29 266 204 133 88
39 FY04
50 FY05
FY07
FY08
FY09
FY10
FY11
RAB to post CAGR of 22% over FY11-13, driven by higher capitalization (Rs b)
We expect PGCIL's RAB to post CAGR of 22% over FY11-13, driven by higher capitalization and build-up in CWIP over FY08-10
187 156 76 83 101 113 127
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
Contribution from other segments increase, reported RoE to improve

PGCIL benefits from three associated activities (1) consultancy income (FY11 EBIT of Rs1.7b), (2) ST open access charges (FY11 Rs2.1b), and (3) telecom bandwidth lease (currently marginal contributor, FY11 PBT Rs334m). These streams will together account for 15% of PAT in FY11 (v/s 6% in FY08) and pose exciting growth opportunities ahead. Besides, PGCIL invited tenders to lease telecom towers and bids are under evaluation for four circles J&K, HP, Punjab and Haryana. All PGCIL's new initiatives are largely capital neutral, and will aid reported RoE.
Up-tick in contribution from consultancy, telecom businesses (Rs m)

Consultancy w ork 9.8 Telecom division % of Trans Business Profits 1,668 8.4 7.3 5.6 3.8 110 -104 FY10 FY11 FY12E FY13E 553 1,752 8.9 1,022
PGCIL's telecom and consultancy divisions together will contribute ~10% of the transmission business profits by FY13
1,413 1,161 917
1,457
-180 FY08
-321 FY09
June 2011
70
ST open access: Direct correlation with merchant volumes (Rs m) PGCIL's ST open access income increased by 5x over FY07-11, driven by higher inter-regional movement of power. We believe FY12/13 will be a transition point for ST power, leading to meaningful increase in volumes
738
FY07
387
FY08
FY09
616
FY10
1,242
FY11
Telecom business could provide upside
The telecom business contribution is driven largely by lease of bandwidth; lease of telecom towers could provide an upside.
We expect EPS CAGR of 18% by FY13; Buy with a TP of Rs125

We expect PGCILs regulated asset base (RAB) to increase from Rs135b in March 2011 to Rs203b by FY13 (up ~50%), with projects of ~Rs225b being commissioned and capitalized during this period. We expect the company to post net profit of Rs31b in FY12 (up 20%) and Rs35b (up 15%). Maintain Buy, with a target price of Rs125 (DCF based, WACC 9%).
Increased regulated asset base to drive core earnings (Rs b)

RAB Core Earnings
Core earnings to grow 50% till FY13
2,115
33.0 27.4 22.1 18.2 11.6 12.7 14.2 158.1 191.9 76.2 83.4 100.8 113.4 129.6 FY07 FY08 FY09 FY10 FY11 FY12E FY13E
Core earnings will post CAGR of 21% over FY11-13, in line with an increase in RAB
June 2011
71
Reported earning growth to be impacted given decline in other income; RoE to improve (%)
Net profit 15 RoE (%) 14
Contribution from other income to decline from ~14% in FY10 to 8% in FY13, limiting reported profit growth. RoE to improve due to stagnant CWIP/Capital Employed ratio and addition to RAB
14 13 11 19.4 23.0
14
14
10
30.5 25.4 15.7
35.1
9.4 FY06
10.9
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
PGCIL trades near historical low valuations, despite the recent outperformance
P/E (x) 36 35.2 30 24 19.3 18 13.6 12 Oct-07 Nov-08 Nov-09 May-08 May-09 May-10 Nov-10 May-11 14.6 Avg(x) Peak(x) Min(x)
P/B (x) 4.7 3.9 3.1 2.5 2.3 1.5 Oct-07 Nov-08 May-08
Avg(x)
Peak(x)
Min(x)
4.5
1.9 1.9 Nov-09 May-09 May-10 Nov-10 May-11
PGCIL trades near its historical low valuations despite recent outperformance
June 2011
72
Financials: Power Grid Corporation

Income Statement
Y/E March Net Sales Change (%) Cost of Goods Sold Staff Cost EBITDA % of Net Sales Depreciation Preliminary Exps w/off Interest Other Income PBT Tax Rate (%) Reported PAT Extra-ordinary items Adjusted PAT Change (%) 2010 71,275 8.3 7,267 5,074 58,933 82.7 19,797 219 15,432 3,759 26,263 5,854 22.3 20,409 2,621 23,031 18.6 2011 83,887 17.7 7,459 5,915 70,513 84.1 21,994 0 17,339 7,111 38,247 11,278 29.5 26,969 -1,569 25,400 10.3
(Rs Million)
2012E 107,110 27.7 8,391 6,654 92,064 86.0 26,115 0 24,856 4,117 45,210 14,668 32.4 30,542 0 30,542 20.2 2013E 127,406 18.9 9,650 7,652 110,104 86.4 31,403 0 30,181 3,459 51,979 16,864 32.4 35,115 0 35,115 15.0
Ratios
Y/E March 2010 Basic (Rs) Consolidated EPS 5.5 Growth (%) 18.6 Cash EPS 10.2 Book Value 37.9 DPS 1.5 Eq. Div.Payout (incl.Div.Tax.) 34.8 Valuation P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2011 5.5 0.3 10.2 46.1 1.5 29.1 2012E 6.6 20.2 12.2 50.7 1.8 30.9 2013E 7.6 15.0 14.4 55.9 2.1 30.9
18.5 9.9 11.9 10.0 2.2 1.5
15.4 8.3 10.2 8.8 2.0 1.8
13.4 7.1 9.6 8.3 1.8 2.1
15.1 8.6
13.6 9.3
13.6 9.8
14.2 9.8
113 0.2
138 0.2
75 0.3
75 0.3
Balance Sheet
Y/E March Equity Share Capital Reserves Net Worth Loans Deferred tax liability Advance against dep Grant in Aid Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Other Current Assets Loans & Advances Current Liab. & Prov. Net Current Assets Application of Funds E: MOSL Estimates 2010 42,088 117,331 159,383 344,168 7,035 22,136 1,988 534,711 432,023 111,410 320,613 204,222 14,532 96,273 3,449 22,149 32,776 4,875 33,024 100,929 -4,656 534,711 2011 46,297 167,373 213,646 408,828 11,467 21,761 1,713 657,415 505,644 133,404 372,240 266,246 13,651 105,171 3,815 31,621 36,801 4,995 27,940 99,893 5,279 657,415
(Rs Million)
2012E 46,297 188,466 234,739 495,038 13,978 21,761 1,713 767,229 605,644 159,519 446,125 334,789 10,821 96,013 4,989 22,009 26,022 5,744 37,250 120,519 -24,506 767,229 2013E 46,297 212,717 258,990 602,445 16,864 21,761 1,713 901,773 730,644 190,922 539,722 394,789 9,017 95,912 5,934 26,179 15,649 6,606 41,544 137,666 -41,754 901,773
2.0
1.7
2.0
2.3
Cash Flow Statement

Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations 2010 27,226 19,797 15,432 5,854 13,141 69,742 2011 38,291 21,994 17,339 11,278 -5,910 60,436 -44 60,392 -135,645 882 -134,764 35,152 68,441 17,339 7,858 78,396 4,024 32,776 36,801
(Rs Million)
2012E 45,210 26,115 24,856 14,668 19,006 100,519 0 100,519 -168,543 2,830 -165,714 0 88,721 24,856 9,449 54,416 -10,779 36,801 26,022 2013E 51,979 31,403 30,181 16,864 6,876 103,574 0 103,574 -185,000 1,804 -183,196 0 110,293 30,181 10,864 69,249 -10,373 26,022 15,649
EO Income -963 CF frm Oper. incl. EO Items 68,779 (Inc)/Dec in FA -100,487 (Pur)/Sale of Investments 1,396 CF from Investments -99,091 (Inc)/Dec in Net Worth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -104 61,438 15,432 7,102 38,799 8,488 24,289 32,776
June 2011
73
Initiating Coverage
SECTOR: UTILITIES
NHPC
BSE SENSEX S&P CNX
18,232 Bloomberg Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
5,473 NHPC IN 12,301 34/22 0/-6/-24 305.1 6.5
CMP: Rs25
TP: Rs27
Neutral
Bunching of capacity to drive core earnings growth, RoE

Growth visibility poor; risks include higher cost, delays and generation linked recovery
NHPC is facing delays in project execution and related cost escalation, which impacted earnings growth/RoE improvement. The CEA's latest review of hydro power projects indicates NHPC's 4.2GW capacity, which is under construction, will be commissioned by FY15, doubling capacity to 9.5GW from 5.3GW in March 2011. Earnings growth is thus expected to be robust at 14.7% over FY11-13. However, RoE improvement will be limited to ~7.5% by FY13 vs 6.3% in FY11, as cash/CWIP comprise 42% of capital employed in FY11 and FY13. NHPC is executing only one project of 330MW due to be commissioned beyond FY15, which provides poor growth visibility. The key risk to the business includes lower than normal monsoons leading to delay in recovery of RoE, non-approval/delays in project costs and delays in capacity addition. We initiate coverage with a Neutral rating.
Y/E March Net Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS(Rs) EPS Gr. (%) BV/Share (RS) P/E (X) P/BV (X) EV/EBITDA (X) EV/ Sales (X) RoE (%) RoCE (%)
2011 2012E 2013E 51.4 34.6 17.9 1.5 7.3 22.3 17.0 1.1 12.4 8.4 6.3 8.1 53.2 39.1 19.8 1.6 10.6 23.3 15.4 1.1 9.9 7.3 6.5 6.9 60.5 45.3 23.6 1.9 19.1 24.5 12.9 1.0 8.2 6.1 7.5 7.8
We expect bunching over FY12-14 due to execution delays Hurdles such as geological surprises, local unrest and environmental issues have led to delays in NHPC's project commissioning by six months to three years for its 4.5GW of projects under construction. This is despite NHPC having spent 40-80% of its cost on the projects as at March 2010. According to CEA's latest review and in our view, the projects will bunch up for commissioning over FY12-14. We expect NHPC to commission 515MW in FY12, 1.1GW in FY13,1.8GW in FY14 and 750MW in FY15. Cost overruns, lower generation could impact RoEs Cost overruns are inevitable in hydro power projects due to complexities and delays. For projects under construction, NHPC has witnessed a 30-80% increase in its cost and thus, cost approvals by state regulators/discoms pose a risk to earnings. NHPC had faced issues of cost overruns not being allowed initially for its Dulhasti, Chamera and Teesta V projects. Besides, as per new tariff norms NHPC's recovery of RoE is partly linked to generation and thus, hydrology risk is passed on to it. Although this is allowed to be recovered over the years, the shortfall in generation may delay recovery of RoE and impact NHPC's reported earnings/RoE. NHPC's reported RoE moved up from 5% in FY06 to 7% in FY10 as it received tariff arrears on projects for which its higher costs were approved. Earnings CAGR of 15% over FY11-13, RoE expansion limited We expect NHPC to report earnings CAGR of 14.7% over FY11-13, driven by commissioning of 1.6GW of projects, and its RAB to grow from Rs70b in FY11 to Rs94b in FY13. Our estimates assume latest cost estimates and delays in approval/ disapproval could impact earnings. We expect NHPC's reported RoE to be subdued over FY11-13, as CWIP remains high and cash on books yields lower returns (together accounting for 42% of capital employed in FY11, expected to fall to 35% by FY14). Reported RoE is thus expected to grow from 7% in FY10 to 9% in FY14. Valuations fair, growth option limited The stock offers very limited growth opportunity, with a PER of 12.9x FY13E (in line with 12.6x for NTPC, with a better growth profile) and 1x P/BV (a large part of net worth deployed in cash/CWIP) and are reasonable in our view. We initiate coverage with a Neutral rating and a target price of Rs27.
74

Domestic Others, Inst, 2.6 9.1 Foreign, 1.9 Promoter 86.4

NHPC Sensex - Rebased 40 35 30 25 20 Nov-10 May-10 Feb-11 May-11 Aug-10
June 2011
NHPC
We expect bunching over FY12-14 due to execution delays

Hurdles such as geological surprises, local unrest and environmental issues have led todelays in NHPC's project commissioning by six months to three years for its 4.5GW of projectsunder construction and its recently commissioned 120MW Sewa project. This is despiteNHPC having spent 40-80% of its project costs as at March 2010. According to CEA's latest reviewand in our view, the projects will bunch up for commissioning over FY12-14. We expect NHPCto commission 515MW in FY12, 1.1GW in FY13,1.8GW in FY14 and 750MW in FY15. Our estimatesare more conservative than the management guidance of ~4.2GW over FY12-14.
Hydro power projects prone to sizable delays NHPC has faced six months to three years' delay in project commissioning due to hurdles such as geological surprises, local unrest and environmental issues.
Projects have been delayed
Sep-17 May-16 Dec-14 Aug-13 Apr-12 Nov-10 Jul-09 Chamera III Subansiri Parbati III Teesta III Teesta IV Nimoo Bazgo Parbati II Uri II Sewa II Chutak 0 7 16 22 13 20 13 14 21 18 20 10 Original CoD Revised CoD Delay (Months) 36 30 40
Capacity addition has been prolonged Delays in project execution impacted NHPC's growth. In July 2009, NHPC planned to commission its 9.5GW capacity by FY13, but now this is feasible by FY15. Over the past four years, NHPC added capacity of only 120GW and growth over FY06-08 was driven by projects in which capacity addition was delayed by more than 3-4 years.
Slippages in capacity addition targets (GW)
IPO (July-09) Mar-10 Dec-10 Apr-11
Installed capacity flat since over the past four years (GW)
7.5
9.5
6.0
9.5 8.7
9.5
9.5
5.2 4.7 3.8
5.2
5.2
5.3
5.3 5.2 5.2 5.2
5.3 5.3
6.5 5.8
6.1
6.5 6.9
6.7
FY10
FY11
FY12E
FY13E
FY14E
FY15E
FY06
FY07
FY08
FY09
FY10
FY11
June 2011
75
NHPC
A large portion of the project costs has been incurred For projects under construction, NHPC spent 40-80% of the projects costs (revised, subject to approval) as at March 2010. Even so, FY11 capacity addition was restricted to 120MW. Delays have been traced to local unrest, extreme work conditions impacting execution and landfalls during execution.
Sizable costs have been incurred, which offers confidence on capacity addition (Rs b)
100 75 50 25 0 ChameraIII TLDP Phase-3 Chutak Sewa* Nimoo Bazgo Cost Spent till FY10 79% 59% 59% 49% 42% 64% 42% 49% 60% 47% % of total cost spent
*Sewa project commissioned in FY11
Bunching of capacity addition in FY12-14 likely In its April 2011 review of hydro power projects CEA indicates that NHPC is expected to commission a sizable capacity in FY14. However, the management indicated capacity addition of ~4.2GW over FY12-14. We expect NHPC to commission a sizable capacity addition (in line with CEA estimates) over FY12-14 given that major projects have been under construction for more than four years and a large part of the project costs have been incurred.
NHPC to witness sizable capacity addition over FY12-14 (GW)
1.80 1.11 0.75 0.52
FY12
FY13
FY14
Subhansri
FY15
Parbati III
Uri -II
TLDP Phase-4
Parbati II
June 2011
76
NHPC
Earnings were impacted as approvals for project cost overruns were delayed (Rs b)
24
Reported FY10 net profit was driven by tariff arrears approved for Dulhasti, Chamera and Teesta
60
18
45
Dulhasti project tariff was approved in FY10 (Rs4.9/unit) and the project was commissioned in April 2007, six years behind schedule
52
12
30 13
15
0 FY07 FY08 FY09 FY10
0 Original Revised/Approved
Hydrology risk could impact recoveries The CERC tariff regulation for FY10-14 links recovery of fixed charges to generation and thus, under recovery is rolled over to the next year. Tariff regulation ensures no under recovery for project returns, but delays in recovering the fixed charge could impact earnings/RoE.
Current tariff regime places hydrology risk with developer
2010-14 Through capacity charges and energy charges, where Capacity Charge (Rs.m) = AFC x 0.05 x (Actual NAPAF) Energy Charge (Rs/Kwh) = AFC x 0.05/Design Energy (Adjusted for Auxiliary consumption & free power) Incentives for generation capped at Re0.8/unit Hydrological risks shared by generator and beneficiary as incentives based on NAPAF (dependent on availability of water) 2005-09 Through primary charges and capacity charges, where Primary Energy Charge = Design Energy x lowest variable charge of thermal plant Capacity Charge (Rs.m)=AFC - Primary energy charge Incentives are charges at primary energy rate Generators insulated from hydrological risks as incentives based on machine availability
FY09 a drought year, but outside the current tariff regulation In FY09, the monsoons were at "drought" levels, as per the Indian Meteorological Department (IMD). Many of NHPC's projects suffered generation losses compared with design energy projects. Since the FY05-09 tariff regulation did not provide for AFC recovery linked to generation (or was covered under the offsetting formula), NHPC did not suffer heavily. In future however, the risk of lower generation could impact earnings.
Trend in design energy and actual generation of operating projects
Capacity (MW) Indira Sagar* 1000 Omkareshwar* 520 Baira Siul 198 Chamera- I 540 Chamera- II 300 Dhauli Ganga 280 Dulhasti 390 Loktak 105 Rangit 60 Salal 690 Tanakpur 94.2 Teesta V 510 Uri 480 Grand Total 5,167 * Owned through NHDC June 2011 Design Energy (BUs) 1,979 1,167 779 1,665 1,500 1,135 1,907 448 339 3,082 452 2,573 2,587 19,612 FY11 10.38 -15.74 -9.03 44.75 -4.54 1.13 16.92 35.41 5.85 3.48 1.59 0.65 16.15 8.63 % Surplus/Shortfall FY10 7.28 -18.34 -20.03 23.66 -8.87 0.00 18.77 -14.96 -2.95 -1.95 4.20 0.62 4.48 2.08 FY09 -20.67 -31.45 -13.86 28.65 -8.60 -1.50 15.52 10.94 -1.77 -2.47 -4.87 -26.74 17.20 -2.82
77
NHPC
Earnings CAGR of 15% over FY11-13E, RoE expansion limited

We expect NHPC to report earnings CAGR of 14.7% over FY11-13E, driven by commissioning of 1.6GW of projects and its RAB to grow from Rs70b in FY11 to Rs94b in FY13E. Our estimates assume the latest project cost estimates and delays in approval/disallowance could impact earnings. We expect NHPC's reported RoE to be subdued over FY11-13, as CWIP remain high, and cash on books yields lower returns (together accounting for 42% of capital employed in FY11, expected to fall to 35% by FY14). NHPC's reported RoE is expected to grow from 7% in FY10 to 9% in FY14.
Capacity addition, revised higher cost to drive RAB increase The commissioning of 1.6GW of projects over FY12-13 will drive NHPC's regulated equity base. We factor in the revised cost estimates and thus delay in approval/ disallowance poses a risk to our estimates However, the addition to RAB is back ended and thus, the full benefit in earnings will be see in FY14 or FY15.
NHPC's RAB to increase sizably (Rs b)
160 RAB Yearly RAB Additon 113 19 120 17 80 68 2 7 25
40
0 FY10 FY11 FY12 FY13 FY14 FY15
Core earnings growth robust, earnings CAGR 15% over FY11-13E NHPC is expected to post earnings CAGR of 15% over FY11-13, driven by capacity addition and addition to regulated equity. RoE expansion will be limited (119bp in absolute terms), since cash/CWIP stay high.
Strong earnings CAGR over FY11-13E, RoE expansion limited
Reported PAT (Rs b) Reported RoE (%) 23.6 16.7 13.3 7.0 6.4 6.5 6.3 17.9 19.8 7.5 29.2 8.8
FY09
FY10
FY11
FY12E
FY13E
FY14E
June 2011
78
NHPC
Sizable part of captial employed in cash/CWIP NHPCs reported RoE will be subdued over FY11-13, as CWIP remains high and cash on books yields lower returns (together accounting for 42% of capital employed in FY11, expected to fall to 35% by FY14).
Cash, CWIP account for 42% of capital employed (Rs b)
540 CE Cash and Investment as % to CE 60%
480
53%
420 360
45% 38%
300 FY10 FY11 FY12 FY13 FY14 FY15
30%
Valuations fair, growth limited

NHPC has been working on 330MW of projects for benefit in the Twelfth Plan, besides 4.5GW of projects already under construction. The management said ~6GW of projects were in the clearance stage, 4.1GW in the survey stage and 6.3GW (JV project) in the MoU stage. NHPC aims to commission 20GW by FY20. This, in our view, is optimistic due to a lack of strong pipeline of projects under construction and delays. Besides, NHPC's management guided that the CBT deadline did not apply to it but our discussion with regulators does not support the view. However, the MoP indicates a possible extension. Thus, the stock offers limited growth opportunity, with a PER of 12.9x FY13E (in line with 12.6x for NTPC, which has a better growth profile) and 1.0x P/BV (a large part of the net worth deployed in cash/CWIP) and are reasonable in our view. We initiate coverage with Neutral rating and a target price of Rs27/sh.
Pipeline strong, growth visibility poor Although the pipeline for NHPC is robust, there is ambiguity about whether these projects are allowed under the ABT mechanism. If they are not, NHPC's growth will be restricted to the Kishanganga project (330MW).
List of projects under development, awaiting clearances
Project Lakhwar Vyasi Pakal Dul Kotli Bhel IA Kotli Bhel IB Kotli Bhel II Teesta IV Loktak Downstream Vyasi Hydro Bursar Hydroelectric Karmoli Lumti Garba Tawaghat Chungar Chal Lachen Hydroelectric Tawang I & II Subansiri (Middle) Subansiri (Middle) Total June 2011 Capacity (MW) 120 1,000 195 320 530 520 66 120 1,020 55 630 240 210 1,500 1,600 1,600 9,726
79
NHPC
NHPC: 1 year P/E band chart

P/E (x) 26 24.7 22 18 14 10 Feb-10 Nov-09 May-10 Nov-10 Feb-11 May-11 Aug-09 Aug-10 18.5 14.0 Avg(x) Peak(x) Min(x)
NHPC: 1 year P/BV band chart

P/B (x) Avg(x) Peak(x) Min(x)
2.0 1.8
1.7 1.5
14.4
1.3 1.0 Feb-10 May-10
1.4 1.0 Feb-11 Nov-09 Aug-09 Aug-10 Nov-10 1.1 May-11
NHPC valuations at a significant discount to historical averages
June 2011
80
NHPC
Financials: NHPC
Income Statement
Y/E March Net Sales Change (%) Total Expenditure EBITDA Margin (%) Depreciation EBIT Interest on Power bonds Interest Other Income - Rec. Profit before Tax Tax Tax Rate (%) Reported PAT EO (Expense) / Income Adjusted PAT Change (%) Margin (%) Less: Mionrity Interest Net Profit 2010 52,273 50.4 9,971 41,301 79.0 12,827 28,474 0 7,394 6,473 27,542 4,766 17.3 22,776 -6,039 16,726 25.7 32.0 1020 15,706 2011 51,437 -1.6 13,798 34,615 67.3 11,666 22,949 0 6,709 8,071 30,876 7,945 25.7 22,931 1,572 17,939 7.3 34.9 1466 16,473
(Rs Million)
2012E 53,162 3.4 12,302 39,107 73.6 13,617 25,490 1,499 7,277 6,560 26,270 6,437 24.5 19,833 1 19,833 10.6 37.3 1562 18,270 2013E 60,456 13.7 13,336 45,297 74.9 16,214 29,083 1,349 7,532 8,539 31,438 7,822 24.9 23,616 1 23,616 19.1 39.1 1677 21,939
Ratios
Y/E MARCH Basic (Rs) EPS (Adjusted) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Dividend Yield (%) Return Ratios (%) RoE RoCE Adjusted RoE Working Capital Ratios Debtor (Days) Inventory (Days) Leverage Ratio (x) Current Ratio Debt/Equity 2010 1.4 2.3 20.4 0.5 31.2 2011 1.5 2.3 22.3 0.5 31.3 2012E 1.6 2.6 23.3 0.4 28.5 2013E 1.9 3.1 24.5 0.5 29.0
18.2 10.7 1.2 7.8 9.8 2.0
17.0 10.8 1.1 8.4 12.4 2.0
15.4 9.6 1.1 7.3 9.9 1.6
12.9 8.0 1.0 6.1 8.2 1.9
7.0 8.5 7.5
6.3 8.1 6.8
6.5 6.9 7.1
7.5 7.8 8.0
107 3
157 3
68 4
57 4
Balance Sheet
Y/E March Equity Share Capital Total Reserves Net Worth Minority Interest Deferred liabilities Adv. Against Depriciation Long Term Loan Total Loans Capital Employed Gross Block Less: Accum. Deprn. Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov. CL Provisions Net Current Assets Appl. of Funds E: MOSL Estimates 2010 123,007 128,065 251,072 15,895 2,521 15,398 163,515 163,515 448,402 280,117 57,101 223,016 128,659 33,455 98,390 483 15,338 61,895 20,673 47,347 22,470 24,877 51,043 448,402 2011 123,007 150,873 273,880 17,357 2,774 15,076 167,716 167,716 476,803 309,837 68,756 241,081 158,013 43,194 86,749 392 22,166 42,653 21,538 52,143 24,143 28,000 34,606 476,895
(Rs Million)
2012E 123,007 163,493 286,500 18,920 2,743 15,089 166,208 166,208 489,461 337,481 82,373 255,108 155,072 12,962 113,425 614 9,888 83,800 19,123 47,106 22,196 24,910 66,319 489,461 2013E 123,007 178,591 301,599 20,596 2,743 15,089 173,581 173,581 513,609 406,481 98,588 307,894 111,006 11,665 137,148 708 9,418 106,986 20,037 54,104 25,579 28,525 83,044 513,609
2.1 0.4
1.7 0.5
2.4 0.3
2.5 0.2
Cash Flow Statement

Y/E March 2010 Oper. Profit/(Loss) before Tax27,542 Interest 7,394 Depreciation 12,827 Direct Taxes Paid -4,766 (Inc)/Dec in WC -535 CF from Oper. incl EO exp.42,461 (inc)/dec in FA (Pur)/Sale of Investments CF from Investments Issue of Shares (Inc)/Dec in Debt Dividend Paid Interest Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance -31,771 -15,552 -47,323 44,794 14,206 -7,105 -7,394 44,501 39,640 26,069 65,708 2011 30,876 6,709 11,666 -7,945 -2,806 38,500 -71,304 -9,739 -81,043 13,523 4,201 -7,188 -6,709 3,827 -38,716 61,895 23,179
(Rs Million)
2012E 26,270 7,277 13,617 -6,437 9,434 50,161 -24,703 30,232 5,530 0 -1,508 -5,650 -7,277 -109 -14,545 41,146 42,653 83,799 2013E 31,438 7,532 16,214 -7,822 6,461 53,824 -24,933 1,296 -23,637 0 7,373 -6,841 -7,532 -7,001 23,186 83,800 106,986
June 2011
81
Update
SECTOR: UTILITIES
Tata Power
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs1,227
TP: Rs1,272
Neutral
Bloomberg Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf.(%) M.Cap. (Rs b) M.Cap. (US$ b)
TPWR IN 237.3 1,465/1,142 -2/-2/-13 287.2 6.3
Commodity earnings drive medium term profitability

FY12 to be an inflexion point, possibly the peak year of earnings until FY14
FY12 will be an inflexion point for Tata Power, due to the (1) commissioning of the first unit of the Mundra UMPP, (2) 1GW of the Maithon project becoming operational in phases, providing merchant upsides (as PPA starts from FY13), and (3) greater visibility on KPC/ Arutmin Mines production ramp-up and continued robust realizations. However, FY12 could also be Tata Power's peak year of earnings in the medium term, given (1) increasing losses from Mundra UMPP, (2) one-time merchant gains from the Maithon project, and (3) no new visibile capacity addition before FY16, as most projects are in the initial stages of development. Re-negotation of fixed price contract for coal supply with KPC/Arutmin Mines remains a key variable to watch for in the near term. We maintain Neutral.
Y/E March Net Sales (Rs b) EBITDA (Rs b) NP* (Rs b) EPS (Rs)* EPS Gr. (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales (x) RoE (%) RoCE (%)
2011 2012E 2013E 69.2 72.8 78.5 15.5 20.5 20.7 19.4 27.2 25.3 78.6 110.1 102.2 26.1 40.0 (7.1) 487 519 545 15.4 2.5 22.5 5.0 7.0 5.8 11.0 2.3 17.6 5.0 9.0 7.2 11.8 2.2 17.9 4.7 7.2 6.6
Commodity earnings to drive medium-term profitability Over FY11-13, we expect Tata Power's consolidated earnings to increase from Rs19.4b in FY11 to Rs25.3b in FY13 (CAGR of 14%). However, commodity earnings will drive a very meaningful part of the increase, as Tata Power is net long on coal by 19-20mt a year. The contribution of commodity earnings to consolidated profitability increased from 9% in FY08 to 44% in FY11, and we expect this to increase to 59% in FY13. Mundra UMPP commissioning to impact profitability from FY13 Given the competitive tariff bid and increasing prices of imported coal (from US$35-40/ ton in 2007 to US$70-75/ton currently), we expect Mundra UMPP to post meaningful losses. Year-1 quoted tariff is Rs1.9/unit and given permissible escalations, we estimate applicable tariff of Rs2.3/unit, resulting in annual losses of ~Rs6b on full commissioning in FY14. After it commissions the Mundra UMPP the profitability of the chain (coal mining + Mundra UMPP) will decline from Rs13.6b in FY12 to Rs10.6b in FY14. Projects under construction largely have regulated/controlled returns We expect Tata Power to commission 5.1GW capacity until FY14, including the Mundra UMPP (4GW) and Maithon (1GW), where offtake has been tied up. Tata Power's merchant capacity is 200MW (commissioned); ~600MW from its Maithon project will also be available for merchant sale in FY12 (as the PPA is effective from April 2012). The incremental project pipeline is 6.9GW, of which 1.3GW is based on captive mines. For other capacities, fuel sourcing has yet to be tied up. Valuation and view We expect Tata Power to post consolidated PAT of Rs27.2b in FY12 (up 40%). Our SOTP-based target price is Rs1,272, comprising Rs527/share for Mumbai distribution (DCF, WACC of 10.5%), Rs80/share for Delhi distribution (15x FY12E PER), defense business Rs14/share (15x FY12E EV/EBIDTA), Rs10/share Tata BP Solar Rs40/ share (20x FY12E PER), Powerlinks Transmission Rs14/share (1.4x FY12E P/BV), investment Rs236/share (BV or market price, with 25% holdco discount), Mundra UMPP + mining JVs at Rs320/share (DCF), Maithon project at Rs78/share, projects under development at Rs80/share and net debt of Rs122/share. Indonesian regulations specify mineral exports at reference prices and strict implementation could possibly impact earnings by Rs3b a year (~3mt to be procured at fixed prices). We maintain our Neutral recommendation.
82
* Consolidated; EPS calculated on fully diluted equity

Others, 16.1 Promoter 31.9
Foreign, 23.5
Domestic Inst, 28.6

Tata Pow er Sensex - Rebased 1,600 1,475 1,350 1,225 May-10 May-11 Nov-10 Aug-10 Feb-11 1,100
June 2011
Tata Power
Commodity earnings to drive medium-term profitability, which could peak in FY12

Over FY11-13, we expect Tata Power's consolidated earnings to increase from Rs19.4b in FY11 to Rs25.3b in FY13 (CAGR of 14%). However, a very meaningful part of the increase will be driven by commodity earnings, given that Tata Power is net long on coal by 19-20mt a year. The contribution of commodity earnings to consolidated profitability increased from 9% in FY08 to 44% in FY11, and we expect this to increase to 59% in FY13.
Commodity earnings to drive medium-term profitability Tata Power is net long on coal to the extent of ~20mt. Hence, the contribution of commodity profit to consolidated profit is higher.
Tata Power is net long on coal (m tons)
Production TPWR share (A) FY08 54.2 16.3 Total Pass through Net requirement based on exposed* on CERC Index coal (B) 0.0 0.0 0.0 0.0 0.0 0.7 4.0 5.6 0.0 0.0 0.1 0.3 0.9 4.3 5.9 Loan position
16.3 15.8 18.8 17.2 20.0 18.8 20.6
FY09 52.8 15.8 0.0 FY10 63.1 18.9 0.1 FY11 58.2 17.5 0.3 FY12 69.8 21.0 1.6 FY13 76.8 23.0 8.3 FY14 88.3 26.5 11.6 * Requirement for Mundra UMPP (4,000MW) and Trombay (100MW)
We expect profitability from KPC/Arutmin Mines to grow to ~2x over CY09-12 due to volume growth and realization improvement, providing strong operating leverage. Besides, there are plans to expand volumes to 100mt over the next three years, with capex of US$1.2b. We believe volume will be a key earnings driver, going forward.
Expect robust profitability for mining companies (US$ m)

Expect m eaningful im provem ent in reported profitability
driven by strong volume and price growth

Sales (m ton) Realization (USD/t) 73 63 44 68 75 78 80 82
1,000 544 119 123 223 368 532 659
1,117
40 31 25 31 36 44
41
50
55
52
58
59
(5) 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E
June 2011
83
Tata Power
The contribution of commodity earnings to consolidated profitability increased from 9% in FY08 to 44% in FY11 and we expect this to increase to 59% in FY13. A large part of the increase in FY12 will be driven by a 'one-time' contribution from merchant capacity at the Maithon project, given commissioning of Unit 1 in June 2011, and PPA obligations will start from the end of FY12.
Contribution of commodity earnings to consolidated profit will inch up (Rs b)
Utility Commodity Others 19.4 14.8 11.9 7.5 0.9 6.0 0.6 5.9 5.4 2.2 4.9 7.7 7.9 11.0 8.4 3.9 FY12E FY13E FY14E 2.9 8.6 13.4 14.9 17.3 27.2 2.8 25.3 2.0 25.0 3.8
FY08
FY09
FY10
FY11
Mundra UMPP commissioning to impact profitability

Given the competitive tariff bid and increasing imported coal prices (from US$35-40/ton in 2007 to US$70-75/ton currently), we expect Mundra UMPP to post meaningful losses. Year-1 quoted tariff is Rs1.9/unit and given permissible escalations, we estimate an applicable tariff of Rs2.3/unit, resulting in annual losses of ~Rs6b on full commissioning in FY14. After the commissioning of the Mundra UMPP, the profitability of the chain (coal mining + Mundra UMPP) will decline from Rs13.6b in FY12 to Rs10.6b in FY14.
We expect Mundra UMPP to post losses of Rs6b a year, as ~25% of the fuel basket is exposed to spot prices for five years and 50% will be exposed after five years. (It has a fixed price contract with KPC/Arutmin Mines for the first five years for procuring ~3mt). Recent revisions as per Indonesian regulations specify mineral exports at reference prices, and could possibly impact earnings by Rs3b a year.
Mundra UMPP to post losses (Rs b)

0.1 0.0 -0.1 -5.0 -0.2 -0.3 -0.4 FY12E FY13E FY14E FY15E FY16E FY17E -8.0 Rs / unit (LHS) Rs b (RHS) 1.0
-2.0
-11.0
June 2011
84
Tata Power
Tata Power's combined profitability from Mundra UMPP and holdings in KPC/Arutmin Mines will be impacted, given losses in the Mundra UMPP. However, the chain's profitability will be robust with RoE of 20-25%.
Profitability of consolidated project investment is robust (Rs b)

FY10 Equity invested/advances Mundra UMPP Mining SPVs Total Profit/(Loss) Mundra UMPP Mining SPVs Total RoE (%) 19.0 13.8 32.8 0.0 4.9 4.9 14.9 FY11 30.3 13.8 44.1 0.0 8.6 8.6 19.6 FY12E 42.6 13.8 56.4 0.2 13.4 13.6 24.1 FY13E 42.5 13.8 56.3 -1.7 14.9 13.2 23.4 FY14E 42.5 13.8 56.3 -6.7 17.3 10.6 18.8 FY15E 42.5 13.8 56.3 -7.0 19.7 12.8 22.7
Mundra UMPP's cash flows will be insufficient for debt servicing, given continued project losses. While cash flows of the mining SPVs can be used, we believe it may not be a desirable option in the initial period.
Debt service could be an issue, higher moratorium provides comfort in initial years (Rs b)
Depreciation Debt repayment
8.5
8.5
8.5
8.5
6.1
6.1
6.1
6.1
6.1
6.1
0.8
FY12E
4.3
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
6.1 FY20E
June 2011
8.5
85
Tata Power
Largely regulated/controlled returns for projects under construction

We expect Tata Power to commission 5.1GW capacity by FY14, including the Mundra UMPP (4GW) and Maithon (1GW), where offtake has been tied up. Tata Power's merchant capacity is 200MW (commissioned); ~600MW from its Maithon project will be available for merchant sales in FY12 (as PPA is effective from April 2012). Incremental project pipeline is 6.5GW, of which 1.3GW is based on captive mines. For other capacities fuel sourcing has yet to be tied up.
Capped returns for projects under construction; development in early stages Tata Power has only 200MW of capacity linked to market returns; most of its capacities have capped/regulated returns. Given the expected correction in short term prices, we believe the profile provides better stability.
Offtake mix of project portfolio
Total Mumbai region 2,027 Regulated returns 1,927 Case 1/2 bids Merchant 100 Remarks Merchant based on imported coal; possibility of incremental 100150MW on a merchant basis Long term PPA with Tata Steel Based on fuel oil, PPA with Karnataka Power Corp valid until 2012 Largely tied-up under LT PPA 100MW on a merchant basis, based on industrial gases JV with DVC, regulated returns Case-2 bid
TISCO CPP 668 668 Bellari IPP 81 81 Wind Power 201 181 20 Haldia IPP 120 20 100 Maithon project* 1,050 1,050 Mundra UMPP 4,000 4,000 Total 8,147 3,927 4,000 220 *As PPAs are effective from FY13, projects commissioned over FY12 offer merchant upsides
3.7GW of a ~7.2GW pipeline is based on captive mines. Fuel sources have not been tied up for most projects. A large part of this development pipeline is in the initial stages (of land acquisition) and project development. We expect meaningful commissioning from FY15/16.
6.5GW of projects at the development stage

Projects Tubed IPP Capacity (MW) 1,200 Remarks 2.3mtpa of a proportionate share for Tata Power (JV with Hindalco, 40% stake); Mining plan approved,aAcquisition of land, forest land approval under process; Initial development activity could start by the end of FY11, CoD possible in FY15 Mandakini Coal Block allotted jointly with other players (Tata Powers share of 2.5mt a year) Mining plan approved by MoC; all clearances in place 50%+ land acquisition done, financial closure to be achieved after full land acquisition CoD possible by FY15 Disbursement for land payments has begun,460 acres of private land has been acquired out of 1,100 acres (900 private and 200 acres government) 200 acres of government land will be available on completion of 75% of private land acquisition. Technical bids for BTG are called and being evaluated CPP to Tata Steels operation in Europe based on waste gas Fuel supply by Tata Steel Fuel supply by procurers 26% stake in SPV, to be developed in Bhutan
Naraj Marthapur
1,200
Coastal Maharashtra (Dehrand)
2,400
Corus (Tata Steel) Jharkhand CPP Naraj Marthapur CPP Dagachhu Hydro project Total
525 500 1,270 113 7,208
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Tata Power
We expect a growth holiday for capacity addition beyond FY13, as not many projects in the development stage have reached the execution stage.
Project commissioning (MW)

10,000 Mumbai TISCO CPP Maithon Mundra UMPP Others
7,500
5,000
2,500
0 FY06 FY07 FY07 FY09 FY10 FY11 FY12E FY13E
Valuation and view

We now expect Tata Power to post consolidated PAT of Rs27.2b in FY12 (up 40%). Our SOTPbased target price is Rs1,272, comprising Rs527/share for Mumbai distribution (DCF, WACC of 10.5%), Rs80/share for Delhi distribution (15x FY12E PER), defense business Rs14/share (15x FY12E EV/EBIDTA), Rs10/share Tata BP Solar Rs40/share (20x FY12E PER), Powerlinks Transmission Rs14/share (1.4x FY12E P/BV), investment Rs236/share (BV or market price, with 25% holdco discount), Mundra UMPP + mining JVs at Rs320/share (DCF), Maithon project at Rs78/share, projects in development at Rs80/share and net debt of Rs122/share. Indonesian regulations specify mineral exports at reference prices and strict implementation could impact earnings by Rs3b a year(~3mt to be procured at fixed prices). We maintain Neutral.
Tata Power: Sum of the parts

Rs m Power Business (Mumbai, IPPs, etc) Defense Business Delhi Distribution Tata BP Solar Powerlinks Transmission India Energy Ltd Investments - Tata Sons - Aftaab Investments - Telecom Investments 125,160 5,596 20,345 9,775 3,342 6,567 13,462 9,034 27,036 Rs/Sh 527 20 80 40 14 28 57 38 114 Business Segment Power utility Defense Power distribution Solar cells, etc Power transmn, generation Power exchange Investment company Investment company Investments in Tata Tele and VSNL Method DCF, WACC 10.4% EV/EBIDTA 15x FY12E PER, 15x FY12E PER, 20x FY12E RoE ~18-20%, 1.4x FY12 P/BV 15x FY12E PER Value of investment, 20% discount to market value Value of investment, 20% discount to market value Tata Tele: At 3x EV/sales for FY09 (~50% discount to Docomo valuations), 20% discount to mkt value for other investment DCF, project NPV BV of investement in FY10 DCF, project NPV, cost of equity 13.5% DCF, project NPV, cost of equity 15% DCF, project NPV, cost of equity 15% Book value of Investment till March 2010 Book value Excluding debt on existing regulatory business
Power projects under development - Mundra, KPC / Mining Investment - Shipping Subsidiary - Maithon Power Project Power projects pipeline Naraj Marthapur Tubed IPP Liquid investments/Cash (net) Govt Bonds, MF, etc Cash in Hand Less: Debt Total
75,841 5,060 18,551 9,122 9,831 17,696 14,269 66,000 304,685
320 21 78 38 41 75 60 278 1,272
Power project, coal mines Shipping Power generation Power generation Power generation Investments
June 2011
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Tata Power
Financials: Tata Power

Income Statement
Y/E March 2010 Total Revenues 70,983 Cost of Energy purchase 2,517 Cost of fuel 40,456 Administ. & Other Exps 9,224 EBITDA % of Total Revenues Depreciation Interest Other Income PBT Tax Rate (%) 18,786 26.5 4,779 4,230 2,816 12,593 -3,205 -25.4 2011 69,185 7,842 34,856 11,028 15,458 22.3 5,101 4,169 4,936 11,124 -1,709 -15.4
(Rs Million)
2012E 72,756 5,713 34,947 11,580 20,517 28.2 5,709 5,826 7,092 16,074 -4,822 -30.0 11,252 19.5 11,252 45.4 27,224 40.0 3,215 2013E 78,528 7,218 38,442 12,159 20,709 26.4 5,709 7,264 5,890 13,627 -4,088 -30.0 9,539 -15.2 9,539 -15.2 25,286 -7.1 3,215
Ratios
Y/E March Basic EPS (Rs) (Recu.) Consolidated EPS Fully Diluted Cons. EPS CEPS (Rs) Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Inventory (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2010 30.1 62.4 62.4 50.3 421.3 13.6 55.7 2011 31.3 78.6 78.6 51.9 486.7 13.0 45.2 2012E 45.5 110.1 110.1 68.6 519.2 13.0 41.6 2013E 38.6 102.2 102.2 61.6 544.8 13.0 28.6
15.4 22.5 5.0 2.5 1.1
11.0 17.6 5.0 2.3 1.1
11.8 17.9 4.7 2.2 1.1
Reported PAT 9,388 9,415 Change (%) 1.8 0.3 Recurring PAT 7,148 7,738 Change (%) 38.7 8.3 Consolidated PAT 14,799 19,441 Change (%) 24.7 31.4 Dividend (Inc. tax) 3,230 3,215 * Incl share of profit from Bumi Resources
7.9 9.2
7.0 5.8
9.0 7.2
7.2 6.6
102 30 0.4
100 30 0.4
100 30 0.3
99 30 0.3
0.6
0.5
0.7
0.7
Balance Sheet
Y/E March Share Capital Reserves Net Worth Loans Capital Cont. from cust. Approp. to project cost Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Deffered Tax Asset Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Current Liab. & Prov. Sundry Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates 2010 2,373 97,614 99,988 58,720 914 5,336 164,958 100,108 42,581 57,527 4,762 66,887 -2,078 59,543 5,894 19,763 12,776 21,110 21,683 14,657 7,026 37,860 164,958 2011 2,473 117,914 120,387 66,000 914 5,336 192,637 115,682 47,791 67,891 0 87,961 -2,078 59,940 5,642 18,920 14,269 21,110 21,078 14,032 7,046 38,863 192,637
(Rs Million)
2012E 2,473 125,951 128,424 86,000 914 5,336 220,674 127,772 53,500 74,273 0 108,769 -2,078 62,847 5,917 19,842 15,978 21,110 23,136 14,716 8,421 39,710 220,674 2013E 2,473 132,274 134,748 91,000 914 5,336 231,998 127,772 59,209 68,564 0 122,008 -2,078 66,501 6,377 21,383 17,632 21,110 22,997 15,858 7,139 43,504 231,998
Cash Flow Statement

Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from operations Extra-ordinary Items CF from oper. incl EOI 2010 12,593 4,779 4,230 3,205 560 18,957 2,240 16,717 2011 11,124 5,101 4,169 1,709 490 19,175 1,677 17,498 -10,703 -21,075 -31,778 15,877 7,280 0 4,169 3,215 15,773 1,493 12,776 14,269
(Rs Million)
2012E 16,074 5,709 5,826 4,822 861 23,648 0 23,648 -12,090 -20,808 -32,898 0 20,000 0 5,826 3,215 10,959 1,709 14,269 15,978 2013E 13,627 5,709 7,264 4,088 -2,139 20,372 0 20,372 0 -13,239 -13,239 0 5,000 0 7,264 3,215 -5,479 1,654 15,978 17,632
(Inc)/dec in FA -7,552 (Pur)/Sale of Investments -12,452 CF from investments -20,004 (Inc)/Dec in Networth (Inc)/Dec in Debt (Inc)/Dec in Cap.Contrib. from Customers Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance E: MOSL Estimates 15,905 6,738 426 4,230 3,230 15,608 12,321 455 12,776
June 2011
88
Update
SECTOR: UTILITIES
Adani Power
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs114
Sailing on synergies
TP: Rs109
Neutral
ADANI IN 2,180.0 145/106 6/-8/-13 248.9 5.6
Accelerated project execution, leveraging on group synergies

Adani Power (APL) is in an accelerated execution phase. The company expects capacity of 4.6GW by the end of FY12 (the largest private IPP) and capex spending of Rs129b in FY11 (among the largest capex spenders in the economy). Mundra (4.6GW) is the most profitable project in the portfolio, contributing 70% to SOTP and 90%+ of FY12/FY13 expected consolidated earnings. At Mundra, as large parts of the capacity have fuel tied-up under long-term contracts and power sales under PPA, coal earnings have been converted into annuity streams. Consolidated DER in FY12/13 is high at 3.3x/2.7x respectively but funding is comfortable as 82% of the capex on a 6.6GW pipeline, to be commissioned by FY13, has been incurred. Fuel availability is a challenge in the interim for Tiroda (3.3GW) and Kawai (1.3GW), given constraints of coal linkages.
Y/E March
2011 2012E 2013E
Net Sales (Rs b) 21.4 76.7 132.2 EBITDA (Rs b) 12.2 46.6 71.6 NP (Rs b) 5.1 25.1 29.7 EPS (Rs) 2.4 11.5 13.6 EPS Gr. (%) 201.8 388.7 18.4 BV/Share (Rs) 29.0 38.6 49.9 P/E (x) 48.5 9.9 8.4 P/BV (x) 3.9 3.0 2.3 EV/EBITDA (x) 33.9 11.1 7.4 EV/ Sales (x) 19.4 6.7 4.0 RoE (%) 8.5 34.1 30.8 RoCE (%) 5.2 13.7 15.4
Accelerated project execution; comfortably placed on several parameters APLs generation capacity is likely to increase to 4.6GW by FY12 and 6.6GW by FY13, and it will be the largest private sector IPP in India. Given the strong parent advantage, APL is comfortably placed on key parameters such as land availability and fuel security. Of the 16.5GW of project portfolio, 10.6GW are being commissioned at Mundra and Dahej, where parent Adani Enterprises (AEL) has access to vast tracts of land. AEL has access to 8b tons of reserves in Indonesia and Australia and controls over 50% market share in overall coal trading/imports into India. Mundra project key driver of earnings/valuations; coal earnings converted to annuity stream Mundra (4.6GW) is APL's most profitable project given contracted fuel supplies from its captive mines in Indonesia at CIF of US$36/ton, translating into competitive fuel cost of Rs1.1-1.2/unit. While the imported coal requirement is 7mt, we understand part of the shortfall in domestic linkages (10mt requirement) will also be met on similar terms. Given that 80% of the 4.6GW capacity has been tied up under long-term PPAs at levelized tariffs of Rs2.8/unit, the Mundra project has an annuity earnings profile. Merchant profitability to contribute sizably to FY12/13 earnings Merchant profitability will be APL's key near-term earnings driver as the trigger points for PPA for a large part of capacities commissioned are in phases from mid-FY13. This will lead to increased merchant sales in the interim period. Key risks are delays in project commissioning (as merchant sales have a limited window opportunity), volatility in merchant prices and fuel availability/pricing. Merchant sales in FY11 was just 12% of total power sales, and is lower than available after meeting contractual PPAs continued disappointments could lead to earnings downgrades. The use of eauction coal for Mundra/imported coal bought on a spot basis (due to shortages in domestic linkages) would impact profitability. Multi-fold earnings growth; maintain Neutral We expect APLs net profit to increase from Rs5.1b in FY11 to Rs29.7b in FY13. Consolidated DER in FY12/13 is high at 3.3x/2.7x respectively. Funding is comfortable as 82% of the capex on a 6.6GW pipeline, to be commissioned by FY13 has been incurred. Our SOTP-based target price is Rs109. Neutral.

Foreign, 18.9
Domestic Inst, 1.3

Adani Pow er Sensex - Rebased 148 136 124 112 100 May-10 Nov-10 Feb-11 May-11 Aug-10
June 2011
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Adani Power
Accelerated execution; comfortably placed on several parameters

APL's generation capacity is likely to increase to 4.6GW by FY12 and 6.6GW by FY13, and it will be the largest private sector IPP in India . Given its strong parent advantage, APL is comfortably placed on several key parameters including land availability and fuel security. Of its 16.5GW project portfolio, APL will commission 10.6GW at Mundra and Dahej, where parent Adani Enterprises (AEL) has access to vast tracts of land. AEL has access to 8b tons of reserves in Indonesia and Australia and controls ~50% market share in coal trading/imports into India.
Capacity addition of 6.6GW by FY13, 9.2GW by FY15 APL has a project pipeline of 16.5GW in various stages of construction, development and planning. Operational capacity is 2GW and a capacity of ~7.2GW is under construction (of which ~4.7GW will be commissioned by FY13). Several issues including restrictions on Chinese worker visas, have led to initial delays in capacity commissioning. Under the Eleventh Plan (FY08-12), APL is likely to commission 4.6GW of capacity. This will be the highest capacity addition among private players and contribute 7.4% of capacity addition in India.
Capacity commissioning set to accelerate (GW)
Mundra Phase 1&2 Mundra Phase 4 Rajasthan (Kaw ai) 10.0 7.92 7.5 6.60 4.60 1.98 0.66 0.0 FY10 FY11 FY12E FY13E FY14E FY15E Mundra Phase 3 Maharashtra (Tiroda) Maharashtra Exp (Tiroda) 9.24
APLs project pipeline entails consistent addition to operational capacity
5.0 2.5
APL to have highest capacity addition in the Eleventh Plan, as per CEA (GW)
9.9
APL will have the highest capacity addition in the private sector during the Eleventh Plan
4.0
3.4
2.9
2.1
2.0
1.2
1.0
1.0
0.6 Reliance Power
0.3 CESC
0.3 CESC
NHPC
NTPC
JSW Energy
Sterlite Energy
Lanco Infra
Jindal Power
Adani Power
Tata Power
JP Power
June 2011
90
Adani Power
Project of 7.2GW in the planning stage: Large part of land already acquired
Dahej Gujarat Capacity (MW) Configuration (MW, Units) Stake (%) Project Clearances Land 2,640 660x4 100 100% land available Sea Water Chhindwara MP 1,320 660x2 100 Bhadreshwar Gujarat 3,300 660x5 100
A project pipeline of 7.2GW is in initial stages and fuel linkages have been applied for. The projects could enter the construction phase over 12-18 months, based on factors such as the progress of fuel tie ups and environment clearances
100% land Land is available available Water Water reserved from Sea Water Pench River Environ TOR approved, TOR approved, TOR approved, EIA study commenced EIA study commenced EIA study commenced BTG NIT issued NIT issued NIT issued Fuel Requirement (m ton) 11.70 5.85 14.63 Fuel Agreement Linkages applied Linkages applied Linkages applied Offtake Not tied-up 10% of capacity on variable rates Not tied-up and 40% capacity on first right of refusal to state on CERC norms
Strong parent advantage = well covered on key aspects Key issues facing players in the Indian power sector include: (1) land availability, (2) fuel security and (3) funding. APL is comfortably placed on many of these aspects given its strong parent advantage. Out of a 16.5GW portfolio, APL is commissioning projects of 10.6GW at Mundra and Dahej, where Adani Enterprises (AEL, 70.3% stake) has access to vast tracts of land, given SEZ development plans. On the fuel front, AEL has access to 8b tons of coal reserves in Indonesia and Australia and controls over 50% market share in overall coal trading/imports to India. This, coupled with control of the logistics chain, including shipping, ports (Mundra, Dahej), means that APL is comfortably placed on several parameters.
Strong parent advantage could enable accelerated execution for a sizable part of the project portfolio
SEZ at Mundra (32,355 acres) and Dahej (GIDC SEZ 4,300 hectares). Access to Sea water Beneficial for 10.6GW of total 16.5GW capacity
Land
Water Adani Enterprises

(70.3% stake in APL)
Fuel
AEL has access to 8b tons of coal reserves at Indonesia (150m tons) and Australia (7.8b tons)
Port
Mundra port would have 100m tons of capacity (50m tons of coal handling terminal) and Dahej would have 15-20m tons of coal hanlding (mix of solid+liquid cargo)
June 2011
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Adani Power
AEL controls 8b tons of coal reserves in Australia and Indonesia

Mines East Kalimantan block Country Indonesia Reserves (m tons) 150 CoD FY11 Remarks 140mt minable reserves, 300mt resources Production of 5mt in FY11 Peak production of 11mtpa Possible peak production of 60mt MPSEZ to develop coal terminal at Dudgeon in Macay, Queensland to export 30-60mtpa
AEL has access to 8b tons of coal reserves in Indonesia and Australia and partly controls the logistics channel through port/ shipping operations
Linc Energy
Australia
7,800
FY15
Total 7,950 Note: In addition, Adani Enterprise has coal purchase rights for 60% of coal through a rail/port project development for PT Bukit Asam, Indonesia. It will develop rail/port under Take or Pay mechanism and initial capacity is 35mtpa, extendable upto 60mtpa of coal handling. However, this would be subject to Indonesia Reference Price Index.
Equity funding requirement for 9.2GW of projects (Rs m) has peaked

Projects Total Debt Equity 7,060 44,540 84,288 74,104 50,336 56,240 345,948 Incurred* Debt Equity 36,440 7,060 Outstanding Debt Equity 866 7,924 7,450 16,240
Mundra Phase-I & II (1,320MW) 36,440 Mundra Phase-III (1,320MW) Mundra Phase-IV (1,980MW) Tiroda Project (1,980MW) Tiroda Exp. Project (1,320MW) Kawai project (1,320MW) Total * As at December 2010
8,117
12,014
FY12E 6,892
FY13E 6,500
13,420 43,720 21,072 69,118 18,526 37,010 12,584 4,680 14,060 2,063 86,722 193,031
13,420 820 21,072 15,170 17,660 37,094 4,660 45,656 6,610 54,177 70,482 152,917
26,399
26,068
FY14E 544
FY08
FY09
FY10
FY11
June 2011
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Adani Power
PPA structure exposes APL to fuel price/availability risks

We have assumed linkages from CIL at 50% (increasing upto 65%), and 20% could would be available through E-auctions. Thus, the operating factor for Tiroda and Kawai projects were lower in the initial years. We believe the economics of imported coal may not be favorable since the projects are located in Central India.
Evaluation of fuel/offtake for 9.2GW of projects
9,240MW Capacity
Fuel availability (linkage) and costs are key aspects to monitor, given higher proportion of initial sales at fixed energy charges (4.7GW) in the 6.6GW portfolio
Fuel portfolio
Offtake m ix
2,442 MW on im ported coal
6,798MW on Dom estic linkage
7,144 MW tieup under LTPPA 4,744MW capacity w ith fixed fuel cost
2,096MW (gross) on m erchant basis 2,400MW capacity w ith escalation on fuel/freight cost
Imports from AEL are at fixed CIF price of USD36/t for 5 years. Price increase 10% every 5 years
Key takeaways
1. The 4,620MW Mundra project: The company will meet 53% of fuel requirement (for 2,442MW) through AEL's imports at fixed prices for 15 years. APL can also meet a shortfall in linkages for 2,178MW through imports in the interim. Parent advantages, including access to coal reserves of 8b tons abroad, control of port infrastructure and dominant market share in coal imports into India (~50%) provide comfort. As per the PPA, energy charges are fixed and thus any increase in prices or mix change will impact profitability. 2. The 3,300MW Tiroda and 1,320MW Kawai projects: The projects are dependant on coal linkages and thus there are risks of coal availability in the interim. Since they are a long way from the coast (located in Central India) the economics of imported coal will be challenging. As per the PPA, energy and freight charges are escalable for Tiroda Expansion (1,320MW) and Kawai (1,320MW). Lower operating rates will impact the recovery of capacity charges and the use of e-auction will impact profitability. Merchant capacity is limited to ~550MW. Re-allocation of coal blocks in Tiroda can lead to improved profitability.
The Tiroda (3.3GW) and Kawai (1.3GW) projects depend on coal linkages and are exposed to availability risks For the Tiroda Expansion and Kawai projects (2.6GW), fuel and freight charges can be escalated, which provides a guard against fuel cost increase
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Adani Power
Merchant contribution to profitability sizable, robust earnings growth ahead

Merchant profitability will be APL's key near-term earnings driver as PPA trigger points for a large part of the capacities commissioned is in phases from mid-FY13 onwards. This will lead to increased merchant sales in the interim . Key risks are delays in project commissioning (as merchant sales have limited opportunity), volatility in merchant prices and fuel availability/ pricing. FY11 merchant sales were just 11.2% of APL's power sales, and after meeting PPA commitments, APL sold less power than was available to it. Such disappointments could lead to earnings downgrades. The use of e-auction coal for Mundra and imported coal bought on a spot basis (due to shortages in domestic linkages) will impact profitability.
Merchant earnings contribution stable (Rs b)...

Merchant Profit Consolidated PAT Contribution from Merchant Pow er (%) 83 68 75 70 44 37 21 21
...driven by ramp-up in merchant volumes (BU)

2,640MW Mundra 1,980MW Tiroda 1,320MW Kaw ai 1,980MW Mundra 1,980MW Tiroda Exp 19.7
12.9 9.7 10.2
25
30
12
27
12
34
FY10
FY11
0.4 FY10
0.8 FY11 FY12E FY13E FY14E FY15E
FY12E
FY13E
FY14E
FY15E
In FY12 and FY13, the contribution of merchant earnings will be higher, as PPAs for Mundra Phase-IV and Tiroda are triggered in phases from mid-FY13. APL will benefit from merchant sales in the interim
Sensitivity of earnings to changes in merchant tariffs (Rs b)

Current 25 Rs0.5/unit decline in real 30 Dow ngrade (%)
A Rs0.5/unit decline in realization will result in ~20% downgrade in APL's FY12/13 net profit
19
22
-21.4% -26.6% FY12E FY13E
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Adani Power
Multi-fold earnings growth (net profit, Rs b) driven by capacity addition (GW)

Mundra Phase 1 & 2 Mundra Phase 4 Rajasthan (Kaw ai) Other income Mundra Phase 3 Maharashtra (Tiroda) Maharashtra Expn (Tiroda)
42.0
30.0
30 25
18.0
6.0
2 FY10 5 FY11 FY12E FY13E
-6.0 FY10 FY11 FY12E FY13E FY14E FY15E
Increase in operating capacity from 990MW currently to 6.6GW by FY13, and higher contribution from merchant power would drive profitability
Return ratios suppressed due to CWIP (Rs b); to improve, going forward
CWIP (Rs b) 77.6 74.3 As % of CE
RoE (%)
RoCE (%) 34.2 31.1
43.5 25.5 127.7 202.3 154.9 102.4
8.6 2.9 1.5 FY10 4.8 FY11
13.0
15.5
FY10
FY11
FY12E
FY13E
FY12E
FY13E
Lower return ratios were due to higher CWIP, given 6GW of projects under construction
Multi-fold earnings growth; maintain Neutral

We expect APLs net profit to increase from Rs5.1b in FY11 to Rs29.7b in FY13. Consolidated DER in FY12/13 is high at 3.3x/2.7x; funding is comfortable, as 82% of the capex has been spent on an initial 6.6GW of projects to be commissioned by FY13. Our SOTP-based target price is Rs109. Neutral.
APL: SOTP Valuations

Value (Rs m) Operational/under construction projects - Mundra power project 104,397 - Maharashtra power project 35,008 - Mundra project (phase 4) 62,729 Cash/investments/advances 74 Projects under development - Rajasthan 529 - Maharashtra expansion 16,669 Investment in shipping business 2,893 Growth option 18,588 Total 237,994 Value (Rs/sh) % to NPV 48 16 29 0 0 8 1 9 109 44 15 26 0 0 7 1 8 100 Rationale DCF, CoE of 11.5% DCF, CoE of 12.5% DCF, CoE of 12.5% FY11 book value DCF, CoE of 13.5% DCF, CoE of 13.5% BV of investment (FY10) 7.2GW of projects under development
June 2011
95
Adani Power
Financials: Adani Power

Income Statement
Y/E March Net Sales Change (%) Operating Expenses EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate (%) PAT before Min. Int. Minority Interest Reported PAT Change (%) Adjusted PAT Change (%) 2010 4,349 1,910 2,438 56.1 353 377 319 2,027 327 16.1 1,700 -1 1,701 1,701 2011 21,352 391.0 9,147 12,205 57.2 1,886 2,366 180 8,133 3,000 36.9 5,133 0 5,133 201.7 5,133 201.7
(Rs Million)
2012E 76,679 259.1 30,055 46,623 60.8 5,813 9,616 313 31,508 6,455 20.5 25,053 -33 25,086 388.7 25,086 388.7 2013E 132,224 72.4 60,594 71,630 54.2 12,996 20,228 171 38,578 8,191 21.2 30,386 679 29,707 18.4 29,707 18.4
Ratios
Y/E March Basic (Rs) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Leverage Ratio 2010 0.8 -2,985.0 0.9 26.5 0.1 15.0 2011 2.4 201.8 3.2 29.0 0.4 15.0 2012E 11.5 388.7 14.2 38.6 1.7 15.0 2013E 13.6 18.4 19.6 49.9 2.0 15.0
48.7 35.6 34.0 19.4 4.0 0.3
10.0 8.1 11.1 6.8 3.0 1.5
8.4 5.9 7.4 4.0 2.3 1.8
2.9 1.5
8.5 5.2
34.1 13.7
30.8 15.4
Balance Sheet
Y/E March Share Capital Reserves Net Worth Minority Interest Loans Deferred Tax Liability Capital Employed 2010 21,800 35,980 57,780 1,023 105,705 120 164,628 2011 21,800 41,427 63,227 0 173,461 3,120 239,807 83,228 2,564 80,664 140,698 2,763 4,165 19,423 8,569 16,462 12 18,445 239,808
(Rs Million)
2012E 21,800 62,279 84,079 -33 272,073 3,120 359,240 209,710 8,307 201,403 154,893 700 3,151 1,000 3,938 5,846 0 2,943 359,240 2013E 21,800 86,973 108,773 646 293,468 3,120 406,008 306,583 21,303 285,280 102,395 1,417 5,434 1,000 15,327 4,846 0 18,332 406,008
Debt/Equity (x)
1.8
2.7
3.2
2.7
Cash Flow Statement

Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations (Inc)/Dec in FA CF from Investments (Inc)/Dec in Net Worth (Inc)/Dec in Debt Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2010 2,027 353 377 -327 1,097 3,527 -86,879 -86,879 -33,479 -55,808 -377 510 89,420 6,068 5,585 11,654 2011 8,133 1,886 2,366 -3,000 -12,476 -3,091 -67,686 -67,686 -1,180 -67,756 -2,366 1,123 67,692 -3,086 11,654 8,568
(Rs Million)
2012E 31,508 5,813 9,616 -6,455 10,872 51,353 -140,677 -140,677 0 -98,613 -9,616 4,304 84,693 -4,631 8,569 3,938 2013E 38,578 12,996 20,228 -8,191 -4,000 59,610 -44,375 -44,375 0 -21,395 -20,228 5,013 -3,847 11,389 3,938 15,327
Gross Fixed Assets 28,549 Less: Depreciation 678 Net Fixed Assets 27,871 Capital Work in Progress 127,691 Inventory 95 Debtors 2,563 Loans and Advances 9,406 Cash 11,654 Current Liabilities 14,617 Provisions 35 Net Curr. Assets 9,066 Application of Funds 164,628 E: MOSL Estimates
June 2011
96
Update
SECTOR: UTILITIES
JSW Energy
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs69
TP: Rs74
Neutral
JSW IN 1,640 136/68 -2/-24/-49 113.7 2.5
JSW Energy: The balancing act

Exposure to merchant power sales, spot coal purchases
Merchant power sales and spot coal purchases are the cornerstones of JSW Energy's (JSWEL's) business model in the medium term, which could lead to earnings volatility in an uncertain environment. JSWEL will commission 1.7GW capacity in FY12/FY13 and will be among the largest private sector power utilities. Development pipeline of 8GW offers value maximization opportunities but will contribute to capacity additions from FY15. The management has an impeccable track record for execution. Robust operational cashflows and comfortable DER at 1.7x imply the growth option is not equity dilutive. Our SOTP based target price is Rs74. We maintain Neutral rating.
Y/E March Net Sales (Rs b) EBITDA (Rs b) NP (Rs b) EPS (Rs) EPS Gr. (%) BV/Share (Rs) P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%)
2011 2012E 2013E 41.8 14.5 8.0 4.9 6.5 33.5 14.3 2.1 12.7 4.7 15.5 10.2 64.6 23.6 11.3 6.9 41.6 39.2 10.1 1.8 7.6 2.9 18.9 13.4 74.9 24.9 10.9 6.7 -3.2 44.7 10.4 1.5 6.8 2.3 15.9 13.4
Merchant power sales, spot coal purchases, could lead to earnings volatility JSWEL's business model in the medium term combines merchant power sales and spot coal purchases, resulting in earnings volatility. Of the 3.1GW operational capacity planned by FY12, 56% of the offtake will be merchant sales and 65% of the fuel purchases will be on a spot basis (imported). Merchant sales will contribute over 80% to FY12 earnings and 67% in FY13 and Rs0.50/unit lower realization can result in 4050% earnings decline. Robust near term cashflows, but FY13-14 could be a growth holiday JSWEL will commission 1.7GW capacity in FY12 / FY13 and installed capacity will be 3.4GW in FY13. Given the front ended capacity commissioning, operational cashflow will be robust (Rs25b in FY13). The development pipeline of 8GW offers value maximization possibilities, but large parts of the pipeline are in initial stages of development and hence capacity addition over FY13-14 will be limited. Given JSWEL's robust cashflows, we believe the growth will not be equity dilutive. Superior RoE until FY12, earnings CAGR of 17% over FY11-13 We expect JSWEL to post net earnings CAGR of 17% over FY1 1-13 driven by capacity addition (3.1GW by FY12 v/s 1.7GW now). We expect RoE of 19% in FY12 (up from 15.5% in FY11) but it will decline to 16% in FY13 due to low profitability from merchant sales and high project investments, given a fresh round of capacity additions. Valuation and view - Neutral with target price of Rs74 We value JSWEL based on the SOTP methodology, arriving at a target price of Rs74. This comprises projects under operation/construction worth Rs44/share (DCF), growth option comprising planned/developed projects of Rs14/share (DCF) and investments/ cash of Rs16/share. We believe the price largely reflects the robust near term capacity addition and strong cashflows. The group's record of execution, project management and robust cashflows offer comfort. We maintain Neutral rating.

Foreign, 10.7 Domestic Inst, 5.9

JSW Energy Sens ex - Rebased
150 125 100 75 50 May-10
May-11
Sep-10
J an-11
June 2011
97
JSW Energy
Merchant sales, spot coal purchases, may lead to earnings volatility

JSWEL's business model in the medium term combines merchant power sales and spot coal purchases, which could result in earnings volatility. Of the 3.1GW operational capacity planned by FY12, 56% of the offtake will be merchant sales and 65% of the fuel purchases will be on a spot basis (imported). Merchant sales will contribute over 80% to FY12 earnings and 67% in FY13 and Rs0.50/unit lower realization can result in 40-50% earnings decline.
JSWEL: merchant sales = 56% of capacity; imported fuel = 65% of sourcing (MW) Capacity (FY12) 3,140 A high proportion of merchant sales (56%) and imported coal (spot purchases of 65%) expose JSWEL to risks in an uncertain environment
Offtake: 56% merchant
Fuel: 65% imported
{ {
FY13E 1.2 2.9 3.8 7.9 1.0 6.9
PPAs 1,476
Merchant 1,664 Imports
Domestic 1,080
Long Term 330
Spot 1,730
Coal imports: spot purchases high (m tons)...

FY11 Karnataka Phase -I Karnataka Phase -II Ratnagiri Total Requirement Sourcing from LT contracts Spot purchases 1.2 2.9 0.7 4.8 0.0 4.8 FY12E 1.2 2.9 2.9 7.0 1.0 6.0
rising fuel cost impacts gross margins (Rs/unit)

Realization (Rs /unit) Fuel cost (Rs /unit) Gros s margin (Rs/unit) 3.8 2.3 3.6 2.8 2.5 2.7 2.1 1.7 5.1 2.3 4.3 2.6 1.8 4.4 2.7 3QFY11 1.6 4.4 2.8
6.8 3.1
5.3 3.0
5.7 2.1
4.6 1.8
4.2 1.7 3QFY10
3QFY09
4QFY09
1QFY10
2QFY10
4QFY10
4.3 2.1
1QFY11
2QFY11
JSWEL procured 100% of its fuel requirement on a spot basis in FY11, leading to increased fuel costs. This, coupled with lower merchant realisations impacted gross margins
A Rs0.50/unit change in merchant tariffs results in 40-50% earnings revision (Rs b)

Current 11 Revised 11
Merchant tariffs make a sizable contribution to earnings (Rs b)

Reported consolidated PAT M erchant PAT % c ontribution from merc hant 87.4 5 11.3 8.0 7.6 9.2 87.4 95.0 81.9 67.4 10.9
7.5
2.8
FY12E
FY13E
FY09
2.4
FY10
6.5
FY11
FY12E
FY13E
JSWEL earnings are highly sensitive to short term prices and a Rs0.50/unit lower realization than estimates can lead to a 40-50% earnings decline in FY12 and FY13
June 2011
7.4
4QFY11
98
JSW Energy
Robust near term cashflows but FY13-14 could be a growth holiday

JSWEL will commission 1.7GW capacity in FY12 and FY13, leading to robust operational cashflow of over Rs25b in FY13. A development pipeline of 8GW offers value maximization possibilities, but large parts of these projects are in initial stages of development, giving them limited growth for capacity addition in the interim. In FY11, based on operational capacity of 1.8GW, JSWEL is among the largest private sector utilities, but will be outpaced by its peers. Given robust cashflow, we believe the growth option is not equity dilutive and the pipeline can be financed through internal accruals.
Capacity addition front ended, we expect a void in the interim as the development pipeline is in initial stages (GW)
Cap addn (MW) 1,410 Cum c ap (MW) 3,410 995 735 1,730 995 270 FY10 FY11 FY12E FY13E FY14E 3,140 3,410
The development pipeline of 8GW offers a growth option beyond FY14, depending on the execution timeframe, given that the projects are in initial stages of development
Of the 3.4GW capacity under construction, 735MW (30%) capacity was commissioned in FY11 and most of the development pipeline is in initial stages of development
Near term cashflows robust (FCFE - Rs b)

26 23
DER comfortable with FY11 net DER at 1.7x
1.7 1.3
FY11
FY12E
FY13E
FY10
FY11
Upfront capacity addition (3.1GW by FY12) will provide recurring cash flow of Rs25b+ a year and enable JSWEL to meet equity requirements for projects under development
Growth option not equity dilutive, equity investment for 8GW of pipeline Rs122b (Rs b)
(Rs m) Kutehr HEP West Bengal project Chattigarh project Jharkhand project Ratnagiri Expansion Total Capacity (MW) 240 1,600 1,320 1,620 3,200 7,980 Stake (%) 100 100 100 100 100 Cost 19,150 96,800 65,000 79,000 150,000 409,950 Total Equity 5,745 29,040 19,500 23,700 45,000 122,985 Debt 13,405 67,760 45,500 55,300 105,000 286,965 Cost 800 280 330 1,410 Cost Spent Equity 800 280 330 1,410 Debt O/S Equity 4,945 25,760 19,170 23,700 45,000 121,575
June 2011
99
JSW Energy
JSWEL comfortably placed to finance its 8GW development pipeline

Projects Raj West Power Ph 2 Kutehr HEP Capacity (MW) Land 270 240 Available Water Clearances/Milestones Env Eqp award FC Pending Pending Expected CoD Offtake 2015 Sep-15 Fuel
Allocation available In progress -
Pending Pending
Clearance PQ for civil recommended contract by EC completed
Ratnagiri
3,200
Largely acquired 32% acquired
Sea water Allocations from Mahanadi River Pending
Pending
Pending
Pending
Apr-15
Chattisgarh
1,320
Public hearing done for Stage 1 clearance Pending
Pending
Pending
Nov-14
West Bengal 1,620
100%
Bids invited
Pending
2015
Jharkhand
1,620
In progress Pending, Pending proposed from Subarnarekha River
Pending
Pending
Aug-15
100% Linkages applied merchant sales Free power and NA balance on merchant sales (88% for first 12 years, 82% for the next 18 years) 50% to MSEDCL, Imported coal to be balance to be sourced from tied-up SACMH Up to 35% to Captive mine state, balance allocation (1.65mt to be tied-up of prop share), balance via linkages. Mine plan approved 810MW to steel Captive mines plant, 405MW each (Ichhapur) allocated to WBMTDC and merchant sales 25% to states, Applied for linkages balance on LT/ST tie-up
Total
8,270 Source: Company
Superior RoE until FY12, earnings CAGR of 17% over FY11-13

We expect JSWEL to post net earnings CAGR of 17% over FY11-13 driven by capacity addition (3.1GW by FY12 v/s 1.7GW now). W e expect RoE of 19% in FY12 (up from 15.5% in FY11) but it will decline to 16% in FY13 due to low profitability from merchant sales and high project investments, given a fresh round of capacity additions.
Capacity addition drives net profit (Rs b)

11.3 10.9
Merchant capacity, total capacity (MW)

Ins talled capacity Merchant c apac ity 3,410 3,140
7.5
8.0
1,730 2.8 995 648 907
1,617
1,980
FY09
FY10
FY11
FY12E
FY13E
FY10
FY11
FY12E
FY13E
June 2011
100
JSW Energy
Merchant prices assumption (Rs/unit)

5.5 4.1
Imported coal sourcing from LT contracts (m tons)

1.02 1.02
4.0 3.5
0.00
0.00 FY11 FY12E FY13E
FY10
FY11
FY12E
FY13E
FY10
The impact of low merchant prices for JSWEL will be partly mitigated by increased sourcing through long term contracts. Delays could impact profitability. RoEs robust, will be impacted after FY12 due to continued investment
RoE (%) - LHS 18.7 15.7 14.3 8.5 2.3 15.5 12.4 Cash/Investments as a % of capital employ ed 18.9 15.9 16.1
FY09
FY10
FY11
FY12E
FY13E
We expect JSWEL's RoE to improve in FY11 and FY12 with the commissioning of new capacity and to fall from 19% in FY12 to 16% in FY13 due to lower merchant sales profitability and higher project investment. JSWEL: SOTP valuations (FY12E)
Value Value (Rs m) (Rs/sh) Operational/Under Construction Projects - Karnataka Phase I 13,628 - Karnataka Phase II 20,515 - Ratnagiri power project 18,716 - Raj West project Phase 1 19,326 Projects under Planning - JSW Energy (Raigarh) 195 - JSW Energy (Bengal) Other business - JSW Power Trading 700 - Jaigad Power Transco 433 - Toshiba JSW Turbine 440 and Generator JV - Barmer Lignite Mining 1,400 Cash on books 11,115 Investments in JSW Steel 11,605 Growth option 23,129 Total 121,202 8 13 11 12 1 7 7 14 74 % to NPV 11 17 15 16 1 1 9 10 19 Rationale COE (%) 11 11 12 12 Capacity (MW) 260 600 1,200 1,080 1,320 1,600
DCF DCF DCF DCF Book Value Book Value Book Value Book Value Book Value
Book Value BV of Investment 25% discount to CMP
June 2011
101
JSW Energy
Financials: JSW Energy

Income Statement
Y/E March Net Sales Change (%) Operating Expenses EBITDA % of Net Sales Depreciation Interest Other Income PBT Tax Rate (%) PAT before Min. Int. Reported PAT Change (%) Adjusted PAT Change (%)
(Rs Million)
2009 2010 2011 2012E 2013E 18,350 23,551 41,762 64,585 74,870 41.9 28.3 77.3 54.7 15.9 13,032 11,416 27,303 41,000 50,009 5,319 12,135 14,459 23,585 24,861 29.0 51.5 34.6 36.5 33.2 602 1,209 171 3,678 911 24.8 2,767 2,767 -55.8 2,767 -7.1 1,361 2,837 742 8,679 1,224 14.1 7,455 7,455 169.4 7,481 170.4 2,668 4,325 1,332 8,797 1,563 17.8 7,235 7,235 -3.0 7,971 6.5 6,130 6,761 2,564 7,502 8,098 3,220
Ratios
Y/E March Basic (Rs) Adjusted EPS Growth (%) Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x) 2009 5.1 6.2 27.1 0.0 0.0 2010 4.6 -9.9 5.4 29.1 0.5 10.0 2011 4.9 6.5 6.5 33.5 0.7 15.0 2012E 6.9 41.6 10.6 39.2 1.0 15.0 2013E 6.7 -3.2 11.2 44.7 1.0 15.0
13,258 12,481 3,111 2,823 23.5 22.6 10,147 10,147 40.3 9,658 9,658 -4.8
14.3 10.7 12.7 4.7 2.1 1.1
10.1 6.5 7.6 2.9 1.8 1.5
10.4 6.2 6.8 2.3 1.5 1.4
18.7 6.5
15.7 9.0
15.5 10.2
18.9 13.4
15.9 13.4
11,283 10,927 41.6 -3.2
4.0
1.5
1.5
1.1
0.8
Cash Flow Statement Balance Sheet

Y/E March Share Capital Reserves Net Worth Minority Interest Loans Deferred Tax liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments 2009 5,466 9,320 14,786 152 59,272 814 75,024 2010 16,401 31,401 47,802 152 78,701 1,161 127,817 2011 16,401 38,473 54,874 152 97,420 1,161 153,607
(Rs Million)
2011 2012E 8,797 13,596 2,668 6,130 4,325 6,761 -1,563 -3,111 -8,950 -72 5,278 23,305 3,000 220 3,220 2013E 12,872 7,502 8,098 -2,823 112 25,761 6,382 220 6,602
(Rs Million)
2012E 2013E 16,401 16,401 47,852 56,935 64,253 73,336 152 152 91,661 88,438 1,161 1,161 157,227 163,087
Y/E March 2009 2010 PBT before EO Items 3,678 8,705 Add : Depreciation 602 1,361 Interest 1,209 2,837 Less : Direct Taxes Paid -911 -1,224 (Inc)/Dec in WC 11,030 -5,246 CF from Operations 15,608 6,433
11,701 36,668 73,008 141,146 154,646 5,349 6,714 9,391 15,521 23,023 6,352 29,954 63,618 125,625 131,623 79,190 86,025 72,256 7,118 0 1,705 14,344 4,521 4,741 4,961
(Inc)/Dec in FA 52,104 31,803 22,571 (Pur)/Sale of Investments 1,498 12,640 -9,823 CF from Investments 53,602 44,442 12,747
Net Curr. Asset s -12,222 -2,507 13,213 19,742 26,502 Application of Funds 75,024 127,816 153,607 157,227 163,087 E: MOSL Estimates
(Inc)/Dec in Net Worth 1,973 26,376 0 0 0 (Inc)/Dec in Debt 36,545 19,430 18,719 -5,760 -3,223 (Inc)/Dec in Deffered Tax Liability -518 347 0 0 0 Less : Interest Paid -1,209 -2,837 -4,325 -6,761 -8,098 Dividend Paid 0 -842 -1,345 -1,904 -1,844 CF from Fin. Activity 36,790 42,474 13,048 -14,425 -13,165 Inc/Dec of Cash -1,199 Add: Beginning Balance 2,949 Closing Balance 1,751 4,297 1,751 6,048 6,656 6,641 6,048 12,989 12,989 19,447 7,073 19,447 26,520
June 2011
102
Update
SECTOR: UTILITIES
Reliance Infrastructure
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs596
TP: Rs879
Buy
Bloomberg Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
RELI IN 268.2 1,225/493 -11/-30/-56 148.9 3.3
FY12-14 an important phase in growth trajectory

EPC to be key near-term earnings driver; assuming status quo for regulatory earnings
Reliance Infrastructure (RELI) has been facing several legal/regulatory issues in its Mumbai/Delhi distribution business, and execution/clearance issues for its power/ infrastructure business. Such issues have also partially impacted its EPC business in the past. Given that its subsidiary, Reliance Power will be adding ~16GW of power projects and RELI will be commissioning infrastructure projects of Rs230b over FY12-14, this period will mark an important phase in its growth trajectory. We believe that transformation/change the company's outlook is contingent on its successful transition through this phase. We assume status quo in its regulated business earnings. We maintain our Buy recommendation, with SOTP-based target price of Rs879.
Y/E March
2011 2012E 2013E
Net Sales (Rs b) 96.1 141.9 164.8 EBITDA 11.8 16.3 18.4 PAT 10.8 12.0 14.4 EPS (Rs) 40.3 44.9 53.7 EPS Gr. (%) -7.0 11.3 19.8 BV/Sh. (Rs) 639.2 677.3 724.3 P/E (x) P/BV (x) EV/EBITDA (x) EV/ SALES (x) RoE (%) RoCE (%) 13.8 0.9 8.7 1.1 6.8 7.0 12.4 0.8 6.4 0.7 6.8 8.1 10.3 0.8 5.1 0.6 7.7 8.8
Near-term uncertainties have impacted business outlook RELI has been facing several business headwinds: (1) Mumbai distribution business license expiry in August 2011 and unrecovered tariff arrears, (2) Delhi distribution business facing cash flow issues, given tariff under-recovery, (3) EPC business traction subject to progress of power and infrastructure business, which in-turn faces possible legal/regulatory issues and execution delays. In addition, there are market apprehensions on the nature of investments of surplus funds and impending grouplevel issues. FY12-14 an important phase in growth trajectory FY12-14 will be an important phase in RELI's growth trajectory, given the planned commissioning of large-scale power and infrastructure assets during this period. Reliance Power (45% subsidiary) expects operating capacity to expand to ~16GW by FY15. In the infrastructure development business, RELI plans to commission cumulative projects worth Rs230b during this period. Accelerated project execution will also accelerate momentum in the EPC division, providing a virtuous growth cycle. However, execution remains a key challenge and is contingent on several external factors. EPC to be key near-term earnings driver; assuming status quo for regulatory earnings Till FY13, the EPC business will drive RELI's standalone earnings, with the regulatory business facing headwinds. We expect the EPC business to report revenue CAGR of 53% and EBIT CAGR of 30% over FY11-13. We assume status quo in RELI's regulated earnings and believe that even in the event of an adverse judgment, the 'wire business' earnings will not be impacted. Valuations/buy back provide comfort We expect RELI to report a net profit of Rs12b (up 11%) in FY12 and Rs14.4b (up 20%) in FY13. The stock has significantly underperformed peers/broader indices. Commencement of Rs10b buy back (up to Rs725/share) and fund infusion of ~Rs40b (Rs918/share) by the promoters provide downside support. We maintain our Buy recommendation, with SOTP-based target price of Rs879.
Shareholding pattern % (Dec-10)

Foreign, 17.6
Domestic Inst, 24.3

Reliance Infrastructure Sensex - Rebased 1,400 1,150 900 650 400 May-10 Feb-11 May-11 Aug-10 Nov-10
June 2011
103
Near-term uncertainties have impacted business outlook

RELI has been facing several business headwinds: (1) Mumbai distribution business license expiry in August 2011 and unrecovered tariff arrears, (2) Delhi distribution business facing cash flow issues, given tariff under-recovery, (3) EPC business traction subject to progress of power and infrastructure business, which in-turn faces possible legal/regulatory issues and execution delays. In addition, there are issues relating to improper allocation of surplus funds and impending group-level issues.
Mumbai distribution business facing headwinds RELI's Mumbai distribution business has been facing several headwinds: (1) lower tariff recovery resulting in creation of regulatory assets of ~Rs20b, but no regulatory asset has been created post 3QFY11, (2) entry of Tata Power in retail distribution, increasing competition and customer migration, (3) non-renewal of PPA with Tata Power for power procurement and eventual stoppages of supply with effect from April 2011, and (4) MERC inviting bids for Mumbai distribution license (expiry in August 2011). Regulated equity for the Mumbai distribution business is Rs22b-23b. We have assumed status quo in regulated earnings and believe that even in the event of an adverse judgment, the 'wire business' earnings will not be impacted. However, there is a possibility that the regulator will not permit recovery of the entire regulatory assets, and could take the stance that inefficiency in planning for power purchases is not a complete pass-through. We await further clarity on the same.
RAB for Mumbai distribution business (Rs b)
25.1 22.6 20.1 15.5 15.8 16.6 17.7
10.3 16.0
Regulatory assets have increased sizably (Rs b)
20.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12E
FY09
FY10
FY11
Delhi distribution business a role model for privatization success RELI's Delhi distribution business is a role model for privatization success. AT&C losses are down from ~50% in FY04 to less than 20%. However, given that the tariff increase has been limited, there have been under-recoveries. We understand that the combined regulatory assets in the books have increased to Rs15b-16b as at March 2011. RELI has proposed monthly adjustment in terms of fuel cost as part of the tariff increase to the Delhi Electricity Regulatory Commission (as also NDPL - the distribution franchise owned by Tata Power). In the interim, it is funding increased working capital requirements through borrowings, increasing the strain on its cash flows.
June 2011
104
Delhi discom's regulated equity (Rs m)

Delhi business Regulated equity (Rs b) Increase (% YoY) 14.7 14.0 13.0 12.0
Revenue gap funded through borrowings (Rs b)

64
15.3
46
17 8
8.0 FY06
9.1 FY07
10.2 FY08
11.5 FY09
13.2 FY10
15.2 FY11
FY08 FY09 FY10 FY11
Projects facing delays, impacting initial EPC execution RELI's EPC division's order book has increased from Rs78b in FY08 to Rs296b currently, and includes Reliance Power's Sasan and Butibori projects. EPC business traction is subject to the progress of RELI's power and infrastructure business, which in-turn faces possible legal/regulatory issues and execution delays.
EPC revenue growth has been moderate, despite a sizable order book
Order book (Rs b) EPC revenues (Rs b) 34.2 25.1 21.0 12.4 8.5 35.0 2005 33.6 2006 55.2 2007 78.5 2008 206.3 2009 196.3 2010 296.4 2011 14.4 33.9
FY12-14 an important phase in growth trajectory

FY12-14 will be an important phase in RELI's growth trajectory, given the planned commissioning of large-scale power and infrastructure assets during this period. Reliance Power (45% subsidiary) expects operating capacity to expand to ~16GW by FY15. In the infrastructure development business, RELI plans to commission cumulative projects worth Rs230b during this period. Accelerated project execution will also accelerate momentum in the EPC division, providing a virtuous growth cycle. However, execution remains a key challenge and is contingent on several external factors.
Reliance Power targets capacity addition of 17GW by FY14 Reliance Power is working on projects of 30GW+ and plans to commission ~16GW by FY15. Strong execution of Reliance Power's projects will in-turn drive RELI's EPC business revenue.
June 2011
105
Reliance Power's capacity addition target (GW)

16.8
Estimate EPC revenue CAGR at ~53% over FY11-13

EPC revenues (Rs b) 112.4 145.7 74.0 36.3 -1.0 20.3 Grow th (% YoY) 118.3
5.0 3.7 1.0
-31.3 12.4 8.5 2006 21.0 2007
-31.2 14.4 2008 25.1 2009 34.2 2010 33.9 74.0 89.0
Current
FY12E
FY13E
FY15E
2005
2011 2012E 2013E
Infrastructure project commissioning to accelerate RELI has already invested ~Rs40b in infrastructure projects. Thus, a sizeable part of the investments required have already been made. The management expects 12 projects totaling Rs174b to start generating revenues in FY12. Most projects totaling Rs230b (including Mumbai Metro Phase-II and WorliHaji Ali Sealink) are likely to be commissioned by FY14. Total size of the investment portfolio stands at Rs400b.
Sizable equity investment in infrastructure projects already made* (Rs b)
Direct SPVs - equity Reliance Infra Project - Eq. Sh Sub-ordinate debt + Adv Reliance Pow er Infra - Eq. Sh 5.0 5.0 11.0 22.5 15.4 6.3 FY10 FY11 FY12E
5.0 5.0 11.0
5.0 5.0 9.7 5.7 FY09
5.0 5.0 12.6
*Excluding preference share investment of Rs23b in infrastructure holding company, Reliance Infra Projects International
EPC to be key near-term earnings driver; assuming status quo for regulatory earnings
Till FY13, the EPC business will drive RELI's standalone earnings, with the regulatory business facing headwinds. We expect the EPC business to report revenue CAGR of 53% and EBIT CAGR of 30% over FY11-13. We assume status quo in RELI's regulated earnings and believe that even in the event of an adverse judgment, the 'wire business' earnings will not be impacted.
Earnings contribution to tilt in favor of EPC; factoring status quo on regulatory earnings We expect RELI's earnings pie to shift in favor of its EPC business, as execution picks up, with regulatory earnings growth remaining muted. Our earnings estimates currently factor in status quo on regulated business.
June 2011
106
Trend in earnings contribution (Rs b)

20 15 10 1 5 0 -5 FY08 FY09 FY10 FY11 FY12E FY13E 1 3 7 1 3 4 4 6 5 Regulated business* Other income Engineering division Other adjustment
Trend in cash and cash equivalents (Rs m)

Particulars Cash Balance ICDs Mutual Funds Bank Deposits Commercial Paper Preference Shares Regulatory Assets Total Less: Debt Net Cash Rs/sh FY07 21,759 77,403 19,727 FY08 877 50,630 17,304 FY09 2,510 16,194 51,814 30,380 10,345 111,242 73,322 37,921 168 FY10 3,018 27,647 10,082 19,406 4,095 24,193 16,028 104,470 41,149 63,321 259
451 119,340 58,583 60,756 266
27,273 96,084 49,889 46,195 196
*FY09 booked arrears of Rs3.6b for past years
Valuations/buy back provide comfort

We expect RELI to report a net profit of Rs12b (up 11%) in FY12 and Rs14.4b (up 20%) in FY13. The stock has significantly underperformed peers/broader indices. Commencement of Rs10b buy back (up to Rs725/share) and fund infusion of ~Rs40b (Rs918/share) by the promoters provide downside support. We maintain our Buy recommendation, with SOTP-based target price of Rs879.
Details of buy back

Validity Period m shares 59.1 10.0 13.8 Max Price Rs/sh 1,600 700 725 Max Size Rs B 8,001 7,000 10,000 Actually Achieved
March 25, 2008 till February 6, 2009 February 25, 2009 till April 8, 2009 April 5, 2011 till February 13, 2012 *Till FY11
Buyback of 8.76m shares, for Rs7955.3m (average price Rs908/sh) Buyback of 2.5m shares, for Rs1273.8m (average price Rs509.5/sh) *Buyback of 1.8m shares, for Rs1,150m (average price of Rs638/sh)
SOTP-based target price at Rs830

Particulars Power Business Delhi Business EPC Business Cash, Cash Equivalents Preference shares Inv in Infrastructure Projects Reliance Power Total Rs m 22,580 15,201 33,763 31,126 39,226 93,786 235,683 Rs/sh 84 57 126 116 146 350 879 Basis Regulated Equity, 1x P/BV FY11 Regulated Equity, 1x P/BV FY11 4x FY13 EV/EBIDTA FY11 Book value, Net of Debt, Ex FY11 Book value At CMP, 25% holding company discount
June 2011
107
Financials: Reliance Infrastructure

Income Statement
Y/E March Sales Other Operating Income Total Revenues Change (%) EBITDA % of Total Revenues Depreciation Interest Other Income PBT Tax Rate (%) Reported PAT Change (%) Adj. PAT Change (%) 2010 63,678 36,595 100,273 3.4 10,282 10.3 3,188 2,922 7,898 12,070 1,453 12.0 10,617 9.8 10,617 16.9 2011 58,062 38,084 96,146 -4.1 11,777 12.2 3,134 2,425 5,132 11,351 541 4.8 10,809 1.8 10,809 1.8
(Rs Milllion)
2012E 67,970 73,975 141,945 47.6 16,269 11.5 3,503 3,347 5,076 14,495 2,464 17.0 12,031 11.3 12,031 11.3 2013E 75,857 88,975 164,832 16.1 18,433 11.2 3,779 3,789 6,505 17,369 2,953 17.0 14,416 19.8 14,416 19.8
Ratios
Y/E March Basic (Rs) EPS EPS (Fully Diluted) CEPS (Rs) Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Inventory (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2010 43.3 43.3 56.4 596.8 6.0 15.6 2011 40.3 40.3 52.0 639.2 6.0 16.7 2012E 44.9 44.9 57.9 677.3 6.0 15.0 2013E 53.7 53.7 67.8 724.3 6.0 12.6
13.8 8.7 1.1 0.9 1.1
12.4 6.4 0.7 0.8 1.1
10.3 5.1 0.6 0.8 1.1
8.2 8.2
6.8 7.0
6.8 8.1
7.7 8.8
Balance Sheet
Y/E March 2010 Share Capital 2,449 Reserves 143,714 Net Worth 146,164 Loans 41,149 Consumer's Security Depos. 0 Deferred Tax Liability 1,577 Capital Employed 188,890 Gross Fixed Assets 74,283 Less: Dep and Reval. Res. -44,869 Net Fixed Assets 29,414 Capital WIP 6,023 Investments 100,196 Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Other Current Assets Current Liab. & Prov. Other Liabilities Provisions Net Current Assets Misc Expenses Application of Funds E: MOSL Estimates 119,545 2,691 17,429 3,018 82,194 14,213 66,287 56,467 9,820 53,258 188,891 2011 2,682 168,768 171,450 46,017 -45 1,577 218,999 82,533 -48,003 34,530 5,644 109,194 128,710 2,700 17,952 38,445 58,468 11,145 65,599 55,976 9,624 63,111 218,999
(Rs Milllion)
2012E 2,682 178,989 181,671 51,792 -90 2,027 235,400 90,783 -51,506 39,277 5,644 116,348 149,606 2,700 18,491 49,243 57,546 21,626 81,995 72,564 9,431 67,611 1 235,400 2013E 2,682 191,595 194,277 55,642 -134 2,477 252,261 96,283 -55,285 40,998 3,500 116,704 172,424 2,700 19,045 71,033 53,630 26,016 87,885 78,643 9,242 84,539 2 252,261
63 10 0.5
68 10 0.5
48 7 0.6
42 6 0.7
0.6
0.3
0.3
0.3
Cash Flow Statement

Y/E March PBT before EO Items Add : Depreciation Less : Direct Taxes Pd (Inc)/Dec in WC CF from Operations (Inc)/dec in FA (Pur)/Sale of Investments CF from Investments (Inc)/Dec in Sh. Cap. & res. (Inc)/Dec in Debt (Inc)/Dec in Cust. Sec. Dep. Dividend Paid Others CF from Fin. Activity Inc/Dec of Cash Add: Beginning Balance Closing Balance 2010 12,070 3,188 1,453 8,716 22,522 -5,974 -6,089 -12,062 17,636 -24,080 0 -1,653 -1,855 -9,952 508 2,510 3,018 2011 11,351 3,134 541 25,574 39,517 -7,872 -8,999 -16,870 16,288 -3,225 -45 -1,810 1,572 12,780 35,427 3,018 38,445
(Rs Milllion)
2012E 14,495 3,503 2,014 6,298 22,282 -8,250 -7,153 -15,403 0 5,775 -45 -1,810 0 3,920 10,798 38,445 49,243 2013E 17,369 3,779 2,503 4,861 23,507 -3,356 -356 -3,712 0 3,850 -45 -1,810 0 1,995 21,790 49,243 71,033
June 2011
108
Update
SECTOR: UTILITIES
CESC
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs276
TP: Rs439
Buy
CESC IN 125.6 433/263 -6/-16/-33 34.7 0.8
Stepping on the growth accelerator

Exploring funding options
CESC is stepping on the growth accelerator across business divisions. The company will expand power generation capacity from 1.2GW to 3.7GW by FY15/16 and the area under operations in the retail business from 0.8msf to 2.5msf by FY15. The company will require Rs40b over the next four years for its power and retail business expansion (including funding of retail business losses) and is exploring funding options. Valuations are reasonable, cash balance is Rs6.2b and regulated core business PAT is Rs4b, which offer comfort.
Y/E March
2011 2012E 2013E
Net Sales (Rs b) 39.8 41.4 45.0 EBITDA (Rs b) 10.2 9.8 10.1 Net Profit (Rs b) 4.7 4.9 5.0 EPS (Rs)* 37.8 38.8 39.6 EPS Gr.(%) 9.4 2.8 2.0 BV/Share (Rs) 274.3 308.7 343.9 P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%) * Excl. Spencers 7.3 1.0 4.5 1.2 13.3 12.9 7.1 0.9 5.0 1.2 12.2 11.9 7.0 0.8 5.1 1.2 11.2 11.3
Regulated business provides steady cash flow; target to commission additional 2.5GW by FY15/16 CESCs regulated business, largely comprising generation (1,225MW) and distribution assets in Kolkata generates steady profit of Rs4b+ a year. This enables CESC to fund equity contribution towards new power generation capacities and other expansion plans. CESC has embarked on a two-pronged strategy in its power vertical: (1) to increase generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) entry into new distribution circles. Projects of 2.5GW are in advanced stages of development/ have entered the construction phase, with initial clearances (water, environment) and land acquisition largely in place. This comprises a 600MW project in Haldia, a 600MW unit in Chandrapur and 1.3GW unit in Orissa. Retail business expansion to reach 3x current space over FY11-14, investment likely CESC is working on expanding the area under operations in its retail business from 0.85msf to 2.5msf over the next three years. Strategies are being formulated to attain profitable growth and plans to enhance store level EBITDA from the current Rs20/sf to Rs50/sf over the next one year. Lately, revenue traction has been good and FY11 same-store revenue growth was ~14%. CESC will need funding for its capex, expansion and to tide over initial losses. Funding inevitable; CESC explores options We estimate the funding requirement for CESCs power and retail businesses at ~Rs40b over the next four years. This comprises Rs30b+ equity funding requirement (including Rs5b invested) for 2.5GW of generation capacity addition, Rs3b-5b towards funding of Spencers losses (FY11 estimate Rs1.1b-1.3b) and capex funding (~Rs0.6b per year), plus funding requirements for the distribution business. CESC is exploring fund raising options for its power and retail businesses. Valuations reasonable; maintain Buy Our SOTP-based target price is Rs439, with the existing power business at Rs277/ share (8x FY12E EPS), investment in Spencers at Rs39/share (Rs5b; EV of 1x FY10 sales), investment in Haldia and Chandrapur projects at Rs57/share (Rs7b) and cash at Rs50/share (Rs6.2b). Maintain Buy.

Others, 11.4 Foreign, 18.7 Promoter 52.5
Domestic Inst, 17.4

CESC Sensex - Rebased
500 440 380 320 260 May-10
Nov-10
Feb-11
May-11
Aug-10
June 2011
109
CESC
Regulated business offers steady cash flow; target to commission additional 2.5GW by FY15/16
CESCs regulated business, largely comprising generation (1,225MW) and distribution assets in Kolkata generates steady profits of Rs4b+ a year. This enables the company to fund the equity contribution towards new power generation capacities and other expansion plans. CESC has embarked on a two-pronged strategy in its power vertical: (1) to increase generation capacity from 1.2GW to 3.7GW by FY15/FY16, and (2) to enter new distribution circles. Projects of 2.5GW are in advanced stages of development/have entered the construction phase, with all initial clearances (water, environment) and land acquisition largely in place. This comprises a 600MW project in Haldia, a 600MW unit in Chandrapur and a 1.3GW unit in Orissa.
Steady cash flow from existing regulated business (Rs b)

RAB Net Profit 4.2 4.3
CESC's regulated business yields strong internal accruals of Rs4b+ a year, providing growth capital
3.5 2.9 2.2 1.3 13.3 FY06 13.9 FY07 14.9 FY08 16.9 FY09
3.5
21.5 FY10
23.1 FY11
24.7 FY12E
Status of projects under construction/development

Plant Chandrapur Remarks FC achieved (DER 75:25), linkages received from SECL Coal linkage received from South Eastern Coal Fields Land has been acquired (455 acres), environment clearance received EPC contract for the project is awarded in two packages: Balance of Plant (BoP) to Punj Lloyd and BTG sets to Sanghai Electric, China 300MW on merchant, 300MW on CERC tariffs Of the 345 acres required for the project, 282 acres have been acquired Financial closure achieved 70% of fuel requirement through linkages (granted from MCL), balance 30% through import (yet to be tied up) Will sign PPA with CESC to supply 450MW CESC invited BTG equipment tender and expects to award projects by September 2010 A large part of the land has been acquired (678 acres of the 1,094 acres required) As per prioritization for coal linkages, the project has secured 90 marks out of 100 Terms of reference for the project have been approved and Environmental Impact Assessment studies have been completed
Fuel linkages are available for Haldia (up to 70%) and Chandrapur. The Orissa project is one of the 12 considered for linkages by the Standing Linkages Committee meeting (score of 90 out of 100) for Twelfth Plan projects
Haldia
Dhenkanal, Orissa
Possible ramp-up in capacity (MW)

4,000 3,000 New Cossipore Budge Budge Orissa Titagarh Dhariw al Southern Haldia
CESC's capacity will increase to 3.7GW based on projects under construction and to 5.7GW based on the development pipeline
2,000 1,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
June 2011
110
CESC
Retail business expansion to reach 3x current space over FY11-14; investment likely
CESC is working on expanding the total area under operations in its retail business from 0.85msf to 2.5msf over the next three years. Strategies are being formulated to attain profitable growth and plans are afoot to enhance store level EBITDA from the current Rs20/sf to Rs50/ sf over the next one year. Lately, revenue traction has been good and FY11 same-store revenue growth was ~14%. CESC will need funding for capex and to fund initial losses, and expansion is contingent on fund raising.
FY10/11 was a year of consolidation, with store closures leading to improved sales (Rs/sf)
Store Nos 1.3 Area (msf)
1,100 1,048 975
1.0
1.0 0.9 0.9 0.9 0.9 0.9 0.9
0.9
906 854 793 660 853 811
3QFY08 337
3QFY09 346
1QFY10 244
2QFY10 215
3QFY10 215
4QFY10 215
1QFY11 204
2QFY11 208
3QFY11 206
4QFY11 210
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
CESC has restructured its retail business and is focusing on profitable growth for existing properties and new additions
Expansion plans to focus on large formats and on going deeper rather than wider (msf) CESC's expansion plan focuses on hypermarkets (taking total area under operations to 3x the current area). The supermaket and convenience store formats will see relatively less space addition. CESC also intends to penetrate deeper in existing territories rather than to enter new locations
Hypers Supers / Convenience stores
0.90
0.50 0.45 0.45 Aug-10 0.50 0.60 Mar-11 0.90 1.50
Mar-12
Mar-13
Mix of geographical penetration and store formats

East, 0.131 South II, 0.285 West, 0.092
SAS, 0.01
Small Stores, 0.36
Hypers, 0.44
South I, 0.165
North, 0.183
Supers, 0.06
Distribution for CESC's retail business in the store format and geographic penetration is even, while new expansion would be concentrated in select formats and locations, providing more consolidation in operations
June 2011
4QFY11
FY09
111
CESC
Focus on private labels across categories (percentage of sales)

45%
CESC plans to increase the share of private labels in FMCG and apparel to increase profitability and intends to increase EBITDA/ sf from the current Rs20/sf to Rs50/sf over the next one year
FMCG
20%
8%
6%
5%
8% 4% 3%
Staples
HWP
Apparel
E&E
F&V
BFS
Fish/Meat
Funding inevitable, CESC explores options

We estimate funding requirement for CESCs power and retail businesses of ~Rs40b over the next four years. This comprises Rs30b+ equity funding requirement (including Rs5b invested) for 2.5GW of generation capacity addition, Rs3b-5b towards funding of Spencers losses (FY11 estimate of Rs1.1b-1.3b) and capex funding (~Rs0.6b a year), plus funding requirements for the distribution business. CESC is exploring fund raising options for its power and retail businesses.
Funding requirement of Rs40b over the next 3-4 years CESC will require Rs40b for its planned expansion in the power and retail businesses. We estimate a gap in funding of ~Rs10b, excluding capex requirement for its existing generation/ distribution business
Particulars Retail expansion Retails losses Power sector Total Cash on books (FY11E) / Net internal accruals* (FY12-14E) Already invested in power projects (FY11E) Funding Gap # *net of dividend, # excluding existing distribution business capex requirement Amt (Rs m) 2,295 3,000 34,375 39,670 24,332 5,000 ~10,000
DER is comfortable; could provide opportunity to leverage (x)

30 6.9 6.2 20 15 2.4 1.7 0.9 0.6 11 6 0.3 FY08 0.4 FY09 0.5 0.3 FY11 0.4 0.4 11 17 14 12 17 29 26 Debt - LHS DER - RHS
Comfortable DER provides opportunities to leverage for growth
FY02
FY03
FY04
FY05
FY06
FY07
FY10
FY12E FY13E
June 2011
112
CESC
Valuations reasonable; maintain Buy

Our SOTP-based target price is Rs439, the existing power business at Rs277/share (8x FY12E EPS), investment in Spencers at Rs39/share (Rs5b; EV of 1x FY10 sales), investment in Haldia and Chandrapur projects at Rs57/share (Rs7b) and cash at Rs50/share (Rs6.2b). Maintain Buy.
CESC: SOTP Valuations

Method Regulated business Real estate Spencer retail Haldia Energy - Chandrapur 600MW - Haldia 600MW Cash Total Valuation 8.0 1.0 Value multiple 34,766 2,174 4,872 7,125 5,171 1,954 6,218 55,156 Value (Rs m) 277 17 39 57 41 16 50 439 Rationale (Rs/sh) At discount to industry average NPV of mall project and land bank valuation (other assets) At discount to industry average Projects in an advanced stage
FY12E PER (x) NPV, Land bank valuation FY10 EV/Sales DCF, COE of 13.5% DCF, COE of 15.0% FY11 Book Value
June 2011
113
CESC
Financials: CESC
Income Statement (Rs Million) Ratios
Y/E March Basic (Rs) EPS * CEPS (Rs) Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Inventory (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2009 29.3 46.5 215.8 4.0 12.2 2010 34.5 50.9 240.8 3.5 10.0 2011 37.8 59.4 274.3 3.8 10.0 2012E 38.8 62.1 308.7 3.9 10.0 2013E 39.6 64.2 343.9 4.0 10.0
Y/E March 2009 2010 2011 2012E 2013E Total Revenues 30,313 32,928 39,764 41,417 45,010 Cost of Energy purchased 4,125 6,370 4,532 4,888 6,375 Cost of fuel 9,447 10,770 16,339 17,156 18,013 Stores & spares 2,450 2,273 2,364 2,600 2,860 Employee Expenses 3,702 4,260 4,431 4,874 5,361 SG&A Expenses 4,464 1,759 1,900 2,090 2,299 EBITDA 6,125 7,497 10,199 9,810 10,102 % of Total Revenues 20.2 22.8 25.6 23.7 22.4 Depreciation 1,749 2,056 2,717 2,920 3,090 Interest 1,410 1,782 2,814 1,996 1,834 Other Income 1,682 1,562 1,242 1,180 1,014 PBT 4,649 5,221 5,909 6,073 6,192 Tax 552 888 1,167 1,200 1,223 Rate (%) 11.9 17.0 19.8 19.8 19.8 Reported PAT 4,097 4,333 4,742 4,874 4,969 Adjusted PAT 3,682 4,333 4,742 4,874 4,969 Change (%) 24.6 17.7 9.4 2.8 2.0 * Excl Spencers; fully diluted
7.3 4.3 1.2 1.0 1.3
7.1 5.0 1.2 0.9 1.4
7.0 5.1 1.2 0.8 1.4
13.0 11.0
13.8 10.8
13.3 12.9
12.2 11.9
11.2 11.3
Balance Sheet
Y/E March 2009 Share Capital 1,263 Reserves 47,573 Net Worth 48,836 Loans 23,981 Consumers Security Dep. 8,212 Capital Employed 81,028 Gross Fixed Assets Less: Depreciation Net Fixed Assets Capital WIP Investments Curr. Assets Inventory Debtors Cash & Bank Balance Loans & Advances Deferred Payments Current Liab. & Prov. Other Liabilities Provisions Net Current Assets Misc Expenses Application of Funds E: MOSL Estimates 94,289 38,261 56,028 12,796 3,104 29,268 2,120 3,889 12,510 10,327 422 20,253 19,022 1,231 9,015 86 81,029 2010 1,263 50,712 51,975 28,126 8,965 89,065 113,640 41,311 72,328 2,783 6,785 28,839 2,383 4,999 11,198 10,105 155 21,756 20,530 1,227 7,083 86 89,065 2011 1,263 54,914 56,176 20,816 9,592 86,585 119,056 44,029 75,027 2,866 5,433 29,893 2,724 5,992 9,218 11,805 155 26,714 25,463 1,251 3,179 79 86,585
(Rs Million)
2012E 1,263 59,232 60,494 19,106 10,264 89,865 124,470 46,949 77,521 2,952 10,533 27,069 2,837 6,241 4,731 13,106 155 28,282 27,006 1,276 -1,213 71 89,865 2013E 1,263 63,634 64,897 17,567 10,982 93,447 130,431 50,039 80,392 3,041 16,558 24,556 3,083 6,782 373 14,163 155 31,163 29,861 1,302 -6,607 62 93,447
47 23 0.4
55 22 0.4
55 25 0.5
55 25 0.5
55 25 0.5
0.4
0.5
0.3
0.4
0.4
Cash Flow Statement

PBT before EO Items Add: Depreciation Interest Less: Direct Taxes Paid (Inc)/Dec in WC CF from Operations Extra-ordinary Items CF from Op. incl EOI 2009 4,649 1,749 1,410 552 -869 6,387 415 5,972 2010 2011 5,221 5,909 2,056 2,717 1,782 2,814 888 1,167 619 1,924 8,791 12,198 0 0 8,791 12,198
(Rs Million)
2012E 2013E 6,073 6,192 2,920 3,090 1,996 1,834 1,200 1,223 -95 1,036 9,695 10,929 0 0 9,695 10,929
(Inc)/dec in FA -12,281 -8,343 (Pur)/Sale of Investments 2,593 -3,681 CF from Investments -9,689 -12,024 (Inc)/Dec in Net Worth -126 (Inc)/Dec in Debt 7,693 (Inc)/Dec in Cust. Sec. Dep. 790 Less: Interest Paid 1,410 Dividend Paid 585 CF from Fin. Activity 6,362
-5,500 -5,500 -6,050 1,352 -5,100 -6,025 -4,148 -10,600 -12,075 8 -1,710 671 1,996 556 -3,582 -4,487 9,218 4,731 9 -1,539 718 1,834 566 -3,212 -4,358 4,731 373
-701 7 4,145 -7,310 753 628 1,782 2,814 494 541 1,921 -10,030
Inc/Dec of Cash 2,646 -1,312 -1,980 Add: Beginning Balance 9,864 12,510 11,198 Closing Balance 12,510 11,199 9,218 * Fully Diluted
June 2011
114
Update
SECTOR: UTILITIES
PTC India
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs81
At the cusp of a big leap
TP: Rs127
Buy
Bloomberg Equity Shares (m) 52-Week Range (Rs) 1,6,12 Rel. Perf.(%) M.Cap. (Rs b) M.Cap. (US$ b)
PTCIN IN 294.5 145/75 -5/-26/-30 23.9 0.5
Consolidated PAT to witness 37% CAGR till FY13, value unlocking possibilities exist
PTC India is likely to witness strong business momentum, driven by the addition of ~4.6GW of projects to its LT trading portfolio over FY12/13. In addition, the tolling arrangements (350MW) will start contributing meaningfully to cash flows in FY12/13. PFS continues to be on a strong footing, post the recent IPO. We expect consolidated profit to double from Rs1.7b in FY11 to Rs3.2b in FY13. Defaults on few LT PPAs, lower ST prices impacting margins, and exposure to a single project/group are key risks in our view.
Y/E March
2011 2012E 2013E
Net Sales (Rs b) 90.6 107.8 147.1 EBITDA (Rs b) 1.4 1.1 1.5 NP* (Rs b) 1.7 2.5 3.2 EPS (Rs)* 5.7 8.4 10.8 EPS Gr. (%)* 51.9 47.2 28.4 BV/Share (Rs) 75.7 78.3 81.4 P/E (x)* 14.2 9.7 P/BV (x) 1.1 1.0 EV/EBITDA (x) 11.1 11.7 EV/ Sales (x) 0.2 0.2 RoE (%) 6.4 6.2 RoCE (%) 9.1 8.9 * Pre Exceptional, Consolidated 7.5 1.0 8.6 0.1 7.0 10.0
Power trading volumes to double by FY13; long-term drivers intact PTC India has a long-term (LT) power trading portfolio of ~1GW. We expect the addition of 1.7GW in FY12 and 2.9GW+ in FY13. We believe trading volumes will increase from 24.5BU in FY11 to 28.6BU in FY12 (up 17%) and 38.4BU in FY13 (up 34%). Also, the composition of trading volumes is changing, with the share of low-margin cross-border trades expected to decline from 22% in FY11 to 9% in FY13. PTC Financial Services (PFS) on strong footing; earnings CAGR of 52% till FY13 As at March 2011, PFS' equity base was Rs4.6b and net worth was Rs6.8b, which will increase to Rs5.6b and Rs10.2b, respectively post issue. Being a relatively new company, PFS' loan book has grown at a rapid pace from Rs200m in FY09 to Rs2.7b in FY10 and further to Rs8b as at end-FY11. Equity investments increased from Rs1.4b in FY08 to Rs4.6b by December 2010. We expect PFS to report a net profit of Rs875m in FY13, up from Rs95m in FY09 and Rs377m in FY11 (CAGR of 52%), driven by increased disbursements. PTC Energy witnessing business traction, driven by tolling projects 100% subsidiary, PTC Energy's tolling arrangement will start contributing to profitability from FY12, as 350MW of capacity is available for sale. The management has tied up coal supply for the project for 10 years, with fixed CIF price for five years (subject to a floor and cap). Based on the current fuel rates, we estimate fuel cost at Rs2.2/unit. We believe that this provides earnings possibilities of Rs577m in FY12 and Rs884m in FY13. Cash on books provides downside protection; Buy PTC has cash and equivalents of Rs9.6b, and has investments of Rs7b in subsidiaries/ project SPVs. We expect PTC to report consolidated net profit of Rs2.5b in FY12 (up 47%) and Rs3.2b in FY13 (up 28%). Maintain Buy, with a price target of Rs127.
Shareholding pattern % (Dec-10)

Foreign, 19.7
Domestic Inst, 48.7

PTC India Sensex - Rebased
152 132 112 92 May-10
Nov-10
Feb-11
May-11
72
Aug-10
June 2011
115
PTC India
Power trading volumes to double by FY13; long-term drivers intact

PTC India has a long-term (LT) power trading portfolio of ~1GW. We expect the addition of 1.7GW in FY12 and 2.9GW+ in FY13. We believe trading volumes will increase from 24.5BU in FY11 to 28.6BU in FY12 (up 17%) and 38.4BU in FY13 (up 34%). Also, the composition of trading volumes is changing, with the share of low-margin cross-border trades expected to decline from 22% in FY11 to 9% in FY13.
Sizable addition to LT portfolio, given strong PPA backlog (GW)

PPA 16.3 15.2 15.3 PSA 15.8 16.4 15.2 3.6
As at March 2011, PTC has signed PPAs for 15.2GW capacity, of which 5.5GW+ projects are expected to be commissioned by FY13.
11.9
10.5
11.2
4.5
4.6
4.8
11.2
14.0
14.2
3.5
3.4
3.4
3.4
3.5
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
2QFY10
3QFY10
4QFY10
1QFY11
3.5
2QFY11
3.5
3QFY11
Trading volumes to witness 25% CAGR till FY13

Trading volumes (MUs) Grow th (%) 34
Volume increase will be largely driven by the commissioning of 5.5GW+ capacity tied up through long-term contracts. We believe that execution of a large part of the 15.2GW PPA will drive strong volume CAGR even beyond FY13.
40 32 34
17 38,377 18,221 24,481 28,684
9,549 FY07
9,889
13,825
FY08
FY09
FY10
FY11
FY12E
FY13E
Changing composition of volumes (MU) to aid margin expansion (MUs)

Short Term 42 Long Term 38 33 LT volumes as a % of total 36 18,195 8,111 6,871 2,963 6,586 FY07 3,612 6,277 FY08 5,812 8,013 FY09 11,350 FY10 16,370 18,286 20,182 10,398 47
Increased share of longterm contracts will translate into relatively higher margins (2-2.5%), as part of these contracts will be outside the purview of the regulatory caps.
37 31
FY11
FY12E
FY13E
June 2011
4QFY11
116
4.0
PTC India
Subsidiaries contribute to earnings growth

PTC Financial Services (PFS) on strong footing; earnings CAGR of 52% till FY13: As at March 2011, PFS' equity base was Rs4.6b and net worth was Rs6.8b, which will increase to Rs5.6b and Rs10.2b, respectively post issue. Being a relatively new company, PFS' loan book has grown at a rapid pace from Rs200m in FY09 to Rs2.7b in FY10 and further to Rs8b as at endFY11. Equity investments increased from Rs1.4b in FY08 to Rs4.6b by December 2010. We expect PFS to report a net profit of Rs875m in FY13, up from Rs95m in FY09 and Rs377m in FY11 (CAGR of 52%), driven by increased disbursements. PTC Energy witnessing business traction, driven by tolling projects: 100% subsidiary, PTC Energy's tolling arrangement will start contributing to profitability from FY12, as 350MW of capacity is available for sale. The management has tied up coal supply for the project for 10 years, with fixed CIF price for five years (subject to a floor and cap). Based on the current fuel rates, we estimate fuel cost at Rs2.2/unit. We believe that this provides earnings possibilities of Rs577m in FY12 and Rs884m in FY13.
Expect sanctions and disbursements to gain momentum (Cumulative, Rs M) Sanctions Disbursements

53,452
39,052
13,975
18,557
27,052
10,375
7,375
4,875
3,813
4,238
17,052
FY10
FY11E
FY12E
FY13E
FY10
3,072
FY11E
10,062
5,493
FY12E
PFS' debt exposure in a single project had to be restricted to Rs1.2b, given net worth criteria. Post the recent IPO, this can now increase to Rs2b-2.5b, and will help to drive growth momentum.
PFC profitability to improve; expect earnings CAGR of 52% till FY13 Expect PFS to report net profit of Rs875m in FY13, up from Rs95m in FY09 and Rs377m in FY11 (CAGR of 52%), driven by increased disbursements. NIM will be higher, given better spreads on mezzanine debt / equity funding.
PAT (Rs m) 5.3 4.6 4.2 3.8 3.7 3.4 875 NIM (%) 5.7 RoA (%) 5.5
255
377
FY10
FY11
FY12E
624
FY13E
7,446 FY13E
June 2011
28,804
Equity / Mezz debt
LT Debt
Equity / Mezz debt
LT Debt
117
PTC India
PTC Energy witnessing business traction, driven by tolling projects (Rs M)

884
We estimate tolling volumes at 1.1BU for FY12 and at 2.5BU for FY13, and factor in pre-tax spread of Rs0.8/unit in FY12 and Rs0.5/unit in FY13. The key advantage is secured coal contracts with cap rates.
577
11 FY10
19 FY11E FY12E FY13E
Strong growth in consolidated earnings; value unlocking possibilities exist

PTC has cash and equivalents of Rs9.6b, and has investments of Rs7b in subsidiaries/project SPVs. We expect PTC to report consolidated net profit of Rs2.5b in FY12 (up 47%) and Rs3.2b in FY13 (up 28%). Maintain Buy, with a price target of Rs127.
Expect consolidated earnings CAGR of 37% till FY13 (Rs M)

FY09 FY10 941 413 528 153 11 1,105 FY11 1,351 947 404 226 19 -1,267 1,681 FY12E 1,417 965 452 375 577 -1,312 2,474 FY13E 1,652 1,179 473 525 884 -1,538 3,175 PTC India - Trading - Other Income PFS PEL Others Total 910 130 780 51 -23 939
Estimate PEL's contribution at 28% in FY13 v/s nil in FY11, and PFS' contribution at 17% in FY13 v/s 14% in FY10.
Investment schedule (Rs M): Value unlocking possibilities exist

FY08 FY09 410 4,460 300 195 1,257 6,623 FY10 410 4,460 480 195 1,257 6,803 FY11 1,000 4,460 1,500 400 1,357 8,718 Subsidiary - PTC Energy - PTC Financial Services Associates Athena Krishna Godavari Teestha (11% stake) Total Investments
PTC India has many levers to unlock value from its investments in projects, once they become operational.
0 540 300 153 702 1,694
PTC: SOTP composition

Business Segment Core Business PTC Financial Services PTC Energy Athena Projects Teestha VI Krishna Godavari Cash Balance Total Power Trading Financial Intermediation Power Generation Power Generation Power Generation Power Generation Method PER, FY13E Mkt Cap, 25% holdco discount PER, FY13E Book Value, FY11 Book Value, FY11 Book Value, FY11 Book Value, FY11 Valuation multiple 10.0 5.0 Value (Rs m) 15,531 4,829 4,421 1,298 1,414 195 9,628 37,315 Value (Rs/sh) 53 16 15 4 5 1 33 127
June 2011
118
PTC India
Financials: PTC India

Income Statement
Y/E March Total Revenues Total Expenses EBITDA % of Total Revenues Depreciation Interest Other Income PBT Tax Rate (%) Reported PAT Change (%) Adjusted PAT Change (%) Consolidated PAT Change (%)
(Rs Million)
2009 2010 2011 2012E 2013E 64,396 76,490 90,632 107,768 147,105 64,132 76,052 89,232 106,695 145,569 264 438 1,400 1,073 1,536 0.4 0.6 1.5 1.0 1.0 62 0 973 1,175 226 19.2 949 69.2 910 73.2 939 55 0 742 1,125 377 33.5 748 -21.2 941 3.4 1,105 17.7 50 11 628 1,967 576 29.3 1,391 86.0 1,351 43.6 1,681 52.1 45 0 646 1,674 607 36.3 1,067 -23.3 1,417 4.9 2,474 47.2 51 0 676 2,160 708 32.8 1,452 36.1 1,652 16.6 3,175 28.4
Ratios
Y/E March Basic (Rs) EPS Consol EPS CEPS (Rs) Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E (Standalone) P/E (Consolidated) EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) 2009 4.0 4.1 4.3 67.6 1.8 45.4 2010 3.2 3.8 3.4 71.2 1.4 43.8 2011 4.6 5.7 4.9 75.7 2.1 45.0 2012E 4.8 8.4 5.0 78.3 2.2 45.0 2013E 5.6 10.8 5.8 81.4 2.5 45.0
17.7 14.2 11.1 0.2 1.1 2.6
16.9 9.7 11.7 0.2 1.0 2.7
14.5 7.5 8.6 0.1 1.0 3.1
6.0 7.4
5.2 7.2
6.4 9.1
6.2 8.9
7.0 10.0
Balance Sheet
Y/E March Share Capital Reserves Net Worth Deferred Tax Liability Capital Employed Gross Fixed Assets Less: Depreciation Net Fixed Assets Investments Curr. Assets Debtors Cash & Bank Balance Loans & Advances Other Current Assets Current Liab. & Prov. Other Liabilities Provisions Net Current Assets Application of Funds E: MOSL Estimates
(Rs Million)
2009 2010 2011 2012E 2013E 2,274 2,945 2,950 2,950 2,950 13,091 18,017 19,373 20,152 21,061 15,365 20,962 22,323 23,102 24,011 95 90 75 75 75 15,460 21,052 22,397 23,177 24,085 614 138 475 7,994 618 623 192 242 426 380 8,760 10,527 676 288 388 9,367 791 339 451 9,367 25,056 14,106 10,416 434 100 10,789 10,741 48 14,267
20 0.1
25 0.0
42 0.1
45 0.1
35 0.1
-0.4
-0.5
-0.3
-0.3
-0.4
Cash Flow Statement

Y/E March PBT before EO Items Add : Depreciation Interest Less : Direct Taxes Paid (Inc)/Dec in WC CF from Operations 2009 1,135 62 0 226 -924 47 2010 1,320 55 0 377 -1,188 -190 -5 -768 -774 5,063 0 412 4,651 3,687 6,256 9,943 2011 1,967 50 11 576 -2,690 -1,238 -5 -1,767 -1,772 579 11 627 -58 -3,068 9,944 6,876
(Rs Million)
2012E 2,024 45 0 607 -1,211 252 -53 1,160 1,107 0 0 638 -638 2013E 2,360 51 0 708 1,972 3,675 -114 0 -114 0 0 743 -743
9,995 15,766 17,646 21,332 3,546 5,310 10,439 13,287 6,256 9,944 6,877 7,598 183 436 230 347 11 76 101 100 3,005 3,900 6,156 7,911 2,562 3,466 6,123 7,871 442 434 33 40 6,990 11,866 11,490 13,421
(Inc)/dec in FA 8 (Pur)/Sale of Investments 5,388 CF from Investments 5,396 (Inc)/Dec in Net Worth Less : Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash Add: Beginning Bal. Closing Balance -12 0 413 -425 5,018 1,237 6,255
15,460 21,052 22,397 23,177 24,085
721 2,818 6,877 7,598 7,598 10,416
June 2011
119
Update: Initiating Coverage

SECTOR: UTILITIES
Lanco Infratech
BSE SENSEX S&P CNX
18,232
5,473
CMP: Rs33
TP: Rs55
Buy
Bloomberg Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%) M.Cap. (Rs b) M.Cap. (US$ b)
LANCI IN 2385.5 75/31 -12/-41/-54 77.9 1.7
Valuation offers comfort, capacity addition looks up

Fuel, PPA uncertainties remain; funding requirement high
Lanco Infratech (LITL) is set to increase capacity from 3.3GW to 5.3GW by FY14, but earnings growth faces headwinds like evacuation infrastructure, fuel security and PPA issues. Higher leverage (~4.5x in March 2011) and funding requirements (Rs16b-18b over FY12-14) are other near term operational challenges. However, the stock's correction discounts concerns and we estimate earnings CAGR of 37% over FY11-13. We initiate coverage with a Buy rating and a target price of Rs55.
Y/E March Net Sales (Rs b) EBITDA Net Profit EPS (Rs) EPS Gr. (%) BV/Share (Rs) P/E (x) P/BV (x) EV/ EBIDTA (x) EV/ SALES (x) RoE (%) RoCE (%)
2011 2012E 2013E 77.8 151.4 168.3 18.9 33.2 37.2 4.4 5.9 8.3 1.9 2.5 3.5 1.7 48.5 11.5 19.4 21.9 25.4 17.5 13.1 9.3 1.7 1.5 1.3 12.2 9.3 9.3 3.0 2.0 2.1 16.4 19.7 19.2 8.0 8.9 7.8
Capacity addition looks up but fuel/PPA uncertainties remain Lanco Infratech's (LITL) operating capacity will rise from 3.3GW to 5.3GW by FY14 as it commissions new units. However, LITL faces PPA issues for Unit-2 atAmarkantak, and the lack of transmission line and fuel security have imapcted returns on its capacity at Udupi (600MW) and Anpara (1.2GW). Merchant capacity is exposed to fuel availability/cost risks and its Unit-2 at Amarkantak faces a tariff cap of Rs2.34/unit, which is under contesting. LITL recently acquired stake in Griffin Mines with a view to fulfilling its long term fuel requirements but the benefits are unlikely before FY13/Y14. EPC business: Captive in-house business offers equity cash flow A robust in-house project pipeline and large third-party contracts contributed to LITL's Engineering, Procurement and Construction (EPC) division's order book, which was Rs301b in March 2011. More than half of this is from three large in-house projects. The in-house power segment contributes ~70% of LITL's outstanding order book. However, we expect moderation even as it provides LITL with strong upfront cash flow. Capacity addition leads earnings growth LITL will post consolidated PAT of 37% CAGR over FY11-13, and the power sector will account for over 80% of earnings in FY12 and FY13. We expect a decline in the contribution of merchant earnings to total PAT, as we assume Amarkantak-I on a regulated returns basis from mid-FY12. We expect LITL's operating cash flow to be sustained at over Rs30b a year and DER is unlikely to taper off in the near term, as debt for new projects is added. We have not assumed consolidation/contribution from Griffin Mines, given lack of clarity on their operational/financial details. Valuations offer comfort, initiating coverage with a Buy, target price: Rs55 LITL's stock has corrected by 60% over the past 12 months (relative under-performance of 54%), due to a lack of clarity on PPAs, fuel security issues, accounting policy changes, higher gearing and funding issues. Although these concerns have not all receded, a price correction has largely discounted them. Our estimates are based on a conservative stance on various issues/operating rates and so we believe current valuations offer comfort. We initiate coverage with a Buy rating and a target price of Rs55.

Others, 9.4 Foreign, 19.4 Promoter 68.0
Domestic Inst, 3.2

Lanc o Infratech Sensex - Rebased 78 66 54 42 30 May -10 Nov -10 May -11 Aug-10 F eb-11
June 2011
120
Lanco Infratech
Power business: Capacity addition up, fuel/PPA uncertainties remain

Lanco Infratech's (LITL) operating capacity will rise from 3.3GW to 5.3GW by FY14 as it commissions new units. However, LITL faces PPA issues for its Unit-2 at Amarkantak, and the lack of transmission lines and fuel security have impacted returns on its capacity at Udupi (600MW) and Anpara (1.2GW). Its merchant capacity is exposed to fuel availability/cost risks and its Unit-2 at Amarkantak faces a tariff cap of Rs2.34/unit, which it is contesting.
Lanco Infratech's operating capacity is 3.3GW and it is working on 6GW (including a 742MW gas-based project) of projects. By FY14 installed capacity will increase to 5.3GW. LITL plans to commission projects with capacity of 4.5GW to generate 15GW by 2015. The company will sell about 366MW of the Kondapalli (Unit-2) project and 100MW of the Anpara project on a merchant basis and the first unit of its Amarkantak project is for short-term sales due to PPA issues with PTC/SEB. Thus, of the planned capacity addition of 4.5GW (excluding gas-based expansion), LITL will have a maximum of 766MW on a merchant basis and 466MW assuming Amarkantak Unit 1 is put on long term PPA. LITL is vulnerable for its gas-based power project because of low gas supply from KG-D6. Out of 3GW of LITL's coal-based projects, 1.8GW are dependent on CIL linkages and 1.2GW are coastal projects, based on imported coal. LITL has been facing PPA-related issues even at Unit-2 of its Amarkantak project, which was recently scheduled on an LT basis on regulated returns, following an order from the state regulator. We have considered Amarkantak Unit-2 on regulated returns (though with tariff caps, which is being contested). To factor in fuel security issues, we assume lower PLFs for coal/gas-based projects. Although LITL's PPA structure largely provides for a fuel cost pass through, it is exposed to fuel availability/cost risk on its merchant capacity and Unit-2 at Amarkantak.
Capacity to grow 3x from FY10 levels (MW)*
6.0 4.5 Kondapalli Amarkantak Anpara Project Vams hi Lanc o Green Tees ta-VI Aban Udpi Projec t Uttaranc hal Phase-I & II
LITL's capacity addition is front ended and capacity will increase to 5.3GW by FY14, including 742MW of gasbased expansion
3.0 1.5 0.0 FY10 FY11 FY12 FY13 FY14
*We have not considered Kondapalli Ph 3 in capacity built out due to ambiguity over gas linkages
LITL is also working on 4.7GW of projects

Projects Capacity (MW) 1,320 1,320 1,320 742 Land , Partly , Partly Water Environment Financial Equipment Remarks Clearance Closure Award , Partly , Partly FY14 FY14 FY14 Combined Cycle by Sep-11
LITL has attained key milestones on projects under construction, providing comfort on capacity under execution/ development
Amarkantak 3/4 Babandh Vidharbha Kondapalli Ph 3
Total
4,702
June 2011
121
Lanco Infratech
Capex largely incurred, equity commitment mainly for projects under development (Rs b)
Projects Stake Capacity Total (%) (MW) Anpara Udupi Lanco teesta Lanco Green Lanco Hydro* Amarkantak 3/4 Babandh Vidharbha Kondapalli Ph 3 Total *Uttranchal 100 100 100 100 100 96 100 100 59 1,200 1,200 500 70 152 1,320 1,320 1,320 732 7,814 44 53 31 6 11 69 74 74 27 388 Cost Spent Spent Mar-11 (%) 43 52 15 6 3 22 16 10 2 169 97 99 49 98 27 32 22 13 9 44 Total 13 11 6 1 2 14 12 15 5 79 Equity Invtd. Mar-11 13 10 5 1 1 9 9 4 1 53 Invt. (%) 99 95 82 95 37 67 76 24 25 67 Equity LITL's O/S Share 0 1 1 0 1 5 3 11 4 26 0 1 1 0 1 4 3 11 2 24
A sizable portion of equity funding for the projects is complete
Thermal capacity: PPA and fuel source mix Fuel supply issues are more prevalent impacting operating rates for projects. The management stated that for 1.2GW each at Anpara, Udupi plants returns are not linked to fuel availability
1,800 MW on Domestic coal 3,854MW Capacity *
Fuel portfolio
Offtake mix
1,200 MW on imported coal
854MW on Gas based project
3,088 MW tieup under LT PPA#

100% capacity has fuel cost pass thr ough
766 MW on Merchant**
Regulatory issues on its PPA/merchant exposure could impact near term earnings, driven by fuel scarcity and/or cost
*Thermal cap acity, Balance 103MW is Hydro (90MW) and Wind (13MW), **300MW of Amarkantak 1 is under negotiation, #300MW Amarkantak Unit 2 original PPA has tarif f cap, under contest
Our estimates factor in a conservative view on fuel/PPA issues due to lack of clarity
Projects Amarkantak U1 Amarkantak U2 Current Status Fuel PPA Obtained through Merchant SECL linkages (70%) and ELT PPA, fuel cost auction (30%) pass through RIL gas upto 90%, current supply at 80% LT PPA, fuel cost pass through Merchant Management's take Fuel PPA FY12 realisation of Linkages at 70% Rs4-4.50/unit and E-auction at 30% Our assumption PP A 6 months Merchant, Linkages at 70% 6 months regulated and E-auction at Regulated return 30% based on old tariff cap Assumed supply only for 70% PLF Merchant realization in FY12 of Rs4.25/unit Full recovery assumed in Import linked to FY12 spot prices Recovery assumed after September 2011 Fuel Linkages at 70% and E-auction at 30% Assumed lower availability, RoE under recovery over FY12-14
Kondapalli U1 Kondapalli U2 Udupi U1
Supply could improve in FY12
Udupi U2
Anpara U1 Anpara U2
Imported under LT LT PPA, fuel cost contract (quantity) pass through but price linked to Indonesia LT PPA, reference price transmission line is index (spot) an issue LT PPA, fuel cost pass through Linkages
State to provide support being Case-2 project
FY12 realisation of Rs4-4.50/unit Expect tariff petition approval September 2011 Tariff recovery for 2nd unit from Sept/Dec 2011 Full recovery of fixed charge, as fuel availability not required, even in case of shortfall
June 2011
122
Lanco Infratech
Fuel supply issues plague LITL's projects, PPA structure covers the risk
Projects Amarkantak Ph 1&2 Requirement Peak Remarks (mtpa/mmscmd)* PLF (%) 2.9 85% 70% PLF for FY12, 75% for FY13 and FY14 and 80% thereafter PPA Structure 300MW merchant sales exposed to pricing/ availability risk, and 300MW regulated project is subjudice due to a tariff cap 366MW merchant sales are exposed to pricing/ availability risk and a 368MW regulated project largely insulated Regulated project Regulated, PPA structure covers fuel price availability/escalation Regulated, PPA structure covers fuel price availability/escalation Yet to be signed
Kondapalli Ph 1&2
1.0
80%
70% PLF for FY12
Aban
0.2 6.1
80% 85%
We factor in lower operating rates due to coal/gas supply issues
Anpara
70% PLF for FY12, 75% for FY13 70% PLF for FY12, 75% for FY13 and FY14 80% PLF assuming 100% LT imported coal supply
Udupi
4.8
85%
Amarkantak Ph 3&4 Babandh
5.9 5.9
85% 85%
Fuel basket same as A1&2 Basket can Yet to be signed comprise domestic linkages (70%) and imports (30%). Captive mine to contribute in later years
Coal sourcing from Griffin Mines limited in the near term (m tons) For upcoming projects, LITL could source from Griffin Mines as the exportable surplus increases from 1mt to 3-4mt by FY14/15. The management expects a faster production ramp-up and thus, there can be upside to sourcing for projects in India
Produc tion Ex portable s urplus 15 11 9 17
9 5 1 FY12E 2 6 3 7 4 3
10
FY13E
FY14E
FY15E
FY16E
FY17E
FY18E
FY19E
June 2011
123
Lanco Infratech
A location advantage can improve visibility on the Amarkantak and Babandh projects
B abandh
Relative proximity of the Amarkantak and Babandh projects to the coast could help to mitigate fuel supply dependence from domestic sources for expansion
Vidharbha 1320MW
Amarkantak
K ondapalli Phase
U dupi phase I & II 1200MW
Cash flow, fund raising to meet equity funding requirements

Particulars Griffin Mines Power projects Anpara Udupi Lanco Teest a Lanco Hydro Uttranchal Amarkantak 3 / 4 Babandh Vidharbha Kondapalli Ph 3 Total funding Net profit of power business Net gap in funding Rs b 17.8 Remarks Acquisition funding, plus capex over FY11-15, current production of 4mtpa to be ramped up to 17mtpa CoD by FY12 First unit commissioned, second to be commissioned by December 2011 CoD by 4QFY13 CoD by FY15 CoD by FY15 CoD by FY15 CoD by FY12 FY11-14
0.1 0.5 1.1 1.3 4.3 2.9 11.3 2.4 41.7 25.6 16.1
We estimate LITL will have a funding requirement, assuming commitment from the recently acquired Griffin Mines
Merchant power contribution to the power business PAT to fall (Rs b)

Merchant Regulated Dow ngrade (%) 10.3
Contribution of merchant sales will fall as we assume Amarkantak-I to be on a regulated returns basis
9.1
24%
9.1
13% 7.3
FY12E
FY13E
June 2011
124
Lanco Infratech
EPC business: Captive in-house business provides equity cash flow

A robust in-house project pipeline and large third-party contracts contributed to LITL's Engineering, Procurement and Construction (EPC) division's order book, which was Rs301b in March 2011. More than half of this is from three large in-house projects. The in-house power segment contributes ~70% of LITL's out s tanding order book. However, we expect moderation even as it provides LITL with strong upfront cash flow.
LITL's EPC division had a strong order book of Rs301b as at March 2011 due to a robust project pipeline and the recent inclusion of a large third-party EPC contract. More than half the order book comprises three large in-house projects, progress on which is crucial for the EPC division's growth. The in-house power segment contributes 70% of the outstanding order book and third-party EPC contracts (power and infrastructure) contribute 30%. We expect EBITDA margins to be range-bound as "competitive cost of development" could be a key to success in Case-1 bids for power projects. Thus, the scope for margin expansion is largely from efficiencies. We have factored in a ~100bp decline in EBITDA margin in FY13 over FY12. The EPC division's contribution to consolidated earnings will be limited, owing to elimination, even as it offers LITL strong upfront cash flow.
EPC order book composition
Infrastru c ture, Rs26b , 9%
Concentrated in few projects

Kondapa lli Ph III, Rs 12b, Tees ta 6% VI, Rs14b, 8% Amarkan tak 3&4, Rs46b, 24% Babandh , Rs 54b, 28%
The three orders contribute 83% of the in-house order book
In-house projects dominate the order book with three large projects accounting for 56% of it
Pow er Others, Rs59b, 21%
Pow er Inhous e, Rs 190b, 70%
Anpara, Rs5b, 2%
Udupi, Rs 3b, 1%
Vidarbha , Rs 56b, 31%
Order book increased recently (Rs b)

Booked Kondapalli Ph 3 (Rs21b) and Vidarbha (Rs57b) in 3QFY10 and Babandh (Rs56b) in 4QFY10
EPC revenue growth constrained in the near term (Rs b)
257
248
209
Booked Amarkantak Ph 3&4 of Rs55b
242
275
301
89.8 59.4 40.8 1.5 5.4 F Y07 15.7 FY12E 58.7
84.2
126
121
113
103
1QFY09
2QFY09
3QFY09
4QFY09
1QFY10
95 2QFY10
147 3QFY10
4QFY10
1QFY11
2QFY11
3QFY11
4QFY11
Revenue growth is likely to be muted in the near term, depending on the progress of the three large projects
June 2011
FY13E
F Y06
F Y08
F Y09
F Y10
F Y11
125
Lanco Infratech
EBITDA margins to be under pressure, given the CBT regime

EBIDTA - LHS 21.1 EBIDTA margin (%) - RHS
EBITDA margin growth could be driven more by execution efficiency than pricing as the "competitive cost of project development" is vital for tariff bidding
19.9 15.4 15.1 13.4 14.1
14.0
13.9
0.2 FY06
1.1 FY07
3.1 FY08
5.7 FY09
9.2 FY10
7.9 FY11
13.5 FY12E
11.9 FY13E
The EPC division's contribution to LITL's consolidated earnings will be low but it offers strong cash flow (Rs b)
Standalone PAT Standalone c as hflow s Contribution to Consolidated PAT Consolidated PAT 52.2 34.2 7.1 5.5 4.9 2.63.1 1.0 FY09 2.4 2.8 3.5 0.8 FY10 FY11 1.7 FY12E 1.7 FY13E FY09 FY10 6.1 4.7 5.9 2.8 1.0 4.6 2.4 4.5 18.2 1.7 0.8 FY11 FY12E FY13E 6.0 28.0 20.7 1.7 EPC businesss Contribution (%) 8.3
Contribution to earnings remains low but strong upfront cash flow will partially meet LITL's project equity requirements
Capacity addition, merchant profits to lead earnings growth

We expect LITL's consolidated PAT to grow by 37% CAGR over FY11-13, driven by capacity commissioning in the power business and profitability at the EPC division. The power sector will account for over 80% earnings in FY12 and FY13. We expect merchant earnings' contribution to total PAT to fall, as we assume Amarkantak on regulated return basis from mid-FY12. We expect LITL's operating cash flow to be sustained at over Rs30b a year and DER is unlikely to taper off in the near term, as debt for new projects is added. We have not assumed consolidation/contribution from Griffin Mines due to ambiguity over operational/financial details.
Consolidated PAT (Rs b) ...

8.3
... dominated by the power sector

Pow er Roads EPC business * Real Estate Trading Others
10
6.0
8
4.6
4.5
5 3 0 -3
FY10
FY11
FY12E
FY13E
FY10
FY11
FY12E
FY13E
Earnings growth is driven by capacity commissioning, strong profitability at the EPC division. The power business will account for over 80% of consolidated PAT
June 2011
126
Lanco Infratech
Sizable merchant sales contribution (Rs b)

Merc hant PAT Contribution to Cons olidated PAT (%)
LITL's merchant earnings will drop due to lower prices and as we assume A1 to be on regulated return from mid-FY12
83.7
4,991
51.0 4,257
FY12E
FY13E
Source: Company/MOSL
Sustainable operating cash flow (Rs b)

38.7 33.5
DER to taper off after FY14 (x)

4.4 4.5
15.5
3.3
2.2
-5.8 FY10 FY11 FY12E FY13E
FY10
FY11
FY12E
FY13E
LITL's operating cash flow to be sustained at over Rs30b and DER will fall meaningfully only after FY14
Source: Company/MOSL
Valuations offer comfort, initiate coverage with Buy rating TP: Rs55
LITL has corrected by 60% over the past 12 months, underperforming the BSE indices by 54%. The underperformance was driven by lack of clarity on PPAs, fuel security, accounting policy changes, higher gearing and funding issues. We believe the price correction has significantly discounted these factors. Our estimates are based on a conservative stance on various issues and operating rates and thus we believe current valuations offer comfort. We initiate coverage with a Buy rating and a target price of Rs55.
June 2011
127
Lanco Infratech
SOTP Valuations
Cap (MW) Operational projects Kondapalli Phase I & II 734 Aban 120 Vamshi 20 Amarkantak I & II 600 Lanco Green 70 Udupi phase I & II 1200 Teesta-VI 500 Anpara Phase I & II 1200 Uttaranchal Phase-I & II 152 Projects under construction/development Babandh 1320 Amarkantak (IIII & IV) 1320 Kondapalli Phase III 732 Vidarbha project 1320 Real Estate Project 3.5 msf Road Project Hoskote - Mudbagal Project Road BOT Nilamangala - DevenHalli Project Road BOT Lanco Electric Utility Ltd Trading Lanco standalone EPC business Total 8x FY13E PER 9,288 37,692 131,523 16 55 29 100 Naphtha/gas Gas Hydro Coal Hydro Imported coal Hydro Coal Hydro Coal Coal Gas Coal Real estate 10,653 864 429 7,900 1,788 11,159 3,099 18,970 1,989 9,009 9,224 11,188 3,540 1,403 4 803 1,808 4 0 0 3 1 5 1 8 1 4 4 5 1 1 0 0 1 8 1 0 6 1 8 2 14 2 7 7 9 3 1 0 1 1 10.5 11.5 11.5 11.5 12.5 12.5 13.5 13.5 13.5 Type NPV (Rs m) NPV (Rs/sh) % of Total WACC (%)
17.0 9.6 9.6
8x FY12 EPS
June 2011
128
Lanco Infratech
Financials: Lanco Infratech

Income Statement
Y/E March Total Revenues Change (%) Operating Expenses EBITDA % of Total Revenues Interest Depreciation Other Income
(Rs Million)
2009 2010 2011 2012E 2013E 60,720 81,076 77,837 151,406 168,352 87.3 33.5 -4.0 94.5 11.2 51,846 65,805 58,933 118,218 131,147 8,874 14.6 2,185 1,073 15,271 18,905 18.8 24.3 3,554 3,479 1,839 7,554 3,537 2,582 33,188 21.9 13,569 7,517 1,501 37,205 22.1 14,192 10,161 1,753
Ratios
Y/E March Basic (Rs) EPS CEPS (Rs) Book Value DPS Payout (incl. Div. Tax.) Valuation (x) P/E EV/EBITDA EV/Sales Price/Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Leverage Ratio Debt/Equity (x) 2009 1.3 2.5 9.5 0.0 2010 1.9 4.2 14.0 0.0 0.0 2011 1.9 4.2 19.4 0.0 0.0 2012E 2.5 7.2 21.9 0.0 0.0 2013E 3.5 8.8 25.4 1.0 28.6
PBT 5,615 Tax Rate (%) 0.0 Reported PAT 5,615 Change (%) 6.0 Minority interest 1,040.8 Share from Associates 4.7 Profit from transaction with Associate cos 647.6 Adj. PAT 3,927 Change (%) -1.6
10,077 10,395 13,602 14,604 3,642 3,850 3,883 3,766 36.1 37.0 28.5 25.8 6,435 6,545 9,719 10,838 14.6 1.7 48.5 11.5 915.0 1,703.3 1,581.2 1,003.1 -178.0 26.1 0.0 0.0 755.3 4,764 21.3 407.3 2,175.4 1,487.5 4,435 5,963 8,348 -6.9 34.5 40.0
25.6 13.3 1.9 3.4 0.0
17.0 9.9 1.9 2.3 0.0
17.5 12.2 3.0 1.7 0.0
13.1 9.3 2.0 1.5 0.0
9.3 9.3 2.1 1.3 3.1
22.8 9.5
23.6 9.5
16.4 8.0
19.7 8.9
19.2 7.8
2.7
2.2
3.3
4.4
4.5
Balance Sheet
Y/E March Share Capital Reserves Net Worth Debts Minority interest Deferred Tax Liability Capital Employed Gross Block Less: Depreciation Net Fixed Assets Capital WIP Investments Inventory Debtors Other Current Assets Loans and Advances Cash
(Rs Million)
2009 2010 2011 2012E 2013E 2,198 2,385 2,387 2,387 2,387 18,778 31,062 43,844 49,807 58,155 20,976 33,448 46,231 52,194 60,542 55,970 83,613 166,517 230,449 270,229 7,033 7,108 8,453 8,453 8,453 175 1,003 5,368 5,368 5,368 84,154 125,172 226,570 296,464 344,592 23,867 7,615 16,252 40,054 9,837 11,285 11,944 53 16,156 9,905 61,644 10,867 50,777 19,237 20,229 16,267 22,270 74 21,800 9,628 62,018 180,519 182,519 14,404 24,262 34,644 47,614 156,258 147,876 108,793 121,655 179,125 31,949 1,697 1,697 21,424 20,273 17,358 21,304 41,317 39,351 131 68 68 47,226 0 0 12,905 897 468
Cash Flow Statement

Y/E March 2009 2010 PBT before EO items 4,494 8,228 Add : Depreciation 1,081 3,251 Interest 2,185 3,554 Less : Direct taxes paid -1,690 -3,642 (Inc)/Dec in WC -3,788 -17,194 CF from operations (Outflow)/Inflow 2,281 -5,803
(Rs Million)
2011 2012E 8,310 9,846 3,537 9,858 7,554 13,569 -3,850 -3,883 -7 9,351 15,545 38,740 2013E 12,114 10,382 14,192 -3,766 532 33,454
(Inc)/dec in FA -20,338 -16,960 -89,930-131,363 -59,470 (Pur)/Sale of Investmnt -2,871 -10,392 -11,720 30,252 0 CF from investments (Outflow)/Inflow -23,209 -27,352-101,651 -101,111 -59,470 (Inc)/Dec in Networth 145 -7,885 -8,323 0 0 (Inc)/Dec in Debt -24,320 -27,643 -82,904 -63,932 -39,780 Less : Interest Paid 2,185 3,554 7,554 13,569 14,192 CF from Fin. Activity (Inflow)/Outflow -21,990 -31,975 -83,672 -50,363 -25,588 Inc/(Dec) of Cash 1,062 Add: Beginning Balance 7,411 Closing Balance 8,473 Actual bank Balance 9,905 -1,180 9,905 8,724 9,628 -2,433 -12,007 9,628 12,905 7,195 897 12,905 897 -429 897 468 468
Creditors 30,792 34,115 63,000 45,700 41,351 Provision 540 995 1,777 0 0 Net Curr. Asset s 18,012 34,929 38,213 16,855 15,894 Application of Funds 84,154 125,172 226,570 296,464 344,592 E: MOSL Estimates
June 2011
129
NOTES
June 2011
130
For more copies or other information, contact Institutional: Navin Agarwal. Retail: Vijay Kumar Goel Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pert aining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interest s/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement NTPC Coal India Powergrid NHPC Tata Power Adani Power JSW Energy Reliance Infrastructure CESC PTC India Lanco Infratech Analyst ownership of the stock No No No No No No No No No No No Group/Directors ownership with of the stock No Yes No No No No No No No No No Broking relationship company covered No No No No No No No No No No No Investment Banking relationship with company covered No No No No No No No No No No No
This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.
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Detailed Report | June 2011

Utilities | Detailed Report | June 2011

Just an eclipse ...

... brighter days ahead!

Indian Power Sector

Dire "state" (Pre-2001)

Rise of reforms (2001-2006)

Redefining period (2012 onwards)

FUEL SUPPLY, OPERATING RATES

DEMAND & DEFICIT

SHORT-TERM POWER MARKET

SEBs (State Electricity Boards)

Electricity Act, 2003

Capacity addition stagnant for nearly two decades

Private sector contribution more than 40%+ (GW)

Coal sourcing to broaden going forward (m tons)

Residential + Agriculture = 46% of power consumption

ST market size declines led by fall in the tariff (Rs b)

Deterioration in finances led by few states

India: Long way to go

Increasing share of thermal (GW)

Power generation increasing despite fuel scarcity (BUs)

Lower demand led to fall in the deficit (%)

Availability in ST market to improve (BUs)

Expected installed capacity of SEB's increasing (MW)

Indian Power Sector: Story in Pictures

Installed capacity build-up (GW)

Hydro capacity build-up (GW)

Power demand as per 17th Electric Power Survey (BUs)

2.3 7.0 6.0 8.3 7.8 2.5

5.8 3.0 7.5 0.2 3.0 1.3 1.3 3.2

5.2 45 7.0 0.1 2.9 35 46 58

16.1 1.9 6.2

1.7 0.1 0.1

17.4 8.3 5.4 10.4 2.0 5.1 11.2

3.6 1.1 2.2 2.2 0.2 0.2 1.5

37.1 4.9 15.0 23.3 10.8

3.3 0.1 3.7 3.9 0.1

Indian Power Sector: Operational Matrix

Coal Fields in India

[A] INSTALLED CAPACITY (GW)

Regional Transmission line build-up (MW)

Northern Region North-Eastern Region

[B] GENERATION (BUs)

2,860 NIL Eastern Region

6,490 Western Region 10,500

[C] FUEL SOURCING

Andhra Pradesh Goa Karnataka

86 89 46 68 317 44 393 9.4 -0.6

[D] BASE DEFICIT

Tamil Nadu Kerala

[E] SEB FINANCES (Rs B)

Transmission Capacity by FY12E Addition expected over FY12E-FY17E

Utilities | Just an eclipse ... brighter days ahead

Utilities | Just an eclipse ... brighter days ahead

Euphoria (2007-09): Fresh wave of private investments

Self-correction (2010-11): Project economics hit; survival of the fittest

Utilities | Just an eclipse ... brighter days ahead

Utilities | Just an eclipse ... brighter days ahead

CPSU's Earnings Yield and Bond Yield Comparison (%)

CPSUs' recent underperformance is likely to be reversed led by revival in earnings growth

CPSU's Earnings Grow th (%) 27.0