1.Indian Ports Initiating CoverageIn the build-out phaseSector Outlook Positive Indian Power Utilities Sector Update March 2012 1

2. Power UtilitiesWith no power comes great responsibilitySector view PositiveIndian power sector (particularly generation utilites) has gone through a complete metamorphosis, with almost DateMar 09, 2012all aspects taking a turn for the worse, over the last 18 months. With the Government showing signs ofintervention, the extent of relief that will be felt by our coverage companies will depend on the nature of Market Datameasures adopted and the totality of such measures. Now, on to our reality checks on potential reforms:SENSEX17120 Domestic Coal Domestic coal supply will continue to be short of demand for power sector (~100MT in FY12E toincrease to ~184MT by FY15E). Hence Coal India (CIL) likely to be compelled to make available a greater quantity of BSE Power 2165coal to power plants with linkages and sign FSAs with a minimum guaranteed commitment of ~80% for the eligible LoAsMarket Performance (%) Imported coal and coal price pooling Given that CIL can ramp-up production at not more than ~5% CAGR over thenext few years it will be forced to consider costlier coal imports to meet the shortfall, in which case it will possibly resort1m 3m 12mto price pooling to ensure that the incremental cost of imports is absorbedSensex-3% 1% -6% Domestic Gas - With gas production at KG-D6 expected to drop further even from the ~36mmscmd in Jan12, PLFs ofsecond-generation gas-based power plants are expected to stay adverse. With increased allocation of APM gas to the BSEPowr 2% 7%-16%power sector not materializing, the completed power projects awaiting gas allocation are unlikely to commenceoperations over FY13-14 BSE Power vs Sensex - Relative performance Tariff reforms Considering the large scale ramifications, the Government has been wary to take-up tariff reforms15%10%aggressively or to back the interests of private developers. Nevertheless PPA reforms (hiking tariffs) to allow a5%reasonable pass-through of fuel costs which will go hand-in hand with consumer-level tariff is a key theme, we expect, 0%-5%will play out over the next year - the single largest reason for our positive view on power utilities as a spaceClosing price-10%-15% Unlike the fossil fuel-based gencos, the hydel utilities face negligible operational risk. However the key adverse variable -20%-25%for these utilities remains project delays for multitude of reasons. PGCIL on the other hand, we believe, will increase -30%-35%capex over FY13-14, driving transmission capexMay-11 Nov-11Jul-11 Mar-11 Mar-12Jan-12 Sep-11 Given the high importance of power sector (~30% of 11th Plan infrastructure spend and 8% of bank credit), we believethe aforesaid measures will be taken. However, we are currently unsure of the totality of these measures and time that BSE Power Sensexwill be taken. Hence, in the interim, we recommend a portfolio approach to investing in utilitiesOur top Buys are Lanco, CESC and GIPCL as we believe that the current stock prices does not factor-in Vijaykumar Bupathyimprovement in business fundamentals, which we think is misplaced. While Lanco will be a focused play onvijaykumar@sparkcapital.insector fundamentals improving, the latter two names will serve as portfolio shock absorbers in case the reform+91 44 4344 0036measures are indefinitely delayed. We also turn positive on PGCIL given the low operational risk involved andimproved growth prospects. Our top shorts are Adani Power and GMR - while on Adani Power, the reason for ourBharanidhar Vijayakumarbharanidhar@sparkcapital.innegative call is because of being exposed on fuel and tied to low-priced PPAs, our view on GMR is largely on+91 44 4344 0038account of stress from non-utility assets (chiefly airports vertical). Find Spark research on Bloomberg (SPAK ), Thomson First Call, Reuters Knowledge and Factset2 3. Power UtilitiesViews on StocksCompany ViewRating With ~2GW at Mundra and ~2.2GW of pipeline projects (Tiroda) not having a secured coal supply, fuel supply concerns outweigh SELLthe positives of strong execution capabilities TP: Rs. 46 Given that the production at Bunyu mine has been delayed significantly Adani Enterprises is supplying coal at a much higher rate CMP: Rs. 76Adani Power (~USD 90/ tonne) compared to the contracted rate of USD 36/ tonne, thereby eroding the near term profits. Also AdaniEnterprises could hike transfer price of coal to Adani Power due to the recent change in Indonesian regulations Company is not hedged for such unanticipated increases in fuel cost as all the PPAs are on fixed levelised tariffs Moreover, stock trades at a significant premium to our DCF valuation of Rs. 46 per share, leading to our Sell rating Scores high on fuel security with >50% of total annual coal requirement for the operational plants being supplied from the groups BUYcaptive mine (ICML); firm coal linkages exist with CIL for the additional requirementTP: Rs. 350 Has a stable fixed-RoE based business model with a full pass through of fuel costs as well as operating costs; WBERC approved CMP: Rs. 265new tariffs for the period 2011-14 with an average tariff hike of ~13% giving good revenue visibility for this periodCESC Pipeline projects of 1,200MW are seeing swift execution, with 600MW at Haldia and 600MW at Chandrapur expected to becommissioned by FY14. As both plants have CIL linkages for coal, coal supply risk exists Stock trades at a steep (~31%) discount to our DCF valuation of Rs. 373 per share leading to our bullish stance on the stock dueto the fixed RoE model with the ability to pass-on fuel costs. Reiterate Buy We like the Companys fuel security as 500MW out of the total 810MW operational capacity have captive mines supplying lignite. BUYCompanys pipeline project of 500MW is also based on lignite from the captive mines. TP: Rs. 88 Though fuel security exists for gas based generation plants (310MW) through firm fuel supply commitments from GAIL & KG D6, CMP: Rs. 71gas shortage has affected the companys generation during FY12 and we continue to factor-in low PLFs going forwardGIPCL Has an attractive fixed-return business model with assured power off take agreements for the entire operational capacity withGUVNL at tariffs set by GERC enabling cost-pass through. Stabilization of the 2nd unit of the power plant at Surat implies limitedrisks to earnings Stock is currently trading at low valuations (Rs. 4 thereafter. AllNava Bharat merchant sales are through intermediaries in the short term market where NBVL does not take up receivable riskVentures At Maamba, high-grade coal sales will commence from April 2012 and the company expects to sell ~0.4mn tons, 0.6mn tons and1.0mn tons in FY13E, FY14E and FY15E respectively, thereby driving >20% consol profits by FY15E Will transform itself into a diversified infra player with operations across Africa, India and South East Asia. Consolidated profitsexpected to grow to Rs. 3.4bn in FY14 (45% CAGR over FY12-14E), with a high RoE profile. Trades inexpensive at P/E of ~7xand ~0.7x of book value (FY13E). Reiterate Buy Faces consistent delays in commissioning of expansion projects due to various external / other factors; only ~150MW expected to REDUCEbe commissioned in FY12 (of the initial target of ~560MW) and ~700MW during FY13TP: Rs. 22 ~1.2GW of capacity is at risk of being transferred to Jammu & Kashmir CMP: Rs. 21NHPC High proportion of capital stuck in CWIP leading to low capital efficiencies; Actual RoE is only ~8% as compared to the regulatedRoE of 15.5% Situation of high CWIP and low RoE unlikely to reverse until FY14, leading to our negative outlook on the companys financials Trades at rich valuations with FY13E P/E of ~11x and P/B ratio at ~0.9x, for a below-par RoE. Reiterate Reduce Although we like the Companys captive lignite mining capabilities scores poorly on execution track record and growth potential REDUCEwith a visible pipeline of only ~500MW at TPS-2 TP: Rs. 84 Faces continued delays (due to technical reasons) in the commissioning / stable operations of the new plants (totaling 750MW CMP: Rs. 87including TPS-2) representing a serious risk to the profitability of the company, particularly during FY13ENLC Has to part with 26% of its mining profits (~80% of company level profits) assuming the Mining Bill is passed, representing asignificant risk to the companys profitability Given these risks to near term profitability, we remain negative on the stock and value the stock at 1.1x FY13E P/BV. ReiterateReduce5 6. Power UtilitiesViews on StocksCompany View Rating Has achieved ~88% of the Rs. 550bn target capex additions in the 11th plan despite the expected yoy fall in capex in FY12E. ADDRobust growth outlook exists as the management has guided for a 12th Plan target spend of Rs. 1tn, which will represent a >80% TP: Rs. 124jump vs. the corresponding 11th plan targetCMP: Rs. 108 Backlog of orders awarded in the last two years which has to be commissioned stands at ~Rs. 250bn which we expect to bePGCILcommissioned over the next two years, driving capitalization, revenues and profitability. Hence, compared to the 9% yoy earningsgrowth expected during FY12E, earnings is expected to grow at a high 14% CAGR over FY12-14E Coupled with the improved earnings growth outlook it has negligible operational risks with a fixed-RoE model, availability basedrevenue model, and limited receivable risks. Upgrade to Add from Sell with a target price of Rs. 124/ share Growth in trading volumes faltering as supply to TNEB has been stopped from Oct 2011. PTC is still supplying power to UP which REDUCEalready has ~Rs. 3bn in dues and has stopped payment from 2QFY12. Supply-freeze to UP is also a possibility hence further TP: Rs. 52risk to volumesCMP: Rs. 57 Flawed risk management practices evident as they allowed the TNEB receivables situation to worsen to the extent of Rs. 7bnPTC (~30% of net worth) Outlook on the companys long term volumes not encouraging as almost all the thermal plants with which PPAs have been signedwill face execution delays due to either coal shortage/ uncertain coal linkage Trades at a premium to our SoTP valuation of Rs. 52 per share. Upgrade to Reduce from Sell due to the recent stockcorrection Well placed on gas supply for its operational plants (YTD PLF of >80%) but is exposed to gas shortage with respect to capacities REDUCEunder construction (UnoSugen 382MW and D-Gen 1.2GW)TP: Rs. 200 Earnings at risk if the recent directive from the MoPNG, asking the power ministry to stop supplying gas from KG D6 to power CMP: Rs. 217plants selling power in the merchant market, is implemented. (>300MW of operational capacity is sold in the merchant marketTorrent Power from Sugen) Also the risk of inadequate / delayed increases in consumer-level tariff persists We fear that cash generation is being utilized towards potentially unrewarding projects. We value the company giving 1.5xmultiple to our FY13E P/BV yielding a TP of Rs. 200 per share. Upgrade to Reduce from Sell due to the recent stockcorrection6 7. Power UtilitiesEstimate RevisionsFY12E, Rs. mnRevision, %FY13E, Rs. mn Revision, %EstimateRevisionsRevenuesEBITDAPAT RevenuesEBITDA PATRevenuesEBITDAPATRevenuesEBITDA PATAdani Power40,559 13,301 2,866 0% 0% 0% 100,138 35,774 5,3920% 0% 0%CESC 60,1747,787 2,697 0% 0% 0%67,6449,215 3,6750% 0% 0%GIPCL13,8514,446 1,321 0% 0% 0%15,2584,625 1,6080% 0% 0%GMR57,614 20,010(1,373)0% 0% 0%80,141 29,737587-24%-28%-87%GVK18,6785,520 1,448 0% 0% 0%21,2666,430 1,2860% 0% 0%Lanco Infratech94,250 18,661(1,108)0% 0% 0% 109,150 20,811 2,0700% 0% 0%Nava Bharat 9,3772,111 1,609 0% 0% 0%13,3513,655 2,5630% 0% 0%NHPC 59,871 39,44323,630 0% 0% 0%65,566 42,94424,8760% 0% 0%NLC46,254 15,06910,763 0% 0% 0%57,352 19,41912,1050% 0% 0%PGCIL92,646 78,14329,531 0% 0% 0% 111,924 94,64133,7360%-1% -5%PTC84,9131,406 1,062 0% 0% 0% 120,5301,960 1,3710% 0% 0%Torrent Power73,640 18,01210,779 0% 0% 0%80,430 21,25211,0030% 0% 0% 7 8. Power UtilitiesValuation MatrixCompany Revenues, Rs.bn EBITDA, Rs.bnPAT, Rs.bn RoE FY11-14E CAGRFY10FY11 FY12E FY13EFY10FY11FY12EFY13E FY10FY11 FY12E FY13E FY10FY11FY12EFY13ERevsEBITDA PATAdani Power4.3 21.4 40.6 100.1 2.412.213.335.82.4 5.1 2.9 5.46% 9%5%10%22%61%44%CESC42.8 51.0 60.267.6 5.3 8.7 7.8 9.21.6 3.1 2.7 3.73% 7%5% 7% 6%13%12%GIPCL9.5 10.9 13.915.3 2.3 3.1 4.4 4.61.1 1.6 1.3 1.69%12%9%10%10%15% 3%GMR 51.2 57.7 57.680.113.615.620.029.72.3(9.3)(1.4) 0.63%-7%-1%0% 2%33% NMGVK 17.9 19.1 18.721.3 4.7 5.1 5.5 6.41.6 1.5 1.4 1.35% 4%3% 3% 8%45% -14%Lanco 81.8 77.8 94.2 109.216.018.918.720.84.6 4.5 (1.1) 2.1 14%11%-2%4% 8%15% -2%Nava Bharat 11.7 11.09.413.4 5.6 3.1 2.1 3.75.0 3.2 1.6 2.6 31%19%8%11%13%20% 2%NHPC51.6 51.4 59.965.641.336.339.442.9 21.823.2 23.624.9 8% 8%8% 8% 8% 8% 3%NLC 41.3 39.5 46.357.413.612.915.119.4 12.413.0 10.812.113%12%9%10% 9%14% -2%PGCIL 71.3 83.9 92.6 111.958.770.578.194.6 20.427.0 29.533.713%14%13% 14% 6%17%12%PTC 77.9 90.0 84.9 120.5 0.8 1.4 1.4 2.00.9 1.4 1.1 1.46% 7%5% 6%10%28%18%Torrent Power 58.3 65.4 73.680.417.117.718.021.38.410.7 10.811.021%22%20% 17%24%29%21%Company Net Debt to Equity (x)CMP Shares M.Cap P/E (x) Price / BV (x)TargetRatingFY10 FY11 FY12E FY13ERs.(mn) Rs. bn FY10FY11FY12E FY13E FY10 FY11FY12EFY13EP/BVx Rs.Adani Power2.3 3.23.74.1 76 2,180 165.570.3 32.2 57.730.73.02.8 2.7 2.4SoTP 46SellCESC 0.5 0.70.91.1 265 125 33.121.1 10.5 12.3 9.00.70.7 0.6 0.6 0.80 350BuyGIPCL0.9 0.70.60.4 71151 10.810.16.68.2 6.70.90.8 0.7 0.6 0.8088BuyGMR3.2 1.92.02.0 28 3,892 108.448.1 NM NM 184.62.00.9 0.8 0.8SoTP 25SellGVK1.0 0.91.41.3 18 1,57927.917.9 18.0 19.321.70.90.7 0.6 0.6SoTP 17 ReduceLanco2.2 3.14.24.5 20 2,40847.610.4 10.7 NM23.01.41.0 1.1 1.0SoTP 32BuyNava Bharat (0.2)0.00.50.8 195 8917.33.5 5.4 10.8 6.81.10.9 0.8 0.8SoTP247BuyNHPC 0.4 0.50.40.4 2112,301 257.111.8 11.1 10.910.31.01.0 0.9 0.9 0.9022 ReduceNLC0.3 0.30.20.2 87 1,678 146.111.7 11.3 13.612.11.41.3 1.2 1.1 1.1084 ReducePGCIL2.1 1.91.92.0 1084,630 500.925.0 18.9 17.315.13.22.4 2.2 2.0 2.00 124 AddPTC (0.5)(0.3) (0.0)(0.1)57295 16.918.0 12.2 15.912.30.80.8 0.8 0.7SoTP 52 ReduceTorrent Power0.8 0.80.71.0 217 472102.712.39.69.5 9.32.62.2 1.9 1.6 1.50 200 Reduce8 9. Industry Scenario9 10. Power UtilitiesIndustry Scenario Reconciling promises and reality!Over the last 8 months (when we first downgraded the coal-based power utilities), the issues of tightness in coal supply, high imported coal prices as well asinadequate pass-through mechanisms in PPAs (Case 1 bids) have exacerbated alarmingly, resulting in escalation of the issues up to the level of the PMO. Giventhe importance of the power sector (~30% of 11th Plan infrastructure spend and 8% of bank credit), the PMO has reciprocated by promising a deadline-basedapproach to solving the power crisis even as they directed CIL to sign FSAs that assure 80% coal supply for power plants and to import coal to meet shortages.While the mentioned event has triggered a wave of positive sentiment towards the power generation sector, we got down to performing a reality check, the keyconclusions of which are as follows#1 Scarcity of indigenous coal to continue - Indias indigenous coal production likely to remain a key concern, although efforts (increased impetus on execution andfaster clearances) are afoot to increase production at a CAGR of >10% over the next 3 years. However, we assume that CILs production will grow only at a CAGR of ~5%over FY12-15E, which will peg the total coal shortage for the power sector at >180MTPA by FY15E (from ~100MTPA currently). Thus, the pressure on CIL linkage willremain, resulting in ~40-60% supply from indigenous sources vis--vis actual linkage.#2 Importing coal the only option and move towards coal price pooling a possibility Given the tight coal supply conditions that are expected to prevail over themedium-long term, CIL is being forced to consider costlier coal imports to meet shortfall. Given that current prices of CIL coal would be at a significant discount (~30-40%) toimported coal of comparable quality, CIL will possibly resort to price pooling to ensure they absorb the incremental cost of imports.#3 Increased gas allocation to power plants unlikely while supply issues could persist, depressing PLFs low Consistent decline in production at KG-D6 (from60mmscmd in 2010 to ~36mmscmd recently) has significantly impacted the PLFs of second-generation gas-based power plants. With gas production at KG-D6 expected todrop further and the increased allocation of APM-gas not being sanctioned for the power sector, fundamentals of these plants are expected to stay adverse.#4 Reforms in PPA tariffs to allow fuel cost pass through PPA reforms to allow a reasonable pass-through of fuel costs is a key theme we expect will play out overthe next year, the single largest reason for our positive view on power utilities as a space. Such reforms will however, need to be backed up with regular increases inconsumer-level tariffs for sustainability.#5 Merchant power still lucrative but will not drive investments as the fuel tap for these plants remain at risk Although merchant tariffs have stabilized at levels>Rs. 4, coal / gas linkages to the merchant plants will come under increased scrutiny. For ensuring such plants remain operational, the utilities will need to demonstrate theexistence of short term / medium term contracts with state utilities. Thus we expect merchant tariffs to remain in a tight band of Rs. 4-4.5 for the foreseeable future.#6 Despite delays in commissioning, operational risks to hydel assets and transmission assets remain low Unlike the fossil fuel-based gencos, the hydel utilitiesas well as the transmission utilities face negligible operational risk. However the key adverse variable for these utilities remains project delays for multitude of reasons.#7 Logistical bottlenecks will likely remain on the fronts of both railways as well as ports We see little / no steps being taken to address the issues of wagonshortage (railways) and inadequate coal handling capacities at ports. Both issues pose operational risks to power plants in the long term, but as structural issues likefeedstock availability and viability of private power plants take centre stage we believe these concerns will be underplayed until the structural issues are resolved.#8 Reduction in borrowing costs coupled with policy initiatives will drive investments into the sector Coupled with some / all of the aforesaid positivedevelopments, lower borrowing costs (1yr forward spreads have moved into negative territory after more than a year), we expect, will lead to improved private sector interestin the power sector.Weighing these expectations in balance, we anticipate that power utilities will, by and large, benefit from the amelioration of sector fundamentals over the nextyear even as increased pressure may be mounted on CIL to absorb the incremental cost of coal imports, at least partly. 10 11. Power UtilitiesIndustry Scenario Focus charts #1 Coal shortage for power sector to become ~184MT in FY15E Coal price pooling the most logical solution - tariff impact 7% CAGRSCCL Supply47415 469over the same periodCaptive Blocks and Others96 Coal shortage for power sectorincludingcaptives(excludingTotal Domestic Supply, MT 584lignite plants) will likely scaleDemand Supply DemandSupply184MT by FY15E Total Shortage, MT129Source: CEA, Spark Capital Research14 15. Power Utilities#2 CIL to be pushed to convert LoAs into valid FSAs driving the need to import and most possibly, price pooling Background CILs production to increase only by 60-70MT over the next 3 years In October 2007, the New Coal Distribution Policy (NCDP) introduced the concept 600 of Letter of Assurance (LoA), which assured supply of coal to developers, 511 provided they met stipulated time-critical milestones.486 500 463 49431 431 441 47 Once the milestones were met, the LoA holders were entitled to enter into Fuel 40444 3794142 400 361 28 34 Supply Agreements (FSAs) with CIL for long-term supply of coal.2524MT CIL had signed FSAs for 306MT (total of 370MT for all sectors) for power sector by300 March 2009. Due to the lackadaisical ramp-up in production, CIL has signed only a 200 limited number of FSAs since. Of the 550 LoAs issued for a total of 378MT, FSAs have been signed for only 55MT, of which only ~19MT pertains to power. 100 Given recent PMOs directive pushing CIL to sign FSAs (where required) and meet shortfall through imports, CIL will need to sign the pending FSAs (and supply) an 0 additional ~150MT for the power sector alone by FY15E even if we assume only 2007 2008 2009 20102011E 2012E2013E 2014E 2015E half of the power plants in pipeline meet the relevant milestones.Coking CoalNon-Coking CoalSource: CEA, Spark Capital Research CILs supply commitments, on the other hand, are daunting!!! Coal price pooling the most logical solution tariff impact USD 12/MMBTU as compared to the USD 5.2/MMBTUCGD 12 14 1821 25 29 pricing for KG-D6 gas and APM gas. Thus, we expect R-LNG to be used only during the summer months, to limit power outagesOthers 8 17 12 67 9 Although power is considered as a priority sector, the EGoM has not increased allocation of APM gas to the power sector, citing the low quantum available as a Total Demand137154157 155172201 key reason. Thus we expect the PLF scenario to remain bleak for gas-based Deficit32 34 4758 75 84 power plants over the next 2-3 years Source: CEA, Spark Capital Research 16 17. Power Utilities#4 High losses and peaking subsidies forcing SEBs to hike tariffs; PPA reforms inevitable as well SEB financials have worsened substantially over the last 5 years Outlook on SEB financials not encouraging, unless consumer tariffsincrease Rs. bnFY06FY07FY08 FY09 FY10TotalAll India State Distribution Utilities FY11 FY12EFY13EFY14EFY15E Revenues950 1,120 1,2501,4001,570 6,290Revenues, Rs. bn1,8932,0872,2932,5172,763 Total Expenditure/ ARR1,120 1,350 1,5601,9102,140 8,080Total Expenditure, Rs. bn 2,4982,7242,9603,2133,489 Loss before Subsidy (170) (230) (310)(510)(570)(1,790)Total Units Supplied, bn units 689751816885961 Subsidy 120130170 250300970 Loss after Subsidy (50) (100) (140)(260)(270) (820)T&D Loss, bn units 163171179187195T&D Loss, % 24% 23%22%21%20% The Shunglu Committee report observes that the situation of the power sectorTotal Units Consumed, bn units 526580637698765 remains largely unresolved when compared to 2003Avg. Cost per Unit Sold4.75 4.70 4.65 4.60 4.56 Accumulated losses are Rs. 820bn (after subsidy) for the period FY06-10 attributable to the gap of ~Rs. 0.60/ unit between average power cost andAvg. Realization per Unit3.60 3.60 3.60 3.61 3.61 average realization. Apart from lack of tariff revisions the panel also holds theGAP before subsidy*, Rs. /unit 1.15 1.10 1.05 1.00 0.95 high AT&C losses (average ~26%) and operational inefficiencies ofSubsidies and Grants 327361395430469 transmission utilities a major reason for this large gap GAP after subsidy*, Rs./ unit 0.53 0.48 0.430.38 0.33*Assuming no Commercial Losses, Source: Shunglu Committee Report SEBs with highest cumulative losses Many have resorted to tariff hikes Strong rationale for PPA reforms to pass-through coal cost, at least partly State Loss, Rs. mn Recent Tariff increases?Tariff Hike Several private developers entered into Case 1 bids / Case 2 bids, which do Tamil Nadu (238,500) YesNov 2011 ~50- 150% proposednot allow fuel costs to be passed through. Given their weak finances, SEBs are Uttar Pradesh(194,750) No -- not open to renegotiating their PPA tariffs (mostly between Rs. 2.2 and 3.0)upwards Madhya Pradesh(89,690) YesJun, 2011Upto ~6% The Case 1 / Case 2 bids are likely to incorporate a Force Majeure clause Rajasthan (77,250) YesSept, 2011 Upto ~28%protecting developers from factors beyond their control such as regulatory Punjab(51,420) YesMay, 2011Upto ~12% changes in Indonesia and unavailability of domestic coal Haryana (45,200) No -- Retrospective changes to PPAs allowing marginal tariff increases are, in our Bihar (44,730) YesJun, 2011NAview, likely. Our view is based on four key reasons (1) CIL will be forced to Jharkhand (35,280) No -- import large volumes of coal to meet their FSAs and will most likely resort tocoal price pooling, (2) PPA tariff increases are unlikely to increase by >25 Maharashtra (28,110) No --paise immediately and by >75 paise even through to FY15, (3) lack of such Karnataka (16,790) No -- reasonable PPA tariff increases would make several power plants unviable and Others (3,570)- -- (4) tariff hikes at the end-consumer level will help soften the blow on SEB Total(825,290)- -- financials Source: Shunglu Committee Report, Spark Capital Research17 18. Power Utilities#5 Merchant power opportunity to remain intact but unlikely to be a growth driver Merchant market realizations have stabilized at ~Rs. 4/ unit in a year Merchant volumes have stagnated with increased power outages8.0 8,0007.06.25.7 5.66.06,000 5.0 4.94.7 4.8 4.5mn Units 4.7Rs. /unit5.04.2 4.2 4.3 4.24.0 3.9 4.0 4.03.8 3.9 3.9 4.0 4,0004.0 2,0003.02.0 0Nov-10 Dec-10Nov-11 Dec-11Apr-10Oct-10 Feb-11Mar-11 Apr-11 Oct-11Jun-10 Jul-10Jan-11 Jun-11Jul-11Aug-10 Sep-10 Aug-11Sep-11 May-10May-11Jul-10Jul-11 Jun-10Jan-11 Jun-11 Aug-10Sep-10 Oct-10Nov-10 Dec-10 Feb-11Mar-11 Aug-11Sep-11 Oct-11Nov-11 Dec-11 Apr-10 Apr-11May-10May-11 Rate in Bilateral trading marketBilateral Exchanges UI Source: CERC Source: CERC Highest loss making SEBs top the power purchasers list During Apr-Dec 2011,~55% of short term trades were via Traders and States (data for Apr-Dec 2011)mn units purchased% Exchanges (IEX & PXIL). Given states like UP, Tamil Nadu, Punjab have the Uttar Pradesh 10,085 14%highest merchant volumes, receivable risk is high for the traders Punjab 8,061 12% PTC, Tata Power Trading Co., NTPC Vidyut are the 3 largest traders by Tamil Nadu 8,042 11%market share Maharashtra6,6299% Haryana4,7677% Rajasthan4,5977% Merchant market remains lucrative for incumbents Andhra Pradesh 3,8556% States like Tamil Nadu, Uttar Pradesh and Punjab are resorting to massive Delhi2,8664%load-shedding in the current year for want of funds to buy power in themerchant market Madhya Pradesh 2,8544% We expect merchant market incumbents to benefit from the stable prices, West Bengal2,6404%driven by limited merchant capacities. However, given that feed stock supply to Others15,697 22% such plants will come under increased scrutiny, we expect the merchant power Total 70,092 100%prices to remain in a tight band of Rs. 4 4.5 over the foreseeable future Source: CERC18 19. Power Utilities#6 Hydel power and transmission sectors remain relatively unscathed by operational uncertainties, but delays prevail Hydel power capacity in the country Private sector remains insignificant Hydel projects to be commissioned under 11th plan - ~3000MW per year3,500Salient Developers MW 2,559 ,NHPC3,767 3,000 7%NHDC1,520 11,852 , 2,50030% Satluj Jal Vidyut 1,5002,359Jaypee Karcham Wangtoo1,000 2,000MWTata Power 4471,500 2,353 2,800Jaiprakash Power Venture 400 24,438 , 1,00063% Jaiprakash Hydro 300Allain Duhangan192 500 981Everest Power Company100 0 160CentralStatePrivate Malana Power Company86FY13EFY14E FY15E NHPC Others Source: CEASource: CEA, Spark Capital Research PGCIL - We expect growth of 76% in capex in 12th plan over 11th plan consequently the yearly capex will increase significantly over FY13-17E 1,20090%200 1,00085%150800Rs. bn Rs. bn600 88% 85% 100 204 1851871,000400 850145 123 128 50 109100550 483 84200680 80% 0 XI th planXII th plan Expected FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17EPGCIL Capex Target Capex Achieved PGCIL capex Source: PGCIL, Spark Capital ResearchSource: PGCIL, Spark Capital Research19 20. Power Utilities#7 Support logistics such as ports and rail capacities will likely remain inadequate, but not a focus area now 65% of thermal capacity is dependent on railways for coal delivery Railways operating at its peak capacity Coal despatched in 2011 from CIL Freight haulage of Indian Railways (total 921MT) in 2011 Avg. Capacity of a 60Coal for Power Wagon (tonnes)3%8% 4% Coal for other sectors 20% No. of Wagons 219,931 4% Steel 35%31% 5% Iron Ore Avg. turn around for6 a Wagon (days) 51%4%Cement Freight CapacityFood Grains 88365%11% (mn tonnes)26% Fertilizers Freight Originated in15% Mineral Oil 921 2011 (mn tonnes) 13% 5% Containers All india thermal capacity getting coal by Railways Utilization, %104% Rail Road MGR Others Others Getting coal by other means Source: CEA, CIL Source: Ministry of Railways Coal Imports likely to grow due to high requirement for powerUpto 45% of Indian ports bulk capacities used to import coalPort Thermal Coal Coking CoalCapacity, MT RemarksParadip136 20 250 224Ennore90 21 205 27 Tuticorin 50 6 200With more than 175 25 Mumbai40 18 45% of existing23Visakhapatnam 47 31 bulk capacities at 150 129MTKandla30 17 Indias key ports 24 Haldia26 7used for importing 92 coal, port 100 198Chennai 21 0 70180capacities are61 28152Mormugao25 7likely to remain5023 26105Cochin00 9inadequate to 64 3844 Kolkata 00 7handle the surge 0New Mangalore 03 15 in coal imports FY09FY10FY11FY12EFY13E FY14EFY15EMundra (Adani Ports) 150 35Coking Coal importsNon Coking Coal imports Total 59 28193 Source: Ministry of Coal, Spark Capital Research Source: Indian Ports Association 20 21. Power Utilities#8 Renewed impetus to the power sector coupled with lower interest rates should increase power sector spend Credit deployment by Scheduled Commercial banks falls in FY12though PFC and REC have continued to lend more in FY121,467462 425 1,099 Credit Deployment329935 814 251Rs. bn Rs. bn Loans 646 634 617176153157 1202947140 212 FY09 FY10 FY11 FY12AnnFY09 FY10 FY11 FY12AnnTo Infrastructure by Scheduled Commercial banks To Power Sector PFCRECIDFC (for Energy) Source: RBI, Spark Capital Research Source: PFC, REC, IDFC, Spark Capital Research One-year forward interest rates likely to be lowerExpect funding scenario for power plants to improve starting FY13E Fuel supply issues, financial condition of distribution utilities and increased 4% prices of coal / gas, were all issues that exacerbated during FY12 3% 2% In response, many pipeline projects were shelved and execution of ongoing projects slowed down, reflecting in lower bank credit to the power sector 1% 0% With key SEBs resorting to tariff hikes, banks have re-opened their lines of-1%credit to the distribution utilities. Also, the expectations of fuel cost being passed through to SEBs, has revived the developer interest in the sector-2%-3% With fundamentals expected to take a turn for the better and interest rates-4%expected to come down, we believe that funding scenario with respect to the Dec-08 Oct-09Dec-09 Oct-10 Dec-10Oct-11 Dec-11Feb-09Apr-09 Feb-10Apr-10Feb-11 Apr-11Feb-12 Jun-09Aug-09 Jun-10Aug-10Jun-11 Aug-11 power sector will likely improve over the next 12-18 months. Lack of funds or the unwillingness to lend, we believe, will not hinder the development of power capacities Spread between Overnight rate and 12m OIS rate Source: Bloomberg 21 22. Company Section22 23. Power UtilitiesRisks persist even as there is hope for policy actionAll the utilities within our coverage with the exception of PGCIL and NHPC have been severely impacted by the adverse fuel supply scenario that has emergedover the last 12-18 months. The utilities have, in turn, focused on near term capacity additions, put many pipeline projects on the backburner and resorted toheavy lobbying with the Government for intervention. Such intervention, they hope, will lead to greater coal availability as well as PPA tariff hikes. In this section,we assess the position of each coverage company in the light of prevailing adverse fuel supply scenario and low, rigid PPA tariffs.We turn positive on PGCIL in the large-cap space and remain positive on Lanco, CESC and GIPCLWe turn positive on PGCIL partly as we expect the significant execution backlog of >Rs. 130bn of orders given in FY11 and current year order awards of >Rs. 160bn to drivethe capitalization at the company. Moreover the companys business model is virtually devoid of any operational risk, rendering the business highly predictable. We expect14% earnings CAGR over FY12-14E. On the back of such an improved growth outlook we upgrade PGCIL to Add from Sell.In CESC, we like the flagship generation-cum-distribution business that has, inter alia (1) the ability to pass through higher fuel costs, (2) reasonable growth of >7% and (3)mid-teen RoE profile. Even as the fuel supply to operational plants is relatively secure, the development projects (1.2GW) are potential beneficiaries of improved coal supply aswell as PPA tariff reforms. In GIPCL, we like their captive mining capabilities that can cater to the operational plants of 500MW and a development pipeline of 500MW. A fixedRoE business model and stabilization of the 2nd unit of the power plant at Surat implies limited risks to earnings. Both stocks are trading at attractive valuations (80%) is exposed togas shortage with respect to capacities under construction (UnoSugen 382MW and D-Gen 1.2GW). Also the risk of inadequate / delayed consumer-level tariff hike persists.PTC has been impacted significantly due to the adverse financial conditions of key SEBs. With the top two customers Tamil Nadu SEB and Uttar Pradesh SEB stopping /deferring payments risks on near-term revenues and collection cloud the companys future. Moreover, steep increases in imported coal cost has rendered the coal-tollingprojects of the company unattractive.As regards NHPC, risks abound with the Jammu & Kashmir government asking NHPC to handover two projects (Salal and Uri I) to the State. Until the issue is settled in favorof NHPC it will remain a key overhang. Moreover, incessant project execution delays implies the RoEs will remain suppressed over the next two years. We remain negative.Overall, we prefer playing predictability in the large-cap space and attractively valued stocks within the mid-cap space. Our detailed scenario analysisdemonstrates that Adani Power and GMR will be the key beneficiaries (although not adequate to change our ratings thereof) of ameliorating sector fundamentals,along with CESC and Lanco.23 24. Power UtilitiesSummary of risks for the power utilities in our coverageGVK Power &Lanco Nava Bharat NeyveliPlants at riskAdani Power CESCGIPCL GMR Infra Torrent Power Infra InfratechVentures Lignite Amarkantak I, II, Orissa 64MWSurat I, II, II KamalangaCoal shortage All PlantsAll Plants-III having CIL--Expansion Emco Energy Anparalinkagefor pipeline for pipelineNo coal linkage Tiroda Phase II - - -- --projects projects Udupi (thoughDependence on Mundra Phases ~15% of~10% of- - -FSA exists with --Imported Coal I, II, IIICapacity Capacity supplier)Jegurupadu I, IIGas shortage- - Vadodara I, IIVemagiri Kondapalli I, II- -SugenGautamiVemagiriUnoSugenNo gas allocation - - - -Kondapalli III- -Expansion D-GenMundra PhasesFuel price risk All plantsAll plantsAll plantsAll plants All plantsAll plantsAll plants All plantsI, II, IIIAll plants as no Orissas All plants (ifSEB & PPA TariffKamalangaAmarkantak IIfuel pass through All plants- -revocation of -tariffs are notissue Emco Energy(Haryana SEB)exists open accessincreased)Risks associated Kondapalli II (riskSugen (risk ofKakinada (risk ofLow merchantwith Merchant - - - -of gas supply -gas supply cutgas supply cut)realizationsPowercut) for ~300MW)LegendHigh Risk Moderate Risk24 25. Power UtilitiesScenario Analysis A low-balled base case and the blue-sky Company Base Case Assumptions Base Case DCF, Rs. /share Blue-sky Assumptions Blue-sky DCF, Rs./ share Current PPA tariffs PPA reforms Adani Power4699 Slow coal production at Bunyu Faster coal production at Bunyu Current coal supply Higher coal supply CESC 373 473 Current tariffs Tariff reforms Gas supply constraint continues Gas supply constraint continues GIPCL SLP-2 operates at low PLFs during 108*SLP-2 operates at higher PLFs 111* FY13during FY13 Existing PPA tariffsPPA reforms GMR Infra2534 Low PLFsHigher coal supply PLFs at Goindwal at 85% assuming Restricted mining at Tokisud, GVK Power & Infra17 incremental mining at Tokisud is 18 limiting Goindwals PLFs to 75% permitted Current PPA tariffs PPA reforms Lanco Infratech32 42 No improvement in coal availability Higher coal supply Existing gas supply continues Existing gas supply continues Torrent Power 171200 No fresh gas allocation Gas allocation for new plants Current tariff for 64MW (Orissa Nava Bharat Tariff increase for 64MW GridCo)247 283 VenturesHigher merchant realizations Low Merchant Realizations Historical trend of PLFsHistorical trend of PLFs Neyveli Lignite76* 76* Mining bill not passedMining bill not passed *valuation based on multiple on forward book Values 25 26. Company Profiles 26 27. Power Grid Corporation CMP TargetRatingRating: Target price:Rs. 108 Rs. 124 AddCAPEX improvement on the cards as we roll forward to FY14Company UpdateCAPEX: PGCILs capex in FY12 is expected to be only Rs. 100bn (only ~Rs. 60bn for YTDFY12) vs. Rs. 123bn in DateMar 09, 2012FY11, rounding off the first year of capex de-growth. Despite the expected yoy fall in capex, PGCIL would have achievedMarket Data~88% of its target capex additions for the 11th plan (~Rs. 483bn capex over FY07-12 vs. a target of Rs. 550bn). SENSEX17120Company management has guided for a 12th Plan target spend of Rs. 1tn, which will represent a >80% jump vs the Nifty 5205corresponding 11th Plan target. Even if we assume only a ~80% achievement-plan ration, it gives a robust growth outlookover the long term.Bloomberg PWGR INOrder Awards robust, execution backlog to play-out: Our analysis of PGCILs order awards indicate a ~Rs. 193bn of Shares o/s4,630mnorders been given-out in FY11 (~Rs. 123bn in FY10). Although award of projects has been healthy, actual execution hasMarket CapRs. 501bnlagged significantly (only ~Rs. 60bn of assets commissioned during 9MFY12) - one likely reason for the tepid execution is 52-wk High-LowRs. 115-94that ~30% of these orders went to fringe players with low execution capabilities. Moreover, obtaining right-of-way tends todelay commissioning of transmission assets. With order awards remaining healthy during 9MFY12, at Rs. 113bn (will3m Avg. Daily Vol Rs. 407mnlikely settle at ~Rs. 150-160bn) we expect this backlog of >Rs. 250bn to be commissioned over the next two years,Index memberNiftydriving capitalization, revenues and profitability. Latest shareholding (%)We tweak our FY13E estimates marginally and introduce FY14 estimates. Compared to the 9% yoy earnings growth Promoters 69.4expected during FY12, we forecast a 14% earnings CAGR over FY12-14E. Institutions21.3Valuation Discussion Public9.1Coupled with the improved earnings growth outlook, we see negligible operational risks to the companysbusiness with a fixed-RoE model, availability based tariffs and limited receivable risks. Driven by the solidStock performance (%)growth outlook, we believe the stock will continue outperforming the key benchmark indices (Sensex and Nifty) 1m 3m12mand deliver absolute returns over the next 1 year. Rolling forward our valuation to FY14E, we attribute a 2.0x P/B PGCIL1% 9%11%multiple yielding a revised price target of Rs. 124/ share (earlier Rs. 101). The stock has traded above thismultiple for >75% of the time over the last 4 years. Upgrade to Add from Sell. Sensex -3%4%-7% Nifty-3%5%-6%Financial summaryVijaykumar Bupathy vijaykumar@sparkcapital.inYear Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn)BV (Rs.) P/BV (x) +91 44 4344 0036FY12E 92,64678,143 29,53150.5 2.2 Bharanidhar VijayakumarFY13E111,92494,641 33,73655.7 2.0bharanidhar@sparkcapital.inFY14E133,672 113,408 38,31662.0 1.8+91 44 4344 0038Find Spark research on Bloomberg (SPAK ), Thomson First Call, Reuters Knowledge and Factset27 28. Power Grid CorporationCMPTargetRatingFinancial Summary Rs. 108Rs. 124 AddAbridged Financial Statements (Standalone)Key metricsRs. mn FY11 FY12E FY13E FY14EFY11FY12E FY13EFY14EProfit & Loss Growth ratiosRevenues 83,887 92,646 111,924 133,672Revenues 17.7% 10.4% 20.8%19.4%EBITDA 70,513 78,14394,641 113,408EBITDA 20.1% 10.8% 21.1%19.8%Other Income7,1116,660 7,085 7,841EBIT 30.4%8.2% 24.3%23.1%Depreciation 21,994 24,63526,94329,202PBT45.6%0.3% 25.7%13.6%EBIT 55,630 60,16874,78392,047PAT32.1%9.5% 14.2%13.6%PBT38,247 38,35248,19454,737Performance ratiosPAT26,969 29,53133,73638,316RoA (%) 4.5%4.2%4.3% 4.1%Balance Sheet RoE (%)14.5% 13.2% 13.7%14.1%Net Worth 213,670233,722 257,978286,815 RoCE (%)9.3%8.7%9.4% 9.9%Total debt432,302487,051 581,808707,923 Total Assets Turnover (x) 0.1 0.1 0.10.1Deferred Tax 11,467 12,74212,742 12,742 Fixed Assets Turnover (x) 0.2 0.2 0.20.2Total Networth & Liabilities657,439733,514 852,5291,007,480 Working capital Turnover (x) 15.915.557.5 21.9Gross Fixed assets505,940580,400 656,349733,817 Financial stability ratiosNet fixed assets372,240422,065 471,071519,338 Net Debt to Equity (x)1.85 1.85 2.05 2.18CWIP266,246291,786 365,837468,369 Current ratio (x) 1.05 1.05 1.02 1.04Investments13,650 13,65013,650 13,650 Working capital days23 236 16Inventories 3,8154,241 5,1476,169 Inventory & Debtor days152103 94 94Sundry Debtors 31,621 22,19023,938 28,693 Creditor days429428398440Cash and bank balances 36,800 53,81253,825 84,029 Interest cover (x)3.20 2.76 2.81 2.47Other Current Assets 32,935 36,01442,806 50,451 Valuation metricsCurrent liabilities99,893110,269 123,769163,242 Fully Diluted shares (mn)4,6304,6304,6304,630Net current assets 5,278 5,989 1,946 6,100Fully diluted M. Cap (Rs.mn)500,936Deferred Tax / Misc. Exp.24 2424 24 Fully Diluted EPS (Rs.) 5.83 6.38 7.29 8.28Total Assets657,439733,514 852,5291,007,480 P/E (x) 19.1 17.4 15.2 13.4Cash FlowsEV (Rs.mn)909,401Cash flows from Operations63,236 92,35890,131 130,044 EV/ EBITDA (x)12.9 11.69.68.0Cash flows from Investing(133,814) (99,051) (149,051) (179,051) BV/ share (Rs.) 46.2 50.5 55.7 62.0Cash flows from Financing 74,603 23,70458,93279,211 Price to BV (x)2.42.22.01.8 28 29. Adani PowerCMPTargetRatingFraught with coal supply risks but best pure-play on potential PPA tariff reformsRs. 76 Rs. 46Sell PPA/PPA Tariff Base Case Blue-SkyPlant/ Status Source of FuelPrice of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareMundra Phase IImported CoalUSD 36/ tonne76% withCase 1 Slower-than-expected ramp-up Target production of 10MTPA from Bunyu 1351(4x330) (AdaniCIF escalatedGUVNL Rs. 2.81 at Bunyu and insufficiency ofexpected only by FY14Operational Enterprises) by 10% onceBunyu coal for the total 4.6GW Continued dependence on high costevery 5 years capacity (>USD 90/tonne) imported coal to takeMundra Phase II 76% withCase 1 Increased dependence on high variable costs upwards of Rs. 2/ unit (as(2x660)GUVNL Rs. 2.35 cost imported coal seen during 3QFY12) impacting profitsOperational 3/4th of the capacity tied-up On the positive side, the plant can sellthrough Case 1 bids~25% of power generation in the merchant market that remains lucrative Adani Enterprises could hikeMundra Phase75% withCase 1transfer price of coal due to Valuation increases manifold assuming anIII Haryana SEBRs.2.35change in Indonesian lawsincremental PPA tariff of Rs. 50 paise per(4x660)unit is sanctioned Transmission lines not yetUnderready for the last phaseConstructionTiroda Phase ICIL CIL price/ e- 70% withCase 1 Allocated coal block cancelled Lohara coal block has been cancelled due 1618(2x660) auction price MaharashtraRs. 2.64 by Ministry of Environmentto proximity to a Tiger ReserveUnder SEB and Forests With only 50% linkage available, the plantConstruction Seeking allocation of anneeds to source remaining coal throughTiroda Phase II No LinkageNA NA - alternate coal block / coal imports / e-auction(1x660) linkage, both of which are Phase II has no coal linkage as well asUnder uncertain PPAConstruction SEB not agreeing to hike We assume PLFs of only ~75% for thesetariffs or terminate the PPAplants and high dependence on importedcoalTiroda Ph III No LinkageNA NA - No coal availability High risk of capacity being significantly1520(2x660) No PPAdelayedUnder Here again we assume low PLFs and highConstructiondependence on imported coal29 30. CESC CMPTargetRatingCore business largely unscathed even as upsides exist for development assets Rs. 265Rs. 350 Buy PPA/PPA Tariff Base Case Blue-SkyPlant/ StatusSource of FuelPrice of FuelKey issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareBudge Budge55% from ICML ~Rs. 2,400/ Supplies toFixed RoE Coal supply from CIL being Fuel supply risk exists only to the tune of 434 445(3x250)15% imports tonne Kolkata and basis with reduced to 50% of Annual~30% of the capacity supplied by CILOperational Howrah fuel costContracted Quantity Can buy coal from e-auction and petition 30% CILdistributionpass Price risk of coal due to thefor higher tariffs based on increased costsTitagarh 55% from ICML ~Rs. 4,400/ circle through imports and e-auction Only major risk is the West Bengal SEBs(4x60) 45% CIL tonneunwillingness to raise the tariffsOperationalAverage WBERCnot approvingtariff nowsufficient and timely tariff Tariff approval for 2011-14 has beenSouthern 70% from ICML ~Rs. 3,100/~Rs. 5.8/ increases obtained with ~13% average hike in tariffs(2x67.5) 30% CIL tonneunit after the No significant difference in blue-sky as weOperationalrecent tariffonly assume tariff revision will be timely hikeNew CossiporeCIL ~Rs. 7,100/ Since it is a very old plant Small capacity that is being operated only(100)tonne(CoD in 1950) it will likelyto meet peak loads and hence no majorOperational cease operating by FY15Ethreat to earningsHaldia CIL - MCL and ~Rs. 2,500/ 75% to(same as Coal supply from CIL being Can buy coal through e-auction and48104(2x300)Imported coaltonneKolkata and above) reduced to 50% of Annual petition for higher tariffsUnderHowrah Contracted Quantity Greater coal availability (at higher prices)Construction resulting in higher PLFs is captured in our blue-sky scenarioDhariwal CIL SECL and~Rs. 1,800/ 50% to MSEBNA Coal supply from CIL being Exposed to offtake risk as well as risks that2053(2x300)Imported coaltonnereduced to 50% of Annualcoal allocation being cancelled as PPAUnderContracted Quantity pertains to only 50% of capacityConstruction Only 50% of the capacity have Once coal availability is ascertained, we PPA believe that inking PPAs for both units Final PPA yet to be inked should not pose a challengeICML Integrated Coal Mining Ltd. also known as Sarshatali mine; apart from these plants the Company has ~2GW of pipeline projects all coal based and none of it having linkage of coal 30 31. Gujarat Industries Power CorporationCMP TargetRatingSecure business even though financials impacted by gas shortage Rs. 71Rs. 88BuyPPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of FuelKey issues faced / risks involved OutlookMerchantRs. /unit Rs. /Share Rs./ ShareSurat I, II Captive Lignite ~Rs. 900/GUVNL Fixed RoE Minimal risk on fuel supply as We expect Surat I to have PLFs of ~75% 108111(4x125) Minestonne basis withlignite is bought from captive Expect lower PLFs at Surat II due to boilerOperationalfuel cost minesissues that have impacted generation over pass the last 12 monthsthrough Our blue-sky scenario assumes higherPLFsVadodara INatural Gas Domestic Gas: V1 - MoW Fixed RoE PLFs hit due to fall in KG-D6 Requires ~1.55mmscmd ofgas for(3x32 GT, from GAIL, KG USD 5.2/ with Companie basis withoutput operations at 85% PLF1x49MW ST)D6 and R-LNG MMBTU s in Gujaratfuel cost Also, given the age of the Has linkage of 0.6mmscmd allocation fromOperational from GAIL and RLNG Gas:passplant, frequent maintenanceKG D6 and the remaining is from GAILGSPC USD 12/ V2 PPA withthroughshut downs lead to lower PLFsunder the APMVadadora II MMBTUGUVNL(1x106 GT, during at least 1 quarter each Low PLFs to persist over FY13-14 (63% for1x54MW ST) year V-I and 55% for V-II during FY12E)Operational No difference here between our base caseand blue-sky scenariosSurat Expansion Captive Lignite ~Rs. 900/GUVNL NA Execution delays We expect this plant to be ready only by(2x250) MinestonneFY16UnderConstructionNote: Base case and blue-sky represent FY13E book value31 32. GMR InfrastructureCMP TargetRatingFuel supply remains a key issue; another potential beneficiary of PPA tariff reformsRs. 28Rs. 25SellPPA/ PPA Tariff Base Case Blue-SkyPlant/ StatusSource of FuelPrice of FuelKey issues faced / risks involved OutlookMerchantRs. /unit Rs. /Share Rs./ ShareGMR PowerDiesel>Rs. 9/ unit TNEB >Rs. 11/ P&L risk minimal as this is a Predictable revenues as well as profits 0.40.4Corp unit fixed cost recovery model Receivable situation could turn adverse if(1x200) Balance sheet risk exists as TNEBs financials fail to improveOperational payments from TN have No difference here between our base caseslowed downand blue-skyVemagiri Power Natural Gas USD 5.2/APTRANSCO Rs. 3.86 Gas supply shortage and Supply from KG D6 has been less for the1.81.8Generation from KG D6 MMBTU One-partconsequent low PLFs plant in FY12 (65% PLF for YTD FY12)(1x388) (Rs. 2.03/unit) tariff with Requires ~2.4mmscmd of gas Expect PLFs to remain under pressureOperationalfuel costfor operations at 85% PLF but No difference here between our base casepass- hasonly~1.5mmscmd and blue-sky scenariosthrough allocation from KG D6Vemagiri Exp.No gasUnknown Merchant As per short No gas allocation We expect both the units to be (1.8) (0.9)(2x384)allocationtermcommissioned by 1QFY13 but we do not1st unitcontractsexpect gas allocation for FY13 and FY14synchronized In the blue-sky scenario we factor-in gas allocation in FY14 itselfGMR Energy Natural GasUSD 5.2/ Merchant As per short Gas supply shortage and Supply from KG D6 has been less for the 2.72.7(1x235)from KG D6MMBTU termconsequently low PLFs plant in FY12 (62% PLF for YTD FY12)Operational (Rs. 2.09/ unit)contracts Requires ~1.4mmscmd of gas Expect PLFs to remain under pressure for operations at 85% PLF but Entered into bilateral contracts to sell has only 0.9mmscmd linkagepower to Andhra Pradesh for the next 1 from KG D6year hence no risk to gas supply during Additional fuel supply risks as this period plant supplies power in the Here as well, base case scenario is the merchant market same as blue-skyKamalangaCIL - MCLCIL price 25% Orissa, ~Rs. 2.86 Low PLFs duetocoal Profits / cash flows to come under pressure 0.65.7(3x350)34% Haryanashortage Our blue-sky assumes greater coalUnder High input cost and firm Caseavailability (at higher prices) and Case 1Construction1 tariffstariff increase of ~30 paiseEmco EnergyCIL - SECL CIL price 33% ~Rs. 2.88 Low PLFs duetocoal Profits / cash flows to come under pressure(2.4) 0.6(600) Maharashtra shortage Our blue-sky assumes greater coalUnderrest merchant High input cost and firm Caseavailability (at higher prices) and Case 1Construction1 tariffstariff increase of ~30 paise32 33. GMR InfrastructureCMP TargetRatingFinancial Summary Rs. 28Rs. 25SellAbridged Financial StatementsKey metricsRs. mn FY10 FY11FY12EFY13E FY10FY11FY12EFY13EProfit & LossGrowth ratiosRevenues51,234 57,738 57,614 80,141Sales 14.5%12.7%-0.2%39.1%EBITDA13,643 15,555 20,010 29,737EBITDA27.9%14.0%28.6%48.6%Other Income 1,6341,573528(596)PAT-19.3% -512.4%-85.2% -142.7%Depreciation 6,1228,609 10,206 12,468Margin ratiosEBIT 9,1558,519 10,332 16,674EBITDA26.6%26.9%34.7%37.1%PBT1,932 (2,241)(2,105)70PAT4.4%-16.1% -2.4% 0.7%PAT2,254 (9,296)(1,373) 587Performance ratiosBalance SheetRoA0.8% -2.3% -0.3% 0.1%Net Worth + Minority66,694125,363138,770149,013RoE3.4% -7.4% -1.0% 0.4%Total debt and grants216,528283,190307,598310,232RoCE 3.2% 2.1% 2.3% 3.6%Total Networth & Liabilities 283,222408,553446,367459,244Total Assets Turnover (x) 0.2 0.10.10.2Gross Fixed assets 146,112255,712334,266369,699Fixed Assets Turnover (x) 0.4 0.30.20.3Accumulated depreciation22,518 33,205 43,411 55,878Working capital Turnover (x)2.3 0.70.91.5Net fixed assets 123,594222,508290,856313,821Financial stability ratiosCWIP 103,829 71,612 53,463 57,281Net Debt to Equity (x)3.2 1.92.02.0Investments 32,283 33,370 33,370 33,370Current ratio (x) 9.620.4 16.49.7Inventories2,1482,7903,1654,697Working capital days156 503 427244Sundry Debtors 3,6535,7366,4749,846Inventory & Debtor days415461 66Cash and bank balances 1,632 42,296 29,393 12,257Creditor days 122 208 208150Loans & Advances17,085 32,837 32,837 32,837Interest cover (x)1.3 0.80.81.0Current liabilities2,5574,0914,3916,130Valuation metricsNet current assets21,962 79,567 67,477 53,508Fully Diluted shares (mn) 3,663 3,8933,8933,893Misc. Expenditure & Def. Tax 1,5541,4961,2011,266Fully diluted M. Cap (Rs.mn) 108,433Total Assets 283,222408,554446,367459,244Fully Diluted EPS (Rs.)0.62 (2.39)(0.35) 0.15Cash Flows P/E (x)45.3 nm(78.9)184.7Cash flows from Operations(1,457) (10,481) 7,3299,834EV (Rs.mn) 353,268Cash flows from Investing (112,446) (77,952) (59,887) (38,731) EV/ EBITDA (x) 25.922.7 17.7 11.9Cash flows from Financing100,342 69,233 25,1642,634Price to BV (x) 1.8 1.00.80.933 34. GVK Power & InfrastructureCMP TargetRatingGas supply concerns cloud the outlook that is further dented by coal supply concernsRs. 18Rs. 17ReducePPA/ PPA Tariff Base Case Blue-SkyPlant/ StatusSource of FuelPrice of FuelKey issues faced / risks involved OutlookMerchantRs. /unit Rs. /Share Rs./ ShareGVK Industries Natural Gas USD 5.2/APDISCOM One-part Gas supply shortage and Supply from KG D6 has been affected 1.81.8Phase I, IIfrom KG D6 MMBTU tariff withconsequent low PLFs severely (74% PLFs for YTDFY12)(1x217, 1x220) fuel cost Requires ~3mmscmd of gas Expect PLFs to remain under pressureOperational pass-for operations at 85% PLF but No difference here between our base casethroughhasallocation of only and blue-sky scenarios ~2mmscmdGautami PowerNatural Gas USD 5.2/APDISCOM One-part Gas supply shortage and Supply from KG D6 has been affected 3.33.3(1x464)from KG D6 MMBTU tariff withconsequent low PLFs severely (77% PLFs for YTDFY12)Operationalfuel cost Requires ~3mmscmd of gas Expect PLFs to remain under pressurepass-for operations at 85% PLF but No difference here between our base casethroughhasallocation of only and blue-sky scenarios ~1.9mmscmdGoindwal Sahib Captive mines CIL Price PSEBFixed RoE Delays in starting commercial Expect the power plant to be ready by end 4.55.5(1x540)(Tokisud & Landed cost of with fuel operations of the mines asof FY13UnderSeregraha in nearly Rs.cost passwell as the plant We expect the Tokisud mine to be readyConstruction Jharkhand)2,400 perthroughduring FY13 tonne In our blue-sky scenario, we factor in higher PLFs of 85%, assuming additional mining of 0.4MTPA from Tokisud is permitted XXXX34 xxxxx 35. Lanco Infratech CMP Target RatingExposed to virtually all concerns on the fuel front but concerns more than priced inRs. 20Rs. 32 BuyPPA/ PPA TariffBase Case Blue-SkyPlant/ Status Source of FuelPrice of Fuel Key issues faced / risks involved OutlookMerchantRs. /unitRs. /Share Rs./ ShareKondapalli INatural Gas USD 5.2/APTRANSCO One-part Gas supply shortageand Supply from KG D6 has been affected 2.82.8(1x368) from KG D6MMBTU tariff with consequent low PLFs severely (60% PLFs for YTDFY12)Operational~Rs. 2.2/ unitfuel cost Expect PLFs to remain under pressurepass- No difference here between our base casethroughand blue-sky scenariosKondapalli II Natural Gas USD 5.2/ Merchant As per short Gas supply shortage and Entered into bilateral contracts to sell 0.50.5(1x366) from KG D6MMBTUtermconsequent low PLFspower to Andhra Pradesh for the next 1Operational~Rs. 2.1/ unit contracts Additional fuel supply risks as year hence no risk to gas supply during plant supplies power in thethis period merchant market Supply from KG D6 has been affectedseverely (75% PLFs for YTDFY12) No difference here between our base caseand blue-sky scenariosAban PowerNatural Gas USD 5.2/TNEBOne-part Gas supply shortageand Gas supply has been impacted during 1.41.6(1x120) under the APM MMBTU tariff with consequent low PLFs FY12 (75% PLF for YTDFY12)Operational~Rs. 1.2/ unitfuel cost We expect PLFs to remain under pressurepass-throughAmarkantak II 70% CIL fromCIL ~Rs. 1400/ 65% to Case 1 Coal shortage resulting in low Company has petitioned to HERC for a(2.1) 3.4(1x300) SECL tonneHaryanaRs. 2.32 PLFs new tariff but our base case assumes noOperational 30% e-auction ~Rs. 2700/ SEB (Haryana specifically) not tariff increase tonne e-auction 35% toRs. 2.70 open to hiking tariffs Our blue-sky assumes greater coalChhattisgarh availability albeit at a higher price coupled with a tariff hike as petitionedAmarkantak I70% CIL fromCIL ~Rs. 1400/ Merchant As per short Coal shortage resulting in low Receivable situation could turn adverse if2.22.5(1x300) SECL tonne termPLFsUP SEBs financials fail to improveOperational 30% e-auction ~Rs. 2700/contracts Receivable risk as power is PLFs to remain in the 70s due to the tonne e-auction currently being sold to UPpersistent coal shortage situation Additional fuel supply risks as Our blue-sky assumes greater coal plant supplies power in the availability albeit at a higher price merchant market 35 36. Lanco Infratech CMP Target RatingExposed to virtually all concerns on the fuel front but concerns more than priced inRs. 20Rs. 32 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of FuelPrice of FuelKey issues faced / risks involved Outlook MerchantRs. /unit Rs. /Share Rs./ ShareUdupi I, II Imported Coal~USD 140/ 99% to MoU route Imported coal cost increase Final tariff approvals from KERC expected 5.85.8(2x600) from Indonesia tonneKarnataka fixed RoE SEB not agreeing to tariffby 1QFY131st unitincreases After the MoEF clearance, transmissionoperational line construction for Unit 2 is progressing - Delaysincommissioningtransmission line for Unit 2we expect it by 2QFY13Anpara I, IICIL NCL CIL ~Rs. 1400/92% to UttarCase II Coal shortage and high coal Both units are commissioned and awaiting4.15.8(2x600) e-auction coal tonne Pradeshwith fuel costCILs coal allocation for FY13Operational for shortage~Rs. 2700/ cost pass SEB not permitting tariff hike We expect low PLFs in FY13 on coal tonne e-auction throughshortage and as Uttar Pradesh would find Receivable risk from UPit difficult to pay high tariffs if e-auction coalis blended Our blue-sky scenario factors-n greatercoal availabilityKondapalli IIINo gasUnkown Not applicableNA No gas allocation Construction of all the units except the(2.1) 0.2(732MW) allocation steam turbine of the second unit isUndercompleteConstruction Plant will be commissioned by 2QFY13 Interest payments / repayments to commence from FY14 and could pose a significant risk to cash flowsCompany also has 3.9GW of coal based capacities and ~600MW of hydel capacities under construction which are expected to be commissioned in FY15 and beyond 36 37. Nava Bharat VenturesCMPTargetRatingFuel supply not the key concern; attractive low-cost model but operational issues persist Rs. 195Rs. 247 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of FuelPrice of FuelKey issues faced / risks involved Outlook MerchantRs. /unit Rs. /Share Rs./ SharePaloncha, AP ~60% from Singareni ~50% Captive~Rs. 2.85/ Minimal fuel risk Coal supply is not expected to be an issue121149(1x50, 2x32)Singareni ~Rs. 1800/unit for Frequent plant shutdowns due with Singareni Collieries honoring theOperational Collieriestonne inter- to maintenance supply commitment Rest from e- e-auction segment Low realizationinthe Merchant market has stabilized withauction and ~Rs. 2300/transfer of average rate at ~Rs. 4.0/ unit for a year; merchant marketimports tonnepowerwith total cost of ~Rs. 2.8/ unit includingfixed cost the Company is in a position to Merchant be profitablerates as per In our base case scenario we have Rs.short term3.9/ unit as merchant realization for the contractsnext 3 years while we make it Rs. 4.2/ unitfor the blue-sky scenarioDharmavaram Imported coal ~USD 90/Merchant As per short Imported coal cost increase We expect the plant to operate at PLFs of(1x20)from Indonesiatonne term Low realizationinthe ~80% as coal importing is not a majorOperationalcontractsmerchant market issue given the small size of the plantOrissa ~60% from CIL ~Rs.~30MW for~Rs. 4.75/ Coal shortage from CIL and Company will buy coal via e-auction on(1x30, 1x64)CIL - MCL 1800/ tonne ferro-chromeunit for coal cost increaseshortage of CIL coal supplyOperational Rest from e- e-auction conversion toferro- SEB issue as Orissa revoked We expect the first 64MW to remain idle tillauction and ~Rs. 2300/ Tata Steelchromeopen access to the first 64MW the tariff petition is approved by OERC,imports tonne conversion also to be conservative we consider tariff of~20MW to Minimal fuel risk Rs. 2.75/ unit for sale to GridCo while weOrissa80% Washery Washery Orissa GridCoRs. 2.75 - Delay in commissioning the make it Rs. 3.05/ unit for blue-sky scenario(1x64)rejects for the rejects ~Rs.3.05/ unit for 2nd 64MWReady to be 2nd 64MW1400/ tonne We expect the second unit to startrest Merchant GridCocommissioned operations in 2QFY13Paloncha80% Washery Washery Merchant As per short Minimal fuel risk We expect the second unit to start 5664(1x150) rejects fromrejects ~Rs.term Low realization inthe operations by the end of FY13Under Singareni 1400/ tonnecontractsmerchant marketConstruction 37 38. NHPCCMP Target RatingAlmost no operational risk but execution delays compensateRs. 21Rs. 22 ReduceOperational Plants State Under construction Key issues faced / statusOutlookBaira Siul Himachal PradeshChamera III Execution delays - diversion Tunnel We expect all units to be commissioned by April(3x60) (3x77) has been clogged, hence2012commissioning is delayedLoktak Manipur(3x35)SalalJammu & Kashmir*Chutak Execution delays due to harsh We expect all units to be commissioned by Nov(6x115)(4x11) weather conditions and manpower2012issuesTanakpur Uttarakhand(3x40) Uri II Execution delays heavy rainfall and We expect all units to be commissioned by AugUri IJammu & Kashmir*(4x60) snowfall affecting final works 2012(4x120) Nimmo Bazgo Execution Delays delay in awarding We expect all units to be commissioned by AprilChamera IHimachal Pradesh(3x15) Hydro Mechanical works due to high 2013(3x180) price bidRangit Sikkim(3x20) Parbati III Though almost complete, operations Commissioning of first few units to take place in (4x130)will not commence until the upstream FY13 and proportional cost to be capitalizedChamera II Himachal Pradesh Parbati II is completed (expected only Depreciation and interest cost to flow though the(3x100) in FY15) P&L with no meaningful generationDhauligangaUttarakhand(4x70) Teesta Low Dam III Execution delays due to the recent We expect all units to be commissioned by AprilDulhasti Jammu & Kashmir (4x33) earthquake 2013(3x130) Teesta Low Dam IV Execution delays due to the recent We expect all units to be commissioned by AugustTeesta V Sikkim(4x40)earthquake2013(3x170)Sewa IIJammu & Kashmir Subansiri Execution delays Issue of downstream We expect all units to be commissioned only by(3x40) (8x250)Impact study & demand for stoppage January 2016of works by anti dam activitiesNHDC Indira SagarMadhya Pradesh(8x125)Parbati II Execution delays due to flashfloods We expect all units to be commissioned only byNHDC Omkareshwar Madhya Pradesh(4x200)and contractual issues May 2016(8x65)*J&K trying to get these projects transferred to the state, weperceive this as a huge risk38 39. Neyveli Lignite Corporation CMP TargetRatingMining bill the key overhang in an otherwise risk free business model Rs. 87Rs. 84ReducePPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of FuelKey issues faced / risks involved OutlookMerchantRs. /unit Rs. /Share Rs./ ShareNeyveli TPS I Mine 1 of Lignite transfer 79% to TNEB Fixed RoE Minimal fuel risk Given the negligible fuel availability risks,7676(6x50, 3x100) Neyveli Lignite price of ~Rs.9% to NLC with fuel Risk to 26% of mining profits if we expect PLFs to follow the historicalOperational1,265/ tonne townships cost passthe Mining bill gets passedtrendthrough Our base case and blue-sky scenarios areNeyveli TPS I Mine 1A ofLignite transfer46%to TNEBExp Neyveli Lignite price of ~Rs.22% to one and the same, where we do not(2x210)1,556/ tonne Karnataka assume risks to earnings from the miningOperational14% to Keralabill3% to PondicherryNeyveli TPS IIMine 2 of Lignite transfer30%to TNEB(7x210) Neyveli Lignite price of ~Rs.19% toOperational1,556/ tonneAndhraPradesh 14% toKarnataka 10% to Kerala5% to PondicherryBarsingsarBarsingsarNA 100% toLignite Lignite mineRajasthan(2x25)OperationalNeyveli TPS IIMine 2A ofLignite transfer 100% to TNEBExp Neyveli Lignite price of ~Rs.(2x250)1,556/ tonneUnderConstructionBase case and blue-sky scenarios represent FY13E book value39 40. Torrent Power CMP TargetRatingConcentrated exposure to gas supply shortages, which show no signs of amelioratingRs. 217 Rs. 200 ReducePPA/ PPA Tariff Base Case Blue-SkyPlant/ StatusSource of FuelPrice of FuelKey issues faced / risks involved OutlookMerchantRs. /unit Rs. /Share Rs./ ShareSugenNatural Gas USD 5.2/ AhmedabadFixed RoE Gas supply shortage and Requires ~5.5mmscmd of gas for6464(3x382.5)from KG D6 MMBTU and Suratbasis withconsequent low PLFs operations at 85% PLF but hasOperationaldistributionfuel cost GERC not approving sufficient 3.31mmscmd allocation from KG D6circlepass and timely tariff increase Supply from KG D6 has been affectedVatva through(2x32.5, 1x35) Additional fuel supply risks as during FY12 (80% PLF for YTDFY12) ~300MWOperationalMerchantAverage plant supplies power partly in We expect gas supply to remain under the merchant market pressure and hence, the PLFs andtariff now merchant volumes as well~Rs. 5/ unit Although supplying to merchant market,Merchant the plant has not been seriously taken up rates as perfor gas allocation cuts, which is a positive short term Our base case and blue-sky assumptionscontractsare one and the same hereSabarmati~70% from CILCIL ~Rs. 3300/Ahmedabad(same as Coal shortage as well as Because of the fuel pass through(1x60, 1x120, SECLtonneand Suratabove) increased cost of importedmechanism we dont see cost of coal /2x110) Rest throughImports ~USD coalavailability being a significant risk as PLFsOperationalimports120/ tonne GERC not approving sufficient have been reasonably good at ~80%and timely tariff increaseduring YTDFY12 We expect the scenario to remain thesame, going forward Given the fixed RoE revenue model, ourblue-sky scenario is no different from ourbase caseUnoSugen No gasNA~665MW to NA No gas allocation We expect UnoSugen to be ready by FY14029(1x382.5)allocationAhmedabad &and D-Gen to be ready by FY15Under Surat We dont expect any gas allocation fromConstructionEGoM for these plants~400MW forD-GEN In our base case, we do not value these Dahej SEZ by(2x400) plants whereas we attribute a value in our FY15EUnder blue-sky scenarioConstruction40 41. Rating InterpretationBuy Stock expected to provide positive returns of >15% over a 1-year horizonAdd Stock expected to provide positive returns of >5%