Power Transmission and Trading

2rd June 2008
Vulnerably Comfortable....
Rabindra Nath Nayak

022-30443309
rabindra.n.nayak@relianceada.com
Anwit Goswami
022-30443317
anwit.goswami@relianceada.com
Corporate Office:
Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,
Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025
2 nd June 2008
INDEX
Particulars Page No.

Sector Summary ------------------------------------------------------------------ 03
Stock Coverage ------------------------------------------------------------------- 04
Industry Overview ---------------------------------------------------------------- 06
Competitive Analysis of the T&D Market --------------------------------------- 08
Major Demand Drivers ----------------------------------------------------------- 11
Transmission Services ----------------------------------------------------------- 22
Power Trading Market ------------------------------------------------------------ 25
Sector Outlook and Valuation ---------------------------------------------------- 26
Companies Covered
Jyoti Structures Ltd ------------------------------------------------------ 30
KEC International Ltd ---------------------------------------------------- 37
Kalpataru Power Transmission Ltd ------------------------------------ 44
Power Grid Corporation of India Ltd ----------------------------------- 50
PTC India Ltd -------------------------------------------------------------- 59
Sector Report - Power Transmission and Trading 2

2 nd June 2008
POWER TRANSMISSION & DISTRIBUTION SECTOR

In a comfortable position
India has one of the lowest electricity consumption levels in Asia, at roughly 600 units of
the region’s per capita average. Low power consumption has been partly due to severe
and widespread electricity shortages throughout the country. The supply deficit is of the
order of 9% of total demand and 12% of peak demand. Apart from inadequate investment
in power generation, high T&D losses incurred due to under metering, under-collection
have also resulted in demand outpacing supply.
Highlights
However, sector fundamentals have improved over the last few years aided by the
We believe the growth of order book for Government of India’s (GoI) intervention during 2001-02 to settle the SEBs’ outstanding
the transmission EPC players will grow in debts. Alternatively considering the fact that the proposed generation capacity addition
the range of 20% to 30% range for the plans and desired interregional grid connectivity levels entail a substantial increase in
next three years time. Further the orders the regional grid capacity from 14,100 MW as on FY07 to around 37,700 MW by FY12E,
from the developing countries will add to
this is bound to provide a significant boost to investments in the transmission and
the growth of the integrated Transmission
distribution space as well. The government estimates the total fund requirement for
EPC companies in the country.
transmission projects over FY07-12 at Rs1,400 bn. Total capex spend estimated for the
distribution segment during the Eleventh Plan is much larger, at Rs2,870 bn. Distribution
capex includes the Rs400 bn estimated to be spent on rural electrification under RGGVY.
Key sector positives

Companies Covered
Massive power generation capacity buildup of the order of 200 GW by 2012 should
Jyoti Structures Ltd
result in a significant ramp up in the domestic T&D sector.
KEC International Ltd
Kalpataru Power Transmission Ltd
Investment in augmentation of transmission capacity targeted by PGCIL is to the order
Power Grid Corporation of India Ltd
of Rs 55 bn over 2008-12.
PTC India Ltd
Clearly Investment in upgradation of power distribution infrastructure would be driven

by the need to reduce T&D losses.
Order book pipeline for most T & D players presently continues to be robust and is
presently around 2.3x FY08A revenues.
Strong demand conditions in the T&D sector notwithstanding, significant capacity

expansions by leading players here would cap profitability levels going ahead but
improvement in profitability levels would be driven more by efficiency gains coming in
from larger ticket size projects and scope of projects herein, rather than from price
increases alone.
Valuation Matrix
EPS PE(x) EV/EBITDA CMP Target C o m m e n t s
(Rs.) Price
FY08E FY09E FY10E FY08E FY09E FY10E FY08E FY09E FY10E (Rs.) (Rs.)
Jyoti Structures 9.0 10.5 14.0 13.9 11.9 8.9 7.1 6.3 5.1 124.5 195 BUY
KEC International 34.9 41.2 51.2 14.8 12.5 10.1 8.7 7.7 6.3 517.0 683 BUY
Kalpataru Power 62.2 84.1 107.4 16.0 11.8 9.2 9.6 7.9 6.2 993.0 1146 HOLD
Power Grid Corp 3.4 3.8 4.3 29.0 25.9 22.9 17.3 14.0 12.8 98.5 93 REDUCE
PTC India 2.1 2.0 2.0 42.1 44.2 44.2 45.0 30.5 24.0 88.5 82 REDUCE
Source: Reliance Money Research

2 nd June 2008
STOCK COVERAGE
We have initiated coverage on three transmission EPC players Jyoti Structures
Limited (JSL), KEC International Limited (KEC), Kalpataru Power Transmission Limited
(KPTL); and Power Trading player PTC India (PTC) and the Central Transmission
Utility, Power Grid Corporation of India (PGCIL).
We rate JSL, KEC and KPTL as top picks at current prices as all the players enjoy
strong order book, excellent project execution capabilities and have the requisite
skill sets to capture the huge spending lined up in the power T&D sector in the
country and in some of the leading developing countries of the world.
As far as PTC and Power Grid are concerned, we believe that although long term
prospects looks attractive, at the current prices both PTC and Power Grid reflect the
near term prospects adequately in their respective valuations and hence we suggest
a REDUCE RATING for both PTC and Power Grid.
Jyoti Structures (JSL)

JSL is more focused in the domestic transmission Sector and should emerge as the
leading beneficiary in executing orders, not only from the public sector utilities, but also
JSL is more focused in the domestic
from the upcoming private sector T&D utilities. The overseas initiatives of JSL will also
transmission Sector and should
contribute appreciably during the next two years time. The stock has witnessed severe
emerge as the leading beneficiary in
beating following its withdrawal decision in raising money from the market. We don’t
executing orders, not only from the
see any problem for the company in financing its growth due to its decision.We expect
public sector utilities, but also from the
CAGR of 36% in consolidated revenue and a CAGR of 25% in consolidated net profit for
upcoming private sector T&D utilities.
JSL during FY08-FY10E. Based on the sum of parts valuation we initiate coverage on
JSL with 12 month price target of Rs 195. At our Target price the stock would trade,
respectively at 18.6x and 13.9x FY09E and FY10E EPS.
KEC International (KEC)

We believe, with the merger of the RPG Transmission and NITL with the KEC would
remain the key revenue driver and perfectly balance its domestic and overseas market
operations going ahead. The merged entity will have greater efficiency both financially
and operationally.We expect the Telecom Tower EPC revenue of KEC to grow at a CAGR
We believe, with the merger of the RPG of 35% and the Transmission and Distribution EPC revenue to grow at a CAGR of 23%
Transmission and NITL with the KEC over FY08-FY10E. Therefore on a consolidated basis we estimate a 25% CAGR in
would remain the key revenue driver revenue and 21% CAGR in net profit for KEC over FY08-FY10E. We recommend a BUY
and perfectly balance its domestic and on KEC based on 8x EV/EBIDTA for FY10E with a 12 month price target of Rs 683. At our
overseas market operations going Target price the stock would trade, respectively at 17x and 13.4x to our FY09E and FY10E
ahead. EPS.
Kalpataru Power Transmission (KPTL)

Consistent entry in to the diverse business is one of the positive for KPTL. The 52%
construction subsidiary JMC Projects (JMC) will remain the great business driver for the
company for the next two years. In FY08 the topline growth of JMC remained at 80% as
compared to 12% for KPTL on a stand alone basis. We expect with the Rs. 2400 crore
robust order book in hand and with the entry into diverse EPC business in various
infrastructure sector the topline growth of JMC would be at least 60% for the next two
Consistent entry in to the diverse
years. The investment in the logistic service subsidiary would start contributing to the
business is one of the positive for KPTL.
consolidated turnover by FY10E. With a robust business growth opportunity expected for
all business verticals, we expect the consolidated net sales of KPTL would grow at a
CAGR of 37% during FY08-FY10E. The net profit would grow at a CAGR of 36% during
the same period. Based on the EV/EBITDA multiple valuation method we initiate coverage
on KPTL with a buy rating with a 12 month target price of Rs1146. At our Target price the
stock would trade, respectively at 13.6x and 10.7x FY09E and FY10E EPS.

2 nd June 2008
PTC India (PTC)

We initiate coverage on PTC India Limited with a REDUCE rating. We believe the
We believe the leadership of PTC in
leadership of PTC in short term power trading would continue. With a strong parentage
short term power trading would and a first mover advantage in power trading in India we believe that PTC has a bright
continue. future ahead considering the fact that Power Trading market in India is still a evolving
market.We have valued PTC based on the sum of parts valuation method, wherein we
recommend a REDUCE rating with a one year price target of Rs 82. At our target price
the stock would trade, respectively at 1.19x and 1.17x to our FY09E and FY10E BVPS.
Power Grid Corporation of India (PGCIL)

We initiate coverage on PowerGrid Corporation of India Limited (PGCIL) with a REDUCE
We expect PGCIL, the principal power Rating. We believe the Indian power sector is at the crossroads with huge capacity
transmission utility in India, to be a addition planned in the power generation and transmission space. Hence we expect
major beneficiary of the changing PGCIL, the principal power transmission utility in India, to be a major beneficiary of the
dynamics in the domestic power sector. changing dynamics in the domestic power sector. We expect PowerGrid to record a
26% CAGR in revenue and 19% CAGR in net profit during FY08-FY10E. Based on the
DCF approach and a comparative EV/EBITDA multiple valuation method we initiate
coverage on PGCIL with a REDUCE rating with a 12 month price target of 93.

2 nd June 2008
INDUSTRY OVERVIEW
A robust and efficient transmission and distribution (T&D) system is critical for the
transfer of power from generating stations to load centres. A T&D system comprises
transmission lines, substations, switching stations, transformers and distribution lines.
In order to ensure the reliable supply of power and the optimal utilisation of generating
capacity, a T&D system is organized in a grid, which interconnects various generating
stations and load centres.
In India, the T&D system is a 3-tier structure comprising distribution networks, state
In India, the T&D system is a 3-tier
grids and regional grids. These distribution networks and state grids are primarily
structure comprising distribution
owned and operated by respective SEBs or state governments (through state electricity
networks, state grids and regional
departments).
grids.
Most inter-state transmission links are owned and operated by the Power Grid
Corporation of India Limited (PGCIL); some are jointly owned by the SEBs concerned. In
addition, PGCIL also owns and operates many inter-regional transmission lines (forming
a part of the national grid) to facilitate the transfer of power from a surplus region to a
deficit one.
The transmission system in India operates at several voltage levels, namely; Extra high
After the enactment of new Electricity
voltage: High voltage direct current (HVDC), 765 kv, 400 kv, 220 kv and 132 kv; High
Act, transmission networks are now
tension: 66 kv, 33 kv, 11 kv; Low tension: 6.6 kV, 3.3 kv, 1.1kv, 22 kv. After the enactment of
being developed through private
new Electricity Act, transmission networks are now being developed through private
participation, with either Power Grid or
participation, with either Power Grid or STUs being one of the equity partners. Currently
STUs being one of the equity partners.
through regulation, Power Grid enjoys a complete monopoly in managing the inter-state
networks.
Over the next five years, the demand for transmission capacity is expected to increase
The Power system within the country dramatically, driven by the substantially bigger increase in generation capacity as well
will also need to be more flexible to as the new emerging requirements of open access, trading and inter regional transfers
enable the integration of power sources of power. The Power system within the country will also need to be more flexible to
like merchant plants, captive plants enable the integration of power sources like merchant plants, captive plants and wind
and wind power plants. power plants. On the top of this the unbundling of the state utilities, entry of private
players for the transmission projects gives an urgent necessity for investment in the
sector.
Need for a strong investment push in the T & D space

The investment is Transmission and Distribution (T&D) in our country has so far not
been given that much importance as is being given to the generation segment. Normally
the investment in power sector should remain in equity between Generation and T&D.
However after the de-licensing of the generation sector, much of the investment has
We believe the investment in T&D currently been concentrated in this segment. Now to align the growth of investment in
should swiftly catch up during the next tandem with that of the investment in generation the country has to speed up its
two to three years time. investment in transmission (Possibly in a ratio of more than 1:1 in favor of T&D), so as
to maintain the viability of the power system of the country, from a longer term perspective.
So we believe the investment in T&D should swiftly catch up during the next two to three
years time. On the other hand to alleviate the prospective risk envisioned by the
generators, merchant or otherwise, the trading of power will shortly become one the
major business activity in the sector.

2 nd June 2008
Transmission EPC Business Segment

The transmission networks are largely executed by the classified EPC executors who
have a established project execution track record and excellent skillsets. These project
executors get orders from the central and state transmission utilities and execute the
projects with a strictly stipulated time frame. Currently around 5 to 6 integrated players
Currently around 5 to 6 integrated
dominate this space and enjoy a total market share of 70% in the country. These players
players dominate this space and enjoy
also undertake power distribution projects (below 132 KV) and telecom tower projects,
a total market share of 70% in the
due to the natural business complicity. Further players like KEC International (KEC),
country.
Jyoti Structures (JSL) and Kalpataru Power Transmission (KPTL) also derive a significant
chunk of their turnover from the other developing markets, based on their track record of
business relationships in these markets.
Competitive Landscape
Company Range Capacity Tonnes (MT)
KEC Up to 765 kv 103000
JSL Up to 765 kv 96000
KPTL Up to 765 kv 84000*
Associated Transrail Up to 400 kv 45000
L&T Up to 400 kv 40000
Total Industry Capacity 8,20,000
Source: CEA, Power Grid and Reliance Money Research
* To increase to 108000mt by end of next quarter
Power Trading Business Segment

Power Trading is an essential intermediation for efficient and effective utilization of the
generation units of the country. Power Trading essentially means the meeting of the very
Power Trading is an essential
short term power demand of the customers through a structured evacuation from a
intermediation for efficient and effective
targeted generator through an economically structured transmission network. Therefore
utilization of the generation units of the a well developed transmission network with adequate redundancy plays an important
country. role in developing a voluminous power trading market in the country.
Currently power trading is strictly regulated through the central power regulator, CERC
and trading volumes are limited, on the one hand due to the dominance of bilateral
power contracts (90% of total power generated) with the generators and the users, and
on the other hand due to lack of availability of surplus power. Around 3% of the total
power generated comes for trading.
Presently PTC holds the largest chunk of power trading volume in the country with a
market share of 50% but due to low entry barriers for the utilities the company is loosing
its market share.

2 nd June 2008
Competitive Analysis of the T & D Market

We have used the Porter’s five point method to put a value perspective to each of the
different sub segments within the T & D and Trading segments. Our analysis shows that
the Power transmission services will remain a monopoly for the CTUs (Central
Transmission Utilities) and STUs(State Transmission Utilities) However, going ahead
in future PGCIL is definitely going to witness more competition from the private sector
players, so far as the wheeling services for the power sector is concerned.
Transmission Tower EPC

Past Execution experience and execution of considerable volume in the past remain a critical factor for getting the projects
Requirement of good capital base to support significant working capital requirement during project execution
Overall Observation: Moderate

Entry Barriers
Outcome : 5 to 6 integrated players dominate 70% of the Market
Popularity of near load center generation modes like Wind power and solar or biomass power plants
Popularity of the underground transmission systems.

Substitution
Overall Observation: Less intense in the near term
Outcome :The investment in Distributed Generation is growing at a very slow pace
Around 18 to 20 players are present in the industry and 6 to 7 players have complete project execution capability.
Competition is severe in the 33KV to 132 KV transmission projects categories. However in projects beyond 132 KV categories the
competition is less severe.
Internal Rivalry
Overall Observation: Moderately intense in the near term, but may intensify
Outcome : Margin hovers around 10% to 15% in the industry
Power Grid and state Transcos are the major buyers of the transmission projects. Recently some merchant power generators have
undertaken trans mission projects either independently or through the association of PGCIL.
These buyers can not backward integrate and therefore the order flow consistency will remain with key players
Bargaining
Due to Buyers concentration the scope of improvement in margin is limited so far as the transmission projects are concerned. Also any
Power Of delays in giving work execution orders by the project owners will show up in the volume off take for the industry. Private ownership of
Buyers the transmission projects will continue to grow at slower pace.
Overall Observation: Intense due to limited number of buyers.
Outcome : Revenue always depend on the investment spending by the stae and central transmission and distribution utilities
Management of costs of Subcontractors, Steel Structure outsourcing service providers and employees will remain a challenge for the
industry.
Bargaining
Power of The threat of forward integration by the subcontractors and outsourcing service providers is quite obvious
Suppliers Overall Observation: Intense due to limited entry barriers for the suppliers.
Outcome : EMCO,Sujana Towers, Ramsarup Industries, Bajaja Electricals, IVRCL Infrastructures and Diamond Cables are the main new
entrants among the suppliers

2 nd June 2008
Wheeling Services
Capital Intensiveness, Strict regulatory environment, High gestation Period and Slower than expected progress of generation capacities
are among the significant entry barriers for the Industry
Overall Observation: Stiff due to regulation

Entry Barriers
Outcome : Only Players with necessity has entered. PGCIL and STUs own a significant transmision capacity in the country
Wider and improved application of non conventional mode or near-load center generation capacity will pose a serious threat to the
industry.
Substitution Overall Observation: Looks remote
Outcome : The investment in Distributed Generation is growing at a very slow pace

Transmission redundancy is almost absent in our country and also has not been incorporated in the long term plans of the country. So
competition for the existing players is absent completely.
Overall Observation: Completely Absent

Internal Rivalry
Outcome : PGCIL and STUs dominate the Transmission Backbone service
Due to limited redundancy in transmission backbone of the country the buyers like distribution utilities. Power Traders and power
producers remain completely dependent on the services of the backbone service providers. However the large private power producers
Bargaining have undertaken owned transmission projects for proper evacuation of their prospective generated power.
Power Of Overall Observation: Moderately Intense
Buyers Outcome : Adani, ADAG,JP group floated transmission companies for proper evacuation of power from their power Plants.
Suppliers of transmission towers or executor have not taken the initiative for owning transmission capacity, largely due to strict
Bargaining regulatory environment as capital intensiveness of the business
Power of
Overall Observation: Stiff
Suppliers
Outcome : No Tower Supplier has so far entered the market.
Power Trading Segment -

Adequate understanding of the power flow in the different parts of the country is a must for generating a critical volume of business as
trading margins are strictly capped by the regulator.
Entry Barriers Overall Observation: Moderate
Outcome : Except PTC, Only Power Generators or Power Utilities have their presence
Consistent growth of bilateral contracts for power off take will remain a threat to the industry.
Substitution Overall Observation: Intense
Outcome : Bilateral Contract dominate with 90% of the generated Power
The availability of tradable power in the country is 2% of the total generation. Due to limited industry scope the internal competition is
severe for the existing players.
Internal Rivalry Overall Observation: Intense
Outcome : Operating margin remain at 2% to 3%
Largely the state/private sector distribution utilities remain the largest buyers of the traded power. The entry barriers are grossly less for
Bargaining these utilities. So they pose a serious threat to the stand alone trading utilities by integrating backward.
Power Of Overall Observation: High
Buyers
Outcome : Groups like Lanco, Adani, ADAG and Tata have entered the business
Although the large power generators can integrate forward for this business, but the small captive generators will remain the greatest
Bargaining contributors for the growth of the stand alone trading utilities.
Power of
Overall Observation: Moderate
Suppliers
Outcome : NTPC, Tata Power, Reliance Energy are successfully running their power trading business.

2 nd June 2008
Scheduling and Dispatching

As per the current regulation only a government company will provide the transmission service in the country. Therefore the entry barriers
are quite stiff as per regulatory guidelines.
Entry Barriers Overall Observation: Stiff by regulation
Outcome: PGCIL along with STUs will continue to dominate with the scheduling and despatching service, both at the national and state level
No substitution is possible.
Substitution Overall Observation: Service is unique for power sector
The statute has specified the areas of operation for the State and Central Sector Transmission Utilities. So internal rivalry is almost
absent.
Internal Rivalry
Overall Observation: Almost absent
Bargaining Transmission service is a licensed service. By the statute only a governemnt company only can be a transmission line operator. So
the statute has restricted the buyers to enter this service, although developping a capability is not difficult.
Power Of
Overall Observation: Insignificant
Buyers
Outcome : PGCIL along with STUs will continue to dominate with the scheduling and despatching service, both at the national and state level
Bargaining In actual terms there is no supplier for this service as the entire service in driven by already developped robust IT network.
Power of Overall Observation: Insignificant
Suppliers
Outcome : PGCIL along with STUs will continue to dominate with the scheduling and despatching service, both at the national and state level

2 nd June 2008
MAJOR DEMAND DRIVERS FOR THE T & D MARKET

Power Generation –
The proposed generation capacity addition plans and desired interregional grid
From the point of view of the initiatives connectivity levels entail a substantial increase in the regional grid capacity from 14,100
that has already been taken in the MW as on FY07 to around 37,700 MW by FY12E. The government estimates the total
generation side this quantum of fund requirement for transmission projects over FY07-12 at Rs1,400 bn. Total capex
investment is becoming an imperative spend estimated for the distribution segment during the Eleventh Plan is much larger,
for ensuring viability of the power at Rs2,870 bn. Distribution capex includes the Rs400 bn estimated to be spent on rural
system of the country. electrification under RGGVY
11th plan spending target is not ambitious but a necessity

During the 11th plan a total investment of Rs.1400 billion has been planned only in the
transmission sector (that includes inter-state and intra-state transmission) as compared
to just Rs.447 billion spent during the 10th plan. Although this looks ambitious, but from
the point of view of the initiatives that has already been taken in the generation side this
quantum of investment is becoming an imperative for ensuring viability of the power
system of the country.
Plan wise achievement of Targeted Generation Capacities
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th
(P)
Target Achievement
Source: CEA
Cumlative Growth In Transmission Lines (Plan Wise)

160000
140000
120000
100000
CKM
80000
60000
40000
20000
0
765 kV H V D C + /- 5 0 0 k V 400kV 2 3 0 k V /2 2 0 k V
V III P la n IX P la n X P la n X I P la n(P )
Source: CEA

2 nd June 2008
PGCIL leads the way in power transmission

PGCIL has been entrusted with the task of building of the national transmission grid.
PGCIL has been entrusted with the task PGCIL is investing in creating a grid, which is expected to take the inter-regional
of building of the national transmission transmission capacity to 30,000 MW by 2012 from 9,500 MW currently. The national grid
grid. has been divided in three phases. The first phase of the project has been completed in
2002 and has established a transmission capacity of 5,000 MW. In the third phase, the
transmission capacity would be enhanced to 30,000 MW.
Inter-regional Transmission – Existing And Planned For 11th Plan: (200kv And Above)
16000
14000
12000
10000
MW
8000
6000
4000
2000
0
NER/ER-
ER – SR
ER –NR
ER-WR
ER-NER
NR-WR
WR-SR
NR/WR
E n d o f 1 0 th p la n 1 1 th P la n (P )
Source: CEA & Reliance Money Research
Investment in transmission and

By and large, investment in transmission and distribution has always lagged behind the
distribution has always lagged behind
generation sector. This is underscored from the fact that while the CAGR in power
the generation sector.
capacity addition during 1990-99 was 4.2%, the CAGR in transmission capacity has
been 3.6% during the same period. But in terms of % of achievement transmission
sector has always scored over the generation sector.
% of Actual vs Targeted Achievement in Generation and Transmission

160
140
120
% of Achievement
100
80
60
40
20
0
FY03 FY04 FY05 FY06 FY07
Ye a r
Trans mis s ion Length (CKM) Subs tation c apac ity (MW) Generation Capac ity (MW)

2 nd June 2008
Transmission sector Investment scenario
70000
60000
50000
40000
30000
20000
10000
0
Total Spending in Total Spending by Total Spending by
State Sector Central Sector Private Sector
10th plan spending Envisaged in the 11th plan
Growth opportunity in Transmission Sector

350000 60
300000 50
40
250000
30
200000
20
150000
10
100000
0
50000 -10
0 -20
2007-08 2008-09 2009-10 2010-11 2011-12
Planned Investments in Transmission (Rs mn) Growth(%)
Further the states have planned to spend Rs 2100 bn in the distribution projects during
the 11th plan. So the 11th plan provides Rs 3.5 trillion business opportunity for the
11th plan provides Rs 3.5 trillion transmission EPC players. Therefore 11th plan spending envisages 30% CAGR
business opportunity for the opportunity for the players in the sector by FY10E in the transmission project sales. More
transmission EPC players. over some equipment manufacturers have also incorporated more than 30% growth in
turnover in their strategic vision.
Growth envisioned by companies in the T&D sector

Companies Strategic Comment Envisaged growth
Siemens, ABB, Areva T&D To double turnover in three years time 33%
Recently the Power Grid has cut its planned spending by 27% for FY09E. Further the
We believe the growth of domestic delay in getting loans from the multilateral loan agencies has slowed down the order
revenue of Transmission EPC players flow for the sector till the last quarter. However the recent sanction of loans by ADB to
will remain at least 25% during FY09E Power Grid and setting up of fund by the Government for the T&D sector coupled with
and 30% for FY10E. higher budgetary allocation in the RGGVY scheme, has brightened the prospects of the
Transmission EPC players. Based on the above facts we believe the growth of domestic
revenue of Transmission EPC players will remain at least 25% during FY09E and 30%
for FY10E.

2 nd June 2008
Capacity addition at various voltage levels in T&D ('000 CKM)

2002 2012E CAGR (%)
Up to 132 kV 160 272 5
220 kV 88 144 5
400 kV 44 101 9
765 kV 3 10 13
HVDC 1 8 23
SEBs are investing in upgrading T&D infrastructure

In the distribution sector, the SEBs are the major investors and investment in this sector
has been driven by the need to reduce its transmission and distribution losses. The
The government has launched the
government has launched the Accelerated Power Development and Restructuring
Accelerated Power Development and
Programme (APDRP) wherein it provides financial assistance for projects identified for
Restructuring Programme (APDRP)
wherein it provides financial assistance loss reduction. As per this scheme, 50% of the project would be funded by the government
for projects identified for loss and the balance cost has to be borne by the SEBs. The investment in distribution sector
reduction. involves:
a) Commercial action includes tamper proof metering at all levels of transformation and
for all the consumers.
(b) Technical action largely involves conversion of the existing distribution network into a
high voltage distribution system (HVDS) which covers reduction of LT lines; taking high
voltage line up to the load centre and supplying power through smaller capacity energy
efficient distribution transformation.
T&D losses - a key area of concern

The technical losses are due to energy Energy losses occur in the process of supplying electricity to consumers due to technical
dissipating in the conductors and and commercial losses. The technical losses are due to energy dissipating in the
equipment used for transmission, conductors and equipment used for transmission, transformation, sub - transmission
transformation, sub - transmission and and distribution of power. These technical losses are inherent in a system and can be
distribution of power. reduced to an optimum level.
Major reasons for high T&D losses in India

Inadequate investment in transmission and distribution, particularly in sub-
transmissionand distribution. While the desired investment ratio for generation and
transmission & distribution is 1:1, the same in India has been as low as 1:0.45. Low
While the desired investment ratio for
investment in the T&D segment has resulted in overloading of the grid network, without
generation and transmission &
distribution is 1:1, the same in India further investment in strengthening of T&D network.
has been as low as 1:0.45. Large-scale rural electrification through long 11 KV and LT lines.
Improper load management.
Poor quality of equipment used in agricultural pumping in rural areas, cooler
airconditioners and industrial loads in urban areas.
Going ahead EPC players will get a lead focus

The tariffs for transmission in the country are strictly regulated through the CERC (Central
Electricity Regulatory Commission) regulation (For Inter-state Power transmission) and
The power transmission cost and the through the respective state regulatory commissions (For intra-state transmission). The
availability of transmission corridor transmission tariff on the other hand depends on the cost involved in the concerned
remain among the major factors for the transmission projects. Therefore the transmission project costs and duration remain
scope and opportunity for the trading perfectly under tab by the state and central sector utilities. Thus the transmission EPC
of surplus power generated elsewhere contractors enjoy limited leeway in getting flexibility in execution cost and time. The
in the country. power transmission cost and the availability of transmission corridor remain among the
major factors for the scope and opportunity for the trading of surplus power generated
elsewhere in the country.

2 nd June 2008
Broad Project Chain of Transmission Capex
Transmission service for
{
Transmission Project Power Trading
Regulated transmission ser-
conceptualization by CTU,
vices and Open Access
STUs and other private
services by CTUs and other
transmission companies.
state and private sector
Project execution by EPC
transmission utilities. Transmission Service for
contractors.
longer and medium term
PPAs

2 nd June 2008
Group Association of Turnkey Mild Competition is expected

Transmission EPC Players
Recently Power Grid has relaxed its qualification requirements for the projects for
Jyoti Structures Valecha
enhancing the scope for the new players. Although it is a positive sign for the industry,
KEC International RPG
but looking at the broad industry structure we believe the group backing and past execution
Kalpataru Power Transmission Kalpataru
skill will play a major role in getting and executing the projects. Smaller players will
Associated Transrail Gammon
under take projects through joint venture or partnership route. Thus we see mild
Unitech Unitech
competition in the near term going forward.
L&T L&T
IVRCL Infrastructures IVRCL
Among our universe of transmission EPC companies, KEC and JSL has a broader work
Source: CEA
exposure in the transmission projects as compared to other players in the industry.
Snapshot of Capability of the companies in transmission sector

Company Location Tower Exposure in Testing Tower Tower Basic Auxiliary
Capacity Telecom Supply Project Substation Substation
(MT) Tower Execution Projects Projects
Turnkey EPC Contractors with tower Fabrication
Jyoti Structures Nasik and Raipur 96000
KEC International Butobori and Jaipur 103000
Kalpataru Power Transmission Gandhinagar 84000*
Associated Transrail Baroda and Butibori 45000
Unitech Butibori 30000
L&T Pondicheri 40000
IVRCL Infrastructures Nagpur NA
Pure EPC Contractors
Bajaj Electricals NA NA
Releance Infrastructure NA NA
Tata Projects NA NA
SPIC SMO NA NA
Best and Crompton NA NA
Steel Structure Suppliers
Ram Sarup Industry Khadagpur 48000
Sujana Towers Hyderabad 128000
Amitasha Enterprises Nagpur 32000
Karamtara Tarapur 30000
Man Structures Jaipur 40000
ICOMM Hyderabad 200000
Maharashtra Steel Mumbai 30000
Equipment Suppliers and Project Integrators
EMCO Baroda 20000
Areva T&D NA NA
ABB NA NA
Siemens NA NA
BHEL NA NA
* The company will increase its capacity to 10800 MT within Q2FY09


2 nd June 2008
Order Book of Transmission EPC companies

We believe the growth of order book We believe the growth of order book for the transmission EPC players will grow in the
for the transmission EPC players will range of 20% to 30% range for the next three years time. Further the orders from the
grow in the range of 20% to 30% range developing countries will add to the growth of the integrated Transmission EPC
for the next three years time. companies in the country. Almost all the leading players have developed good track
records in implementing orders in many developing regions of the world. Currently
orders from different geographies constitute a significant part of the total order book of
the companies.
Snap Shot of Order Book of our universe of companies
60000
50400
50000
40000
31200
Rs. in Mn
33000 30000
28300
30000 23000
25000
20000 20000
16740
20000
10000
0
JSL KPTL KEC
FY06 FY07 FY08
Source: Company and Reliance Money Research

Only Standalone
Snapshot of Foreign orders of all the companies
90% 84%
80%
67%
70%
60% 55%
50% 45%
40% 33%
30%
20% 16%
10%
0%
KPL KEC JSL
Foreign Orders Domes tic Orders

2 nd June 2008
Order Book to Turnover Ratio

3.0
Order Book/Net T&D Turnover

2.5
2.0
1.5
1.0
0.5
0.0
FY06 FY07 FY08 FY09E FY10E
JSL KPTL KEC
Our discussions with the managements of the companies make us believe that the
revenue from the foreign markets would grow in the range of 20% to 25% range. After the
We expect the growth of profitability merger of RPG Transmission, overseas orders constitute 45% of total order book of
through overseas orders will remain the KEC and the company maintains that this kind of exposure will continue in the future as
highest with Jyoti (due to lower base) in well. KPTL expects to maintain a foreign revenue contribution at 32% to 35%. But recently
our universe of Transmission EPC Jyoti has become very aggressive in adding orders from the overseas markets. Its gulf
companies. joint venture will start contributing to the profitability of the company from FY09E and also
the recently formed subsidiary in South Africa has got two big orders from that region.
Therefore we expect the growth of profitability through overseas orders will remain the
highest with Jyoti (due to lower base) in our universe of Transmission EPC companies.
EBITDA Margins to remain between 10% to 11%

The operating margins of the tower EPC business would remain in the range of 10% to
11% range. We don't see any severe competition which will have an impact on the
margin as optimum scale of operations will continue to remain with five to six players of
the industry and they will continue to get orders from the transmission utilities due to
their past project execution track record and skill sets. However the quality of orders will
impact the margin going forward.
Generally the Price Variation (PV) formula of IEEMA effectively covers around 80% to 90%
The rise in prices of commodity and of the project cost of the transmission projects. This is applicable only for the domestic
labor cost directly hit the margins of the transmission projects. However the PV formula is occasionally applied in the domestic
distribution and foreign project distribution projects. More over the foreign projects are largely not covered under any
revenues of EPC companies. such price escalation formula. Therefore the rise in prices of commodity and labor cost
directly hit the margins of the distribution and foreign project revenues of EPC companies.
Cost Analysis of Transmission EPC Companies

Cost Analysis JSL KEC KPTL
Cost of Materials as a % of Sales 66 51 49
Personnel Exp as a % of Sales 3 4 5
Sub cont Exp as a % of Sales 12 22 19
Other operating exp as a % of Sales 7 11 11

2 nd June 2008
Transmission Project break-up (For Normal Transmission Projects)

Sub segment % in Segment % of Total sub segments as % of Total
Transmission Line
Foundation 20 65 13
Tower Supply and Erection 30 19.5
Conductor 40 26
Insulators 5 3.25
Stringing with Insulators 5 3.25
Total 100 65
Substation
Foundation and Civil Works 10 25 2.5
Transformers 30 7.5
Other Electrical Equipments 10 2.5
Switchgear Control Panel and Monitoring system 50 12.5
Total 100 25
Overall Testing Services 100 10 10
Total 100 100
Source: Industry Reports and Reliance Money Research
Work Scope for the Transmission companies

Work % of total Transmission project cost
Foundation Work of Transmission and Substation 14%-15%
Tower and Substation Bay Supply and Erection 20%-25%
Conductor and Insulator Procurement and Stringing 28%-30%
Overall Testing Services 9%-10%
Total 70%-80%
Order Quality Analysis: KEC is the most vulnerable

In our universe of transmission EPC companies JSL and KPTL will remain more se-
cure from the adverse swing in commodity prices.
Order Quality Analysis

Company Order Quality Effect in the Estimates
KPTL According to the company around 25% to 30% of 100 basis points rise in
its total order book is vulnerable to adverse swing stand alone raw material
in commodity and labour cost swings. cost has been estimated. 20
bps and 50 bps decline in
EBITDA margin has been
incorporated in FY09 and
FY10 Stand Alone Financial
estimates.
JSL Domestic Transmission order has a proportion of 130 basis points of decline
65% in total order book. Thus along with the order in EBITDA margin have been
exposure to the private transmission utilities JSL is incorporated in Stand alone
completely protected for margin from the swing in Estimates.
prices up to 65% order.
KEC Domestic order constitutes 50% of the total order Considering the merger
book. Around 85% of the total order book efficiency 100 basis points
constitutes orders for transmission projects. in decline in EBITDA margin
Therefore around 45% of the total order is has been incorporated in
protected from margin erosion in the event of spike FY09 and FY10 estimates.
in commodity prices.

2 nd June 2008
Working Capital: KEC will remain the leader

The Transmission EPC industry is quite working capital intensive. The projects are
executed largely through well documented design specified by the transmission utilities.
Transmission projects are executed at places which are far away from the manufacturing
bases of the companies. So to bring economy in logistic the companies maintain lot of
inventory at the execution places. Moreover in the distribution projects the debtor periods
are higher as compared to the transmission projects. So inventory and debtor period in
total get extended up to 180 days for the players.
Working Capital Cycle of Turnkey Transmission EPC companies

Part and Sub Parts of % of Time for the Impact on % of Period of Days of
Transmission Projects Total Receipt Creditors payment Payments Disadvantage$
Supply Portion of the Project
Advance Payment* 15% 0 Days Orders placed with Suppliers** 90%-100% After 30 to 70 days 50 days to 70
of the work order days
Receipt on Dispatch 75% 120 Days
Receipt on the receipt at Site 10% 130 Days
Erection Protion of the Project
80% 150 Days Payment Made to Workers or 90% to 100% After 120 days till 60 days to 70
Payment on completion of
Subcontractors 180 days days
Specified and Certified
Project Components
Payment on Completion of 10% 180 Days

Major Milestone
Payment on Commissioning 10% 200 Days

* Bank Guarantee of 10-15% has to be given on the receipt of the order
** In case of Big Orders Payment is provided through opening a Letter of Credit with the bank
$ Indicates the overall difference between the Receivable and payment period
Subcontractors, Steel manufacturers and other electrical equipment makers are the key
suppliers of the Industry. The transmission EPC players do not get good credit periods
The transmission EPC players do not from the players and with respect to sales the credit period lasts up to 90 to 100 days.
get good credit periods from the players Thus the players in the industry need augmentation of working capital margin to sustain
and with respect to sales the credit their growth based on the envisaged revenue potential. Sometime in anticipation of a
period lasts up to 90 to 100 days. large order the players have to maintain a satisfactory level of liquid resources to get
qualify for the contract. This has necessitated companies to augment the working capi-
tal need by taking the equity route. Often good group support helps companies meet
their working capital needs
Execution parts of Tower

Particulars Time in Days
Design and Listing out of the Project Components 30
Sourcing of Steel and Zink 30
Fabrication 30
Inspection and Dispatch 30
Project Execution 60
Total Days 180
Working Capital Periods of Turnkey EPC companies and Tower Suppliers (FY08)
Company Inventory Days Debtor Days Creditors Days
JSL 25 131 85
KPTL $ 44 131 46
KEC 44 164 71
Sujana Towers* $ 41 67 30
Source: Industry Reports and Reliance Money Research *Considered to be Supplier of Tower
$ Reliance Money Research Estimate

2 nd June 2008
Industry Concerns
Price of Aluminium Normally the EPC industry is working capital intensive. So at the time of sudden
3500
growth in orders normally companies try to augment their respective long term working
3000
2500
capital requirement through debt to finance the growth. So in the event of rise in
USD/TOnne
2000 interest cost and in the situation of financing the growth through debt would put adverse
1500
impact on the bottom line and cash flow of the companies. We have not factored in the
1000
interest cost in our valuation methodology. However we have factored in 100 basis
Nov-07
Jan-06
Jun-06
Jan-07
Jun-07
Jul-07
Jan-08
Feb-06
Mar-06
Mar-07
Apr-07
Feb-08
Apr-08
May-06
Aug-06
Sep-06
Oct-06
Dec-06
Aug-07
Oct-07
May-08
Source: Capitaline point rise in interest cost in our financial estimates for FY09 and FY10.
Price of Steel Angle

50000
45000
Steel and other bought out components constitute 50% to 60% of the total cost of the
40000
35000
companies. Fixed price orders normally ranges from 30% to 60% of the total order
book of the companies. Therefore any further adverse swing in the basic commodity
30000
Rs/Tonne
25000
prices and inflation will lead to pressure on margins and hence valuation of the
20000
15000
10000
5000 companies. We have incorporated rise in raw material cost in our estimates based on
0
the order exposure of the companies. However any further adverse swing from that
Jan-06
Feb-06
Mar-06
May-06
Jun-06
Jul-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
May-07
Jun-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Sep-06
Sep-07
Apr-06
Aug-06
Apr-07
Aug-07
Apr-08
Source: Capitaline
level may impact the overall margin and our valuation.
Price of Zinc
5 00 0
4 50 0
Till the Q3 of FY07 the flow of order to the sector was slow, although the overall
4 00 0
3 50 0 investment necessity was very much there. Therefore slow progress of tendering put
3 00 0
USD/Tonne
2 50 0
2 00 0
adverse impact on the growth of the sector. We believe with the kind of requirement in
1 50 0
1 00 0
T&D the sector in the country more than 70% of the targeted investments would be
50 0
0 executed during the current plan. However any further slippages from this level will
Nov-07
Jan-06
Jun-06
Jan-07
Jun-07
Jul-07
Jan-08
Feb-06
Mar-06
May-06
Aug-06
Sep-06
Oct-06
Dec-06
Mar-07
Apr-07
Aug-07
Oct-07
Feb-08
Apr-08
May-08
impact the growth outlook for the sector and also the valuation of the companies.
Source: Capitaline

2 nd June 2008
TRANSMISSION SERVICES
Transmission Services: Return Growth will not be
commensurate with capex growth
High Leverage will contain profitability

Our assumption and estimates in the transmission service are restricted to Power Grid
Almost Rs 190 bn has been planned
Corporation, as it is the only listed entity in this business. It provides both the wheeling
during the current plan by the private
and scheduling services to the power utilities and Generation Companies. Although the
sector in transmission.
government has opened the transmission services for the private participation in 1998,
but the pace of private initiative has been slow so far. It is expected to take pace during
the current five year plan. Almost Rs 190 bn has been planned during the current plan by
the private sector in transmission. However services of the private transmission utilities
will remain restricted to wheeling services only during the near and medium term.
Power grid and STUs will continue to provide the scheduling services for the sector.
Break-up of Transmission Services
Transmission
Assets owned by a Service
Owner ship service Operating Service
Publicly held or a jointly
(Scheduling and
held Company (Wheeling Service) Despatching) A non Profit
(Regulated Tariff Structure)
Activity
Assets owned by
Publicly Held or Jointly Done by PGCIL
Held company, getting or By STUs
market based return on
Transmission wheeling
Service
Power Grid is executing projects worth Rs. 55 billion during the 11th plan. However it
has cut its planned investment by more than 27% for FY09E. Therefore going ahead we
have incorporated 73% of the total planned capex for the current plan for PGCIL in our
estimates.
Broad project Chain of Transmission Utilities
Construction Stores Capital Work in Commissioned

and Advances Progress Projects
(Materials that has been (The part of work of the
(The part of work of the
procured or the advances transmission projects that
made for the same for the transmission projects that
has been partially
prospective projects) completed) has been completed)

2 nd June 2008
Typical Transmission Project Execution Schedules

Time Activity Year 1 Year 2 Year 3
Primary Project Work
Tower Execution
Work Packaging
Tower Supply and Erection
Line Material supply and implementation

(Excluding Conductors and Insulators)
Conductor Package
Insulator Package
Substation Execution
Primary Work
Engineering and Civil Work
Execution of Primary Structures
Bus Bar Materials
Execution of Bay Equipments and

Other Electrical Auxiliaries
Execution of Control and other

Critical Power Substation Equipment
Transformers and Reactor
Project Complete
Source: CEA and Reliance Money Research
We have assumed the following capital expenditure for Power Grid over the next four
years.
Projections for Investment and Financing (in Rs Mn)

Year FY08 FY09E FY10E FY11E FY12E FY13E FY14E
Total Investment Made/Envisaged 64,650 80,400 95,511 94,963 80,145 87,598 94,897
Addition to Debt 38,790 48,240 57,306 56,978 48,087 52,559 56,938
Total Assets In Transmission 393,592 459,663 535,161 609,160 672,404 749,654 834,038
Addition to total Commissioned Projects 80,876 92,398 87,835 91,284 86,906 87,594 90,054
Addition to total Capital Work in Progress 65,248 50,100 54,753 58,542 54,744 53,257 56,640
Addition to Construction and Stores 12,930 16,080 19,102 18,993 16,029 17,520 18,979
Source: MoP, Power Grid and Reliance Money Research
RoE will remain below 14% in the short term

Broadly speaking transmission tariff is nothing but a provision of return for the equity
investments made by the utilities plus the compensation made for the maintenance for
the invested assets. So the regulators and authorities of a country will not allow the
utilities to set tariff according to market demand and therefore the tariff will remain stiffly
regulated. It is evident from the following table, which depict the RoE of some big
transmission utilities globally.

2 nd June 2008
Snapshot of RoE's of some Transmission Utilities Globally

Utility Country RoE % Financial Year
State Grid Corporation of China China 3.8 2006
ITC Holding USA 11.5 2007
Power Link Australia 7 2007
Power Grid India 11.3 2007
Therefore utilities may try generating return from other business sources to raise their
company wide RoE, despite making investments in the transmission sector. In the
Utilities may try generating return from
shorter to medium term we don't see any significant let up in the RoE of PGCIL. RoE will
other business sources to raise their
remain below the Regulated RoE due to significant investment in CWIP (Capital Work In
company wide RoE, despite making
Progress) and Construction and Stores (C&S). We estimate that the RoE will top the
investments in the transmission sector.
regulated RoE only by FY14E (For Details please refer to our PGCIL Report enclosed
herewith)

2 nd June 2008
POWER TRADING: COMPETITION WILL INTENSIFY

Power Trading
Power Trading is essential for meeting peak demand and for overall resource
optimization. Recognition of trading as a separate activity is in sync with the overall
framework of encouraging competition in all segments of the electricity industry.
Power trading contract broadly exists in three different types of

formats such as
Bilateral: mutual contracts between buyer and seller
Trilateral: Through a trading intermediary
Exchange: Equitable auction based trading
India has the 5th largest power system in the world. SEBs / Discoms are the bulk
purchasers of power. Most of the bulk supplies are in the form of PPAs having station
wide tariffs and are essentially long term. Power markets generally operate with PPAs
for long term trading and bilateral for the short term trading. For very short term there is
UI power. Currently short term trading constitutes 3% of total energy market.
PTC will maintain its leadership status

PTC will remain the leader in short Term Power Trade market -
We estimate that the generated power in the country will grow at 6% over the next five
in the short term traded power.
years time. PTC will maintain its leadership status in the short term traded power.
However with the transparent mechanisms for trading PTC will lose its market share in
the long run. We assume the company's market share will hover around 44% by the end
of FY14E.
Assumption of Power Trading and Market share of PTC

Year FY04 FY05 FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY13E FY14E
Total Power generated (In BU) 519.4 548.1 578.8 624.5 704.5 744.3 789.0 836.3 886.5 939.7 996.1
Total short term Traded Power (In BU) 11.0 11.9 14.2 15.0 17.6 18.6 19.7 20.9 22.2 23.5 24.9
% of generated Power 2.1 2.2 2.5 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.5
Market Share of PTC (in %) 100 71 59 44 55 53 51 49 47 45 44
Total Short term Power Traded by PTC (In BU) 11.03 8.36 8.36 6.6 9.7 9.9 10.1 10.3 10.5 10.7 10.9
Source: CERC and Reliance Money Research
We believe with the kind of initiatives the company has already taken in partnering with
prospective generators, the long term and short term power mix would be 50:50 in the
total portfolio of the company by FY14E. The company targets a mix further to 70:30 in the
long run. We have assumed 5 paisa margin per unit for the long term power and main-
tained 4 paisa margin per unit for the short term traded power. Accordingly we estimate
a blended trading margin of 4.7 paisa per unit by FY14E.
Assumption
Year FY08E FY09E FY10E FY11E FY12E FY13E FY14E
Short Term Power (in MU) 9889 10087 10289 10494 10704 10918 11137
Long Term Power (in MU) 0 2500 3750 4895 6389 8340 10887
Total Traded Power (in MU) 9889 12587 14039 15389 17094 19259 22023
Short Term as a % of Long Term 100 80 73 68 63 57 51
Overall Trading Margin in Paise 3.5 3.8 4.0 4.1 4.2 4.3 4.4
Source: MoP, Power Grid and Reliance Money Research

2 nd June 2008
SECTOR OUTLOOK AND VALUATION

Transmission EPC: Bench Mark EV/EBITDA of 8 on FY10E Estimates
We have used a comparative valuation method to value the transmission EPC

companies. The industry is quite similar to other industry EPC companies. We base our
assumption based on the following facts,
Sector is order book driven: The growth is completely order book driven and past
execution capability and good capital back up weighs up much in getting the prospective
The revenues are recognized based on orders. Like other EPC industries this industry is also working capital intensive as
mile stone completion of the projects. debtor and inventory days have 50 to 60 days margin over the creditor days.
Revenue recognition: The revenues are recognized based on mile stone completion
of the projects.
Profitability: Like other EPC companies, raw materials, bought out items and
subcontracting expenses constitute 72% to 80% of the total revenue of the companies.
Thus the operating margins remains in the range of 11% to 14%.
Risks: Slow work orders from the main executors may show up in slower growth in
revenue, despite satisfactory order book in hand.
Capital Expenditure and Risk: In general, like other EPC companies, majority of equity
investment of the companies goes for the augmentation of the working capital. Some
time companies do capex to improve future capability based on their respective future
growth potential. On the flip side if there is a significant slow down of the orders then
capacity cost eats significantly to the profitability of the companies.
Snap Shot of EV/EBITDA of selected EPC companies

Year FY08 FY09E FY10E
IVRCL Infra & Projects Ltd 16.1 11.4 8.8
BGR Energy Systems Ltd 22.5 13.9 9.1
Patel Engineering Co 15.9 12.3 9.0
Nagarjuna Constructions 13.4 9.8 7.3
Simplex Infrastructures Ltd 12.8 8.4 6.1
GMR Infrastructure Ltd 48.0 24.2 16.4
GVK Power and Infrastructure Ltd 16.0 10.5 6.2
LANCO Infratech Ltd 18.6 7.5 4.7
Average 20.4 12.3 8.5
Source: Consensus Estimates
Looking at the vertical sectoral exposure of the Transmission EPC companies, on the
We have assumed a bench mark EV/
one hand and observing at the comparative growth of power sector among the entire
EBITDA of 8 for on FY10E estimates,
infrastructure sector we have assumed a bench mark EV/EBITDA of 8x for on FY10E
for valuing the Transmission EPC
estimates, for valuing the Transmission EPC Companies. However the total valuation
Companies.
approach will differ, considering varying business model of the companies (See valuation
of the respective companies).
Transmission Services: DCF and Comparative EV/EBITDA

Methodology
We have used both comparative and DCF valuation model to value Power Grid.
For comparison we have taken the EV/EBITDA multiple of ITC Holdings limited, a holding
company of one of the largest transmission assets in US. The basis of comparison is
based on the following facts.

2 nd June 2008
Consolidated Operating assets: Like PGCIL, majority of the assets are in

Transmission Projects
Revenue Characteristics: Revenue is regulated through FERC (Federal Electricity
Regulatory Commission the counter body of CERC) regulation
Operating Margin: Operating Margin is 68% as compared to 83% for Power Grid
Balance Sheet structure: The net current assets has remained negative over the
years and RoE almost same as that of Power Grid
We use a higher multiple of 13 for power grid as compared to the ITC, because of the
monopoly status maintained by power grid in the transmission business in the country.
We believe it would be very difficult for any promoter to set up such a parallel transmission
network in the country, over the next one and half decade.
Power Trading: DCF and Book Value of Cash and Investments

Looking at the business consistency of the power trading business we have used a
DCF model for valuing the core trading business of PTC.
Recently the company has raised Rs 1.2 bn from the market to increase its business
Looking at the business consistency intermediation activity in other segment of the power sector. Besides the business
of the power trading business we have intermediation this resources will also augment its long term working capital requirement
employed DCF model for valuing the of the company, looking at the prospective augmentation the long term power in to its
core trading business of PTC. total trading portfolio. The company has already set up a finance subsidiary for undertaking
viable business intermediation activity. Looking at the future potential of the power sector
in the country and observing the market led return opportunities from this sector in the
future, we believe the company would look for more than 20% return on its investments
after three years time. However we have taken the book value of the cash and investment
balance of the company in our valuation.

2 nd June 2008
Valuation Matrix
Companies JSL KEC KPTL PGCIL PTC
RM Rating BUY BUY HOLD REDUCE REDUCE
CMP (Rs) 125 520 993 98.5 88.5

Target Price (Rs) 195 687 1146 93.2 82.3
Revenues FY09 (Rs in Mn) 19820 35503 36333 56480 54628.5

Revenue FY10 (Rs in Mn) 25524 44044 50336 67474 66989.0
EBITDA FY09 (Rs in Mn) 2173 4116.5 3860.7 47578 299.6

EBITDA FY10 (Rs in Mn) 2802 4886.5 4999.4 56659 370.0
EBITDA Margins FY09 (%) 11.0 11.6 10.6 84.2 0.5

EBITDA Margins FY10 (%) 11.0 11.1 9.9 84.0 0.6
Net Profit FY09 (Rs in Mn) 849.6 2033 2229 15811 454.2
Net Profit FY10 (Rs in Mn) 1136.1 2528 2847 18115 455.9
EPS FY09 (Rs) 10.5 41.2 84.1 3.8 2.0

EPS FY10 (Rs) 14.0 51.2 107.4 4.3 2.0
PE FY09 (x) 11.9 12.6 11.8 26.2 44.3

PE FY10 (x) 8.9 10.1 9.2 22.9 44.1
EV/EBITDA FY09 (x) 6.3 7.7 7.9 14.0 30.5

EV/EBITDA FY10 (x) 5.1 6.3 6.2 12.8 24.0
Market Caps/ Revenues FY09 0.5 0.7 0.7 7.3 0.4

Market Cap/Revenues FY10E 0.4 0.6 0.5 6.1 0.3
RoE FY09 (%) 20.6 33.5 22.7 10.8 3.0

RoE FY10E (%) 22.0 30.7 23.1 11.6 2.9
ROCE FY09 (%) 27.7 31.2 24.6 9.5 4.1

ROCE FY10 (%) 28.7 31.7 26.7 9.6 4.1
Price/BV FY09 (x) 2.5 4.2 2.7 2.8 1.3

Price/BV FY10 (x) 2.0 3.1 2.1 2.7 1.3
Source:Company Reliance Money Research

2 nd June 2008
Companies

2 nd June 2008
Stock details
Jyoti Structures RECOMMENDATION :BUY
BSE Code 513250
NSE Code JYOTISTRUC Price: Rs. 125 Target Price: Rs.195
Reuters Code JYTS.BO
Bloomberg Code JYS IN We initiate coverage on Jyoti Structures (JSL), one of the key players in the
Market Cap (Rs Mn) 10,146.5
Free Float (%) 73.1 Transmission & Distribution space project with a BUY, which we believe is well
52-wk Hi/Lo (Rs) 328/141
Avg weekly Vol (BSE) 23765
positioned to take advantage of the strong growth driven by the huge
Avg weekly Vol (NSE) 81660 investments lined in the Power sector. JSL enjoys an experienced management
Shares o/s (mn) FV Rs 2 81.2
team, which has a strong grip on execution deadlines in this business and
Source:Reliance Money Research
hence it is ideally placed to capitalise on this huge business opportunity leading
to substantial growth both in terms of revenue and profits.
Summary table
Year to March FY07 FY08E FY09E FY10E We expect CAGR of 36% in consolidated revenue and a CAGR of 25% in
Total Revenue 9723.8 13719.5 19820.3 25524.1
consolidated net profit for JSL during FY08-FY10E. Based on the sum of parts
Growth % 39 41 44 29
EBITDA 1263.0 1725.1 2173.4 2801.7
valuation we initiate coverage on JSL with 12 month price target of Rs 195. At
EBITDA margin % 13.0 12.6 11.0 11.0 our Target price the stock would trade, respectively at 18.6x and 13.9x to our
Net Profit 549.9 727.0 849.6 1136.1 FY09E and FY10E EPS.
EPS (Rs) 6.8 9.0 10.5 14.0
CEPS (Rs) 7.5 9.8 11.8 15.3
EV/EBITDA 9.2 7.1 6.3 5.1
Key Positives
EV/Sales 1.2 0.9 0.7 0.6
ROE % 20.3 21.7 20.6 22.0 Strong Order Book Pipeline would drive revenue growth
ROCE % 28.4 29.5 27.7 28.7 The current total domestic order book of JSL stands at Rs 2652 crore with around
P/E (x) 18.5 14.0 11.9 8.9
Rs 1800 crore orders from the transmission line towers projects. Around 2/3rd of
P/CEPS (x) 16.7 12.8 10.6 8.1
Source:Company Reliance Money Research
the transmission line tower projects orders are in the 400 KV lines and around
40% of the rest in the 765 range KV lines. Due to its considerable expertise in
transmission projects and good association with private transmission utilities,
we believe that JSL will be the largest beneficiary from the Rs 900 bn business
Shareholding pattern (31st March 08)
opportunity in the private sector. We therefore, estimate that the revenue for JSL
Public & Others from the domestic market would grow at more than 30% over the next 2 years time.
12% Promoters
27%
Growing Business Opportunities in Middle East & Africa

Financial The 70% South African subsidiary of JSL has also witnessed a good move in
Institutions
30% winning substantial orders in a short time span. Currently this subsidiary has a
Foreign
Institutions total orders to the tune of USD 110 mn which are to be executed in the next one
31%
and half year's time. Both these business would further boost JSL's domestic
push and contribute to the overall topline and bottomline growth of JSL in the next
2 years.
Stock Performance (Rel to sensex) Competition in the T & D segment unlikely to intensify
Within the T & D business segment, apart from project execution capabilities and
400 25000
BSE enjoying a track record, new entrants need to invest in tower manufacturing
20000
capacities and require strong pre qualifications norms before they get eligible for
300
large orders from Power Grid and other large customers. Hence entry barriers
15000
within the T&D sector demands long term commitment from players making it a
200 stronghold for existing players. JSL is amongst the top three T&D players in India,
10000
and with strong execution and product capabilities is likely to benefit significantly.
JSL
100 5000
We Recommend a Buy with a target price of Rs. 195

May-07 Jul-07 Aug-07 Oct-07 Nov-07 Jan-08 Feb-08 Apr-08 May-08
Source: Capitaline
Based on the sum of parts valuation we initiate coverage on JSL with a 12 month
target price of Rs 195. At our Target price the stock would trade, respectively at
18.6x and 13.9x to our FY09E and FY10E EPS.

2 nd June 2008
Organisation Structure
JSL
Subsidary Joint Venture
*Shree Chhatrapati South African Gulf Jyoti

*JSL Structures Ltd *JSL Corporate
Shahu Power Subsidary (70%) International
(98.5%) Services Ltd (100%)
Company (100%) LLC(26%)
Source:Company , Reliance Money Research,

* Passive Subsidiaries
Company Background
JSL is one of the leading players in JSL was established in 1974. JSL is one of the leading players in providing turnkey
providing turnkey solutions in the field solutions in the field of high voltage power transmission lines, substations and rural
of high voltage power transmission electrification. It undertakes turnkey projects, offering a complete range of services from
lines, substations and rural design, engineering consulting, tower testing, manufacturing, construction and project
electrification. management.
JSL has supplied over 650,000 MT of transmission line towers, structures to various
utilities in India and abroad. It has tested more than 200 types of transmission line
towers for various clients worldwide. The company operates with the capacity of up to
800kv transmission lines and 400kv substations. It has expanded its operations to over
39 countries as of today.
Investment Drivers
Growing Business Opportunities in Middle East & Africa –

The business initiatives of JSL in foreign projects would start getting good substantial
benefits during the current financial year. Further the 70% South African subsidiary of
JSL has witnessed a good growth in winning substantial order in a shorter time period.
Currently this subsidiary has a total order book of Rs $110 mn. This subsidiary will yield
total revenue of Rs 2.53 bn during FY09E. On the top of this, the total export orders of the
company currently stand at 15% of the total Stand alone order of Rs 3120 crore.
Robust Order Book Pipeline to drive 28% revenue CAGR over FY08-
FY10 –
JSL’s current total domestic order book stands at Rs 2652 crore with around Rs 1800
crore orders coming from transmission towers. Around 2/3rd of the transmission tower
JSL’s current total domestic order book orders are in the 400 KV lines and around 40% of the rest in the 765 range KV lines. In
stands at Rs 2652 crore with around fact it is one of the largest project executors of Power Grid. Also the company gets
Rs 1800 crore orders coming from consistent orders from the private transmission utilities in the country. Currently JSL is
transmission towers. executing orders for Reliance Energy, Adani Power and some other private transmission
utilities. During the current five year plan around Rs 900 bn has been targeted to be
spent by the transmission utilities. Based on the robust order book and positive industry
outlook, we believe the revenue for JSL stand alone grow at more than 28% during
FY08-FY10E.

2 nd June 2008
SWOT profile
Strong and Extended Project

Executing Capability in Weak working capital margin support
Transmission Projects as compared
to the peers
Strengths Weakness
Opportunity Threats
Good scope in diversification into the Aggresive bidding for undertaking

other sector to improve economy in foreign projects may worsen the
operation of the capacity in hand overall financial of JSL
Q4FY08 Performance (Standalone) (Rs.Mn)
Rs Mn Q4FY08 Q4FY07 Grth (%) FY08 FY07 Grth (%)

Net Sales 4,100.6 2,871.8 42.8 13,704.0 9,708.4 41.2
Other Income 6.3 1.0 537.4 15.2 8.2 85.3
Total Income 4,106.9 2,872.8 43.0 13,719.2 9,716.6 41.2
Total Expenditure 3,585.2 2,482.7 44.4 11,985.3 8,454.5 41.8
EBITDA 515.4 389.1 32.5 1,718.7 1,253.9 37.1
EBITDA (%) 12.6 13.5 (7.2) 12.5 12.9 (2.9)
Interest 157.4 100.3 57.0 464.3 328.9 41.2
Depreciation 18.2 16.1 13.1 67.0 58.2 15.2
PBT 346.2 273.8 26.5 1,202.6 875.1 37.4
Provision for tax 153.6 109.6 40.1 478.5 324.9 47.3
PAT 192.6 164.2 17.3 724.1 550.2 31.6
EPS (Rs) 2.4 2.0 17.3 8.9 6.8 31.6
Jyoti Structures Ltd witnessed a top line growth of 43% YoY to Rs.4100.6 mn in Q4FY08
as against Rs.2871.8 mn in the same period last year. Similarly the topline for the FY08
Jyoti Structures Ltd witnessed a top line grew at 41% YoY. JSL’s operating margins dipped by 90 bps to 12.6% during the Q4FY08
growth of 43% YoY to Rs.4100.6 mn in due to higher raw material. Raw material cost as percentage of net sales stood at 68.4%
Q4FY08 as against Rs.2871.8 mn in in Q4FY08 as against 50.7% in Q4FY07, while the erection and subcontracting expenses
the same period last year. to sales decline by 900 bps to 8.7% as against 17.7%.Higher working capital need led
to a 57% rise in interest cost during the Q4FY08. Thus it registered a growth of 17% YoY
in net profits during the quarter to Rs.192.6 mn.
The PAT for the FY08(12 months) has shown a spurt of 31.6% YoY to Rs.724.1mn as
against Rs.550.2 mn, while the margins showed a marginal decline of 40 bps to 15.2%.

2 nd June 2008
Financial Outlook
37% CAGR in consolidated Revenue over FY08-10

As compared to the other transmission companies covered in our universe JSL is more
focused in the domestic transmission sector. So the company will remain as the leading
beneficiary in executing orders, not only from the public sector utilities, but also within
JSL is more focused in the domestic
the emerging private sector T&D utilities. JSL is currently executing orders for groups
transmission sector.
like R-ADAG and Adani in their respective forays in the transmission sector. We believe
this association will go a long way in maintaining business consistency and we expect
a 27% CAGR in turnover for the stand alone JSL for FY08-FY10E.
Currently the South African JV of the company has a total order of USD 110 mn. Based on
the kind of projects in hand, we expect Rs 2.53 bn contribution to the consolidated JSL
for FY09E. JSL is giving significant strategic focus to this subsidiary. In order to capitalize
on the growth opportunity in this part of the world JSL has planned to purchase,
approximately, equipments worth Rs 350 mn (that is optimally required) for this subsidiary
We expect a 37% CAGR in
and would lease these equipments to this subsidiary. Based on the robust business
consolidated revenues of JSL over
guidance for this subsidiary we expect a 20% growth in revenue by FY10E. Thus we
FY08-FY10E.
expect a 37% CAGR in consolidated revenues of JSL over FY08-FY10E.
Revenue Stream Assumptions

25000 50
45
20000 40
35
15000 30
Rs in Mn
(%)
25
10000 20
15
5000 10
5
0 0
FY06 FY07 FY08E FY09E FY10E
Revenue From Stand Alone Entity Contribution from Subsidiaries Total gross Revenue Growth (%)
11% EBITDA margins from Stand Alone business of JSL -

JSL has 85% of its total order book from the transmission projects, where the IEEMA
price variable clause protects the margin up to 90%. Nevertheless we have taken a 130
basis point decline in the stand alone EBITDA margin in our estimates for FY09E and
We expect a 9% EBITDA margin for FY10E. We expect a 9% EBITDA margin for the South African Subsidiary. Further we have
the South African Subsidiary. estimated the commission from Gulf Jyoti and Equipment Hire receipt from the South
African subsidiary in our estimates based on the revenue and estimated capex for the
respected entities.

2 nd June 2008
EBITDA Break up and Contribution from Subsidiaries and Joint Ventures

Year (Rs.Mn) FY06 FY07 FY08E FY09E FY10E
EBITDA of JSL 747.9 1253.9 1718.7 1934.0 2514.2
EBITDA from the Subsidiaries from South Africa 228.0 274.9
EBITDA from Indian Subsidiaries -13.7 9.1 6.4 11.4 12.5
Total Consolidated EBITDA 734.1 1263.0 1725.1 2173.4 2801.7
Equipment Hire Income from South Africa Subsidiary 52.5 52.5
Du Pont Analysis
We estimate that due to significant
We estimate that due to significant capex the consolidated RoCE of JSL will decline to
capex the consolidated RoCE of JSL
27% from the expected FY08 estimated level of 30%. However with the rise in asset
will decline to 27% from the expected
turnover and controlled working capital position the company would improve its RoCE to
FY08 estimated level of 30%.
28% by FY10E.
RoCE movement of JSL (Consolidated) (Rs.Mn)

Year FY07 FY08E FY09E FY10E
Sales 9724 13719 19820 25524
EBIT 1204 1657 2067 2692
Net Current Assets 3618 4889 6446 8446
Net Fixed Assets 605 666 1160 1082
EBIT Margin 12% 12% 10% 11%
Assets Turnover 2.30 2.47 2.61 2.68
RoCE 29% 30% 27% 28%
Valuation: Buy with a target price of Rs 195

To bring at par the financials of all other transmission companies we have taken the
incidental financial costs, other than pure interest cost of JSL, in to the operational cost.
We have placed our valuation based on our revised EBITDA estimates.
Thus we value consolidated JSL with out its Joint Ventures and outside interest in South
African subsidiary, at Rs 197 based on our benchmark of 8x EV/EBITDA multiple FY10E.
After giving effect to the value of the JV and outside interest in the subsidiary we arrive at
a target price of Rs 195 for the company.
Valuation of Consolidated JSL
Dilution of Equity: A mild concern
Value of JSL With out Gulf Jyoti 197.9
Recently JSL has postponed its decision on dilution of equity looking at the unfavorable
Value of Gulf Jyoti 3.2
market conditions. Earlier the company was planning to raise approximately Rs 3936
Total Value of Consolidated JSL 201 mn from the market, for investing in its joint venture in South Africa, for modernizing its
Less: 30% outside Interest in South Africa plants at its existing facility at Nashik and at Raipur and for meeting the working capital
subsidiary 5.8 margin of the company.
Value of JSL 195
Source: Reliance Money Research Incorporated Equity Dilution in the recently Scrapped Fund raising Plan
Type of Dilution No in Mn Total in Rs Mn#
Equity Issue 7.6 1901
Issue of Warrants 4.2 1050
FCCB 3.94 985
Total 15.7 3936
#6 month average price of 250 as on 19th January 2008, has been considered

2 nd June 2008
The company has gone ahead with its investments in its targeted projects through
higher recourse to the structured supplier credit. Now the company is planning to add
around Rs 600 mn of additional debt during FY09E. It has guided a total capex of Rs 600
JSL has gone ahead with its mn for FY09. This includes the capex for the Subsidiary in South Africa. For supporting
investments in its targeted projects the subsidiary in South Africa JSL has currently planned to do the capex and provide
through higher recourse to the these equipments on lease to the Subsidiary.
structured supplier credit.
Currently the company has done no significant investment in South Africa. But we believe
the equity investment of JSL in this subsidiary would be Rs 10 mn by the end of FY09.
We have analyzed the valuation taking into consideration of the following assumptions.
We assume that on the raising of the equity during FY10E the company would repay Rs
600 mn of term loan first and rest would go in meeting the working capital margin for
JSL.
Valuation comparison based on Financing Option during FY10E

Capex Assumption for JSL and Financing Option by FY10E With Dilution Without Dilution
Its Subsidiary for FY09 Total Money Raised by JSL (in Rs Mn) 800 -
Capex for SA Subsidiary done by JSL 350 @ Price (in Rs) 160 -
Equity Capital in (Rs Mn) 172 162.3
Stand alone Capex 250
Total Debt Stand Alone JSL (in Rs Mn) 3472 4272
Total Capex 600
Total Debt Consolidated JSL (in Rs Mn) 3561 4361
Impact on Target Price (in Rs) 194 195
We have done the following sensitivity analysis for equity dilution and arrived at the
conclusion that, keeping everything same, the dilution would have little material impact
on the valuation of the company, on our assumed dilution of equity.
Sensitivity of Value of Consolidated JSL on dilution of Equity at different Price band

Price in Rs/ Money Raised in Rs mn 800 1200 1600
140 192 191 191
150 193 192 192
160 194 193 193
170 194 194 194

2 nd June 2008
Profit & loss statement (Rs mn) Balance sheet (Rs mn)
Y/E March FY07 FY08E FY09E FY10E Y/E March FY07 FY08E FY09E FY10E
Net sales 9,723.8 13,719.5 19,820.3 25,524.1 Equity Cap 161.4 162.3 162.3 162.3
% Growth 39.0 41.1 44.5 28.8 Reserves 2,543.7 3,194.7 3,958.8 4,999.9
EBIDTA 1,263.0 1,725.1 2,173.4 2,801.7 Networth 2,705.1 3,357.0 4,121.1 5,162.3
% growth 72.0 36.6 26.0 28.9 Total Debt 1,607.5 2,287.8 3,531.9 4,361.1
Other Income 8.2 15.2 71.7 77.4 Net Deffered Tax Liability 55.1 55.1 55.1 55.1
Depreciation 59.4 68.3 106.3 109.5 Minority Interest - - 42.6 94.2
Interest 329.3 464.7 707.5 858.2 Total Liability 4,367.8 5,700.0 7,750.7 9,672.8
EBIT 1,211.8 1,672.0 2,138.8 2,769.6
Net Block 605.3 665.9 1,159.5 1,082.0
EBIT margin 12.5 12.2 10.8 10.8
Investments 121.0 121.0 121.0 121.0
Contribution from JVs 18 22.4
CA Loans/Adv 6,499.2 8,530.4 11,493.8 14,956.6
PBT 882.5 1,207.3 1,449.3 1,933.8
Inventory 818.4 809.6 1,127.4 1,454.8
% Growth 100.5 36.8 20.0 33.4
Debtors 3,639.0 4,905.5 6,631.7 8,573.3
Tax provision 327.9 480.3 557.1 746.0
PAT 554.7 727.0 892.2 1,187.7 Cash & Bank 93.3 153.8 82.4 211.5
% growth 114.5 31.1 22.7 33.1 Loans & Advances 1,948.5 2,661.4 3,652.3 4,717.0
EO items (4.7) - - - CL & Provisions 2,881.7 3,641.0 5,047.5 6,510.7
Minotity Interest - - 42.6 51.6 Current Liabilities 2,685.0 3,335.9 4,719.3 6,088.4
Adj PAT 549.9 727.0 849.6 1,136.1 Provisions 196.7 305.1 328.1 422.4
Dividend (%) 35% 40% 45% 50% NCA 3,617.6 4,889.3 6,446.3 8,445.9
EPS (Rs) 6.8 9.0 10.5 14.0 Mis exp 23.9 23.9 23.9 23.9
BVPS (Rs) 33.3 41.4 50.8 63.6 Total Assets 4,367.8 5,700.0 7,750.7 9,672.8
Ratio Analysis Cash Flow Statement (Rs mn)

OPM(%) 13.0 12.6 11.0 11.0 PBT 882.5 1,207.3 1,449.3 1,933.8
NPM(%) 5.7 5.3 4.3 4.4 Depreciation 59.4 68.3 106.3 109.5
ROE(%) 20.3 21.7 20.6 22.0 Interest 329.3 464.7 707.5 858.2
ROCE(%) 28.4 29.5 27.7 28.7 Others 83.1 - - -
Int cover(X) 3.9 3.7 3.2 3.4 Operating CF 1,354.3 1,740.3 2,263.1 2,901.5
Debt/Equity(X) 0.59 0.68 0.86 0.84 Change in WC (1,398.9) (1,211.2) (1,628.5) (1,870.4)
Gross FA turnover (x) 9.92 12.48 11.66 14.59 Gross Operating CF (44.6) 529.1 634.6 1,031.1
Debtors Days 136.6 130.5 - -
Direct taxes paid (334.8) (480.3) (557.1) (746.0)
Inventory Days 35.3 24.6 24.1 24.1
Other adjusment (4.7) - - -
Valuation Ratios (x)
Net operating CF (384.1) 48.8 77.5 285.0
P/E 18 14.0 11.9 8.9
Investing CF (173.0) (128.8) (600.0) (32.0)
P/CF per share 16.7 12.8 10.6 8.1
Free Cash Flow (557.1) (80.0) (522.5) 253.0
EV/EBDITA 9.2 7.1 6.3 5.1
Financing CF 611.1 140.6 451.1 (123.9)
EV/Sales 1.2 0.9 0.7 0.6
Net Change 54.0 60.6 (71.5) 129.2
Mkt cap/Sales 1.0 0.7 0.5 0.4
Opening Cash 39.3 93.3 153.8 82.4
CEPS(Rs) 7.5 9.8 11.8 15.3
Closing Cash 93.3 153.8 82.4 211.5
P/BV 3.8 3.0 2.5 2.0

2 nd June 2008
Stock details
KEC International RECOMMENDATION : BUY
BSE Code 532714
NSE Code KEC Price: Rs.517 Target Price: Rs.687
Reuters Code KECL.BO
Bloomberg Code KECI IN
Market Cap (Rs Mn) 25,508
We initiate coverage on KEC, with a BUY after the recent merger of RPG
Free Float (%) 58.5 Transmission and NITL leading to greater operational efficiency and improved
52-wk Hi/Lo (Rs) 922/501
Avg weekly Vol (BSE) 2566 financial strength for the merged entity.
Avg weekly Vol (NSE) 42145
We expect the Telecom Tower EPC revenue of KEC to grow at a CAGR of 35%
and the Transmission and Distribution EPC revenue to grow at a CAGR of 23%
over FY08-FY10E. Therefore on a consolidated basis we estimate a 25% CAGR
Summary table in revenue and 21% CAGR in net profit for KEC over FY08-FY10E. We recommend
Year to March FY07 FY08E FY09E FY10E a BUY on KEC based on 8x EV/EBIDTA for FY10E with a 12 month price target of
Total Revenue 20406.3 28144.8 35503.4 44043.9 Rs 687. At our Target price the stock would trade, respectively at 17x and 13.4x
Growth % 18 38 26 24 to our FY09E and FY10E EPS.
EBITDA 2518.5 3543.2 4116.5 4886.5
EBITDA margin % 12.3 12.6 11.6 11.1 Key Positives –
Net Profit 1046.5 1721.6 2032.6 2528.0
EPS (Rs) 21.2 34.9 41.2 51.2
CEPS (Rs) 28.0 40.0 47.4 57.8
Higher capital efficiency through Merger
EV/EBITDA 11.6 8.7 7.6 6.3
The merger of RPG Transmission and NITL will lead to higher efficiency and will
EV/Sales 1.4 1.1 0.9 0.7 enhance operational and financial capability of KEC. The recent quarterly
ROE % 38.5 39.6 33.5 30.7 performance of KEC clearly demonstrates this fact. Further the reduction of sub
ROCE % 32.0 31.4 31.2 31.7 contracting expenditure with respect to net sales has reduced the overall business
P/E (x) 24.4 14.8 12.5 10.1 risk of the company.
P/CEPS (x) 18.5 12.9 10.9 8.9
Source:Company Reliance Money Research,
Robust Order Book Pipeline to drive 28% revenue CAGR over
FY08-FY10
Current order book of KEC stands at Rs 50 bn, which is 1.75 times of the FY08
Shareholding pattern (31st March 08) turnover. We believe the domestic transmission revenue would grow at 30% CAGR
and the foreign revenue would grow at 20% CAGR for FY08-FY10E. Thus the total
Public & Others, turnover would grow at a CAGR of 28% for FY08-FY10E.
10.7
Promoters, 41.5
Telecom Tower business to provide further revenue traction
Financial The government is planning to go for tendering of 40000 telecom towers under
Institutions, 34.6 USO fund to role out telecom network in the rural areas. With KEC planning to
Foreign
Institutions, 13.2 make a big entry here we expect the growth in revenue in Telecom Towers for the
company would remain at 40% CAGR during FY08-FY10E.
Vast geographical exposure: CAGR of 20% in revenue is

expected from foreign markets
After the merger the domestic and overseas exposure of the company would get
Stock Performance (Rel to sensex)
perfectly balanced. We expect a 20% CAGR in revenue from the foreign projects
1000 25000 over the next three years as compared to 30% growth in the domestic revenue.
BSE
800
20000
Return Ratios to improve significantly post merger
We believe the merger will augment the working capital margin of KEC appreciably.
15000
Thus the company would add no or very marginal debt to finance its future growth.
600
Thus even after spending Rs 100 crore during FY09, the company would see no
10000
KEC decline in its RoCE for FY09 and with maintained growth momentum the RoCE
400 5000
will improve by 200 basis points by FY10.
Source: Capitaline Buy with a target price of Rs 687

We initiate coverage on KEC with a buy recommendation with a 12 month target
price of Rs 687 based a 8x EV/EBITDA multiple based on FY10E. We rate KEC as
the second top pick in our universe of transmission EPC companies.

2 nd June 2008
Corporate restructring at KEC International

Issue of
shares
Shareholders
Issue of
shares
Issue of
shares
Promoters KEC Octav
International Ltd Investments
Demerger Ltd(New Co to
be listed)
Merger
National
10.30%
Information RPG
Technologies Transmission
Ltd(NITEL)
Source: Company
Company Description
KEC International Ltd (KIL), a group company of RPG Enterprises, is engaged in the
power transmission and distribution business. The Company has presence in over 40
KEC International Ltd (KIL), a group
countries. The Company has gained a position of leadership in the areas of quality,
company of RPG Enterprises, is
technology, capacity and capability. KEC has supplied more than two million metric tons
engaged in the power transmission and
of towers and has constructed over 58,000 kilometers of transmission lines. The
distribution business.
company also involves in the execution of Railway Electrification projects, setting up
Sub-stations and power Distribution Networks, Optical Fibre Cable (OPGW) installations,
Turnkey Telecom Infrastructure Services and maintenance of Power Transmission Lines.
Investment Drivers
Higher efficiency through Merger

RPG transmission, a group transmission EPC company along with NITL, a group
Telecom Tower EPC Company got merged with KEC last year. With this the total tower
capacity of the company is increased to 103000 MT, which is the largest tower capacity
among all the integrated Transmission EPC companies in the country. We expect with
a stronger merged balance sheet the company would go for bigger order with greater
efficiency.
Telecom Tower: Immediate traction expected from USO fund

mobilization
NITL, the group company which got merged into the company last year is dedicatedly
engaged in the erection of telecom towers for the telecom operators in the country. The
aggressive rolling out of networks by the telecom operators and dedicated telecom
tower companies will have good growth of EPC revenue of KEC. Further looking at the
expected elections in the country the government is planning to go for tendering of
40000 telecom towers under USO fund to role out telecom network in the rural areas. So
in the whole we expect the growth in revenue in Telecom Towers would remain at 40%
CAGR during the next 3 years.
Vast geographical exposure: CAGR of 20% in revenue is expected

from foreign markets
The pre merged KEC had a vast exposure in the overseas markets. During FY07 the
revenue contribution from the foreign projects remained at 70% of the total revenue.
We expect 20% CAGR in revenue from Currently after the merger the orders mix of the company has reduced to 50:50 (Foreign:
the foreign projects over the next three Domestic). We expect 20% CAGR in revenue from the foreign projects over the next
years. three years.

2 nd June 2008
Moving up in the value Chain: from Executor to owner

This year KEC has under taken a BOO project under the USO fund. Under this the
KEC has under taken a BOO project company will execute 400 towers in the rural and class C telecom areas with a subsidized
under the USO fund. cost of Rs 100 crore. These towers will be owned by the company and will be rented out
to the telecom operators in those areas. Till FY13E the company cannot go for
commercialization these towers and the expenses made for the operation of these
towers will be reimbursed by the operators.
From FY14E the company can rent out these towers at market rates. The company
expects 4 operators each for each tower with a monthly rental of Rs 40000 per operators.
As we don't see any visible business from this operation in the near future so we have
not factored in this development, in arriving at our target price.
BOO telecom Project under USO fund (Rs. Mn)

Total Project Cost (Spending in FY09) 1000
Equity % 30%
Equity (In Rs Mn) 300
Debt 700
Interest Rate 8%
Number of Towers 400
Cost per Tower in Mn 2.5
Revenue Per tower per month (Accrue in FY14E) 0.16
Per year Revenue per tower 768
Operating Cost (55% of Revenue) 422
Operating Profit 346
Depreciation 66.7
Interest 56
PBT 222.9
Tax @ 35% 78.0
PAT 144.9
RoE % 48.3
Cash Flow
Net Profit 144.9
Depreciation 66.7
Investment In WC 115.2
Operating Investment 28
Net Cash Flow 68.4
KEC is also interested in undertaking transmission BOOT projects with partner ship
KEC is also interested in undertaking basis. It has already participated in the bidding of the western grid strengthening scheme.
transmission BOOT projects with Like KPTL it is also looking for the opportunities in this business, for the long term
partner ship basis. business consistency.

2 nd June 2008
SWOT profile
Significant exposure in the Overseas Profitability depends on commodity

market that perfectly insulate the price due to significant exposure to
financials from regional slow down. the foreign markets
Strengths Weakness
Opportunity Threats
Significant dependency from the

Strong Forward integration and supply side may invite contingency
business diversification scope liability
through group company support.
Q4FY08 Performance(SA) (Rs. Mn)

Net Sales 10,310.3 6,437.0 60.2 28,144.8 20,406.3 37.9
Other Income 2.4 3.2 (25.0) 2.5 6.9 (63.8)
Total Income 10,312.7 6,440.2 60.1 28,147.3 20,413.2 37.9
Total Expenditure 9,177.1 5,724.5 60.3 24,601.6 17,887.8 37.5
EBITDA 1,133.2 712.5 59.0 3,543.2 2,518.5 40.7
EBITDA (%) 11.0 11.1 (0.7) 12.6 12.3 2.0
Interest 179.2 168.0 6.7 676.5 592.5 14.2
Depreciation 48.5 80.4 (39.7) 250.7 334.3 (25.0)
PBT 907.9 467.3 94.3 2,618.5 1,598.6 63.8
Provision for tax 301.3 165.4 82.2 896.9 552.2 62.4
PAT 606.6 301.9 100.9 1,721.6 1,046.4 64.5
Adj PAT 606.6 301.9 100.9 1,721.6 1,046.4 64.5
Equity Capital 493.4 493.4 - 493.4 493.4 -
EPS (Rs) 12.3 6.1 100.9 34.9 21.2 64.5
During the quarter ended March 31, 2008, net sales grew by 60.2% YoY to Rs 10310.3
million. The operating expenditure stood at Rs 9177 million a jump of 60% YoY giving an
EBITDA margin of 11%. The PAT had also shown an impressive growth of 101% YoY to
During the quarter ended March 31,
Rs. 606.6 mn. During entire FY08, KEC reported top line growth of 38% with revenues
2008, net sales grew by 60.2% YoY to
clocking Rs. 28144.8 million. The EBITDA for FY08 jumped by 40.7% YoY to Rs.3543.2
Rs 10310.3 million.
mn from Rs.2518.5 mn in FY07.The EBITDA margin had also shown a growth of 30 bps
YoY to 12.6% in FY08. Its net profit jumped by 64.5% over the previous year to Rs.1721.6
Mn for the FY08. The Company has a healthy order book position of Rs 50400 mn of
which Rs 8400 mn are L1 positions as on 31st March 2008. The breakup of KEC’s order
book position is as below:
Africa Rs. 9740 mn Middle East Rs. 11550 mn

Central Asia Rs. 8710 mn India Rs. 19020 mn
North America Rs.1380 mn.

2 nd June 2008
Financial Outlook
Revenue estimated to grow by 25% CAGR during FY008-FY10E

We believe with merger of the RPG Transmission and NITL with the company the revenue
driver will be perfectly balanced between the domestic and overseas market. Around
80% of its total order book constitutes transmission projects from the domestic and
foreign markets. The order from Power Grid constitutes around 75% of the total domestic
We believe with merger of the RPG
order book of the company. We expect 30% CAGR in turnover for the domestic
Transmission and NITL with the
Transmission Revenue and 20% CAGR in the overall foreign transmission revenue of
company the revenue driver will be
KEC. In our estimates we have incorporated 25% growth in turnover for the Telecom
perfectly balanced between the
Tower revenue during FY10E over the merged telecom tower revenue of Rs 1.43 bn for
domestic and overseas market.
FY09E. Thus we expect the gross revenue of the company would grow at a CAGR of 25%
during FY08-FY10E.
Post Merger Revenue Model of KEC
45000 45
40000 40
35000 35
30000 30
Rs in Mn
25000 25
(%)
20000 20
15000 15
10000 10
5000 5
0 0
FY06 FY07 FY08E FY09E FY10E
Transmission Revenue Telecom Projects and Services Revenue Total Revenue Growth (%)
Decline in EBITDA margin in FY09E & FY10E

In our universe of Transmission EPC companies, the business revenue of KEC is 50%-
60% protected from the risk in decline in margin. That is due to the significant business
exposure to foreign projects, where the price escalation clause is almost absent.
Therefore we have taken 100 basis points and 50 basis points in decline in EBITDA
margin for FY09E and FY10E, respectively due to the rise in the raw material and
subcontracting costs.
No significant addition of Debt is expected

We estimate the merged entity would be having a total debt of Rs 6000 mn during the
FY08E. We expect appreciable improvement in operating cash flow due to efficiency
We estimate the merged entity would
gained through merger would improvise the company to not to take additional debt to
be having a total debt of Rs 6000 mn
finance its envisaged growth. Thus we hope there would be appreciable improvement
during the FY08E.
in RoCE for the company (See Du Pont Analysis).
Estimation for Debt of merged KEC

Debt Component Debt in Rs Mn Basis of Calculation
Expected Debt of KEC 5352 20% of Sales of KEC against 19% of Last year
Expected Debt of RPG 635 Last year Debt on books assuming little growth in
RPG FY08 Turnover
Expected Debt of NITL 13 1.2% of Sales of NITL as against 1.2% of sales of
Last year
Total Debt 6000
Source: CEA

2 nd June 2008
Du Pont Analysis: Rise in RoCE despite the Rs 100 crore capex during
FY09 -
We have incorporated no addition to the over all debt for the merged entity for the next
year. Thus we have estimated that despite Rs 100 crore of capex for owning the telecom
tower under USO fund during FY09. The RoCE of the company would see a rise due to
sustained growth momentum in the transmission business both from the domestic
and international markets.
Du Pont Analysis (Rs. Mn)

Year FY06 FY07 FY08E FY09E
Sales 20406 28145 35503 44044
EBIT 2184 3293 3809 4562
Net Fixed Assets 4099 4323 5215 5240
EBIT Margin 11% 12% 11% 10%
RoCE 33% 31% 31% 32%
Valuation: Buy with a target price of Rs 687

We have valued the merged KEC at Rs We have valued the merged KEC at Rs 687 based on a 8x EV/EBITDA multiple based on
687 based on a 8x EV/EBITDA multiple FY10E. We rate KEC as our second best pick in our universe of transmission EPC
based on FY10E. companies.

2 nd June 2008
% Growth 18.1 37.9 26.1 24.1 Preference Capital 130.0 - - -
EBIDTA 2,518.5 3,543.2 4,375.7 5,330.6 Reserves 2,213.1 3,852.0 5,567.1 7,748.7
% growth 55.2 40.7 23.5 21.8 Networth 2,719.9 4,345.4 6,060.5 8,242.1
Total Debt 3,864.2 6,000.0 6,000.0 6,000.0
Other Income 6.9 2.5 2.8 3.0
Net Deff Tax Lia 290.3 200.0 200.0 200.0
Depreciation 334.4 250.7 307.8 324.6
Total Liability 6,874.5 10,545.4 12,260.5 14,442.1
Interest 592.5 676.5 720.0 720.0
Net Block 4,099.2 4,322.8 5,215.0 5,240.4
EBIT 2,191.1 3,295.0 4,070.7 5,009.1
Investments 205.9 1.1 1.1 1.1
EBIT margin 10.7 11.7 11.5 11.4
CA Loans/Adv 12,477.9 19,102.4 23,315.2 29,496.7
PBT 1,598.6 2,618.5 3,350.7 4,289.1 Inventory 1,505.7 2,952.2 3,766.4 4,698.9
% Growth 109.1 63.8 28.0 28.0 Debtors 9,040.9 12,665.2 15,976.6 19,819.8
Tax provision 552.2 896.9 1,147.7 1,469.1 Cash & Bank 213.9 670.6 21.9 793.9
PAT 1,046.5 1,721.6 2,203.0 2,820.0 Loans & Advances 1,717.3 2,814.5 3,550.3 4,184.2
% growth 112.3 64.5 28.0 28.0 CL & Provisions 9,908.5 12,881.0 16,271.0 20,296.3
Adj PAT 1,046.5 1,721.6 2,203.0 2,820.0 Current Liabilities 9,538.8 12,278.7 15,559.9 19,411.9
Dividend (%) 45 50 55 60 Provisions 369.6 602.3 711.0 884.3
EPS (Rs) 21.2 34.9 44.7 57.2 NCA 2,569.4 6,221.4 7,044.3 9,200.5

OPM(%) 12.3 12.6 11.6 11.1 PBT 1,598.6 2,618.5 3,091.5 3,845.0
ROE(%) 38.5 39.6 33.5 30.7 Interest 592.5 676.5 720.0 720.0
ROCE(%) 32.0 31.4 31.2 31.7 Others (136.0) - - -
Debt/Equity(X) 1.42 1.38 0.99 0.73 Change in WC (2,213.4) (3,195.4) (1,471.5) (1,384.2)
Gross FA turnover (x) 4.36 5.40 5.54 6.51 Gross Operating CF 176.1 350.3 2,647.7 3,505.4
Debtors Days 161.7 164.3 164.3 164.3
Direct taxes paid (394.6) (896.9) (1,058.9) (1,317.0)
Inventory Days 30.7 43.8 43.8 43.8
Other adjusment
Net operating CF (218.5) (546.6) 1,588.8 2,188.4
P/E 24 15 13 10
Investing CF (98.2) (154.0) (1,200.0) (350.0)
P/CF per share 18.5 12.9 10.9 8.9
Free Cash Flow (316.7) (700.6) 388.8 1,838.4
EV/EBDITA 11.6 8.7 7.6 6.3
Financing CF (99.2) 1,157.2 (1,037.5) (1,066.3)
EV/Sales 1.4 1.1 0.9 0.7
Net Change (415.9) 456.6 (648.7) 772.0
Mkt cap/Sales 1.0 0.9 0.7 0.6
Opening Cash 629.8 214.0 670.6 21.9
CEPS(Rs) 28.0 40.0 47.4 57.8
Closing Cash 213.9 670.6 21.9 793.9
P/BV 7.2 5.9 4.2 3.1

2 nd June 2008
Stock details
Kalpataru Power Transmission RECOMMENDATION : HOLD
BSE Code 522287
NSE Code KALPATPOWR Price: Rs. 993 Target Price: Rs.1146
Reuters Code KAPT.BO
Bloomberg Code KPP IN
Market Cap (Rs Mn) 26,314.5 Consistent entry in to the diverse business is one of the grate positive for KPTL.
Free Float (%) 36.3
52-wk Hi/Lo (Rs) 2040/968 The 52% construction subsidiary JMC Projects (JMC) will remain the great
Avg weekly Vol (BSE) 27327 business driver for the company for the next two years. In FY08 the topline
Shares o/s (mn) FV Rs 10 26.5 growth of JMC remained at 80% as compared to 12% for KPTL on a stand alone
Source:Reliance Money Research basis. We expect with the Rs. 2400 crore robust order book in hand and with
the entry into diverse EPC business in various infrastructure sector the topline
Summary table growth of JMC would be at least 60% for the next two years. The investment in
Year to March FY07 FY08E FY09E FY10E the logistic service subsidiary would start contributing to the consolidated
Total Revenue 15986.8 26748.5 36332.8 50335.7 turnover by FY10. With a robust business growth opportunity expected for all
Growth % 90 67 36 39 business verticals, we expect the consolidated net sales of KPTL would grow
EBITDA 2563.2 3105.9 3860.7 4999.4
at a CAGR of 37% during FY08-FY10E. The net profit would grow at a CAGR of 36%
EBITDA margin % 16.0 11.6 10.6 9.9
Net Profit 1627.2 1647.8 2228.8 2847.0 during the same period. Based on the EV/EBITDA multiple valuation method we
EPS (Rs) 61.4 62.2 84.1 107.4 initiate coverage on KPTL with a buy rating with a 12 month target price of
CEPS (Rs) 68.3 76.8 102.3 129.2
Rs1146. At our Target price the stock would trade, respectively at 13.6x and
EV/EBITDA 11.3 9.6 7.9 6.2
EV/Sales 1.8 1.1 0.8 0.6
10.7x to our FY09E and FY10E EPS.
ROE % 25.3 21.0 22.7 23.1
ROCE % 22.4 22.9 24.6 26.7 Key Positives
P/E (x) 16.2 16.0 11.8 9.2
P/CEPS (x) 14.5 12.9 9.7 7.7
Source:Company Reliance Money Research, KPTL's consolidated business entity will have a complete secured business
model as compared to other focused transmission EPC companies in our
universe. Roughly T&D revenue constitute 60% of the total consolidated turnover
of KPTL and rest 40% is derived from its 52% subsidiary JMC and Pipe line
business.
Public & Others
Financial 5%
Institutions KPTL also provides the labor related works in the Gas pipe line business.
24%
Company believes that going forward complete EPC work will be awarded to it,
which will add significantly add to its top and bottom line, with of course some
Foreign Promoters
Institutions 64% sacrifice in margins
7%

The company has committed investment of Rs. 1000 mn in the losgistic venture.
The company will mainly invest in the warehouse with world class facility. The
revenue reorganization from this logistics business is expected to be booked
fully from FY11. We have taken Rs 80 crore of revenue from the Subham Logistic
for FY10E estimates.
2500 25000
BSE
2000 20000
KPTL has already participated along with Tata Power in the bidding of the Western
Grid Strengthening scheme. We expect with the sooner formalization of RFP
1500 15000 guidelines the company would go for bidding for such projects. However the
company may have to dilute the equity to strengthen its balance sheet to undertake
1000 KPTL 10000
such projects.
500 5000
Based on the EV/EBITDA multiple valuation method we initiate coverage on KPTL
Source: Capitaline
with a hold rating and a 12 month target price of Rs. 1146. At our Target price the
stock would trade, at 13.6x and 10.7x FY09E and FY10E EPS.

2 nd June 2008
Company Background
Kalpataru Power Transmission Limited (KPTL) is one of the leading companies in the
Kalpataru Power Transmission Limited
field of turnkey projects for extra high voltage transmission lines (up to 800 KV) across
(KPTL) is one of the leading
India and overseas. It is also in the business of EPC services for distribution projects of
companies in the field of turnkey
11/33 kv lines & substation, construction of cross country pipelines and telecom towers.
projects for extra high voltage
KPTL has two fabrication plants with an annual installed capacity of 84,000 MTs one of
transmission lines (up to 800 KV)
across India and overseas the largest in the world and is equipped with modern machineries and automated
temperature controlled galvanizing baths, besides its own state-of-the-art testing station
and R & D Centre.
Investment Drivers
Diversified Business Exposure: Higher Domestic Focus

Among our universe of transmission companies KPL has a diversified business portfolio
on a consolidated basis. Thus the consolidated entity will have a complete secured
business model as compared to other transmission EPC companies in our universe.
The acquisition of JMC projects has Expected growth of JMC will be more than 60%
given KPTL strong presence in The acquisition of JMC projects has given KPTL strong presence in factories, industrial
factories, industrial structures, structures, buildings, software parks and roads & bridges. KPTL sees better growth for
buildings, software parks and roads & JMC as it plans to put around Rs 80 crore to 100 crore each to improve the capability of
bridges. JMC going forward.
Oil and Gas pipeline Business

Huge opportunity in the oil and gas pipeline business as the industry expects around
18,000 km of pipeline to be built in the next five-six years to meet the growing crude oil
and natural gas demand. The company plans to invest more in this business to become
a leading player in this business. Currently the company provides only the labor related
works in this segment. Company believes that going forward complete EPC work will be
awarded to it, which will add significantly add to its top and bottom line, with of course
some sacrifice in margin.
Venturing in to Logistics: Big opportunity

After acquiring Shubham Logistics, the company is seriously thinking logistics as a
major avenue of investment. The company has committed investment of Rs. 1000 mn in
this venture. The company will mainly invest in the warehouse with world class facility.
The revenue reorganization from this logistics business is expected to be booked fully
from FY11. The company is planning to offer other value added service such as testing,
shorting, grading, processing, packaging, cold storage, delivery etc along with the renting
out of warehouses. The company has tied up with both the commodity exchanges and
number of banks for commodity financing for which it will enjoy commission. We have
taken Rs 80 crore of revenue from the Subham Logistic for FY10E estimates.
BOOT projects in Power Transmission: Want to be a leading player

Currently the government has formalized Request for qualification (Rfq) for facilitating
the private investment for the transmission sector. Soon it is expected that the Request
KPL wants to become a leading for proposals (RFP) guidelines would be formalized. KPL wants to become a leading
investor in BOOT projects in Power investor in this business. KPL has already participated along with Tata Power in the
Transmission bidding of the Western Grid Strengthening scheme. We expect with the sooner
formalization of RFP guidelines the company would go for bidding for such projects.
However the company may have to dilute the equity to strengthen its balance sheet to
undertake such projects. We have not factored in any such projects in our estimates.

2 nd June 2008
KPTL
JMC Projects Shree Shubham *Energylink (India)

(India) Ltd Logistics Ltd. Pvt. Ltd (100%)
(52%) (75%)

* Passive subsidiary
SWOT profile
Diversified Business Exposure Growth of subsidairy is more than

provide economy of scale in the standalone KPTL itself.
operation
Strengths Weakness
Opportunity Threats
Forward integration by undertaking

transmission BOOT projects in the High commoditity price may dent the
country consolidated margin.
Q4FY08 Performance(SA) (Rs. Mn)

Net Sales 6,295.4 5,217.7 20.7 17,375.8 15,243.6 14.0
Other Income 65.5 63.8 2.7 214.7 124.6 72.3
Total Income 6,360.9 5,281.5 20.4 17,590.5 15,368.2 14.5
Total Exp 5,537.9 4,270.3 29.7 14,959.8 12,754.5 17.3
EBITDA 757.5 947.4 (20.0) 2,416.0 2,489.1 (2.9)
EBITDA (%) 12.0 18.2 13.9 16.3
Interest 113.3 90.7 24.9 397.2 279.6 42.1
Depreciation 70.0 53.6 30.6 218.0 167.6 30.1
PBT 639.7 866.9 (26.2) 2,015.5 2,166.5 (7.0)
Prov for tax 136.0 222.3 (38.8) 516.0 571.6 (9.7)
PAT 503.7 644.6 (21.9) 1,499.5 1,594.9 (6.0)
EO Items (0.7) (0.7) - (0.7) (14.0) (95.0)
Adj PAT 503.0 643.9 (21.9) 1,498.8 1,580.9 (5.2)
EPS (Rs) 19.0 24.3 56.6 59.7
During Q4FY08, the topline of KPTL had grown by 20.7% YoY to Rs. 6295.4 mn. The
EBITDA margin declined by 620 bps YoY to 12% mainly due to higher raw material and
components cost. As a result profit after tax recorded a downside of 22% YoY to Rs. 503
mn. On a yearly basis, the standalone net sales for the FY08 had shown a growth of 14%
YoY but the margins declined by 240 bps YoY to 13.9%. As a result the net profit slipped
marginally by 5.2% YoY to Rs. 1498.8 mn.
2 nd June 2008
Financial Outlook
Consolidation of full year financials of JMC with KPTL

Till the Q3 of FY07 the KPTL was holding less than 50% share of JMC project. So the
consolidated accounts of KPTL reflect only 2 month's financials of JMC Projects of FY07.
However after acquiring more than 50% of JMC, KPTL is now consolidating the accounts
of JMC with itself from FY08 onwards. Thus the full year financials of JMC projects is
reflected in the consolidated financials of KPTL in FY08. Our estimates and valuation
are based on the consolidated financials of KPTL.
37% CAGR in consolidated revenues during FY07-FY10E

KPTL is putting more emphasis on the growth of JMC projects, the 52% listed subsidiary
of the company. The company is planning to invest Rs 80 to Rs 100 crs annually in JMC
The company is planning to invest Rs projects as compared to Rs 25 to 30 crs in the stand alone entity. More over the investment
80 to Rs 100 crs annually in JMC in the stand alone entity will remain tilted in acquiring material handling equipments for
projects as compared to Rs 25 to 30 the Gas Pipeline (Infrastructure Division) business of the company. According to the
crs in the stand alone entity. company management, due to some client specific reasons the T&D business
performance of the company remained unimpressive during FY08. We believe this will
get reversed and the T&D revenue of the company would grow at 25% during FY09E and
by 28% by FY10E.
At the same time with good bout of strategic focus the growth of JMC will remain good.
This will drive the consolidated financials and so the valuation of the company. We have
assumed 60% growth of Turnover of JMC during FY09E and FY10E.
Consolidated Revenue Stream (Rs. Mn)

Year FY06 FY07 FY08E FY09E FY10E
T&D 7,849.9 13,665.5 15,387.5 19,017.3 23,757.3
% Change 74.1 12.6 23.6 24.9
Energy Division 180.6 275.4 396.3 435.9 479.5
% Change 52.5 43.9 10.0 10.0
Infrastructure 370.7 1,465.4 1,832.9 2,016.2 2,217.8
% Change 295.3 25.1 10.0 10.0
JMC Revenue - 976.7 9,244.7 14,695.5 23,512.8
% Change 846.5 59.0 60.0
Ware Housing Revenue - 0.3 94.1 500.0 800.0
% Change 431.6 60.0
Others 311.0 24.6 99.2 99.2 99.2
% Change (92.1) 304.2 0.0 0.0
Total Revenue 8,712.3 16,407.9 27,054.7 36,764.2 50,866.7
% Change 88.3 64.9 35.9 38.4
Source: Company, Reliance Money Research
27% CAGR in EBITDA during FY08-FY10E

Based on the order quality of the company (As discussed above) we have reduced 20
basis points in stand alone EBITDA margin for FY09E and then reduced the same by 50
We estimate the consolidated EBITDA
basis points during FY10E. We believe the margin reduction would largely be due to
of JMC will grow at a CAGR of 49%
relatively higher raw material cost as a % of total sales of the stand alone KPTL. However
during FY08-FY10E.
we have incorporated little less than 8% of EBITDA margin in our estimates, for JMC
during the next three years. We estimate the consolidated EBITDA of JMC will grow at a
CAGR of 49% during FY08-FY10E.

2 nd June 2008
Reconciliation of EBITDA (Rs. Mn)

Stand Alone EBITDA 1,144.1 2,489.1 2,416.0 2,895.0 3,434.1
% Change 117.6 (2.9) 19.8 18.6
EBITDA of JMC Projects 77.5 667.7 921.4 1,474.2
% Change 761.8 38.0 60.0
EBITDA of Other Subsidiaries - (3.4) 22.2 44.3 91.2
% change 105.9
Total Consolidated EBITDA 1,144.1 2,563.2 3,105.9 3,860.7 4,999.4
Du Pont Analysis
FY07 RoCE of JMC Projects stands at 17% as against 31% for the stand alone KPTL for
the same period. However with a higher growth in turnover and with a relatively lesser
With a higher growth in turnover and capex spend the RoCE of the JMC would have improved to 23%. Thus with the
with a relatively lesser capex spend the consolidation the consolidated RoCE of KPTL will remained maintained at 30% during
RoCE of the JMC would have improved FY09. Again with the significant rise in turnover of JMC the consolidated RoCE will
improve to 32%.
to 23%.
RoCE of KPTL (Consolidated without investment) (Rs. Mn)

Sales 15987 26749 36333 50336
EBIT 2382 2719 3377 4423
Net Fixed Assets 3232 4195 4962 5635
EBIT Margin 15% 10% 9% 9%
RoCE 30% 30% 30% 32%
RoCE of JMC Projects (Rs. Mn)

Sales 1444 5022 9185 14696 23513
EBIT 64 327 561 816 1408
Net Current Assets 347.7 966.9 837.9 1658.7 3048.6
Net Fixed Assets 594.2 989.8 1622.1 2219.8 2798.4
EBIT Margin 4% 7% 6% 6% 6%
Assets Turnover 1.5 2.6 3.7 3.8 4.0
RoCE 7% 17% 23% 21% 24%
Valuation: Consolidated Entity Valued at Rs 1146

Based on our bench mark EV/EBITDA Based on our bench mark EV/EBITDA multiple of 8x based on FY10E financials we value
multiple of 8x based on FY10E KPTL along with JMC Projects at Rs 1342. The company holds 52% stake in JMC
financials we value KPTL along with JMC project and 75% stake in Subham Logistics. Therefore after deducting the proportionate
Projects at Rs 1342. value of outsider's interest in JMC and Subham Logistics we arrived at a consolidated
value of Rs 1146 for the equity shareholders of KPTL.
Value of KPTL (In Rs.)

Recommended value of KPTL and its subsidiaries 1342
Less: Value attributable to Outside Shareholders 195
Value Attributable to Exclusive shareholders of KPTL 1146

2 nd June 2008
% Growth 90.2 67.3 35.8 38.5 Reserves 6,177.6 7,593.1 9,542.9 12,079.8
EBIDTA 2,563.2 3,105.9 3,860.7 4,999.4 Networth 6,442.6 7,858.1 9,807.9 12,344.8
Other Income 123.1 251.0 418.9 638.0 Net Deff Tax Liability 158.3 158.3 158.3 158.3
Depreciation 181.6 386.5 483.2 576.8 Minority Interest 624.7 772.4 1,018.5 1,447.7
Interest 284.2 485.4 444.9 440.0 Total Liability 11,211.8 12,999.2 15,474.7 18,990.7
EBIT 2,504.7 2,970.4 3,796.3 5,060.6 Net Block 3,231.9 4,195.4 4,962.2 5,635.4
EBIT margin 15.5 11.0 10.3 9.9 Investments 1,392.1 1,392.2 1,392.2 1,392.2
PBT 2,220.5 2,485.0 3,351.4 4,620.6 CA Loans/Adv 13,462.7 16,303.5 21,137.9 28,489.8
% Growth 135.2 11.9 34.9 37.9 Inventory 1,890.5 2,359.6 3,114.0 4,189.2
Tax provision 590.2 688.5 876.6 1,344.5 Debtors 6,999.4 9,199.3 12,382.4 17,005.0
PAT 1,630.3 1,796.5 2,474.9 3,276.1 Cash & Bank 1,367.5 601.0 434.1 596.6
% growth 145.0 10.2 37.8 32.4 Loans & Advances 1,458.0 1,750.0 2,288.6 3,084.8
EO After Tax (14.0) (1.0) - - CL & Provisions 6,875.5 8,892.3 12,018.0 16,527.1
Minority Interest (17.1) (147.7) (246.1) (429.2) Current Liabilities 6,095.8 7,987.6 10,862.7 15,046.1
Adj PAT 1,627.2 1,647.8 2,228.8 2,847.0 Provisions 779.7 904.7 1,155.3 1,481.1
Dividend (%) 75 75 90 100 NCA 6,587.3 7,411.1 9,119.9 11,962.7
EPS (Rs) 61.4 62.2 84.1 107.4 Mis exp 0.5 0.5 0.5 0.5

OPM(%) 16.0 11.6 10.6 9.9 PBT 2,220.5 2,485.0 3,351.4 4,620.6
ROE(%) 25.3 21.0 22.7 23.1 Interest 253.2 485.4 444.9 440.0
ROCE(%) 22.4 22.9 24.6 26.7 Others (58.6) - - -
Int cover(X) 9.5 6.9 9.6 12.8
Operating CF 2,596.7 3,356.9 4,279.5 5,637.4
Debt/Equity(X) 0.62 0.54 0.46 0.41
Change in WC (2,308.3) (1,590.3) (1,875.7) (2,680.3)
Gross FA turnover (x) 4.08 5.08 5.58 6.48
Gross Operating CF 288.4 1,766.6 2,403.8 2,957.1
Debtors Days 128.6 131.4 131.4 131.4
Direct taxes paid (555.6) (688.5) (876.6) (1,344.5)
Inventory Days 45.3 43.8 43.8 43.8
Other adjusment (14.0) - - -
Net operating CF (281.2) 1,078.1 1,527.3 1,612.6
P/E 16 16 12 9
P/CF per share 14.5 12.9 9.7 7.7 Investing CF (3,780.8) (640.2) (1,100.5) (1,179.9)
EV/EBDITA 11.3 9.6 7.9 6.2 Free Cash Flow (4,062.0) 437.9 426.8 432.7
EV/Sales 1.8 1.1 0.8 0.6 Financing CF 4,014.1 (493.8) (444.2) (200.1)
Mkt cap/Sales 1.6 1.0 0.7 0.5 Net Change (47.9) (55.9) (17.4) 232.6
CEPS(Rs) 68.3 76.8 102.3 129.2 Opening Cash 411.0 363.1 307.3 289.9
P/BV 4.1 3.3 2.7 2.1 Closing Cash 363.1 307.3 289.9 522.4

2 nd June 2008
Stock details POWER GRID CORP. RECOMMENDATION:REDUCE

BSE Code 532898
NSE Code POWERGRID
Price: Rs. 98 Target Price: Rs. 93
Reuters Code PGRD.BO
Bloomberg Code PWGR IN We initiate coverage on Power Grid Corporation of India Limited (PGCIL) with a
Market Cap (Rs Mn) 414,571
Free Float (%) 13.6 REDUCE Rating. We believe the Indian power sector is at the crossroads with
52-wk Hi/Lo (Rs) 80/167 huge capacity addition planned in the power generation and transmission space.
Hence we expect PGCIL, the principal power transmission utility in India, to be
Shares o/s (mn) FV Rs 10 4,208.8 a major beneficiary of the changing dynamics in the domestic power sector.
Source:Reliance Money Research We expect PowerGrid to record a 26% CAGR in revenue and 19% CAGR in net
profit during FY08-FY10E. Based on the DCF approach and a comparative EV/
EBITDA multiple valuation method we initiate coverage on PGCIL with a REDUCE
Summary table rating and a 12 month price target of 93.
Year to March FY07 FY08E FY09E FY10E
Total Revenue 35898.5 43686.9 56479.7 67474.0 Key Positives
Growth % 14 22 29 19
EBITDA 29564.5 35785.4 47577.7 56658.5 PGCIL enjoys a sound business model with virtually no
EBITDA margin % 82.4 81.9 84.2 84.0
competition
Net Profit 12386.5 14200.0 15811.1 18115.0
PGCIL’s core transmission business has low levels of risks with stable returns.
EPS (Rs) 2.9 3.4 3.8 4.3
Currently, CERC regulates the returns of PGCIL, providing a 14% return on equity.
CEPS (Rs) 4.9 5.8 7.1 8.2
We see marginal improvement in returns over the long term as customer
EV/EBITDA 20.2 17.3 14.0 12.8
EV/Sales 16.6 14.2 11.8 10.7
requirements and investor expectations are balanced.
ROE % 11.3 10.3 10.8 11.6
ROCE % 10.8 9.3 9.5 9.6 Driven by the industrial and services sectors, the Indian economy is growing at a
P/E (x) 33.5 29.2 26.2 22.9 fast pace of 8-9% annually. As compared to this the power crisis has long been the
P/CEPS (x) 20.1 17.0 14.0 12.0 bane of the country with a power deficit of ~10% and peak power deficit of ~14%.
Source:Company Reliance Money Research, Consequently, we believe the lack of growth in generation and transmission
capacities in previous plan periods is likely to result in higher growth in capacities
in the future. According to the Central Electricity Authority (CEA) estimates India is
likely to add ~78,577 MW in generation capacity in the Eleventh Plan.
Public & Others,

Similarly, India’s inter-regional transmission capacity is likely to increase from
Financial
Institutions, 3.9 6.7 14,100 MW in June 2007 to 37,150 MW by the end of the Eleventh Plan. We believe
Foreign, 3.0
PGCIL occupies a key position in the development of Indian power sector since it
is a primary power transmission provider a pure play on the growth in the power
sector.
Promoters, 86.4 Telecom and Entertainment business initiative to drive revenue

growth
Source:Reliance Money Research The company targets total revenue of Rs 3 bn by FY10E from the telecom business.
We expect with the increased band with renting to the entertainment and data
center business the telecom revenue of the company would grow at a CAGR of
30% over FY08-FY14E.
250 25000 Growth in power sector inevitable
PowerGrid plans to add 60000 ckt KM to the inter-state transmission network by
BSE
FY12, with total additional capacity of 23100 MW. The company has mandated to
contribute 73% of the total transmission capex of the country in the 11th plan with
20000
150 total capex of Rs 550 bn. We expect with higher operational efficiency the over all
15000 RoE of the company would reach 16% as against the 14% regulated RoE return
PGCIL
on the commissioned projects. Thus we estimate the Transmission revenue of
the company would grow at a CAGR of 18% over FY08-FY14E.
50 10000
Oct-07 Nov-07 Jan-08 Feb-08 Mar-08 May-08
We Recommend a REDUCE Rating with a target price of 93

Source: Capitaline
We value PowerGrid based on a DCF approach and a comparative EV/EBITDA
multiple valuation method and assign a REDUCE rating and with a 12 month price
target of 93. At our Target price the stock would trade, at 23x and 20x our FY09E
and FY10E EPS.

2 nd June 2008
PGCIL
*Subsidary *Joint Venture
Parbati Koldam Byrnihat Parbati Koldam Byrnihat Transmis- Parbati Koldam Byrnihat Transmis-
Transmission Transmission Transmission sion Company Transmission sion Company
Company Ltd(100%) Company Ltd(100%) Company Ltd(100%) Ltd(100%) Company Ltd(100%) Ltd(100%)

* Financials has not been considered in valuation
Company Background
Powergrid is one of the largest Powergrid is one of the largest transmission utilities in the world with its huge
transmission utilities in the world with transmission network spread over the entire length and breadth of the country. Powergrid
its huge transmission network spread consistently has been maintaining the availability of its transmission system above
over the entire length and breadth of 99% levels through deployment of latest Operation and Maintenance techniques at par
the country. with global standards.
The company commenced operations in 1992 as all inter-state and inter-regional power
transmission assets of the country were consolidated in a single entity. Currently PGCIL
owns and operates 64,700 circuit kms of electrical transmission lines and110 electrical
substations with a 66,650 MVA Transformation Capacity. Further PGCIL has diversified
into consultancy business for transmission and distribution related projects in India
and abroad. The company also entered in to telecommunication network business by
laying overhead Optic Fibre Network of 20,000 Kms for telecom connectivity to major
cities and towns.
Investment Drivers
Telecom and Entertainment initiative business initiative to drive

revenue growth
PowerGrid provides bandwidth services to the telecom operators through its nationwide
20,000 km optical fiber cable (OFC) links along with its transmission lines. Currently
part of the western region has not been properly connected through this network. By the
end of this financial year the company would be connecting this region. PowerGrid is
targeting total revenues of Rs 3 bn by FY10E from the telecom business. We expect with
the increased band with renting to the entertainment and data center business the
telecom revenue of the company would grow at a CAGR of 30% over FY08-FY14E.
Growth in power sector inevitable – Consequently PGCIL’s power

transmission business stands to benefit significantly
We believe the company would All the transmission projects of the company are progressing as per schedule. We
expedite its investment towards the believe the company would expedite its investment towards the transmission segment
transmission segment and around and around 90% of the total assets of the company remain deployed in the transmission
90% of the total assets of the company business. The company plans to add 60000 CKM to the inter-state transmission network
remain deployed in the transmission by FY12, with total additional capacity of 23100 MW. The company has mandated to
business. contribute 73% of the total transmission capex of the country in the 11th plan with total
capex of Rs 550 bn. This capex will be funded with a debt equity ratio of 70:30.

2 nd June 2008
Consultancy business to grow at a steady pace –

On an average the company charges 10% to 11% of the total project cost as consultancy
On an average the company charges fees. The company is very active in the RGGVY projects in the northern part of the
10% to 11% of the total project cost as
country. Based on the guidance given and with the increased competition from other
consultancy fees. players in the country we believe this segment would grow at a flatter pace over the next
six years.
SWOT profile
Continue to dominate in both the
segment of the transmission Returns are strictly regulated and
services, thanks to regulation scope of efficiency gain is less
Strengths Weakness
Opportunity Threats
Change In technology in the near

Enter in to wireless telecom network load-center technologies and failure
sharing and better consulting of timely commissioning of the linked
opportunity in the foreign markets generation capacity or the projects
of the company
Financial Outlook
Investments will be 73% of the projected investment by MoP

Looking at the cut in the investment target for Power Grid for the FY09, we have accordingly
reduced the investment target for the coming year. We believe 73% of the targeted
investment will be done by power grid during the current financials year.
Projected Investments of Power Grid (Rs. Mn)

Total Investment Made/Envisaged 64,650 80,400 95,511 94,963 80,145 87,598 94,897
Addition to Debt 38,790 48,240 57,306 56,978 48,087 52,559 56,938
Total Assets In Transmission 393,592 459,663 535,161 609,160 672,404 749,654 834,038
Addition to total Commissioned Projects 80,876 92,398 87,835 91,284 86,906 87,594 90,054
Addition to total Capital Work in Progress 65,248 50,100 54,753 58,542 54,744 53,257 56,640
Addition to Construction and Stores 12,930 16,080 19,102 18,993 16,029 17,520 18,979
Out of the total investments a significant chunk of investment is expected to be spent in

the Transmission segment. On the other hand there will also be a good growth in
investment in Telecom business of the company.

2 nd June 2008
Segment Assets Composition of Power Grid (Rs. Mn)

Year FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY13E FY14E
Transmission 261,085 326,518 393,592 457,664 531,273 603,079 663,849 738,337 819,660
Consultancy 622 600 606 612 619 625 631 637 644
RLDC/ULDC 16012 15483 15638 15795 15952 16112 16273 16436 16600
Telecom and Others 8324 8088 9706 11647 13976 16771 20126 24151 28981
Others 11763 16642 17782 22798 28483 33501 36731 40814 44849
Total Assets Employed 297805.9 367332 437324 508516 590303 670087 737610 820374 910733
Add: Liab and pro less Misc Assets 36,207 48,223 48,893 60,431 72,096 79,418 80,021 88,932 98,359
Balance Sheet Total 261,599 319,109 388,431 448,084 518,207 590,669 657,589 731,442 812,374
Source: Power Grid and Reliance Money Research
Revenue to grow at a 24% CAGR during FY08-FY10E

We believe in the current financial year the company will focus more on adding the
transmission assets. Thus the topline and equity resources will largely driven by the
We believe in the current financial year growth of the transmission assets by the company. However in any case the government
the company will focus more on adding routes the defense network through the OFC network of the company then we can expect
the transmission assets. some business momentum for the telecom assets of the company. We believe if in any
case it does happen then the business momentum would be gradual. Further looking at
the potential of the telecom asset of the company and the recent regulation of CERC (For
using transmission towers for telecommunication) we think we have fairly factored in
the potential revenue in this segment.
Revenue Model (Rs in Mn)

Transmission 40087 52106 62077 72934 83663 93874 104001
Consultancy and 2350 2374 2397 2421 2445 2470 2495
Project Management Fees
Telecommunication 1250 2000 3000 4200 5460 6825 8531
Other Income 3,313 2,624 2,439 2,197 2,106 2,027 1,956
Total Income 47000.0 59103.9 69913.1 81752.2 93674.8 105195.4 116983.1
PowerGrid will earn a 14.6% RoE return by FY14E

PGCIL is permitted to charge 14% Powergrid has a secure business model. In India, CERC determines the transmission
return on equity for its transmission tariffs, guided by the tariff policy and the provisions of the Electricity Act. PGCIL is permitted
services after considering interest to charge 14% return on equity for its transmission services after considering interest
expenses, depreciation, and advance expenses, depreciation, and advance against depreciation, operation and maintenance
against depreciation, operation and expenditure. Due to the Tripartite Agreement, the company’s outstanding from the SEBs
maintenance expenditure. are fully guaranteed.
The company also charges short term open access at 25% of its applicable regular
fixed charges for regional access and 50% of its applicable regular fixed charges for
inter-regional access. Power Grid retain 25% of the short term open access charge and
pass on 75% of the charge to its regular customers in the form of rebate adjustments in
their monthly bills.
Powergrid also enjoy incentives based on the availability of its transmission lines beyond
the target availability prescribed for such lines. The target availability prescribed for an
AC system is 98% and for an HVDC system is 95%. The incentive is provided at 1% of
equity for each percentage point of increase in annual availability beyond the target
availability. {Incentive = Equity (Annual availability - Target availability)/ 100}.
For early repayment of dues Power Grid grant rebate to the utilities. Thus considering all
we believe PGCIL would earn a RoE of 14.5% on its equity investments in the
transmission assets. Thus we estimate that the company would achieve a RoE of
14.6% by FY14E.

2 nd June 2008
Growth prespective of different segments of PGCIL

Business Segment of PGCIL Our prespective for Growth Overall View
Transmission Services Completely Regulated so during the investment phase the regulated return will
greately offset by the cost associated with the non commissioned projects
Scheduling and Despatching Services Will remain a non profit making activity, thanks to regulation
Cunsultancy Services Enjoy Limited Competitiveness with respect to the other players involved in project
cunsultancy business in the power industry
Open Access Service Sharing of revenue for reducing the long term Transmission tariff greatly offset
the available opurtunity
Telecom Services Provides good oppurtunity to use the existing bandwidth and backbone for various
telecom application, but being a public sector, the sanction process for this busines
may be slower, as this activity strictly differs from the flagship activity.
Estimation of Transmission Revenue and Company wide RoE (Rs. Mn)

Year FY06 FY07 FY08E FY09E FY10E FY11E FY12E FY13E FY14E
Regulated Equity Estimated 79201 85660 109922 137642 163992 191378 217449 243728 270744
Total Pass through cost estimated 18,500 22,564 26,585 34,718 41,431 48,931 56,486 63,463 70,243
RoE Return @ 14.5% from FY09E 12,672 13,706 15,389 19,958 23,779 27,750 31,530 35,340 39,258
Average Transmission Revenue 31,172 36,269 41,975 54,676 65,210 76,681 88,016 98,803 109,501
PAT 10089.3 12293.7 14200.0 15811.1 18115.0 21141.7 24854.8 28204.2 31303.5
Net Worth 100,020 109,649 137,886 146,311 155,562 166,855 180,876 196,770 214,777
RoE 10.1% 11.2% 10.3% 10.8% 11.6% 12.7% 13.7% 14.3% 14.6%
Du Pont Analysis
The EBIT margin of the PGCIL would improve largely due to improved growth in the
Telecom business and maintenance of efficiency in the transmission operation. Faster
commissioning of the ongoing projects by FY10E will lead to rise in RoCE to 8%.
RoCE movement of PGCIL (Rs. Mn)

Sales 35899 43687 56480 67474
EBIT 21289 25633 33675 40121
Net Current Assets -14725 1298 -5014 -13249
Net Fixed Assets 312565 367062 433559 512532
EBIT Margin 59% 59% 60% 59%
RoCE 7% 7% 8% 8%
RoE movement of PGCIL (Rs. Mn)

Sales 35899 43687 56480 67474
Net Profit 12386 14200 15811 18115
Networth 109649 137886 146311 155562
NpM 35% 33% 28% 27%
Sales per NW 0.3 0.3 0.4 0.4
RoE 11.3% 10.3% 10.8% 11.6%
Concerns
Further slow down in capex addition will drive down our valuation and estimates.
The transmission tariff structure will go for review after FY09. So any change in the
regulation would definitely affect our earning estimates and hence the valuation.

2 nd June 2008
Valuation:
We have used a FCFE based DCF valuation approach to value Power Grid. Our
recommendation has incorporated 14.5% RoE return on our estimated regulated Equity
of the company with leverage on new investment at 60%. We have assumed 73% of the
total planned investment of the company will be implemented during the current plan
period and rest would be spill over to the next five year plan.
DCF of core business of Power Grid (Rs. Mn)

Year FY09E FY10E FY11E FY12E FY13E FY14E
Net Profit 15,811.1 18,115.0 21,141.7 24,854.8 28,204.2 31,303.5
Depreciation 13,902.6 16,537.7 19,276.2 21,883.4 24,511.2 27,212.8
Capital Expenditure (79,604.1) (94,754.5) (94,244.8) (79,462.1) (86,949.3) (94,281.5)
Investment in Working Cap 10,177.4 12,333.3 8,569.0 3,227.7 12,638.2 13,925.2
Increase in Debt 48,240.0 57,306.4 56,977.9 48,086.7 52,558.6 56,938.4
FCFE 8,527.0 9,537.8 11,719.9 18,590.5 30,962.8 35,098.4
Discounted FCFE 7,482.5 7,344.2 7,918.9 11,022.5 16,109.4 16,024.1
Discounted Terminal Value 187,782.0
Total DCF Equity Value of Core operation 253,683.5
Treasury Investments 15,918.3
Current Cash Balance 27,253.4
Value Per Share 70.5
DCF Assumptions and Value One year Forward Value 80.4
RF 7 Source: Reliance Money Research
Beta 1.16
RM 13 Sensitivity of DCF value to CoE^ and TG*
Cost of Equity 14.0 130
Terminal Growth 5% 120
Value of PGCIL (Rs)

110
100
90
80
70
60
50
11 12 13 14 15
Cost of Equity
TG @ 1% TG @ 2% TG @ 3% TG @ 4% TG @ 5%
Source: Reliance Money Research /* Terminal Growth, ^Cost of Equity
Sensitivity of DCF Value of PGCIL on RoE and LNI (€)

100
90
DCF Value of of PGCIL (Rs.)
80
70
60
50
40
30
20
10
0
14 15 16 17 18
RoE in %
40 50 60 65
Source: Reliance Money research / LNI: Leverage on new investment

2 nd June 2008
Valuation of PGCIL based EV/EBITDA multiple

Comparable Price (Rs.) 71 100 102 115 120
EV/EBITDA on FY10E 10.7 12.9 13.0 14.0 14.4
Valuation summery of Power Grid

Valuation Mode Value Weight Weighted Value
Value through EV/EBITDA 102 60% 61.0
DCF Value based on Assumptions 80 40% 32.2
Target Price 93
Valuation Sensitivity Analysis for New projects and financing

Power Grid gets regulated return for its implemented transmission assets. But it does
not get any returns on its investments in Capital Work in Progress and Construction and
stores. However the company takes additional leverage to finance these investments.
Power Grid gets regulated return for its Therefore the composition of these assets in the balance sheet has got a considerable
implemented transmission assets. bearing on the financials of the company. We have employed a sensitivity analysis for
valuing PGCIL for the new investment, additional leverage for the new investment and
asset composition for future. Nevertheless, putting everything same we have assumed
the above asset composition for the future investment and arrived at the target price of
Rs 93.
DCF Value Sensitivity with LNI (€) and % of NICP (^)
120
DCF Value of PGCIL
100
80
60
40
20
0
40 50 60 70
L e v e ra g e o n N e w In v e s tm e n ts (L N I)
40 50 60 65

(€) Leverage on New Investments (ALNI)
(^) New Investment in Commissioned projects

2 nd June 2008
DCF value sensitivity with % of New investment in CWIP and that in CS
130
120
110
Value of PGCIL
100
90
80
70
60
50
11 12 13 14 15
C o s t o f Eq u it y
TG @ 1 % TG @ 2 % TG @ 3 %
TG @ 4 % TG @ 5 %

2 nd June 2008
Net sales 35,898.5 43,686.9 56,479.7 67,474.0 Equity Cap 38,262.2 42,088.4 42,088.4 42,088.4
% Growth 14.1 21.7 29.3 19.5 Reserves 71,386.6 95,797.9 104,222.5 113,473.6
EBIDTA 29,564.5 35,785.4 47,577.7 56,658.5 Networth 109,648.8 137,886.3 146,310.9 155,562.0
Other Income 2,979.4 3,313.1 2,624.2 2,439.0 Net Deff Tax Lia 4,193.3 4,193.3 4,193.3 4,193.3
Depreciation 8,275.8 10,152.9 13,902.6 16,537.7 Total Liability 319,108.8 388,430.9 448,084.4 518,206.7
Interest 11,404.2 10,442.0 16,535.4 19,916.2 Net Block 312,564.6 367,061.7 433,559.1 512,532.0
EBIT 24,268.1 28,945.6 36,299.2 42,559.9 Investments 19,670.0 18,332.7 17,536.8 16,780.7
EBIT margin 62.4 61.6 61.4 60.9 CA Loans/Adv 35,097.2 51,929.5 57,419.8 60,990.1
PBT 12,874.8 18,503.6 19,763.8 22,643.7 Inventory 1,841.3 1,927.0 1,934.9 2,052.0
% Growth 16.9 43.7 6.8 14.6 Debtors 4,904.8 4,805.6 6,212.8 7,422.1
Tax provision 2,526.3 4,303.6 3,952.8 4,528.7 Cash & Bank 11,968.2 27,253.4 28,393.9 29,067.9
PAT 10,348.4 14,200.0 15,811.1 18,115.0 Loans & Advances 14,912.6 16,333.2 19,004.4 20,433.4
% growth 10.0 37.2 11.3 14.6 CL & Provisions 48,351.6 49,021.6 60,559.9 72,224.8
EO items 2,038.0 - - - Current Liabilities 40,017.9 40,144.7 50,361.5 60,025.9
Adj PAT 12,386.5 14,200.0 15,811.1 18,115.0 Provisions 8,333.7 8,876.9 10,198.3 12,198.9
NCA (13,254.4) 2,907.9 (3,140.1) (11,234.6)
Dividend (%) 9.6 12.0 15.0 18.0
Mis exp 128.6 128.6 128.6 128.6
EPS (Rs) 2.9 3.4 3.8 4.3
Total Assets 319,108.8 388,430.9 448,084.4 518,206.7
BVPS (Rs) 28.7 32.8 34.8 37.0

OPM(%) 82.4 81.9 84.2 84.0 PPBT 14,820.0 18,503.6 19,763.8 22,643.7
NPM(%) 31.9 30.2 26.8 25.9 Depreciation 8,227.1 10,152.9 13,902.6 16,537.7
ROE(%) 11.3 10.3 10.8 11.6 Interest 9,671.8 10,442.0 16,535.4 19,916.2
ROCE(%) 10.8 9.3 9.5 9.6 Others (469.4) - - -
Debt/Equity(X) 1.76 1.68 1.92 2.17 Change in WC 12,451.2 1,417.5 10,177.4 12,333.3
Gross FA turnover (x) 0.12 0.12 0.12 0.12 Gross Operating CF 44,700.7 40,516.0 60,379.3 71,430.9
Debtors Days 49.9 40.2 40.2 40.2
Direct taxes paid (1,245.4) (4,303.6) (3,952.8) (4,528.7)
Net operating CF 43,455.3 36,212.4 56,426.5 66,902.1
P/E 33 29 26 23
Investing CF (67,357.6) (63,312.7) (79,604.1) (94,754.5)
P/CF per share 20.1 17.0 14.0 12.0
Free Cash Flow (23,902.3) (27,100.3) (23,177.6) (27,852.3)
EV/EBDITA 20.2 17.3 14.0 12.8
Financing CF 29,980.0 42,385.6 24,318.1 28,526.3
EV/Sales 16.6 14.2 11.8 10.7
Net Change 6,077.7 15,285.3 1,140.5 674.0
Mkt cap/Sales 10.5 9.5 7.3 6.1
Opening Cash 5,890.5 11,968.2 27,253.4 28,393.9
CEPS(Rs) 4.9 5.8 7.1 8.2
Closing Cash 11,968.2 27,253.5 28,393.9 29,067.9
P/BV 3.4 3.0 2.8 2.7

2 nd June 2008
Stock details PTC India RECOMMENDATION : REDUCE

BSE Code 532524
NSE Code PTC Price: Rs.88 Target Price: Rs. 82
Reuters Code PTCI.BO
Bloomberg Code PTCIN IN
Market Cap (Rs Mn) 20115.2 We initiate coverage on PTC India Limited with a REDUCE rating. We believe the
Free Float (%) 78.9
52-wk Hi/Lo (Rs) 202/56 leadership of PTC in short term power trading would continue. With a strong
parentage and a first mover advantage in power trading in India we believe that
PTC has a bright future ahead considering the fact that Power Trading market
in India is still a evolving market. We have valued PTC based on the sum of parts
valuation method, wherein we recommend a REDUCE Rating with a one year
Summary table
price target of Rs 82. At our target price the stock would trade, respectively at
Year to March FY07 FY08E FY09E FY10E
Total Revenue 37666.6 39061.5 54628.5 66989.0 1.19x and 1.17x to our FY09E and FY10E BVPS.
Growth % 21 4 40 23
EBITDA 324.8 208.1 299.6 370.0
EBITDA margin % 0.9 0.5 0.5 0.6 Key Positives
Net Profit 350.9 486.7 454.2 455.9
EPS (Rs) 1.5 2.1 2.0 2.0
CEPS (Rs) 2.4 3.3 3.1 3.1 Power Trading Business : PTC’s Leadership to continue
EV/EBITDA 60.4 45.0 30.5 24.0 We believe with the additional generation capacity the volume of generated power
EV/Sales 0.5 0.2 0.2 0.1
ROE % 13.2 3.3 3.0 2.9
would grow at a CAGR of 6%. PTC is expected to maintain its market share at 50%
ROCE % 19.1 4.2 4.1 4.1 till FY14E. However by having good volume of Long term PPAs and PSAs in hand
P/E (x) 57.3 41.3 44.3 44.1
and with already booked transmission corridors the company would increase its
P/CEPS (x) 36.5 26.6 28.4 28.3
Source:Company Reliance Money Research, long term power in its trading portfolio. We believe the ratio of long term to Short
term power would become 70:30 by the year FY14E.
Shareholding pattern (31st March 08) Fuel Intermediation Segment : A large potential business
Public & Others Promoters opportunity
19% 21%
Recently PTC has entered into a long term contract for coal of 1.5 million ton per
annum with an Indonesian company for 20 years. We expect the envisaged 400
Financial MW of tooling capacity would get commissioned by FY12E and the fuel supply
Institutions
24% Foreign from the SPV, formed for mining, would start by FY11E. Thus the company will get
Institutions
36% an opportunity for trading of this coal to the prospective coal users in the country by
FY11E. We have incorporated 8% rise in volume of coal and 8% increase in trading
margin after FY11E, in our estimates.

PFS: The investment Routers for long term value
250 25000
During FY08 the company raised Rs 12 bn through a follow on public offer. The
BSE
20000 main objectives of the issue were, to deploy the raised resources in various power
and mining assets in the country and abroad and to augment the working capital
150 15000
need of the stand alone entity. We believe that the company would gradually spend
PTC 10000
the cash resources over a period of three years, which would yield a return up to
30% in FY13E and further this return would grow at 6% beyond FY13E.
50 5000
Source: Capitaline
Valuation : Reduce with one year price target at Rs. 82
Applying DCF on the core trading business of PTC and adding the cash in books
we value PTC at Rs. 82 with a one year time horizon.

2 nd June 2008
Company Background
PTC India Ltd is the leading power trader in India with a diversified role of a Complete
Energy Solutions Provider. It is a Government of India initiated Public-Private Partnership,
PTC India Ltd is the leading power whose primary focus is to develop a commercially vibrant power market in the country.
trader in India with a diversified role of PTC is the pioneer in developing and implementing the concept of power trading in India
a Complete Energy Solutions Provider. and has successfully demonstrated its efficacy in optimally utilizing the existing
infrastructure within the country to the benefit of all.
Since its inception in 1999, PTC has sought to provide holistic services that address the
sustainability of a power market model, including intermediation for long-term supply of
power from identified domestic and cross-border power projects, financial services like
providing equity support to projects in the energy value chain, advisory services and
foray into providing fuel linkages to power plants of various utilities / generators
participating in the power market.
PTC
Athena Energy
PTC India Financial Ventures Private Ltd
Services Ltd (60%) (Associate)( 20%)

2 nd June 2008
Investment Drivers
Power Trading Business – PTC’s Leadership to continue

PTC has initialed/signed approx 10500 MW of PPAs and subsequently about 6500 MW
of PSA/MOU for sale of power. The PPAs and the PSAs include 1400 MW of power
PTC has initialed/signed approx 10500 contracted with Bhutan from the three hydro projects viz Tala, Chukha & Kurichu. During
MW of PPAs and subsequently about FY 09, PTC expects about 500-600 MW of long term power (from IPPs, apart from Cross
6500 MW of PSA/MOU for sale of power. Border) to come in to total portfolio. The volume of the short term traded power constitutes
around 2% of the total generated power in the country. PTC, due to its past association
with power utilities holds 50% of the total market share in this total traded power.
We believe with the additional generation capacity the volume of generated power would
grow at a CAGR of 6%. PTC will try maintaining its market share at 50% till FY14E.
However by having good volume of Long term PPAs and PSAs in hand and with already
booked transmission corridors the company would increase its long term power portfolio.
We believe the ratio of long term to Short term power would become 70:30 by the year
FY14E and the current cap on the short term trading margin will remain capped at 40
paise per unit. The company will enjoy 50 paise margin for the long term power till
FY14E.
Tentative commissioning schedule of capacities where PTC has long term PPAs
Projects in (MW) Hydro Thermal Gas Total
Total FY 08-09 90 300 100 490
Total FY 09-10 170 300 0 470
Total FY 10-11 0 3731.5 0 3732
Total FY 11-12 2654 1580 0 4234
Fuel Intermediation Segment : A large potential business opportunity

PTC has entered into a long term Recently PTC has entered into a long term contract for coal of 1.5 million ton per annum
contract for coal of 1.5 million ton per with an Indonesian company for 20 years. Out of this around 1.2 million ton would be
annum with an Indonesian company used for its tooling project in Andhra Pradesh. The mining will be done through an SPV
for 20 years.. (Special Purpose Vehicle) formed by the company. This SPV will deal with the mined
coal.
The Tooling contract will last for 25 years. Under this the company will provide fuel to the
power generator in return will take the full ownership of the generated power by paying
the necessary capacity charges to the power generators. So far the proper MoU has not
been signed for the tooling projects. The company maintains that this will be decided
soon. We have therefore, not considered the impact of this in our estimates. However
we have considered the increased fuel intermediation activity in our estimate beyond
FY11E.
We expect the envisaged 400 MW of tooling capacity would get commissioned by FY12E
and the fuel supply from the SPV would start by FY11E. Thus the company will get an
opportunity for trading of this coal to the prospective coal users in the country by FY11E.
We have incorporated 8% rise in volume of coal and 8% increase in trading margin after
FY11E, in our estimates.
Assumption for the Tooling Project in AP

Capacity 400
Units Generated in MU 2628
Per Units Coal Required 0.4
Per Units Coal Required in Ton 0.0004
Total Coal Required in Ton 1.1

2 nd June 2008
PFS: The investment Routers for long term value

During FY08 the company raised Rs 12 bn through a follow on public offer. The main
PFS has so far invested in various objectives of the issue were, to deploy the raised resources in various power and
power assets in the country. mining assets in the country and abroad and to augment the working capital need of the
stand alone entity. To route the investment properly the company has floated a finance
subsidiary PTC Financial Services. This subsidiary has so far invested in various power
assets in the country.
Recently this subsidiary has raised resources on its own to augment its asset base.
Thus the holding in the subsidiary has come down. The management wants to retain
not less than 26% stake in PFS in the long run. We believe this will raise the long term
holding value for the company.
Prospective Business linkages of PTC
Investment in
Market Making
Activities and
Ventures(e.g
Wind Mill and Investment in IEX)
Other Renewable MoU for Trading
Power Projects the Out Put
PTC Financial
Services,
(Financial
Intermediation)
MoU for owning
New
Tooling Subsidiary
the entire out put PTC
for trading after
Projects
Power
(To sell
paying the capacity (Power
power) and capital cost. Trading of
Generation Power Mar k et
from
MoU for Availing Wind Mill
Captive Power Surplus power for
Producers trading in short Plants)
and long term
MoU for Availing

Independent Surplus power for
Power Producers trading in short
and long term
Sale of Fuel
to PTC
SPV for Fuel

(Fuel Intermediation)
Equity Interest Business Intermediation

2 nd June 2008
SWOT profile
Focused business approach and

good understanding of the Power Strict regulation of the trading margin
sector dynamics of the country
Strengths Weakness
Opportunity Threats
Technological development and
availability of better online exchange
led platform may lead the generators
Intermediation in several value and utilities to set up their own
chains of the power Sector power trading arms. This in turn lead
to lesser intermediation opportunity
for the company
Q4FY08 Performance (Rs. Mn)

Net Sales 5,466.0 6,024.8 (9.3) 39,061.5 37,666.6 3.7
Other Income 193.5 29.2 562.7 428.7 190.6 124.9
Total Income 5,659.5 6,054.0 (6.5) 39,490.2 37,857.2 4.3
Total Expenditure 5,438.3 5,972.1 (8.9) 38,856.3 37,348.3 4.0
EBITDA 27.7 52.7 (47.4) 205.2 318.3 (35.5)
EBITDA (%) 0.5 0.9 (42.1) 0.5 0.8 (37.8)
Interest 1.3 2.3 (43.5) 16.5 19.6 (15.8)
Depreciation 7.4 8.5 (12.9) 29.5 32.9 (10.3)
PBT 212.5 71.1 198.9 587.9 456.4 28.8
Provision for tax 22.8 15.0 52.0 102.3 106.3 (3.8)
PAT 189.7 56.1 238.1 485.6 350.1 38.7
Extraordinary Items 2.4 1.9 26.3 1.4 0.8 75.0
Adj PAT 192.1 58.0 231.2 487.0 350.9 38.8
Equity Capital 2,274.2 2,274.2 - 2,274.2 2,274.2 -
EPS (Rs) 0.8 0.3 2.1 1.5
Q4FY08 performance of PTC showed a decrease in net sales by 9.3% YoY to Rs.5466
mn mainly due to the fell in volume of unit traded. The volumes during the quarter
Q4FY08 performance of PTC showed
showed a dip of 15.4%, decreasing to 1223 MUs as against 1445 MUs. The operating
a decrease in net sales by 9.3% YoY to
margin declined by 40 basis points to 0.5% on a YoY basis and as a result the EBITDA
Rs.5466 mn mainly due to the fell in also slump by 47.4% to Rs. 27.7 mn from Rs. 52.7 mn as compared to the corresponding
volume of unit traded. quarter last year. The other income recorded a growth of 562.7% to Rs 193.5 mn, mainly
driven by interest income on surplus cash from QIP issue. As a result the PAT for the
Q4FY08 recorded a growth of 231% YoY to Rs. 192 mn.
For the FY08, the topline of PTC Ltd increased by 3.7% to Rs. 39061.5 mn. The traded
volumes during this period showed a growth of 3.6% YoY increasing to 9889 MUs as
against 9549 MUs. The PAT had shown a growth of 39% YoY to Rs. 487 mn from Rs.
350.9 mn.

2 nd June 2008
Financials and Projections

Based on the assumptions made above we estimate following revenue stream for the
PTC Stand Alone till FY10E.
Revenue Model of PTC Stand Alone (Rs. Mn)

Segment FY06 FY07 FY08E FY09E FY10E
Sales of Electricity 30379 36914 40266 56658 69633
% of growth 22 9 41 23
Sales of Imported Coal 179 135 146 162 180
% of growth (25) 8 11 11
Surcharge and rebate 527 617 666 919 1115
in Power Trading
% of growth 17 8 38 21
Total Sales 31086 37667 41077 57739 70928
% of growth 21 9 41 23
Trading margin/unit would improve from 3.8 paisa to 4.7 paisa by FY14E
From the following price data it is inferred that on an average basis the price of traded
power has risen by 40% during FY07 over FY06. During the same period PTC has
On an average basis the price of traded witnessed 29% rise in its price of the traded power. We have factored in a 10% rise in
power has risen by 40% during FY07 traded power price by PTC in our estimates.
over FY06.
Price Movement of Traded Power

Sale Price (Rs) FY06 FY07
Vol (MU) % of Total Vol (MU) % of Total
0.00 -1.00 0.0 0.0 252.2 1.7
1.00 -2.00 0.0 0.0 0.0
2.00 -3.00 5103.3 36.0 1387.7 9.2
3.00 -4.00 8437.1 59.5 1781.0 11.9
4.00 -5.00 647.9 4.6 7203.3 47.9
5.00 -6.00 0.0 0.0 3936.8 26.2
6.00 -7.00 0.0 0.0 461.7 3.1
Total 14188.3 100.0 15022.8 100.0
Du Pont Analysis
Regulatory cap on the trading margin Regulatory cap on the trading margin coupled with slow traction in the long term trading
coupled with slow traction in the long portfolio will lead to a thinner 0.5% at EBITDA level of PTC. The asset turnover will
term trading portfolio will lead to a improve due to marginal capex required for the trading business of the company. Thus
thinner 0.5% at EBITDA level of PTC. the RoCE will go up to 3% from the expected 2% during FY08E.
Movement of RoCE of PTC (Stand Alone) (Rs. Mn)

Sales 37667 39062 54629 66989
EBIT 292 179 264 329
Net Fixed Assets 175 169 162 155
EBIT Margin 0.8% 0.5% 0.5% 0.5%
RoCE 55% 2% 2% 3%

2 nd June 2008
Movement of RoE of PTC (Stand Alone) (Rs. Mn)

Sales 37667 39062 54629 66989
Net Profit 351 487 454 456
Networth 2656 14967 15246 15526
NpM 1% 1% 1% 1%
Sales per NW 14.2 2.6 3.6 4.3
RoE 13.2% 3.3% 3.0% 2.9%
Along with the treasury investments we Source: Reliance Money Research
value the company at 82 per share.
Valuation
We have used the DCF valuation method to value the PTC. We have valued the core
trading business of the company at Rs 16.8, with a terminal growth of 5%. Further we
have valued the investments of the company at their respective book values. The
management along with its new equity partners is looking for suitable business
intermediation opportunities in the power sector in the country.
Therefore the Rs 10 bn of cash that is currently in the books of the company should get
a higher value as compared to its book value. However, from a conservative point of view
we have valued the current cash balance of the company at its book value. In this way we
value the present value of the cash balance of the company at Rs 45 per share. Along
with the treasury investments we value the company at 82 per share.
DCF of core trading business of PTC (Rs. Mn)

Year FY09 FY10 FY11 FY12 FY13 FY14
EBIT without Other Income 286.7 356.8 408.6 480.1 570.5 685.4
EBIT(1-Tax Rate) 215.0 267.6 306.5 360.1 427.9 514.0
Depreciation 12.9 13.2 13.5 13.9 14.2 14.5
Inv in Working Capital (77.6) (32.6) (9.1) 3.5 25.8 64.1
Investment in Fixed Assets (29.1) (34.3) (40.1) (47.7) (57.7) (71.0)
FCFF 121.3 213.9 270.8 329.8 410.2 521.7
Discounted FCFF 106.3 164.2 182.2 194.5 211.9 236.2
Discounted Terminal Value 2,719.1
Total Value of the Firm 3,814.4
Less: Debt -
Core Business Value 3,814.4
Core Business Value per Share 16.8
One Year Forward Value 19.1
DCF Value Sansitivity to CoE^ and TG*

Valuation Summery of PTC
86
Core Business Value of Trading Business 19.1
84
Cash Balance per Share 45.1
82
Book Value of Investment Per share 18
80
DCF value of PTC
Value of Share 82
78
76
74
DCF Assumptions 72
RF 8% 70
RM 14% 68
13 14 15 16 17
Beta 1.02
C o E
CoE 0.14 1 2 3 4 5
Terminal Growth Rate 5%

Source: Reliance Money Research Source: Reliance Money Research
* Terminal Growth, ^Cost of Equity

2 nd June 2008
Net sales 37,666.6 39,061.5 54,628.5 66,989.0 Equity Cap 1,500.0 2,274.2 2,274.2 2,274.2
% Growth 21.2 3.7 39.9 22.6
Reserves 1,155.7 12,692.9 12,971.6 13,252.0
EBIDTA 324.8 208.1 299.6 370.0
Networth 2,655.7 14,967.1 15,245.8 15,526.2
% growth -35.7 -35.9 44.0 23.5
Net Deff Tax Lia 9.4 9.4 9.4 9.4
Other Income 192.9 428.7 342.0 279.4
Depreciation 13.0 12.6 12.9 13.2 Total Liability 2,665.1 14,976.5 15,255.2 15,535.7
Interest 19.6 16.5 23.1 28.3 Net Block 175.4 168.8 161.8 154.6
EBIT 504.8 624.2 628.7 636.2 Investments 2,111.2 4,111.2 4,111.2 4,111.2
EBIT margin 1.3 1.6 1.1 0.9 CA Loans/Adv 2,634.5 12,951.1 13,921.4 14,769.7
PBT 457.2 590.8 605.7 607.9 Debtors 1,625.4 1,651.9 2,218.8 2,666.4
% Growth -19.8 29.2 2.5 0.4 Cash & Bank 481.8 10,759.3 10,967.4 11,222.4
Tax provision 105.3 103.2 151.4 152.0
Loans & Advances 523.1 531.7 728.7 875.7
PAT 351.9 487.6 454.2 455.9
CL & Provisions 2,272.9 2,271.5 2,956.1 3,516.8
% growth -13.3 38.6 -6.8 0.4
Current Liabilities 1,658.0 1,654.1 2,337.8 2,897.4
EO items (1.0) (0.9) - -
Adj PAT 350.9 486.7 454.2 455.9 Provisions 614.9 617.4 618.4 619.4
Dividend (%) 10.0 7.0 7.0 7.0 NCA 361.6 10,679.6 10,965.2 11,252.9
EPS (Rs) 1.5 2.1 2.0 2.0 Mis exp 16.9 16.9 16.9 16.9

OPM(%) 0.9 0.5 0.5 0.6 PBT 457.2 591.0 605.7 607.9
ROE(%) 13.2 3.3 3.0 2.9 Interest 19.6 16.5 23.1 28.3
ROCE(%) 19.1 4.2 4.1 4.1 Others (158.3) - - -
Int cover(X) 26.5 38.6 27.8 23.0 Operating CF 331.4 620.1 641.7 649.4
Gross FA turnover (x) 160.3 162.1 221.1 264.7 Change in WC (111.7) (41.4) (77.6) (32.6)
Debtors Days 15.8 15.4 14.8 14.5 Gross Operating CF 219.7 578.7 564.1 616.8
Creditors Days Days 16.5 15.9 16.0 16.2 Direct taxes paid (116.9) (103.2) (151.4) (152.0)
Valuation Ratios (x) Other adjusment

Net operating CF 102.9 475.5 412.7 464.8
P/E 57 41 44 44
Investing CF (43.6) (2,022.5) (29.1) (34.3)
P/CF per share 36.5 26.6 28.4 28.3
Free Cash Flow 59.3 (1,547.0) 383.6 430.5
EV/EBDITA 60.4 45.0 30.5 24.0
Financing CF (171.0) 11,824.4 (175.5) (175.5)
EV/Sales 0.5 0.2 0.2 0.1
Net Change (111.8) 10,277.4 208.1 255.0
Mkt cap/Sales 0.4 0.5 0.4 0.3
Opening Cash 593.6 481.8 10,759.3 10,967.4
CEPS(Rs) 2.4 3.3 3.1 3.1
Closing Cash 481.8 10,759.3 10,967.4 11,222.4
P/BV 5.0 1.3 1.3 1.3

2 nd June 2008
Corporate Office:
Reliance Money House, Plot No - 250 - A - 1, Baburao Pendharkar Marg,
Off Annie Besant Road, Behind Doordarshan Tower, Worli, Mumbai - 400025
Tel.: 91-22-30443301, Fax No.: 30443306
Equities: Trading through Reliance Securities Limited | NSE SEBI Registration Number Capital Market :- INB 231234833 |
BSE SEBI Registration Number Capital Market :- INB 011234839 | NSE SEBI Registration Number Derivatives :- INF 231234833
Commodities : Trading through Reliance Commodities Limited | MCX member code: 29030 | NCDEX member code: NCDEX-CO-05-00647|
NMCE member code: CL0120 Mutual Funds : Reliance Securities Limited | AMFI ARN No.29889
DISCLAIMER: This document has been prepared by Reliance Money Limited, Mumbai and is to be used by the recipient and not to be circulated. The
information provided should not be reproduced, distributed or published, in whole or in part without prior permission from the company. The information and the
opinions contained in the document have been compiled from source believed to be reliable. The company does not warrant its accuracy, completeness and
correctness. This document is not and should not be construed as an offer to sell or solicitation to buy any securities.

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2rd June 2008

Rabindra Nath Nayak

Particulars Page No.

Sector Report - Power Transmission and Trading 2

POWER TRANSMISSION & DISTRIBUTION SECTOR

Key sector positives

 Clearly Investment in upgradation of power distribution infrastructure would be driven

 Strong demand conditions in the T&D sector notwithstanding, significant capacity

Sector Report - Power Transmission and Trading 3

Jyoti Structures (JSL)

KEC International (KEC)

Kalpataru Power Transmission (KPTL)

Sector Report - Power Transmission and Trading 4

PTC India (PTC)

Power Grid Corporation of India (PGCIL)

Sector Report - Power Transmission and Trading 5

Need for a strong investment push in the T & D space

Sector Report - Power Transmission and Trading 6

Transmission EPC Business Segment

Power Trading Business Segment

Sector Report - Power Transmission and Trading 7

Competitive Analysis of the T & D Market

Transmission Tower EPC

Overall Observation: Moderate

 Popularity of the underground transmission systems.

Outcome :The investment in Distributed Generation is growing at a very slow pace

Outcome : Margin hovers around 10% to 15% in the industry

Overall Observation: Intense due to limited number of buyers.

Sector Report - Power Transmission and Trading 8

Overall Observation: Stiff due to regulation

Outcome : The investment in Distributed Generation is growing at a very slow pace

Overall Observation: Completely Absent

Source: Reliance Money Research

Power Trading Segment -

Entry Barriers Overall Observation: Moderate

Substitution Overall Observation: Intense

Outcome : Bilateral Contract dominate with 90% of the generated Power

Internal Rivalry Overall Observation: Intense

Outcome : Operating margin remain at 2% to 3%

Source: Reliance Money Research

Sector Report - Power Transmission and Trading 9

Scheduling and Dispatching

Entry Barriers Overall Observation: Stiff by regulation

Substitution Overall Observation: Service is unique for power sector

Source: Reliance Money Research

Sector Report - Power Transmission and Trading 10

MAJOR DEMAND DRIVERS FOR THE T & D MARKET

11th plan spending target is not ambitious but a necessity

Plan wise achievement of Targeted Generation Capacities

Cumlative Growth In Transmission Lines (Plan Wise)

Sector Report - Power Transmission and Trading 11

PGCIL leads the way in power transmission

Source: CEA & Reliance Money Research

Investment in transmission and

% of Actual vs Targeted Achievement in Generation and Transmission

Source: CEA & Reliance Money Research

Sector Report - Power Transmission and Trading 12

Transmission sector Investment scenario

10th plan spending Envisaged in the 11th plan

Source: CEA & Reliance Money Research

Growth opportunity in Transmission Sector

Planned Investments in Transmission (Rs mn) Growth(%)

Source: CEA & Reliance Money Research

Clearly Investment in upgradation of power distribution infrastructure would be driven

Strong demand conditions in the T&D sector notwithstanding, significant capacity

Popularity of the underground transmission systems.