Fuel Security Is The Theme: - Key Differentiator & Determinant of Profitability

POWER SECTOR
July 1, 2011
July 1, 2011
Fuel Security is the Theme

Key Differentiator & Determinant of Profitability
Our Top Picks are: CESC, NTPC & Tata Power Why do we like the power sector?
The BSE Power Index has underperformed by 23.3% to Sensex over past 12 months due to near-term concerns i.e. unavailability of coal, lower merchant rates and deteriorating financial condition of State Electricity Boards (SEBs). This underperformance offers an opportunity amid historically low valuation, assured returns in regulated business model, likely tariff hike by the distribution companies (DISCOMs), coal asset acquisitions, and allocation of coal blocks, which we believe would improve the sector al outlook and the performance of the stocks. Again, t he Power Index is trading at 2.07x at 33% discount to its last three years average mean of 3.1x, which provides the margin of safety. We also see a strong demand with restricted supply (demand-supply gap to remain till FY15E), commissioning of 1.1 lakh MW capacity (up 60%) over FY10-15E.
Power Sector
Theme Report
Analyst Contact
Rupesh Sankhe
Adani Power
CMP Target Price Upside MCap (Rsbn/US$mn) 52 Week High/Low (Rs) Avg. Daily Volume ('000) Bloomberg Code
+91-22-22895022 rupesh.sankhe@karvy.com
Hold
110 117 6% 239/5342 145/105 735 ADANI IN
Power Deficit to Persist till FY15E despite Rise in Supply
With ~110,000MW of generation capacity e stimated to be added over FY10-15E, the power deficit would reduce from 10.1% in FY10 to 3.3% in FY15E. While, the power supply is likely to rise at a CAGR of 10.2%, the demand is expected to rise at 8% CAGR.
CESC
Buy
299 381 27% 37/831 433/252 114 CESC IN
Fuel Security is the Theme: Coal Deficit to Continue
Over FY10-15E, while the coal demand is likely to rise at CAGR of 10.2%, the output is set to rise at CAGR of 7.2%. Thus the deficit is likely to result in rise in India's coal imports from 35 mn metric tonne (MMT) in FY10 to 134 MMT in FY15E.
JSW Energy
Hold
67 75 12% 109/2443 136/64 1,329 JSW IN
Merchant Rates at Rs. 3.5/unit levels to yield ~22% RoEs in FY13E
The merchant power rates in India have gone up from Rs. 3 per unit in FY06 to Rs. 6 in FY10 due to increased power deficit. However , with new capacities coming up, the merchant rates settling at levels of Rs. 3.5 per unit in FY13E marking a decline of 40% over FY10-13E would yield RoEs of ~22%.
Differentiating Parameters over the Near -term
NTPC
Buy
187 219 17% 1541/34348 222/165 2,432 NTPC IN
In our view the best players have huge capacity addition in the near-term providing revenue visibility, execution capability and fuel security. With rising coal deficit, we expect RoE of merchant-based capacities to level down to sustainable levels of 22% from 35-40% current level. We prefer utilities with I. Assured RoEs of regulated business model vs. merchant business model (due to high coal price and lower merchant realization), II. Fuel Linkages, III. Strong Balance Sheet & Execution Track Record, and IV. Low Valuation & Low-risk business models. We initiate coverage with BUY recommendation on CESC (Fuel Security, Attractive Valuation), NTPC (Fuel Security, Assured RoE) & Tata Power (Fuel Security, Strong Portfolio). We initiate coverage on Adani Power (Fundamentally Priced-in) & JSW Energy (High Dependence on Imported Coal, Exposure to Merchant Biz) with HOLD recommendation. Exhibit 1: Valuation Summary
Company Rating CMP (Rs) TP (Rs) 117 381 75 218 1503
Tata Power
Buy
1,308 1,503 15% 310/6919 1468/1132 249 TPWR IN P/E (x) FY12E 10.0 9.6 9.1 16.0 12.0
Core RoE (%) * P/BV (x) MCap (Rs FY11 FY12E FY13E FY11 FY12E FY13E bn) Adani Power Hold 110 239 19.2 44.8 28.1 3.8 2.8 2.2 CESC Buy 299 37 7.1 8.1 11.5 1.0 0.8 0.7 JSW Energy Hold 67 20.5 20.9 19.6 1.9 1.6 1.4 109 NTPC Buy 187 1541 19.5 20.9 20.4 2.3 2.1 1.8 Tata Power Buy 1308 17.4 19.4 19.8 2.2 1.9 1.6 310 Source: Karvy Institutional Research, * Core RoE is based on operational assets and adjusted for CWIP
FY11 46.7 12.6 13.1 18.3 15.1
FY13E 9.6 7.1 10.8 13.8 10.6 1
July 1, 2011
Power Sector
Table of Contents
Industry
Demand-supply gap to reduce, but power deficit to continue till FY15 Power demand to increase in line with economic growth Low per capita consumption of power indicates high growth potential Power supply to increase substantially led by private sector Capacity addition dogged by numerous execution challenges Power deficit to reduce 7-12
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Fuel security - Key Determinant of Profitability Coal deficit in power sector to continue Domestic coal shortage to see surge in imports Inadequate infrastructure a constraint for coal imports Private power generators acquire coal mines abroad Fuel Security-key to profitability CESC, NTPC and Tata Power best placed in terms of fuel security
Merchant Power settling at levels of Rs. 3.5/unit in FY13 yields RoEs of ~22%
13-17
Players with capacities coming up in near term, to benefit from high merchant rates Poor financial position of SEB's a major concern for merchant power generators 20
Valuation Methodologies-FCFE Model Companies Covered Adani Power CESC JSW Energy NTPC Tata Power
31-45 46-60 61-75 76-88 89-109
July 1, 2011
Power Sector
Demand-Supply Gap to Narrow Down by FY15E

Our View: While the long-term fundamentals remain intact; the power deficit would persist till FY15E, despite narrowing of demand-supply chasm
Power Demand
Power demand to increase in line with economic growth
The elasticity of electricity demand to GDP growth has been declining from the 7 th Plan and hit a low of 0.7x in the 10 th Plan due to increased share of the service sector in GDP. However, we expect elasticity of electricity to rise from 0.7x in the 10th Plan to 1.0x going ahead due to higher share of industrial and infrastructure sectors in GDP. The demand for power is largely understated in India, as reflected in load shedding & peak deficit. In our opinion, rural electrification programme, higher outlay in manufacturing and infrastructure would drive the demand further. Exhibit 2: Electricity Consumption Pattern Exhibit 3: Electricity demand vs. GDP growth
100 75 50 25 0 Industrial FY10 Domestic FY14E Agriculture Commercial & Others (%) 11 20 22 47 10 17 (Elasticity (x) 22 51 2 1.5 1 0.5 0
6th Plan 7th Plan 8th Plan 9th Plan 10th Plan 11th Plan 12th Plan
Source: Industry, Karvy Institutional Research
Exhibit 4: India's Per Capita Power Consumption

1,200 1,000 800 600 400 200 0 FY2005 FY2006 FY2007 FY2008 FY2012E
(kwh) (Govt. Target)
Low per capita power consumption shows high growth potential
India's per capita power consumption of 704 units per annum is miniscule compared to the power consumption of many developed countries that indicates the high growth potential of the sector. The National Electricity Policy envisages a rise in per capita consumption of power to 1,000 units by 2012, with rising affluence and shift from traditional forms of energy. The expansion of the manufacturing sector in India would boost overall power demand. In order to increase the per capita power consumption, the Government has scaled up investment in the T&D segment. As per the Power Ministry, the earmarked investment for 11th & 12 th Plan period is Rs. 1,400 bn & Rs. 2,400 bn, respectively with a view to improving the power availability. Exhibit 5: Significant investments in the Power T&D (Rs. bn)
5,000 4,000 3,000 2,000 1,000 0 Transmisision 11th Plan Est Source: Industry, Karvy Institutional Research 3 Distribution 12th Plan Est R&M
Substantial investments to bolster T&D segment
Source Industry: Karvy Institutional Research
July 1, 2011
Power Sector
Execution has improved in the 11 th Plan

There has been slippage in power capacity addition target in the last three FiveYear Plans. The situation has improved in the current plan (FY07-12), and we expect ~62% (vs. 51.5% in 10th Plan) of planned capacity to be achieved in the plan period. The total capacity addition during the current plan period is estimated at 49,000MW. We expect fundamental execution issues related to land acquisition, obtaining various clearances and fuel security to persist and expect substantial spill-over from the 11 th Plan to be completed in FY13E and FY14E. Exhibit 6: Capacity addition as Percentage of Target
50,000 40,000 30,000 20,000 10,000 0 7th Plan 8th Plan 9th Plan 10th Plan As a % of Target 11th Plan (E) Capacity added Source: Industry, Karvy Institutional Research (MW) (%) 100 80 60 40 20 0
July 1, 2011
Power Sector
Power Supply
Currently, the central and state utilities have a dominant share in the countrys overall generation capacity. Going ahead, we see a paradigm shift in the participation of the private sector players in power generation. The fillip has originated from the Electricity Act 2003 and National Tariff Policy 2006. The private sector, which contributed a mere 11% to installed capacity in FY10, is expected to account for ~55% of the total capacity addition planned over FY1015E. Private sector participation has been increasing on attractive returns, increased flexibility and availability of funding options and high merchant power rates that has been the catalyst. Installed capacity is set to increase from 159, 398MW in FY10 to 270,929MW in FY15E. Exhibit 7: Power Capacity Addition (FY10-15E) (MW)
Central Sector DVC Neyveli NHPC NTPC Nuclear Power Corporation Satluj Others Total - Central sector State Sector Private Sector Adani Power Adhunik Avantha CESC China Light & Power (CLP) Essar Power GMR GVK Indiabulls JP Power Ventures JSPL JSW Energy KSK Energy Konaseema Lanco Infratech Reliance Infra Reliance Power Sterlite Energy Tata Power Torrent Power Others Total Private Sector Total Addition Total capacity Source: CEA, Karvy Institutional Research
Private Sector to Augment Power Supply
FY10
3,544 2,490 5,175 31,494 4,340 1,500 5,410 53,953 73,984 660 191 1,200 515 823 900 700 1,000 995 144 280 1,321 940 300 3,104 1,647 16,741 31,461 1,59,398 1,59,398
FY11E
1,000 750 812 1,490 600
FY12E
2,600 1,430 2,500 1,000
FY13E
550 2,050 4,280 600
FY014E
550 1,000 5,350 412
FY15E
3,980 1,400
4,652 6,413 660 945 718 1,500 300 600 613 5,336 16,401 175,799
7,530 3,723 2,640 768 330 1,500 1,200 700 1,260 600 1,325 10,323 21,576 1,97,375
7,480 3,500 1,980 1,200 2,000 540 1,920 730 -
7,312 3,500
5,380 3,500
540 1,200 1,200 1,320 1,370 1,350 660 1,520 270 1,500 720 730 660 2,000 1,000 16,040 26,852 2,47,417
1,600 1,670 370 1,350 660 1,620 1,500 1,500 1,312 730 1,320 1,000 14,632 23,512 2,70,929
2,640 1,200 12,210 23,190 2,20,565
Bottleneck in Equipment supply eases : Point to excess capacity in relation to power capacity
We believe aggressive power equipment capacity by BHEL (20GW) and the new private players such as L&T (4GW) will create excess capacity to handle the requirements of power sector. Chinese & Korean companies have also entered Indian power equipment market to tap huge opportunities in the segment. During the 10 th Plan, India has achieved only 50% planned capacity, as the shortage of equipment capacity was the major reason. By FY14E, we expect Indian BTG capacity to be at 41,000MW per annum against requirements of 26,000MW.
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July 1, 2011
Power Sector
Exhibit 8: Equipment Capacity Expansion Plans (In MW)

Companies Global Players Boilers Turbines Likely to be commissioned Existing Capacity Total Capacity
BHEL L&T JSW Bharat Forge Gammon Thermax BGR
NA Mitsubishi Toshiba Alstom Ansaldo Babcock Hitachi
5,000 4,000 3,000 4,000
5,000 4,000 3,000 5,000 2,000 4,000
FY13 FY11-12 FY12-13 FY12-14 FY12-13
15,000 -
20,000 4,000 3,000 5,000 2,000 3,000 4,000
Also, we do not expect any constraints from generation (EPC) contracts and transmission business as many players have entered in these business. Exhibit 9: Constraints from Generation
No constraint Generation BTG EPC Ash handling Coal Handling Cooling towers Chimany Dimeneralised plant Fuel oil system Transmission Substation Transmission lines
Source: Karvy Institutional Research
Moderate -
High -
We estimate ~110,000MW of generation capacity to be added over FY10-15E and this would reflect in higher power supply that would increase at a CAGR of 10.2% exceeding demand by a CAGR of 8% during the mentioned period. However, the power deficit would reduce from 10.1% in FY10 to 3.3% in FY15E.
Particulars
Expect the power deficit to narrow by FY15E
Exhibit 10: India Power Deficit
FY10 159,398 117,955 0.74 75 775 746 830 8.0 0.9 7.2 84 10.1
FY11E 175,799 130,091 0.74 75 855 10 812 897 8.5 0.95 8.1 85 9.5
FY14E 247,417 173,192 0.7 75 1,138 12 1,081 1,133 8.5 0.95 8.1 52 4.6
FY15E 270,929 189,650 0.7 75 1,246 10 1,184 1,224 8.5 0.95 8.1 41 3.3
Total capacity (MW) Effective capacity (MW) Eff. cap/Total cap PLF (%) Total generation (bn units) Growth (%) Total availability (bn units) Total demand (bn units) GDP Growth (%) Power Demand Elasticity to GDP growth Electricity demand growth (%) Deficit (bn units) Deficit (%)
July 1, 2011
Power Sector
Fuel Security A Concern & Key Determinant of Profitability

Our views on key issues
I. II. III. IV. V. VI. VII. VIII. Coal deficit to continue Too much environmental concerns and regulatory approvals resulting in project delays Coal Linkages is the key: Most private firms acquire overseas mines to meet the shortfall Coal Imports to Surge due to Domestic Coal Shortage Coal Imports: Inadequate infrastructure a constraint Cost Pressure Significant Leeway for hike in domestic coal prices Alternate fuels: gas-based power firms face availability, infra bottlenecks RoE Sensitivity to Coal Prices & Tariffs Levelling of Tariffs
I. As most upcoming capacities are coal-based, coal deficit in power sector would continue
Presently, coal-based plants account for ~ 60% of India's power generation capacity. This scenario is expected to continue given a major portion of the upcoming capacity is also based on coal. According to our estimates, the power sector would require additional coal supply of ~446MT over the next five years at a 10.2% CAGR, while the coal production is expected to increase by 7.2% CAGR over the next five years. Exhibit 11: Power sector Demand & Supply for Coal (MTPA) (FY10-15)
Particulars Demand Growth Domestic supply Growth To be imported Imports (%) FY10 401 366 35 FY11E 437 9 384 5 53 12 FY12E 481 10 413 8 68 14 FY13E 529 10 445 8 84 16 FY14E 587 11 480 8 107 18 FY15E 652 11 518 8 134 21
Source: CEA, Karvy Institutional Research
Note: The actual quantity of coal imported would be lower adjusted for the difference in calorific value.
July 1, 2011
Power Sector
Exhibit 12 : Of the 201 captive blocks allotted, only 25 are operational

Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total blocks Power 1 1 1 1 4 1 1 11 4 7 21 25 10 1 89 Iron & Steel 3 2 1 1 7 16 14 7 10 61 Total blocks ProducOthers allotted tion 1 1 2 3 1 1 18 20 4 2 51 1 6 0 4 2 1 2 1 21 5 24 53 52 24 3 201 2 1 1 1 3 1 2 4 10 25
II. Ongoing environmental concerns - Go & No-go zones
In a recent move, the MoEF has classified coal fields under two categories i.e. go zones and no-go zones. A no-go zone refers to the coal mines situated in densely forested areas, where mining operations are strictly prohibited. On the other hand, if a coal field is situated in a go zone, the Ministry considers mining proposals for approval or rejection based on their suitability. However, the projects in the go zones also have to go through the environmental and forest clearance process before getting the approval. The MoEF has classified 203 coal blocks measuring 3.5 lakh hectares under the no-go zone.
Too much regulatory approvals required

The Indian coal industry is a highly regulated industry, which gives it a monopolistic character. Currently, only government-controlled companies are allowed to sell coal in open market. As part of the coal reforms, the Indian Government has allocated 201 coal blocks to public and private companies for captive use since 2003, but only 25 of them are operational. Further, the output has been very low, as most of these captive blocks have recently started operations due to delays on the procedural front; and problems related to mining approvals, land acquisition and rehabilitation issues.
Exhibit 13: Thermal coal imports (mtpa)

150 CAGR 31.6% 100 50 0 FY10 FY11E FY12E FY13E FY14E FY15E Source: Karvy Institutional Research 35 53 68 84 107 134
III. Coal Linkages is the Key: Most private power producers hunt for overseas coal assets to meet the shortfall
The major private power generating companies of India such as Tata Power, Reliance Power and JSW Energy have acquired coal mines abroad to meet their fuel requirements. Tata Power has acquired 30% stake in the coal mines of Bumi Resources, which will provide 12.3 MTPA of coal for its Mundra project. Through its acquisition of SACMH, JSW Energy was also looking for acquisition of CIC Energy, which was however could not be materialized. CESC has picked up a 4.8% stake in an Australia-listed mining company i.e. Resource Generation for $10 mn. NTPC plans to set up a new entity for acquiring coal assets abroad to secure fuel supplies for its coal-based plants. Exhibit 14: Acquisition of Coal Mines by Indian Power Companies
Company GMR Energy Adani Power GMR Infra Reliance Power Tata Power JSW Energy Location of Mine Indonesia Indonesia South Africa Indonesia Indonesia South Africa Description 100% stake in Trinity Coal Adani Enterprise acquired stake in mine and tie -up Stake in Homeland Energy 100% stake in 3 mines 30% stake in 2 mines of Bumi Resources Acquisition of 100% stake in SACMH Year 2009 2008 2008 2008 2007 2010
July 1, 2011
Power Sector
IV. Coal Imports to Surge due to Domestic Coal Shortage Coal Demand to grow at a CAGR 10.2% over FY10-15E, against a production estimate of a CAGR of 7.2% over the same period
A major portion of domestic coal is sold at notified prices (not market driven) and is available at high discount to imported coal even after adjusting for the difference in quality. However, the coal-based power plants face the problem of inadequate domestic coal supply owing to delays in procurement of coal linkages, obtaining environment clearances and other regulatory approvals for conducting mining operations (both Coal India and captive coal blocks), hurdles in expansion and logistical and infrastructural issues.
Exhibit 15: International Coal Price Trends (US$/Tonne)
250 200 150 100 50 24 0 Mccloskey New Castle Coal
192 118
In FY10, the domestic coal supply fell short of demand by 35 MT. We expect the coal shortage to become acute going ahead, with demand set to outpace supply. Coal demand, which increased at a CAGR of 8% over FY03-09, is expected to spike and record a CAGR of 10.2% over FY10-15E. On the other hand, the domestic coal production is expected to rise at a CAGR of 7.2% during the mentioned period leading to higher deficit. Against this background, we estimate India's coal imports to grow from 35 MMT in FY10 to 134 MMT in FY15E, registering a CAGR of 31.6%. New Castle Coal Index has gone up from $24 per tonne in FY03 to $192 per tonne in FY08. Hence, we believe that the coal-based power generators with secure coal access (by way of long-term import contracts or captive coal mines abroad) are better placed than the rest. Indonesia and South Africa together account for more than 95% of India's thermal coal imports due to the locational advantages. Indonesia accounts for lion's share of Indias coal imports at 80%. Exhibit 16: Forecast for Coal Demand & Production (MTPA)
Coal Demand Growth (%) Power Growth (%) Based on domestic coal Based on imported coal Cement Growth (%) Other Industries Growth (%) Domestic Coal Production Growth (%) Available for power Growth (%) Available for Cement & others Growth (%) Shortage Power Other Industries Source: Industry, Karvy Institutional Research FY10 534 401 366 35 30 103 534 366 98 35 35 FY11 579 8 437 9 384 53 32 7 110 7 579 384 5 101 4 53 41 FY12E 634 9 481 10 413 68 35 9 118 7 634 413 8 105 4 68 47 FY13E 693 9 529 10 445 84 38 9 126 7 693 445 8 110 4 84 54 FY14E 764 10 587 11 480 107 42 11 135 7 764 480 8 114 4 107 63 FY15E 842 10 652 11 518 134 46 10 144 7 842 518 8 119 4 134 72
Jan-03 Aug-03 Mar-04 Oct-04 May-05 Dec-05 Jul-06 Feb-07 Sep-07 Apr-08 Nov-08 Jun-09 Jan-10 Aug-10 Mar-11
Exhibit 17: Imports Requirement Sensitivity

Coal Production growth (%) 4 Imports (FY12E) 81 4 Imports (FY13E)
Source: Karvy Institutional Research 9
5 76 5 78
6 72 6 73
7 68 7 68
8 63 8 64
Coal Production growth (%) 82
July 1, 2011
Power Sector
Our View: Coal imports will not resolve the problem of domestic coal shortage, as we foresee a lot of challenges. The problem is compounded by the country's inability to handle imported / domestic assets, as the actual capacity additions are expected to be lower for handling incremental coal imports of 446MT. At the same time, the coal import is also fraught with policy risks. We believe that a steep rise in coal imports will put pressure on Indias port handling capacity and the associated inland rail / road transportation.
V. Key Issues for Coal Imports: Poor Infrastructure a Major Constraint

Port Capacity: We estimate India's coal imports to grow from 35 MMT in FY10 to 134 MMT in FY15, registering a CAGR of 31.6%. The coal handling capacity of major ports is 47 MTPA, with a total capacity addition of 67 MTPA, which will take total port capacity to 114 MTPA. Indian ports just have adequate capacity to handle existing level of coal imports. The issue has also been flagged in the mid-term appraisal of the 11th Plan, as per which by the end of the current Plan, the imported coal will account for 11.7% of the estimated demand, as against 7% projected earlier. This will rise further to over 20% by the terminal year of 12th Plan (2012-17). Despite this visible demand, the investments in the ports sector have been low, projected at Rs. 406.47 bn during the 11 th Plan, which is less than half of the original target of Rs. 879.95 bn. Rail network: In FY10, 46.3% of the coal was transported through railways and the balance mainly through roads (28.7%) and Merry Go-round Systems (MGR) (19%). The expected demand of around 681 MTPA in FY15E from 401 MTPA in FY11 will require additional transportation capacity. Higher demand growth from commodities as against capacity addition delays in railways network will pose significant challenges to efficient distribution. As per the Memorandum of Understanding (MoU) signed with the Coal Ministry, Coal Indias rake requirement for FY11E was 185 per day, as against the average railways rake supply of 155 per day. However, if the Railways fail to provide the required number of rakes, then Coal India will be forced to cut its production targets set in the MoU. Exhibit 18 : Inadequate Supply of Railway Rakes
(Rakes per day) Target Availability Shortfall
Source: CIL, Karvy Institutional Research
FY08 156 153 3
FY09 163 156 8
FY10 165 155 10
FY11E 185 155 30
FY12E 204 164 39
FY13E 226 174 52
FY14E 248 185 64
FY15E 271 196 75
VI. Significant Cost Pressure; Leeway for hike in domestic coal prices
Since the deregulation of coal pricing in 2000, Coal India (CIL) has revised the notified coal prices in India only five times till date. As a result, the price of notified coal has increased at a 4.9% CAGR over FY2000-2010. The Company has kept prices for linkage coal significantly lower than the landed cost of coal, even after adjusting for the a content. Over the years, CILs prices have sh traded at a discount of 36-69%, as compared to international prices. This is because coal prices in India can have a significant impact on the power sector, which accounts for ~80% of CILs sales volume. CIL predominantly controls the Indian coal market, accounting for ~82% of the total coal production, followed by Singareni Collieries Company (SCCL). Moreover, the power sector operates within a government-regulated RoE regime that warrants lower coal prices to keep power cost under control.
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July 1, 2011
Power Sector
CIL ups prices by 12% in Feb11 for non-regulated sectors

Coal India has hiked price of premium grades of coal, A & B, to the international price and will now be offered at a 15% discount on the global spot prices. The benchmark price will be decided through a complex formula involving calorific value of the coal, as well as on the basis of Indonesian coal spot prices. Rest of the grade, C to F, will now be 30% dearer than the earlier notified price. The hike has been for non-regulated sector , while power, fertilizer and defense have been left out of the hike, which consumes approximately 80% of CILs coal.
We believe that the coal price of grade A & B likely to increase annually to cover inflation, rising wage & dearness allowance hikes etc., but other grades (C-grade) consume d by the power sector will be under government control.
VII. Alternate Fuels: Gas-based power firms face availability, infra bottlenecks
The estimated requirement of gas is much higher than estimated availability The contribution of gas to India's total installed power generating capacity was 10.3% (17,456MW) as on March 31, 2011. In FY11, the gas-based plants accounted for 12.5% of the actual power generation of the country. Currently, from the total availability of natural gas of 160 MMSCMD, ~40% is being supplied to the power sector. Further, from the 55 MMSCMD of APM gas available, 24.5 MMSCMD is being supplied to the power sector. In the Jul10 meeting of the Empowered Group of Ministers (EGoM), total gas allocation of 91.6 MMSCMD was finalised, with 43.1 MMSCMD being allocated to the power sector (31.2 MMSCMD on firm basis and 12 MMSCMD on fallback basis). Moreover, 10 MMSCMD of gas was allocated to the captive power plants on fallback basis. However, by the end of the 11th Five Year Plan, the total gas requirement is expected to be 129 MMSCMD, which is much higher than the estimated availability.
Non-utilization of allocated gas reflects poor gas trunk pipeline grid hampering power generation
One of the issues affecting the power sector is the non-utilization of allocated gas primarily impacted by inadequate pipeline infrastructure. The present gas trunk pipeline grid is only around 10,000 km in length. Several pipeline systems have been proposed, which are currently in the authorization process as per the legal framework of the PNGRB Act, 2005. Exhibit 19: Power Sector - Gas Requirement
140 120 100 80 60 40 20 0 FY2008 FY2009 FY2010 FY2011E FY2012E Source: Karvy Institutional Research 11 (mmscmd)
July 1, 2011
Power Sector
VIII. RoE Sensitivity to Coal Prices & Tariffs

Until 2003, all power companies earned regulated returns as specified by the CERC regulations (base RoE as 15.5% with incentives). However, current industry dynamics provided players opportunity to generate super normal profits. During FY07-FY10, the private players expose to merchant business generated RoE in excess of 70-80%, but given the fall in merchant realisation and higher coal prices we expect RoE to settele at 22%.
We believe that the high demand for coal has increased the coal price, which are significantly higher than domestic coal linkage. The companies who got linkage would get advantage in securing higher RoE.
Exhibit 20: Illustration of RoE at Various Coal Prices & Tariffs
Capacity (MW) Units Generated (MU) at 85% PLF Tariff (Rs/unit) Coal cost (Rs. per MT) Calorific Value Heat rate Coal required in kg per unit Coal cost per unit of generation O&M and other costs Cash cost of generation (Rs. per unit) Depreciation Interest PBT Tax PAT per unit Project cost (Rs. in crore) RoE (%)
Linkage Coal 1,000 1,000 1,000 7,446 2.5 1,900 3,500 2,450 0.7 1.33 0.27 1.60 0.32 0.51 0.07 0.02 0.05 4,500 2.6 7,446 3 1,900 3,500 2,450 0.7 1.33 0.27 1.60 0.32 0.51 0.57 0.17 0.40 4,500 20.0 7,446 3.5 1,900 3,500 2,450 0.7 1.33 0.27 1.60 0.32 0.51 1.07 0.32 0.75 4,500 37.3
Imported Coal 1,000 1,000 1,000 7,446 2.5 3,798 5,235 2,450 0.5 1.78 0.27 2.05 0.32 0.51 -0.37 -0.11 -0.26 4,500 -13.0 7,446 3 3,798 5,235 2,450 0.5 1.78 0.27 2.05 0.32 0.51 0.13 0.04 0.09 4,500 4.4 7,446 3.5 3,798 5,235 2,450 0.5 1.78 0.27 2.05 0.32 0.51 0.63 0.19 0.44 4,500 21.8
Captive Coal 1,000 1,000 1,000 7,446 2.5 1100 3,500 2,450 0.7 0.77 0.27 1.04 0.32 0.51 0.63 0.19 0.44 4,500 22.1 7,446 3 1100 3,500 2,450 0.7 0.77 0.27 1.04 0.32 0.51 1.13 0.34 0.79 4,500 39.4 7,446 3.5 1100 3,500 2,450 0.7 0.77 0.27 1.04 0.32 0.51 1.63 0.49 1.14 4,500 56.8
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July 1, 2011
Power Sector
Key Issues for the Power Sector

I. Poor financial health of SEBs: A major concern for merchant power firms
Most State Electricity Boards (SEBs) suffer from high technical and commercial losses, irrational power tariffs and inefficient T&D infrastructure. So, the power sector subsidy continues to be the largest component of the state government subsidies. The reforms initiated so far have not yielded any significant results due to lack of political will and support from the state governments. According to estimates by the Planning Commission, the T&D losses of the DISCOMS estimated to be about Rs. 680 bn in FY10, as against Rs. 450 bn in FY09, registering a rise of 55% on YoY basis. At FY08 tariff levels, the 13th Finance Commission believes this could be as high as Rs. 686 bn in FY11E and move up to Rs. 1,161 bn by FY15E. In our view if the financial health of the SEBs does not improve, it would prevent them from purchasing power at competitive rates, which could cap the merchant power rates and affect the merchant power players negatively. The projected aggregate losses of state T&D utilities at the 2008 tariffs are given in the following Exhibits. Exhibit 21: Net Losses of state T&D utilities (Rs. crore)
FY10-11 0 -20000 -40000 -60000 -80000 -100000 -120000 -140000 Source: 13 th Finance Commission, Karvy Institutional Research (68643) (80319) (88170) FY11-12 FY12-13 FY13-14 FY14-15
Exhibit 22: Cash Losses of SEBs

(Rs. in crore) Gujarat Maharashtra Punjab Rajasthan Tamil Nadu FY07 208 -653 -1187 -299 -901 -4612 FY08 -38 -949 -693 -2167 -3108 -2985 FY09 222 -2632 -142 -7325 -6640 -7168
(98664) (116089)
Uttar Pradesh
Source: 13 th Finance Commission, Karvy Institutional Research
These financial projections assume a reasonable reduction T&D loss in each state. As against the enormous financial losses indicated above, the subsidies in 2007-08 stood at Rs. 169.5 bn. Thus, there is a large and burgeoning uncovered gap. The key reasons for the increasing gap can be summarized as follows: I. Absence of timely tariff hikes has increased the gap and has impaired utility operations further. Some states have not raised tariffs for the past eight to nine years in spite of increasing deficits, II. Higher T&D losses III. Higher cost of short-term purchased to reduce load shedding, as several utilities have not planned capacity addition as per the demand requirements thereby relying on short-term purchases at high rates (an average of Rs. 7.31 per kWh, as compared to Rs. 4.52 per kWh in 2007-08). Tariff increase requirements to bridge the gap, even in the better performing states, are as much as 7% per annum on an average (considering the 2007-08 subsidy levels). In some of the poorly performing states, the increase in requirements is as much as 19% per annum, which is indeed difficult to achieve, which pose a high risk to their financial stability.
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July 1, 2011
Power Sector
Exhibit 23: Total Financing Requirements of Power Sector (Rs. crore)

140000 120000 100000 80000 60000 40000 20000 0 101271 115637
75880
88529
93604
FY10-11 Source: 13th Finance Commission
FY11-12
FY12-13
FY13-14
FY14-15
Exhibit 24: Losses Estimates for Maharashtra SEB (Case Study)

FY09 Power Purchase (MU) Within state Outside state Inter-state Transmission Losses (MU) (as a % of power purchased) Available for Distribution (MU) Distribution Losses (as a % of power distributed) Power Sold (MU) Average realization per unit (Rs) Total sales (cr) Cost of supply per unit Total revenue expenditure Cash Losses (cr)
FY10 84,641 61,031 23,610 1,145 5 83,496 15,196 18 62,696 3.87 24,263 4.36 27,323 -3,060
FY11E 85,862 62,252 23,610 944.4 4 84,917 14,436 17 70,481 3.99 28,095 4.53 31,959 -3,864
FY12E 87,107 63,497 23,610 944.4 4 86,162 14648 17 71,515 4.11 29,362 4.67 33,400 -4,039
FY13E 88,377 64,767 23,610 944.4 4 87,432 14,863 17 72,569 4.23 30,688 4.81 34,910 -4,221
FY14E 89,672 66,062 23,610 944.4 4 88,728 15,084 17 73,644 4.36 32,077 4.95 36,490 -4,412
FY15E 90,993 67,383 23,610 944.4 4 90,049 15,308 17 74,740 4.49 33,531 5.1 38,144 -4,612
79,745 54,170 25,575 1,240 5 78,505 17,648 22 57,796 3.69 21,327 4.01 23,199 -1,872
II. Merchant Power: We expect rates to decline as capacity addition softens Settling at levels of Rs. 3.50 per unit in FY13 yields RoEs of ~22%
I. Merchant Power Tariffs to Decline 40% over FY10-13E
The merchant power rates in India have gone up from Rs. 3 in FY06 to Rs. 6 in FY10 due to increased power deficit. With new capacities getting operational, the merchant rates are expected to decline by 40% over FY10-13E, settling at healthy levels of Rs. 3.5 per unit in FY13E and yielding RoEs of ~22%. Further, seasonal factors and events such as elections would play a crucial role in determining the prices. An analysis of the merchant power rates show that historically the summer months (Mar-Jun) witness heavy demand from both the domestic and industrial segments, resulting in load shedding and upward push in the merchant power rates, as the distribution utilities attempt to procure power at higher prices to meet the increased demand.
II. Capacity Additions to Soften Rates

We expect a substantial portion of the uncompleted capacity addition of the 11th Plan to be commissioned in FY13E and FY14E, resulting in a fall in demand for merchant power beyond FY14E. Further, the weak financial position of SEBs, which is not likely to show any major improvement over the next few years, would restrict their ability to buy mer chant power and in turn keep the prices low. Accordingly, for FY12E and FY13E, we have assumed average merchant power rates of Rs. 4 per unit and Rs. 3.5 per unit , respectively and expect it to settle at lower levels of Rs. 3.5 per unit, as newer capacities come up.
14
July 1, 2011
Power Sector
Exhibit 25: Merchant Power Rates vs. Power Deficit (FY06-14E)

8 6 4 2 0 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2015E FY2006 FY2013E FY2014E
Merchant rates to decline 40% from FY10 (%)
12 10 8 6 4 2 0
Merchant Rates (LHS) Source: Karvy Institutional Research
Power Deficit (RHS)
Our View: Huge Capacity Addition in Inter-Regional Transmission & Open Access would improve Regional Imbalances
Currently, inter -regional power transmission capacity is 22,000MW, which is expected to increase to 37,000MW by FY12E. Power Grid Corporation of India (PGCIL) has envisaged capital expenditure of Rs. 1,000 bn in the 12 th Plan period, as against Rs. 550 bn in the 11 th Plan. PGCIL has identified seven highcapacity transmission corridors to generate power from projects coming up in the eastern and southern states, which would facilitate transfer of electricity to the power-starved northern and western regions. In our view this capacity addition would bring proper flow of electricity. Exhibit 26: Inter-Regional Transmission Capacity (MVA)
Regions ER-SR ER-NR ER-WR ER-NER NR-WR WR-SR NER-NR-NR-WR 132/110KV Total (MVA)
Source: CEA, Karvy Institutional Research
FY07 3,130 3,430 1,790 1,260 2,120 1,720 0 600 14,050
FY12E 3,630 12,130 6,490 2,860 4,220 2,720 6,000 600 38,650
FY17E 7,830 18,030 16,990 2,860 14,420 9,020 6,000 600 75,750
It may be noted that a fall in the merchant power rates is at a much higher rate than the fall in deficit.
While assuming merchant tariffs, we factor in following parameters:

1. 2. 3. 4. Demand-Supply dynamics (Peak deficit from 10% to 3.3% in FY15E) (Refer Exhibit # 10) Capacity addition pace under merchant route/Untied capacity (10,500MW) The long-term prices of around Rs. 2.8-3.3 per unit arrived during the recent Case-1 bids. (Refer Exhibit # 29) The peak unscheduled inter-change (UI) charges of Rs. 7 per kWh charged in the case of over-withdrawal and withdrawal of power at lesser frequency should act, as the ceiling for merchant power in normal circumstances. IEX Price trend CERC intervention to regulate prices in the past.
5. 6.
Accordingly, for FY12E and FY13E, we have assumed average merchant power rates of Rs. 4 per unit and Rs. 3.5 per unit respectively, and expect it to settle at lower levels of Rs. 3.5 per unit till FY15E.
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July 1, 2011
Power Sector
We do not believe there will be any significant decline in our merchant tariffs assumption of Rs. 3.5 per unit in FY13, due to the following factors:
Exhibit 27: Volume (MUs) Traded Below & Above Rs. 4 / kWh in Mar11
1500 1000 500 0 3.77-3.93 Source: CERC 4.07-7.42 1311
1. 2. 3.
98.64
4.
5.
The power traded through exchanges is only around 1.5% of the total power traded in India. Bilateral tariffs are more stable taking commercial risks into consideration for internal ROEs calculation. SEBs merchant power purchase is just 10% of the total power distributed coupled with lower cost v merchant route for private ia consumers. Domestic fuel shortage should lead to an increasing use of the high cost imported fuel, leading to an increase in the overall cost of power produced. Increase in fuel cost will lead to increase in tariff to more than Rs. 3 per unit by FY14E.
Exhibit 28: Volume (MUs) Traded Below & Above Rs. 4 / kWh in Apr11
10000 8000 6000 4000 2000 0 3.17-3.85 Source: CERC 4.04-5.65 363 8961
Exhibit 29: Tariffs determined through competitive bids

Project Sasan UMPP Mundra UMPP MW 3,960 4,000 Fuel type Company Date of award Captive Coal Mine Reliance Power Jul 07 Imported Coal Tata Power Dec 06 Imported Coal Reliance Power Captive Coal Mine Reliance Power Coal Linkage Lanco Infratech Captive Coal Mine Indiabulls Coal Linkage China Light & Power Coal Linkage Sterlite Energy Coal Linkage Coal Linkage Coal Linkage Lanco Infratech Jaiprakash Associates Jaiprakash Associates Nov 07 Jan 09 Jun 06 Mar 08 Mar 08 Jul 08 Feb 09 Feb 09 Feb 09 Bid 1.2 2.26 2.33 1.77 1.56 0.81 3 2.86 3.31 2.97 3.03
Krishnapatnam 3,960 Tilaiya UMPP 3,960 Anpara 1,200 Bhaiyathan ajjar Talwandi Rajpura Bara Karchana 1,600 1,320 1,980 1,320 1,980 1,320
16
July 1, 2011
Power Sector
Exhibit 30: Price of short term transactions of electricity, April 2011

7 6 5 4 3 2 1 0
PX(IEX) UI (NEW GRID) PX(PXIL) Bilateral UI(SR GRID)
Short-term Tariffs Northwards
Trend:
Directionally
Moves
Rs/KWH
After hovering between Rs. 2.5-3.5 per unit in FY11, the merchant tar iffs have started to move up to Rs. 4-4.5 per unit in Q4FY11 on higher demand. Some southern states have shown Rs. 7-8 per unit as per the IEX in Mar11. Contract Volume & Prices in Apr11
The reported short-term contract volume was 9,324.62 MUs in Apr11, as against 1,410.05 MUs in Mar11. In Apr11, 96% of total volume has been contracted at above price of Rs. 4 per kWh. The contracts are well-spread throughout the month and in a range of Rs. 3.17 per kWh to Rs. 5.65 per kWh. The contracts reported were mostly for one-month period of power delivery. In the beginning of Apr11, the OTC contract prices were fairly close to the Indian P ower Exchange (IEX) spot prices, while Power Exchange of India (PXIL) had higher spot prices. The minimum price in the exchanges during 28 th March 1 st May was Rs. 2.83 per kWh (IEX,24th Apr11), while that in the OTC market was Rs. 3.17 per kWh. The maximum price at the exchange reached Rs. 11.03 per kWh (PXIL, 3rd Apr11) and in the OTC market it was Rs. 5.65 per kWh. Subsequently the PXIL prices came down in the month and converged with the OTC contract and the IEX spot prices. In Apr11, the OTC contracts mostly are for a delivery period of a month. In the month under review, the contracts entered above Rs. 4 per kWh were 47 out of total 60 contracts.
Source: CERC
Exhibit 31: Three-Month Forward Curve Power Prices (13th May 5th Aug 2011)
5 4.5 4 3.5 3 13-May-11 Source: CERC 13-Jun-11 13-Jul-11 Rs / Unit
Cumulative Volume up Significantly

In Apr11, the cumulative volume traded above Rs. 4 per kWh was 8,961 MU, as against 1,311 MUs in Mar11, which is 96% (as against 93% in Mar11) of total OTC contracts for Apr11. The forward curve for the next three month from 13 th May11 to 5 th Aug11 shows upward sloping on month on month basis. For May11 delivery, the power price is Rs. 4.74 per kWh, which dropped to Rs. 4.21 per kWh on 1 st Jun11. For Jun11 delivery, the price drops to Rs. 4.02 per kWh and remain there till end of the month of Jun11. For the 1st July, the price rises to Rs. 4.56 per kW h and remains at that level till 30th July, as against Rs. 3.49 in Mar11 contracts thereby showing some strength. For power delivery in Aug11, the price rises to further to Rs. 4.58 per kWh, thereby showing some strength. This forward curve made in Apr11 is based on 100 contract prices reported by the traders.
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July 1, 2011
Power Sector
However, Price Underperformance Provides Opportunity

The BSE Utilities Index has underperformed the BSE Sensex by 23.3% over the past 12 months. The key premises for this underperformance have been: I. Cut in the production estimate of Coal India coal availability, II. Deteriorating financial condition of SEBs leading to sharp corrections in merchant prices, and III. Lower PLF & SEBs Blackout. Stocks with higher merchant power exposure have corrected significantly, given the rise in coal costs. The companies with coal resources have performed better due to higher valuations of their reserves. At current valuations the sector is looking cheap relative to its historical valuation multiples (BSE Utilities Index is trading at 2.07x at a 33% discount to its last three years average mean of 3.1x). At the trough valuations, the sector traded at its lowest historical P/BV of 1.8x recorded in FY09. Whilst the reforms encouraged private sector participation in power generation, aggressive expansion undertaken by the developers have pushed valuations from 1.5x P/BV in FY05 to ~5x in Peak (2008) on the back of high merchant prices, which were at Rs. 5-7 per unit, and core RoE ranging from 1835%). But, the concerns over higher coal prices, coal unavailability, lower merchant rates resulted in valuation erosion to 1.5-3x P/B. With sustainable RoE of 22%, we believe current valuation at 1.7X P/B, EV/EBITDA 8-9X gives margin of safety. Exhibit 32: Price Performance of Power Stocks Absolute & Relative to the Sensex
Absolute Return (%)
Company BSE Power Index Adani Power CESC JSW Energy NTPC Tata Power Source: Bloomberg 1M 3.5 (4.0) 11.6 (3.2) 10.1 6.2 3M (2.7) (2.1) (3.0) (6.0) (1.8) (3.8) 6M (11.4) (15.7) (17.3) (28.3) (6.5) (4.6) 12M (16.6) (11.7) (19.7) (45.6) (6.3) (1.8) YTD (12.8) (16.0) (17.3) (32.8) (7.7) (6.3) 1M 1.2 (6.4) 9.2 (5.6) 7.7 3.8
Relative to Sensex Return (%)

3M (0.5) 0.1 (0.8) (3.7) 0.5 (1.6) 6M (3.7) (8.0) (9.5) (20.6) 1.2 3.1 12M (23.3) (18.3) (26.3) (52.2) (12.9) (8.4) YTD (4.0) (7.1) (8.4) (23.9) 1.1 2.6
Exhibit 33: One Year Forward-P/B- BSE Power Index

6,000 5,000 4,000 3,000 2,000 1,000 0 Apr-06 Source: Bloomberg Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 (Rs) 4x 3x 2x 1x
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July 1, 2011
Power Sector
Exhibit 34: Tata Power vs. Sensex

120 115 110 105 100 95 90 85 Jul-10 Sep-10 Aug-10 Nov-10 Dec-10 Feb-11 Jun-10 Oct-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11
Exhibit 35: Adani Power vs. Sensex

120 115 110 105 100 95 90 85 80 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 May-11 May-11 Mar-11 Apr-11 Jun-11 Jun-11 19
Sensex Source: Karvy Institutional Research
Tata Power
Adani Power
Exhibit 36: JSW Energy vs. Sensex

130 120 110 100 90 80 70 60 50 Jun-10 Jul-10 Aug-10 Sep-10 Dec-10 Jan-11 Feb-11 Jun-11 Oct-10 Nov-10 Mar-11 Apr-11 May-11
Exhibit 37: CESC vs. Sensex

130 120 110 100 90 80 70 60 Jun-10 Jul-10 Aug-10 Sep-10 Dec-10 Jan-11 Nov-10 Feb-11 Oct-10 Mar-11 Apr-11
JSW Energy
CESC
Exhibit 38: NTPC vs. Sensex

120 115 110 105 100 95 90 85 80 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Apr-11 May-11 Mar-11 Jun-11
NTPC
July 1, 2011
Power Sector
Valuation Methodology Free Cash Flow -To-Equity (FCFE) is a Preffered Choice

Most of the private sector players do not have much operating capacity in place, despite having a large portfolio of upcoming projects, as: I. Most of these projects are expected to take a minimum of 2-3 years to get fully operational, thus making the cash flows from these projects backended. II. These plants will also take time to stabilize and would report lower PLFs in the initial years. III. Besides, these plants would face fuel shortage in the initial years, which would also contribute to low PLFs and lower revenues.
Why we prefer FCFE Methodology The logic

I. P/BV methodology to value power utilities is not appropriate due to their huge capital work in progress, which suppresses RoE considerably in the near term, although they would improve substantially when the plants get operational. II. Similarly, the EV/MW methodology method has its own drawbacks, as it fails to take into account the asset quality and the difference in fuel sources. III. Earnings based multiples like P/E and EV/EBITDA too are not suitable as valuations will fall significantly with a surge in earnings post commissioning of new capacities. IV. The Free Cash Flow-To-Equity (FCFE) methodology has been used to value the companies covered in this report, which we believe is best suited considering the substantial capital investment involved and long-term nature of the power business resulting in cash flows over a long period. This methodology also captures the effects of all variables such as capital cost of the project, fuel cost, merchant tariff potential, etc. Our assumptions for the cost of equity differ from project to project considering the risks involved in project execution. We have assumed 10% of the gross block as terminal value for each project. Further, in certain cases, we have provided discounts in the range of 25-75%, based on project milestones achieved. We believe that going ahead the merchant power prices would temper once the power deficit reduces on the back of capacity addition. With most of the private sector players betting big on merchant power capacities, fuel supply at fixed prices will be critical in determining the profitability of a company. Thus, the companies that have secure fuel supply linkages or captive coal blocks would be better placed than those relying on spot coal imports. This is because the spot rates of imported coal fluctuate substantially based on global demand and supply, exposing the players to the risks of high coal costs.
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July 1, 2011
Power Sector
Rationale we follow while cherry picking

Fuel Security: We expect the coal shortage to become acute going ahead, with the demand set to outpace the supply. We estimate India's coal imports to grow from 35 MMT in FY10 to 134 MMT in FY15E, registering a CAGR of 31.6%. This leads us to the belief that coal-based power generators that will secure coal access (in the form of long-term import contracts or captive coal mines abroad) are better placed than others. Operational Assets & Near-term Capacity Addition: We believe that the companies with operational assets and exposure to the merchant power business will continue to gain from high merchant rates till FY13E. We assume merchant rates of Rs. 4 per KWh in FY12E, declining to Rs. 3.5 per KWh in FY13E, and remaining at this level until FY15E; and 2% hike thereafter, as the recent competitive bids have already set a price band of about Rs. 2.8-3.2 per KWh. We expect merchant rates to be at a premium of at least 10-15% to longterm PPA rates considering the risks associated with the business. Merchant Business with Captive Coal Blocks or Fuel Linkages: The critical factor for power utilities to generate higher RoE is linked to fuel-security. In this context, the merchant business with captive coal blocks even at Rs. 3.5 per unit can generate RoE in excess of 50% on account of lower fuel cost. Merchant business that are dependent on spot coal, would earn RoE in the range of 010%, as higher spot rate (imported or e -auction) would lower PLF thereby increasing fixed cost. RoEs of 22% are sustainable; we prefer companies with assured RoE: In the global context, the power utilities are generating RoE (10-14%) slightly higher than the cost of equity and trading between 1-5-2X P/B. We believe at Rs. 3.5 per unit, imported coal-based plant will yield a RoE of 22%, which is sustainable in our view considering the risk associated with business model. In our opinion, certain key factors such as the quantum of near-term capacity addition providing revenue visibility (and ability to profit out of high merchant rates), execution capability and fuel security would distinguish the top players from the rest. We prefer companies with assured RoE, Fuel Secured at current valuation.
21
July 1, 2011
Power Sector
Scorecard Analysis
We have evaluated the companies under coverage to assign score, based on different parameters. We have assigned 5 points to each parameter to arrive at aggregate score. Based on our analysis on a scale of 100 points, Tata Power scores the highest (82 points) due to strong operational assets, robust financials, while JSW Energy scores the lowest (60 points) on account of higher exposure to merchant business, excessive dependence on imported coal etc. Exhibit 39: Scorecard Analysis
Adani Power PROJECT PORTFOLIO Operational and near term Capacities - Generation Operational and near term Capacities - Distribution FUEL SECURITY Secure fuel linkages Imported Coal Domestic Coal Captive Mines - Allocation of Coal Blocks New Mining Laws Impact Coal Acquisition Power Capacity constraints Rail Capacity constraints Cost Dynamics Impact on Coal Input Costs REVENUES Near-term visibility Portfolio Tariffs Merchant Power Exposure Merchant Power tariffs Me rchant Sales/Total Sales Incentives on higher PLF based Tariffs ADEQUATE FUNDING FOR GROWTH PLANS Generation of Cash Flows Funding Gaps Debt Servicing Obligations Financials Composite Score 3 3 3 3 3 4 3 4 3 4 3 3 3 3 3 5 4 5 4 4 5 4 5 5 5 4 3 3 3 3 2 4 4 2 2 2 3 4 3 4 4 4 2 4 4 1 1 1 5 5 5 1 1 1 4 3 4 3 3 3 4 5 4 3 5 4 4 4 4 2 4 4 4 1 2 2 2 3 2 3 3 1 5 4 5 3 4 4 4 3 5 5 5 4 2 3 5 5 4 5 4 1 3 3 3 5 5 1 5 3 CESC JSW Energy NTPC Tata Power
5 = Excellent; 4 = Good; 3 = Average; 2 = Below Average; 1 = Very Poor
22
July 1, 2011
Power Sector
Our Top Picks are best placed in terms of Fuel Security

Fuel shortage being a major concern, the companies have attempted to address the same by initiating measures such as acquiring coal mines abroad, entering long-term fuel supply agreements for imported coal or getting allotment of captive coal blocks. We like, CESC, NTPC and Tata Power on fuel security.
Exhibit 40: Fuel Security
120 100 80 60 40 20 0 Adani Tata JSW NTPC Power Power Energy CESC
Adani Power: The Company has planned to operate its plants through a mix of domestic and imported coal. It has signed a 15-year FSA with its promoter company AEL to procure 15.1 MTPA of coal to its projects located in Mundra at US$36 per tonne (CIF) with an average GCV of 5,200 kcal per kg. Additionally, APL has obtained / or is in the process of obtaining domestic linkage for its Mundra complex and Tiroda project. However, we have concerns on the availability and quality of coal. CESC: The Company has increased generation capacity by over 25%. It depends on domestic coal for most of its fuel requirements. About 50% of its coal requirements are met through Integrated Coal Mining (ICML), which is a group company, 40% is linkage from Eastern Coalfields & Bharat Coking Coal (Coal India arms), while the balance is imported from Indonesia. JSW Energy: The Company has a major portion (65% at the end of FY13) of its capacity is based on imported coal, which would be subject to the vagaries of spot coal in the short term.
Exhibit 41: Capacity addition Private Sector (FY10-15)

30000 25000 20000 15000 10000 5000 0 FY11 FY12 FY13 FY14 FY15 (MW) (%) 70 60 50 40 30 20 10 0
NTPC: The Company has secured coal linkages for 90% of its existing projects. It has 33,194MW of capacity, of which 15,740MW is under construction. NTPC has signed PPAs for a cumulative capacity of 1 lakh MW, which provides assured off-take for its future projects. Being a central public utility, NTPC is governed by the regulated return model. Tata Power: The Company has secured fuel linkage for its upcoming plants Mundra UMPP would be fueled by 12.3 MTPA of coal that it would receive from the coal mines of Bumi Resources. It has also obtained 100% fuel linkage for its 1,050MW Maithon Project in JV with Damodar Valley Corporation (DVC). Besides, the Company has stakes in two different JVs, which have been allotted the Mandakini and Tubed coal blocks.
Private Players Total Capacity addition Private capacity %
Road Ahead: we see many positives over the long-term despite the underperformance
Given the aggressive capacity expansion by the private players on the commissioned over FY10-15, the private sector which contributed mere 11% to installed capacity in FY10 is expected to account for ~65% of the total capacity addition planned over FY10-15E.
Strong Net Sales Growth (50+ Growth)

Ex. 42: Net Sales Growth (FY10-13)
250% 200% 150% 100% 50% 0% Adani JSW Tata Power Energy Power NTPC Cesc
Over the next 3-4 years, we expect the power companies to report strong net sales growth in the range of ( 3-200%) on the back of higher incremental 1 capacity addition and low base effect.
Coal Acquisition & Allocation of Coal Blocks

In the light of high coal deficit, we expect the companies will continue to see coal assets for acquisition. We expect some of the coal blocks lying in the nogo areas which could not be used for mining may be shifted to the go-areas to expedite clearance for power projects. The companies, which have made significant investments in blocks in no-go areas, could be given priority. Our Top Picks are:, CESC, NTPC & Tata Power
23
July 1, 2011
Power Sector
Exhibit 43: Comparative Analysis of Companies under Coverage

Company Adani Power CMP: 110 Reco Key Arguments Key Concerns Long -term fuel security a major concern. Cancellation of coal linkage(30% to Mundra 2640 MW. Huge expansion plans to increase its generation capacity to 5,745MW from the current 1,125MW are expected to propel its growth going ahead. High imported coal price. Merchant Exposure Execution delays, Availability of coal New Mining laws in Indonesia could restrict exports Key Financial Highlights Topline to grow at a CAGR of 200% over FY10-13E Net Profits to grow at 143% FY10-13E Recovery in retail business a key trigger. Net profit to grow at CAGR of 50% from FY1013E Valuation Trading at 2.2x FY13E Book value SOTP based value of Rs. 117 Trading at 0.7x FY13E Book value SOTP-based Target price of Rs. 381 HOLD Strong near term revenue visibility due to 3,960MW operational capacity in FY12E Early commissioning of plants to result in more merchant Power till FY13E BUY Regulated business model / Improving retail business
CESC CMP: 299
JSW Energy CMP: 67 NTPC CMP: 187 Tata Power CMP: 1,308
HOLD A major portion (70%) of JSWEL's FY12E capacity would operate on imported coal. High exposure on merchant power rates. BUY Impressive project Portfolio backed by sound execution skills. BUY Regulated model Impressive project Portfolio backed by sound execution skills Bumi acquisition provides a derivative play on coal Adequately -funded growth Plans
Top-line to grow at a CAGR of 44% over FY10-13E Net Profits to grow at 11% FY10-13E Pretax RoE at 23%.Net profit to grow at 11% CAGR over FY11-13E. Topline to grow at a CAGR of 19% over FY10-13E
Trading at 1.4x FY13E Book value SOTP-based Target price of Rs. 75 Trading at 1.8x FY13E Book value SOTP-based Target price of Rs. 219 Trading at 1.6 x FY2013E Book value SOTP-based Target price of Rs. 1,503
Source : Karvy Institutional Research
Exhibit 44: Global peers Comparison

Mkt Cap (US$ mn) India Adani Power CESC JSW Energy NTPC Tata Power Global Exelon Corp* Southern Co * Dominion Resources Nextera Energy INC* Rwe AG* Endesa SA* Enel SPA* Tokyo Electric Chubu Electric Kansai Electric Hong Kong Hongkong Electric CLP Holdings China Resources China Datang Intl Power Huadian Power Intl 14,816 19,626 8,399 9,877 3,460 13.6 14.9 11.7 13.6 86.8 13.2 14.2 9.6 11.6 20.1 13.0 13.2 8.9 8.9 16.3 1.9 1.9 1.4 1.1 0.7 1.8 1.8 1.3 1.0 0.7 1.7 1.7 1.2 0.9 0.6 15.0 12.8 12.7 8.1 1.3 14.2 13.2 14.0 8.4 3.2 14.0 12.3 13.5 8.8 4.0 26,693 32,370 25,559 23,178 36,115 32,860 60,501 8,704 16,606 19,440 10.1 15.1 14.1 12.3 9.2 10.5 9.4 7.3 18.1 12.5 13.6 14.2 13.5 11.7 9.0 9.8 9.1 (2.5) 13.7 11.5 13.7 13.4 12.8 11.0 10.5 9.0 8.9 (47.8) 12.3 10.1 1.8 1.8 2.0 1.5 1.6 1.2 1.1 0.2 0.8 0.8 1.7 1.7 1.9 1.4 1.5 1.2 1.0 0.3 0.8 0.8 1.7 1.6 1.8 1.3 1.3 1.1 1.0 0.4 0.8 0.8 18.7 12.7 14.4 12.3 17.0 11.9 11.8 3.2 4.5 6.8 12.9 12.9 14.4 12.1 16.3 12.7 12.0 5.9 5.9 7.2 12.7 12.3 14.8 12.0 13.3 11.7 11.5 8.0 6.7 7.9 5,380 7,67 2,427 33,409 6,739 46.7 12.6 13.1 18.3 15.1 10.0 9.6 9.1 16.0 12.0 9.7 7.1 10.8 13.8 10.6 3.8 1.0 1.9 2.5 2.2 2.8 0.8 1.6 2.3 1.9 2.2 0.7 1.4 1.8 1.6 8.5 6.3 15.4 13.0 15.6 32.0 6.3 18.9 13.7 17.1 25.7 7.9 13.7 14.2 15.4 FY11E P/E (x) FY12E FY13E FY11E P/B (x) FY12E FY13E FY11E ROE (%) FY12E FY13E
Source : Bloomberg & Karvy Institutional Research, * Fiscal year end Dec, CY10 24
July 1, 2011
Power Sector
Key Challenges Affecting Power Sector Players

Exhibit 45: Key Risks & Challenges Land Acquisition Location of a plant is the key for successful operation of a plant. In many cases, the state governments take the onus of procuring the land under the Land Acquisition Act, which provides compulsory acquisition if it is in public interest. The land acquisition process is time-consuming and on an average takes 30 months to complete. The acquisition process could meet legal and other obstacles, if the owner of the land objects to compulsory acquisition on the grounds that the land is used for agricultural purpose or when the proposed area to be acquired is excessive. The main bone of contention lies in arriving at a suitable compensation for the owners of the land. The Ministry of Environment & Forest (MoEF) issues the environment clearance certificate on recommendation of the Expert Appraisal Committee based on the Environment Impact Analysis prepared by the project developer, which is generally a time-consuming process. The issues related to environment clearance arise relating to rehabilitation of the affected people, use of forest land and coastal area for projects. Generally, the projects on forest land require forest clearance, which again is timeconsuming. Further, the developer needs to pay the NPV of the expected loss arising from the use of forest land. The companies also face hurdles in developing captive coal blocks situated in the forest areas. Obtaining uninterrupted fuel supply is of paramount importance as fuel shortage would result in low PLF and in a worst-case scenario cripples the entire project. Further, the failure to enter into a fuel supply agreement (FSA) at fixed prices might result in cost escalation affecting profitability. Generally, it takes 25-30 months to achieve coal linkage, as it is a long drawn process. The project developer has to apply to the coal ministry for linkage, which then allots the linkage from CIL and its subsidiaries based on various considerations such as plant location, size, etc. Similarly, the allocation of captive blocks is time consuming, as it involves getting a number of regulatory approvals. Obtaining gas linkages also takes a lot of time. Power equipment generally consist of two major portions i.e. BTG (Boiler, Turbine & Generator) and BOP. India is currently facing shortage in BTG and BOP equipment. T certain o extent, the BTG shortage is met through Chinese imports and capacity expansion at BHEL current capacity of 15,000MW, which is set to rise to 20,000MW per annum by FY12 as wells as capacity addition by the new players.
Environment Clearance
Fuel Supply Agreement
Equipment
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July 1, 2011
Power Sector
Exhibit 46: Valuation Summary: Relative & Comparative Valuations

APL Current Capacity Under Construction Capacity Current +UC Capacity Pipeline Capacity Total Capacity FY10 FY11E FY12E FY13E CAGR over FY10-13E Share Price Market Cap FY13 Enterprise value EV/MW based on FY2013 capacity No of shares Earning Matrix (EPS) FY10 FY11E FY12E FY13E RoE (%) FY10 FY11E FY12E FY13E
Source: Company & Karvy Institutional Research
CESC 1,225 1,200 2,425 4,640 7,065 975 1,100 1,225 1,225 7.9% 299 37 87 71 125
JSW Energy 1990 1,150 3,140 7,800 11,210 995 1,400 2,740 3,140 46.7% 67 109 185 67 1640
NTPC 33,033 19,440 59,473 16,110 75,583 31704 34044 38364 43814 11.4% 187 1541 2155 56 7241
Tata Power 3,100 5,416 8,516 5,600 14,074 2,945 3,127 5,990 8,516 42.6% 1,308 310 554 65 247
MW MW MW MW MW MW MW MW MW (%) Rs. Rs. in bn Rs. in bn Rs. in mn / MW
1980 5,940 7,920 8,580 16,500 660 1,980 3,960 6,600 115.40% 110 239 489 74 2180
0.8 2.4 11.0 11.5
12.4 23.7 31.4 42.3
4.5 5.1 7.3 6.2
10.6 10.8 11.7 13.6
82.9 87 109.3 124
4.2 8.5 32.0 25.7
3.4 6.3 6.3 7.9
23.2 15.4 18.9 13.7
13.6 13.0 13.7 14.2
18.0 15.6 17.1 16.7
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July 1, 2011
Power Sector
As per the current CERC Tariff Regulations, RoE is fixed on pre-tax basis, for which the base rate of 15.5% would be grossed up through the applicable tax rate for the company. Further, the companies are also eligible for incentives for exceeding the prescribed level of operational efficiencies with respect to the Plant Availability Factor (PAF). On the flip side, the companies are also penalized for not meeting certain operation criteria with regard to plant heat rate and auxiliary consumption. While the regulations have provided for higher RoE for thermal power projects, the regulations have provided for a higher normative O&M expenses. Exhibit 47: New & Old Regulations at a Glance
Parameter Old Norm New Norm
RoE (%) Efficiency Incentive GSHR 300/330/350MW 600/660MW Auxiliary Consumption (%) 200MW 500MW and above Maintenance Spares Operation & Maintenance Cost Depreciation Refinancing Gains Source: CERC 9 7.5 1% of Capital cost 10.95 lakh/MW (500>MW) 3.6%+AAD Not to be retained 8.5 6 8.5 20% of Normative O&M expenses 13 lakh/MW 5.28% Generators can Retain 33% of gain 2450 Kcal/KWh NA 2,425 Kcal/KWh 2,425 Kcal/KWh 14 80% PLF 15.5 85% PAF
New Tariff Norms (FY09-14) Favorable for Power Sector
RoE at 15.5%: The CERC has specified a Pre-Tax RoE of 15.5% for the tariff period 2009-14, as against a Post-Tax RoE of 14% in the previous tariff period (FY04-09). It allowed rate of RoE of 16% and 14% for the tariff period 2001-04 and 2004-09, respectively. Further, it has allowed an additional RoE of 0.5% for projects commissioned after April 2009 within specific timelines. We believe the additional RoE will act as an incentive for a project developer to achieve timebound milestones. This is expected to be positive for central sector as from 2009-10 onwards as the player would earn 15.5% RoE. Depreciation Rate: The CERC has removed the concept of AAD, while increasing the depreciation rates applicable for projects. As against a deprecation rate of 3.6% for thermal power projects and 2.57% for hydel projects, the CERC has increased the depreciation rate to 5.28%, which we believe will result in the lowering of tariff of a project during the initial years. The 5.28%depreciation rate will require a debt repayment period of 13-14 years. Incentives linked to PAF as against PLF: Under the new regulations for 200914, the CERC has raised the normative annual PAF for the full recovery of fixed charges from 80% to 85% thermal generating stations. This is a positive for plants that are operating at lower PLFs on certain issues compared to their availability.
Other Key Regulator y Developments
Open Access in Inter-State Transmission: The CERC has notified regulations for medium-term (3-12 months) and long-term open access (12-25 years). Grid connected utilities can seek either medium-term or long-term access to system. Any generating plant having installed capacity of at least 250MW and any bulk consumer having at least a load of 100 MW can seek connectivity to interstate transmission system. This regulation has benefited merchant players to bridge the demand-supply deficit and earn higher realization. Promotion of Renewable Energy: The CERC has notified tariff regulations for determination of tariffs for projects being setup on renewable energy sources. The regulations has also specified that minimum renewable purchase standards be set at 5% for total power purchases for FY10 and should be increased by 1% each year for ten years. CERC has notified higher RoE for the project pre-tax 19% for first 10 years and pre-tax 24% from 11th year onwards which makes sector more attractive.
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July 1, 2011
Power Sector
Exhibit 48: New CERC Norms Parameter

RoE
FY09-14
15.50%
FY04-09
14%
Remarks
Positive
NTPC
Operates under regulated business model (100%). It has benefited by 150 bps due to new tariff norms. Fixed cost recovery is based on plant availability factor as against PLF is profitable for NTPC as the Company has higher plant availability.
Tata Power
Operates under MERC regulations. But all SEBs adhere to CERC regulations. -
Adani Power
Does not have projects under regulated tariff. Most of its projects are under Case-1 bidding. Neutral
JSW Energy
Its portfolio is mix of merchant business & Case1 bidding.
CESC
Its 1,000MW (90%) operates under regulated tariffs of WBEDCL. -
Efficiency Incentive
85% PAF
80% PAF
Negative
Depreciation
5.28%
3.6%+AAD
Neutral
Refinancing gains
Operation & Maintenance cost Station Heat Rate
Generators can Retain 33% of gain 13 lakh/MW 2425
Not to be retained 10.95 lakh/MW (500>MW) 2450 (300/330/35 0 MW) 14%
Positive
Marginally Positive Marginally Negative Positive
With proposed increase in Availability norm from 80% to 85%, the quantum of energy/availability for incentive is reduced. Moreover, with Income Tax on incentive to be borne by NTPC, effective rate of incentive has reduced. Existing regulation provides 25p/kWh on Scheduled PLF. With new proposal the effective rate for will be 21.5 p/kWh for coal stations The depreciation rate at 5.28% will require a debt repayment period of 13-14 years; the higher r turn on equity will partly e offset the impact of the abolition of AAD which were providing higher cash-flows in the initial years. Regulators has allowed r etention of 33% of the benefits, if any, arising out of re-financing of loans earlier utilities have to passed it entirely to the beneficiaries. Increased in O&M on account of expected increase in wages
Neutral
Neutral
Neutral
Neutral
Neutral
Tighter norms will reduce incentive
Higher RoE for Transmission Lincencee
15.5%
NTPC does not have transmission network
Higher RoE for Transmission business to benefit TATA Power to some extent of Rs 15 cr.
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July 1, 2011
Power Sector
ANNEXURE
Reforms Attract Higher Investments in Power Sector
Prior to implementation of the Electricity Act 2003, the two impediments that prevented entry of private sector players into the power generation segment were the requirement of licenses to generate power and single buyer model for power generation companies. However, the Electricity Act 2003 eliminated both the need for licensing and the single buyer model, while providing the necessary impetus for increased participation by the private sector players. The Act also targets to address the problem of payment security faced by the private players, which prevented them from putting up generation capacity.
National Tariff Policy Additional Fillip for Private Participation
Multiple Revenue Models
As per the National Tariff Policy (NTP), it is essential to attract adequate investments in the power sector by providing appropriate RoI, as the budgetary resources of the central and state governments are incapable of providing the requisite funds. As per the NTP, it is also equally necessary to ensure availability of electricity to the different categories of consumers at reasonable rates for achieving the objectives of rapid economic development of the country. Balancing the requirement of attracting adequate investments to the sector and ensuring reasonable charges for the consumers is the critical challenge for the regulatory pr ocess.
The Indian power companies enjoy the benefit of adopting a multiple revenue models with each providing unique advantages. The companies can earn RoEs ranging from 15.5% to as high as 75%. Till recently, the power generation companies in India operated only under the fixed RoE-based business model. Fixed RoE-based Business Model: The central public sector utilities continue to function as per this model for a major portion of their output. As per the current CERC Tariff Regulations, the RoE is fixed on pre-tax basis, for which the base rate of 15.5% would be grossed up through the applicable tax rate for the company. The companies are also eligible for incentives in case they exceed the prescribed level of operational efficiencies with respect to the PLF. However, on the flip side, the companies are penalized if they do not meet certain operational criteria with regard to plant heat rate and auxiliary consumption. The companies can also pass through the fuel cost. Exhibit 49: CERC Tariff Regulations (FY10-14)
Parameter
RoE (%) Efficiency Incentive GSHR 300/330/350MW 600/660MW Auxiliary Consumption (%) 200MW 500MW and above Maintenance Spares Refinancing Gains Source: CERC
Old Norm
14 80% PLF
New Norm
15.5 85% PAF
2450 Kcal/KWh NA 9 7.5 1% of Capital cost Not to be retained
2,425 Kcal/KWh 2,425 Kcal/KWh 8.5 6 - 8.5 20% of Normative Operating expenses Generators can Retain 33% of gain
Advantages of fixed RoE model: The biggest advantage of the RoE model is that it ensures stable cash flows and assured returns to the utilities. The power plants operating under the fixed RoE model have assured off-take due to the long-term PPAs, which generally last for 25 years and hence enjoy revenue certainty. Competitive Bidding: Under competitive bidding, the power utilities select the suppliers through a bidding process wherein the power generator quoting the lowest tariff is preferred. The mega power projects (MPPs) and ultra mega power projects (UMPP's) adopt the competitive bidding route, wherein the low cost bidder is selected to execute the project.
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July 1, 2011
Power Sector
Exhibit 50: Power Business Models

Business Model Regulated Returns Normative RoE Upside Saving on Norms, PAF Incentive Captive Power Plant Value Drivers Operational Efficiency Major Players Utilities like NTPC, NHPC Jindal Steel & Power (JSPL)
PPA driven Merchant Sales, Trading Saving on agreed terms, PAF Capabilities + Incentive Operational Efficiency Trading Capabilities Control on Capital and Fuel Costs Control on Capital and fuel costs
Merchant Case 1 Case 2
Market driven Bid driven Bid driven
No cap on returns PAF Incentives PAF Incentives
JSPL, Adani Power Adani Power Tata Power, Reliance Power
Source: Company, Karvy Institutional Research
Merchant Power: The merchant power business has a revenue model that is different from the regulated model and competitive business models. The merchant power plants are not tied-up with long-term PPAs and hence, the Independent Power Producers (IPPs) experience off-take risks. The merchant plants depend on redundancies in the existing transmission system to evacuate power. Thus, to ensur e large volumes of power evacuation, dedicated transmission systems are required. Private sector players like Adani Power and JSW Energy, who are developing merchant power plants, are also developing their own transmission networks. According to our estimates, the overall merchant power capacity addition is expected to be around 10,000-12,000MW in the 11th Plan period (FY07-12). Presently, the sale of power under the merchant route appears to be an attractive option, considering the power deficit prevalent in the country. Exhibit 51: Relative economics of a 1,000MW plant
(Rs. in mn) Units Generated (MU) Units Sold (MU) Tariff (Rs. per unit) Revenue (Rs mn) Operating Cost Operating Profit Depreciation EBIT Interest PBT Tax Tax Rate (%) PAT Equity RoE (%) Source: Karvy Institutional Research Tariff - based plant 29,784 27,848 2 5,5700 2,2010 3,3690 9360 2,4330 14850 9480 1890 20 7590 4,5000 16.8 Merchant power plant 29,784 27,848 5 13,9240 2,3680 11,5560 9360 10,6200 14850 9,1350 3,1050 34.0 6,0300 4,5000 134
With each of the three business models having their own risk return profile, profitability of the companies primarily hinge on their revenue mix and the level of fuel security. While most public sector generators like NTPC and NHPC operate almost entirely under the regulated return model, there is a huge difference in the revenue off-take profile of the IPPs. While an IPP like Tata Power has limited exposure to merchant power, APL and JSW Energy have more than 30% of their FY12E operational capacity under the merchant route.
30
Right Business Model Key Determinant of Profitability
POWER
July 1, 2011
July 1, 2011
Adani Power
Bloomberg: ADANI IN Reuters: ADAN.BO HOLD
Adani Power
Initiating Coverage Analyst Contact

Rupesh Sankhe +91-22-22895022 rupesh.sankhe@karvy.com
Strong, but priced-in Fundamentals

Adani Power (APL) is expected to have 6,600MW power capacity by FY13E, which will make the Company one of the largest private sector players. Out of 13.2GW capacity, APL has tied-up 51% in Case-I bids, while the balance is untied. APL is largely dependent on Indonesian coal having entered into long-term off-take agreements, which ensures stability. However, we believe cheaper fuel price and strong operational asset are priced-in, which validate our HOLD recommendation. The Company is planning to fuel its plants with Indonesian coal procured from its promoter Adani Enterprises (AEL). However, in our view the long-term fuel security still remains a concern considering the likely disruptions of coal supply due to lower production in Bunyu mines, and new laws restricting exports from Indonesia. Again, the Fuel Supply Agreement (FSA) with AEL is only for 15 years, as against the total plant life of over 30 years. The Power Purchase Agreement (PPA) structure renders APL prone to risks associated with fuel pricing and availability, as most of its underconstruction capacity has been tied-up through fixed tariffs having no fuelescalation clause. Out of 9.2GW capacity, long-term PPAs have been contracted for 7.8GW , while 1.4GW will be available on merchant basis. Thus any variations in fuel costs will have a direct impact on project profitability.
Recommendation
CMP: Target Price: Upside: Rs 110 Rs 117 6%
Long-term Fuel Security A Major Concern
Stock Information
Market Cap. (Rs bn / US$ mn)239/5342 52-week High/Low (Rs) 145/105 Shares Outstanding (mn) 2180 3m ADV Rs mn 93.1/USDmn 2.1 Beta 0.69 Sensex 18,846 Nifty 5,647
PPA Structure with Risks related to Pricing & Availability
Stock Performance (%)

1M 3M 12M YTD Absolute (4.9) (2.5) (13.4) (15.7) Rel. to Sensex (6.7) 0.6 (19.9) (7.5)
Pre-PPA sales to result in high merchant volumes till FY14E
As the projects in Mundra are expected to be commissioned ahead of the schedule, well before the start of commitment to supply under long-term PPAs, the power generated during the lag time can be sold through merchant route.
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Jun-10 Dec-10 Aug-10 Oct-10 Feb-11 Apr-11 Jun-11 150 140 130 120 110 100
Mundra to account for 60% value of proposed 6,600MW capacity
APL's total capacity, which currently stands at 1,980MW, is set to increase to 6,600MW by FY12E. It enjoys good medium- to near-term revenue visibility due to huge operational capabilities. Given the low fuel cost from AELs captive mine at CIF of US$36 per tonne, Mundra projects seem to be very profitable. As per our valuation, Mundra projects constitute 60% value on account of cheap fuel supply agreements with AEL. APL has been traded at premium to other p layers on account of higher RoE. However, at the CMP the stock is trading at P/BV of 2.8x and 2.2x its FY12E and FY13E and EV/EBITDA of 7.7 x FY13E, which we believe fairly valued. We have arrived at an SOTP-based value of Rs. 117 for the stock. We initiate coverage on the stock with a HOLD recommendation. Exhibit 1: Key Financials
Y/E March (Rs mn) Net Sales EBIDTA Net Profit EPS (Rs) PER (x) EV/EBITDA (x) FY09 (55) (55) FY10 4,349 2,438 1,700 0.8 141.1 136.9 FY11 21,352 12,205 5,132 2.4 46.7 29.9 FY12E 75,716 45,909 23,946 11.0 10.0 9.2 FY13E 121,920 63,308 25,011 11.5 9.6 7.7
Stock Fairly -priced Limited Upside from CMP
Sensex (LHS)
Adani Power (RHS)
Source: Capitaline, Karvy Institutional Research
1 year forward P/B

190 170 150 130 110 90 70 50 Aug-09 (Rs)
4x 3.5x 3x 2.5x
Dec-09
Aug-10
Dec-10
Apr-10
Source: Company , Karvy Institutional Research
Apr-11
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July 1, 2011
Adani Power
Company Financial Snapshot

Consolidated Profit & loss
Rs mn Net revenues EBIDTA Interest Depreciation Profit before Tax Provision for tax Adjusted Net Profit Reported Net Profit Profit & Loss Ratios EBIDTA Margins (%) PAT Margins (%) EV/Sales (x) EV/EBIDTA (x) PER (x) 57.2 24.0 17.1 31.4 46.7 60.6 31.6 5.6 9.3 10.0 51.9 20.5 4.0 7.2 9.6 FY11 21,352 12,205 2,366 1,886 8,132 3,000 5,132 5,132 FY12E 75,716 45,909 10,054 6,288 29,906 5,960 23,946 23,946 FY13E 121,920 63,308 19,546 12,745 31,237 6,225 25,011 25,011
Company Background Adani Power (APL) is promoted by Adani Enterprises, which is the flagship company of Adani Group. APL is currently in the process of commissioning 6,600MW of power, which is in various stages of development. While the Company is developing all the projects coming up at Mundra on its own, the Tiroda project is developed by APML. All of the Company's upcoming projects are coal-fired, with the 1,320MW Mundra-I project based on subcritical technology and the other projects based on supercritical technology. The Company is procuring equipment for its power plants from various Chinese manufacturers such as Dongfang and Shanghai Electric.
Consolidated Balance Sheet

Rs mn Shareholders funds Total Loans Deferred Tax Liability Total Liabilities Net block Investments Net Current Assets Total Assets Balance Sheet Ratios RoCE (%) RoE (%) EV/Sales (x) Debt/Equity (x) 5.7 8.5 17.1 2.0 14.9 32.0 5.6 2.6 13.6 25.7 4.0 2.7 FY11 62,911 135,705 199,639 98,897 0.7 20,552 199,639 FY12E 86,857 245,220 333,100 181,708 0.7 26,805 333,100 FY13E 107,508 300,715 409,247 268,063 0.7 17,134 409,247
Consolidated Cash Flow

Rs mn EBIT (Inc)/Dec in Working Capital Cash Flow from Operations Other Income Depreciation Interest Paid Dividends Paid Tax Paid Net cash from Operations Capital Expenditure Free Cash Flows Inc/(Dec) in LT borrowing Cash from Financial Activities Opening Cash Closing Cash Change in Cash FY11 1,032 1,010 2,042 180 1,886 2,366 0 3,000 9,474 (2,541) 6,932 3,000 3,000 1,165 11,098 9,932 FY12E 3,962 (7,456) (3,494) 340 6,288 10,054 436 5,960 19,584 (13,350) 6,235 10,952 10,952 1,110 18,296 17,186 FY13E 5,056 (35,576) (30,520) 220 12,745 19,546 436 6,225 8,653 (9,856) (1,203) 5,550 5,550 1,830 6,177 4,347
Shareholding pattern (FY11)

Public 6% FIIs 19% MFs 1%
Segment wise break-up (FY11)

Others 1%
Promoters 74%
Power Business 99% Source: Company
Source: Company
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July 1, 2011
Adani Power
Outlook & Valuation:
Why we have HOLD Recommendation on the Stock?

With limited upside from CMP, despite factoring cheap fuel, we believe APL should trade at premium to other power players on account of:
I. Most profitable power projects; Cheaper fuel supply agreements II. Higher near-term capacity addition from 300MW in FY09 to 6,600 III. Fuel Security: Concerns on Coal Quality, Availability & Calorific IV. Long term PPA exposes fuel price risk; mismatch between Fuel V. Mundra Phase-II PPA a swing factor; Mundra a cash cow for APL
various moving parts expose to near-term earnings volatility At the CMP, Adani Power is trading at P/BV of 2.8x and 2.2x its FY12E and FY13E and EV/ EBITDA of 7.7x FY13E. We have arrived at an SOTP-based value of Rs. 117 for the stock by valuing 9,240MW of capacity under the FCFE Valuation methodology. Out of the projects valued, 1,980MW is operational and 7,260MW is under construction at Mundra, Tiroda and Kawai. We have also valued the 1,320MW Tiroda expansion project. We have not valued 8,580MW of projects which are on the pipeline, which are in pre-development stages. Exhibit 2: SOTP Valuation
Project Details Mundra Phase I,II & III Mundra Phase IV Tiroda Phase I Tiroda Phase II Kawai Rajasthan Cash & investment in hand FY11 Terminal value Total (Rs Per Share) Capacity (MW) 2,640 1,980 1,980 1,320 1,320 COD Operational Operational Under construction FY15 FY15 Cost of Equity (Ke) 14% 14% 14% 14% 14% Value Method FCFE FCFE FCFE FCFE FCFE Equity Stake Value % (Rs mn) 11,0297 100 47,284 100 46,692 74 43,968 17,907 11,098 28,000 74 74 Milestone Discount 0 0 0 50% 50% APLs Value (Rs mn) 110,297 54,119 34,552 16,268 6,626 11,098 28,000 251283 Per share value 51 22 16 7 3 5 13 117
with AEL
MW by FY13E
Value; Change in Indonesian Mining Laws a risk to fuel supplies
Supply Agreements and asset life a concern with the power offtake agreement in place
VI. Merchant profitability high contribution to FY12-13E earnings,
Source: Company and Karvy Institutional Research
Adani Power is trading at P/B of 2.2x & P/E 9.6x based on FY13E, which at discount 37% to its historical average (FY09-FY11) of 3.5X P/B respectively. Adani Power has traded at P/B of 4.2x during FY09-10 when merchant realization were higher. Exhibit 3: 1 Year-Forward P/E
300 250 200 150 100 50 0 Dec-09 Apr-10 Dec-10 Apr-11 Aug-09 Aug-10 (Rs)
Max Min Mean 72.9 9.8 31.3
Exhibit 4: 1 year-Forward P/B

170 25x 20x 15x 10x 150 130 110 90 70 50 Aug/09 Aug/10 Dec/10 Dec/09 Apr/10 Apr/11 33 (Rs)
Max Min Mean 4.2 2.6 3.5
4x 3.5x 3x 2.5x
Source: Bloomberg, Karvy Institutional Research
July 1, 2011
Adani Power
Investment Rationale

Long-term Fuel Security Remains a Major Concern FSAs for duration less than economic life A Concern Long-term PPA Exposes Fuel Price Risk PPA with GUVNL for Mundra Phase-II a Swing Factor Pre-PPA sales to result in high merchant volumes till FY14E
I. Long-term Fuel Security Remains a Major Concern

Exhibit 5: Annual Coal Requirement (MTPA)
35 30 25 20 15 10 5 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Indonesia Domestic Source: Karvy Institutional Research
APL has planned to operate its plants through a mix of domestic and imported coal. It PL has signed a 15-year FSA with its promoter company, AEL to procure 15.1 MTPA of coal to its projects located in Mundra at US$36 per tonne (CIF) with an average GCV of 5,200kcal per kg. AEL in turn would source coal from its 100%-owned arm PT Adani Global, which has entered into agreements to exclusively mine coal in Bunyu Island, Indonesia. Earlier, APL has obtained domestic linkage for its Mundra Projects (30% of requirements) & Tiroda Project , which has cancelled by the coal ministry. The reserves at Bunyu are estimated at 150 mn tonne (MT), while the Mundra plant when fully commissioned would require 15 MTPA of coal. Though the output in these mines may be ramped up to 7 MTPA, we have concerns on the availability and quality of coal. Again, the Gross Calorific Value (GCV) of coal found in Bunyu is likely to be lower than 5,000kcal per kg, below APL's estimate of 5,200 kcal. However, AELs recent 100% acquisition in the Galilee coal tenement in Australia which would take 5-6 yrs for ramp up & Coal Purchase Rights for 60% of PT Bukit Assam concessions in South Sumatra provides potential coal supply for the remaining under developments planned capacity but again pricing is the issue. AEL has access to 8 bn tonne of coal reserves in Australia and Indonesia. AEL controls over 50% of market share in overall coal trading in India. Exhibit 6: Coal Supply Matrix (MTPA)
Coal Supply Matrix Mundra Indonesia MCL Domestic Linkage Other Domestic Linkage (assumed) Tiroda South Eastern Coalfields (Grade F) Western Coalfields (Grade E) Other Domestic Linkage (approved) Other Domestic Linkage (applied)
2009 0 0 -
2010 7.4 7.4 0 0 0 0 -
2011 2012E 2013E 2014E 2015E 7.4 17.4 17.4 17.4 17.4 7.4 0 0 0 0 7.4 6.4 3.6 0 14.2 2.5 2.2 4.5 5 7.4 6.4 3.6 0 14.2 2.5 2.2 4.5 5 7.4 6.4 3.6 0 14.2 2.5 2.2 4.5 5 7.4 6.4 3.6 0 14.2 2.5 2.2 4.5 5
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July 1, 2011
Adani Power
II. Fuel Supply Agreements for duration less than economic life A Concern
AEL has agreed to supply Mundra plant with 4.6 MTPA of coal from Bunyu Islands (Indonesia) at US$36 per tonne CIF with 10% hike after five years. The agreement is for 15 years from commissioning, while the PPA with Gujarat Vidyut Nigam (GUVN) is for 25 years. The reserves at Bunyu Island are estimated at 150 mn tonne (MT), which is suffice for only 10 years. So APL would need to make new fuel supply arrangements to ensure continuity of operations. Again, as it has been found that the GCV of coal imported from Bunyu is lower than the APLs expectation, APL would need to import South African coal, resulting in higher cost of power generation. As the PPA with GUVNL does not allow passing the power at a higher cost, APLs profitability would come under pressure, in case the quality of Bunyu coal continues to remain low. Again, if the strip ratio rises due to geographical reasons, AEL will not be able to supply coal at low prices. Unfavourable Changes in Indonesian Mining Laws may Hit Supply: Export of minerals constitutes a major portion of Indonesia's GDP. However, various factors such as declining reserves and low reserve-to-production ratio have forced the country to review its export policies. Major unfavorable changes in Indonesia's mining laws, which curtail the export of coal, would have a severe affect on fuel availability for APL's projects. Exhibit 7: Project-wise Availability & Requirement
Project MundraI & II MundraIII Capacity 1,320 MW 1,320 MW Demand (MTPA) 3.7 @6,000 Kcal per kg 4.06@5,200 kcal per kg Details of Contract 15-year FSA with AEL to supply 4.6mtpa of coal with GCV of 5,200 kcal per kg +Domestic coal linkages recommended 15-year FSA with AEL to supply 4.04mtpa of coal with GCV of 5,200 kcal per kg + Domestic coal linkages recommended 15-year FSA with AEL to supply 6.5mtpa of coal with GCV of 5,200 kcal per kg Letter of intent received from Mahanadhi coal fields MCL to supply coal with GCV of 4,000 kcal per kg The company has a tapering linkage. Earlier captive coal block allocation at Lohari West has been cancelled. The company is expected to get new captive block allocated in lieu of the cancelled block.
Mundra IV
1,98 MW
5.81@5,200 kcal per kg
Tiroda - I
1,980 MW
6.18@4,895 kcal per kg
Cancellation of Lohara Coal-blocks for Tiroda Project: APL had been
allocated coal blocks at Lohara West and Lohara Extension for the Tiroda project. However, the allocation got cancelled by the Ministry of Environment & Forest (MoEF), citing its proximity to the tiger reserve. However, the Company has got a tapering linkage in lieu of the cancelled coal block allocation in the interim period and is expected to be allotted another coal mine in lieu of the Lohara mine.
35
July 1, 2011
Adani Power
Exhibit 8: Rs.0.5 fall in merchant price to earnings sensitivity

20,000 15,000 10,000 5,000 0 FY12E Current FY13E Revised % Change (Rs mn) (%) 28 27 26 25 24 23 22 21
III. Long-term PPA Exposes Fuel Price Risk

The major portion (51%) of generating capacity has been tied-up under Case-I bidding. Out of the 13.2GW capacity, long-term PPAs have been contracted for 7.8GW. Out of the long-term PPAs, 4.7GW (3.4GW from Mundra & 1.3GW from Tiroda) are under Case-I bidding expose to fuel price risk. Thus, any variations in fuel costs will have a direct impact on profitability. The long-term PPAs at fixed tariffs are expected to ensure steady revenues in the long-term. Moreover, the PPAs entered into by APL under such Case-I bids are at levelised tariffs ranging from Rs. 2.35-3.24 per unit . Exhibit 9: Projects Details
Projects Mundra I & II Mundra III Mundra-IV Tiroda Tiroda Expansion Kawai Chindwara Dahej Total Capacity Off-take 1,320 1,000 1,320 1,000 1,980 1,424 1,980 1,320 1,320 1,320 1,320 2,640 13,200 1,200 1,200 660 7,804 Levelised Tariff PPA Term Procurer 2.89 25 GUVNL 2.35 25 GUVNL 2.94 25 UHBVNL/DDBVNL 2.64 25 MSEDCL 3.24 3.24 25 25 25 25
MSEDCL RRUVNL MP GOVT
IV. PPA with GUVNL for Mundra Phase-II a swing factor

In Feb11, APL entered into a 25-year PPA for supply of 1,000MW of power from its 1,320MW Phase-II capacity in Mundra for a flat rate of Rs. 2.35 per kWh, subject to certain conditions. As the Mogra-II coal block has been designated as a No-Go Area by the MoEF, APL intends to terminate the PPA, which entails a cost of Rs. 1 bn. Although the Gujarat Electricity Regulatory Commission (GERC) ruled against APL on its plea to terminate the PPA, opining that under Case-I bids the source of fuel is not identified, and the onus of fuel availability lies solely with APL, the Company has challenged this ruling in the Appellate Authority.
Out of proposed 6,600MW capacity, Mundra to account for 50% value:

APL's total capacity, which currently stands at 1,980MW, is set to increase to 6,600MW by FY13E. With ~4,000MW of capacity in operation by FY12E, the Company enjoys good near-term visibility. The healthy cash inflows generated by the Company would help it fund its future capex.
Exhibit 10: Capacity Addition Highest in Pvt Space (MW)
12000 10000 8000 4000 2000 0 TATA Power NHPC LANCO INFRA NTPC Reliance Power ADANI POWER JSW Energy CESC 3100 2900 (MW) 6000 4620 3400 6,000 3,960 4,000 1,980 2,000 660 0 FY10 FY11E FY12E FY13E 9900
(MW)
Exhibit 11: APLs Installed Capacity (MW)

8,000 6,600
2000
1200
250
Source: Company , Karvy Institutional Research 36
July 1, 2011
Adani Power
Exhibit 12: Details of projects to be operational by FY13E

Project Location Installed Capacity Procurement Status Type Technology Mundra - I & II Gujarat 1,320MW BTG & BOP Coal fired 15-yr FSA with AEL to supply 4.6 MTPA of coal with GCV of 5,200 kcal/kg + domestic coal linkages recommended Long -term PPA for 1,000MW with GUVNL Mundra - III Gujarat 1,320MW EPC contracts entered Coal fired 15-yr FSA with AEL to supply 4.04 MTPA of coal with GCV of 5,200 kcal/kg + Domestic coal linkages recommended Mundra IV Gujarat 1,980MW EPC contracts entered Coal fired 15-yr FSA with AEL to supply 6.5 MTPA of coal with GCV of 5,200 kcal per kg. LoI secured from Mahanadhi Coalfields to supply coal with GCV of 4,000 kcal per kg Long -term PPA for 1,424 MW (2X715MW) with UHBVNL and DHBNNL Tiroda Maharashtra 1,980MW BTG & BOP contracts entered Coal fired APL has a tapering linkage. Coal block allocation at Lohari West has been cancelled. APL may get new block allocated in lieu of cancelled block. Long -term PPA for 1,320MW with MSEDCL
Power Off-take
Long -term PPA for 1,000MW with GUVNL, merchant sale of up to 221MW of surplus power entered with AEL 320MW Unit #1 commissioned, Unit #2 to be commissioned in Q3FY12 Rs. 57.96 bn
Merchant Capacity Expected date of commissioning Project Cost
320MW Commissioned
320MW Q4FY12
320MW Q1FY13
Rs. 43.5 bn
Rs. 89.6 bn
Rs. 92.63 bn
Exhibit 13: Under-developments Projects

Project Water Land acquisition Availability Environment clearance Equipment
Pending Pending Pending Pending Pending
Fuel Arrangement
Linkage applied Pending Pending Linkage applied Linkage applied
Off-take
Not Tied-up Rajasthan Govt MSEDCL 1200 Not Tied-up 40% capacity with MP
Financial
Pending Pending 75% Pending Pending
Dahej Sea Water Kawai (1320) Available Tiroda II(1320) Available Bhadreshwar Chhindwara
100% land acquired TOR approved Land acquired Completed 75% land acquired Pending
Sea Water Land acquired TOR approved Pench River 100% land acquired TOR approved
2,640MW Mundra- I & II: APL has entered into a long-term PPA with GUVNL for the sale of power, under which GUVNL would buy 1,000MW power from MPP- I & II for 25 years from the date of commercial operations of the plant. The tariff for the contracted power ranges from Rs. 2.81 per unit in the first year to Rs. 3.42 per unit in the last year, with a levelised tariff of Rs. 2.89 per unit and consists of capacity charges (at 80% PLF) and energy charges. Again, for power sold above base PLF of 80%, MPP-I & II is entitled to an incentive of Rs. 0.25 per unit for the power generated and sold. The rest portion of power generated from this plant will be sold on merchant basis. Mundra-III: APL had entered into a long-term PPA with GUVNL for the sale of power. Under the PPA, GUVNL was to buy 1,000MW of power at Rs. 2.35 per unit. However, APL wanted to pull out of the PPA as it could not execute the coal supply agreement with GMDC for the supply of coal. Its stance was that coal supply by GMDC from the Morga coal block to the project was a condition precedent for the PPA and, hence, APL is well within its rights to cancel the PPA. However, in a setback to APL, Gujarat Electricity Regulatory Commission has directed it to honour its PPA signed with GUVNL at the earlier determined rate. Thus, APL will have to utilize imported coal at a higher-than-expected cost to fulfill its obligation and supply power at the
37
Power Off-Take Arrangement
July 1, 2011
Adani Power
earlier agreed price, which would impact its margins considerably. The rest portion of the power generated from this plant will be sold on merchant basis. We have arrived at a per share value of Rs. 51 for Mundra-I, II & III. Valuation: We have arrived at a value of Rs. 51 for Mundra I, II & III. Exhibit 14: Financial & Valuation of 2,640MW Mundra I, II & III
(Rs mn) Capacity Sales Volume (Mn units) Competitive Merchant Realization Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit Period FY12-37) Per Share
FY2012E 2,640 17,536 5,442 12,094 3.92 65,927 26,183 39,744 4,595 6,255 28,894 9,598 19,296 18,653 18653 1,10,296 51
FY2013E 2,640 19,357 13,403 5,954 3.20 60,723 30,224 30,499 4,595 6,455 19,448 6,460 12,988 8,929 7832
FY2014E 2,640 19,357 15,768 3,589 2.78 54,038 31,599 22,440 4,957 6,248 11,235 3,732 7,503 5,581 4294
FY2015E 2,640 19,357 15,768 3,589 2.87 55,853 33,037 22,815 4,957 5,452 12,406 4,121 8,285 5,653 3815
Mundra IV: APL has entered into long-term pow er PPAs with UHBVNL and DHBVNL for the sale of 1,424MW of electricity. The PPAs are for a term of 25 years from the date of commercial operation of the power project. Under the PPAs, UHBVNL and DHBVNL are entitled to get 712MW of electricity each at a tariff ranging from a maximum of Rs. 3.26 per unit to a minimum of Rs. 2.35 per unit during the terms of the off-take agreements. We have arrived at a value of Rs. 22 per share from Mundra IV. Valuation: We have arrived at a value of Rs. 22 for Mundra-IV. Exhibit 15: Financial & Valuation-1,980MW Mundra-IV
(Rs mn) Capacity Sales Volume (Mn units) Competitive Merchant Realization Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV PV (FY2012-36E) Per Share
Source: Karvy Institutional Research 38
FY2012E 1,320 2,652 1,000 1,652 4 9,789 3,624 6,165 2,110 381 3,674 82 3,592 (4,846) (4,846) 54,119 22
FY2013E 1,980 11,906 9,235 2,672 3 36,177 17,332 18,845 422 622 17,801 2,793 15,008 1,984 1,741
FY2014E 1,980 14,293 11,235 3,058 3 41,716 21,683 20,033 422 549 19,062 3,430 15,632 3,950 3,039
FY2015E 1,980 14,293 11,235 3,058 3 41,987 22,668 19,319 422 475 18,422 3,436 14,985 4,087 2,759
July 1, 2011
Adani Power
Exhibit 16: Pre-PPA Schedule

Projects Mundra III U1 U2 U3 Tiroda I U1 U2 U3 Apr-12 May -12 Jun-12 Aug -12 Aug -12 Aug -12 5 3 2 Sep-11 Jan-12 May -12 Aug - 12 Feb-13 Feb-13 11 13 9 COD PPA Start Gap Date Months
V. Pre-PPA sales to result in high merchant volumes till FY14E

The Mundra projects are likely to be commissioned 6-12 months before the start of the long-term PPAs. Power generated during the lag time can be sold under the merchant route. APL's merchant volumes are set to grow from 1,172MU in FY10 to 11,628MU in FY12. Merchant volumes are expected to remain at a high 13,635MU in FY13E as well. Further, if APL is able to terminate the disputed GUVNL contract, merchant sales would increase to 40% of 6,600MW. Beyond 6.6GW, APL is also setting up ~2,640MW projects that are based on bidding. Overall, APL will have ~24% of the capacity as merchant post FY14E. As a result, we expect APL to post healthy OPMs of 62% and 55%, respectively in FY12E and FY13E, respectively. Exhibit 17: Merchant vs. PPA
100 80 60 40 20 0 FY11 FY12 PPA (% of total) Source: Karvy Institutional Research FY13 FY14 Merchant (% of total) FY15 (%)
Exhibit 18: Cash Flow to remain healthy

25,000 20,000 15,000 10,000
(Rs mn)
(x)
3.0 2.5 2.0 1.5 1.0 0.5
This will also result in volatility in earnings during these years (Rs. 0.5/kWh change in merchant tariff impacts FY13 earnings by 20%).The merchant volumes should stabilize at 23% levels once all long term PPAs start to kick in.
No funding concerns for under developments projects: APLs power portfolio for its fuel security (50% coal tied up), long-term off-take arrangements (60% of 0 0.0 portfolio) and high RoE generation capability (tariffs of Rs. 2.35-3.24/ kWh). FY10 FY11 FY12 FY13 Notably, Case-I bid PPAs offer steady near-annuity cash flows over the longCashflow from Operation Net Debt/Equity term, with merchant sales providing medium-term fillip to earnings. We Source: Karvy Institutional Research estimate internal accrual once all the projects get commercial operation by FY12-13E are expected to meet funding needs for the large development pipeline. The Companys next phase of capacity addition involves construction of Tiroda 1,980MW, Dahej 2,640MW, Kawai 1,320MW Ratnagiri-II project, 1,320MW Chidawra project. These under-construction & under developments projects would require equity contribution of over Rs. 85 bn over FY12-16E. The operating cash flows generated would be sufficient to fund the equity contribution of under-construction projects, thereby requiring no equity dilution. Exhibit 19: Equity requirement (Rs mn)
5,000
Project Mundra Phase I,II Mundra III Mundra IV Tiroda Kawai Chindwara, MP Dahej Tiroda II Total
Capacity 1,320 1,320 1,980 1, 980 1, 320 1320 1, 980 1, 320 1,2,540
Total cost 43,500 57,960 89,600 92,630 59,400 66,000 99,000 66,000 5,74,090
Debt 34,800 46,368 71,680 64,841 41,580 46,200 69,300 46,200 4,20,969
Equity 8,700 11,592 17,920 27,789 17,820 19,800 29,700 19,800 1,53,121
Equity already deployed 17,660 6,610 4,660 28,930
Equity to be deployed 10,129 11,210 19,800 29,700 15,140 85,979

39
July 1, 2011
Adani Power
Exhibit 20: Financial Assumption

Estimates FY10 FY11E FY12E FY13E Operational Parameters Capacity (MW) Sales Volume (MU) PPA Merchant Competitive JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Tariffs Avg realization (Rs/unit) PPA Merchant Competitive Blended Fuel cost Avg Fuel Cost (Rs/unit) Imported Coal (MT) Domestic Coal (MT) Financial Forecasts Sales (Rs mn) Operating Expenses (Rs mn) EBIDTA (Rs mn) EBIDTA margin (%) Net Interest Expense (Rs mn) Avg. Interest rate (%) PAT (Rs. mn) PAT margin (%) EPS (Rs.) Cash Flow Forecast (Rs. mn) CFO (a) CFI (b) FCF(a-b) CFF - Total Changes in cash (a+b+c) 121 450 412 862 7 89 95 1980 3504 2992 6985 6496 7 40 95 3960 6442 13,746 21,707 20,188 7 63 95 6600 29,113 11,498 43,858 40,610 7 76 95 Growth (%) FY11E FY12E 1536 710 0 0 100 84 359 211 211 0 0 FY13E Comments
67 Expecting Mundra & Tiroda to come on stream 352 Company has signed PPA with GUVNL. -16 Merchant to contribute till FY12 (Pre -PPA ) 56 Volumes to track capacity growth 55 0 Remain unchanged - PLF improvements as plants get stablised. 0
2.6 5.5
2.6 4.5 3.5
2.6 4.5 3.9 0.9 9.8 0.0
2.6 4.1 3.0 1.0 15.2 4.8
218 391 379 401 2 528 0 817 -39 202 0 -68 352 -69 -10
1 -1 11 13 207 255 226 276 6 325 0 99 32 367 107 425 -10 265 73
-2 PPA signed with GUVNL at Rs 2.23 -8 Merchant rates to come down -22 11 Avg cost to remain lower on cheaper fuel cost 55 Contract with AEL 61 Sales to track capacity growth 97 38 -14 Margins to fall on account of lower merchant realization 94 Higher on asset capitalization 0 4 -35 To fall on account of lower merchant realization & higher depreciation costs. 4 -56 To remain healthy on the back capacity commissioning -26 -119 -49 -75 To improve on the back of operating assets.
0.8 1.0 0.0
0.8 3.2 0.0
4,349 21,352 75,716 121,920 1,911 9,147 29,807 58,612 2,438 12,205 45,909 63,308 56.1 57.2 60.6 51.9 376.73 2366.4 10054 19546 11% 11% 11% 11% 1,700 5,132 23,946 25,011 39.1 24.0 31.6 20.5 0.8 9,502 7,968 1,534 9,561 1,109 2.4 9,474 2,541 6,932 3,000 9,932 11.0 19,584 13,350 6,235 10,952 17,186 11.5 8,653 9,856 -1,203 5,550 4,347
40
July 1, 2011
Adani Power
Karvy vs. Consensus
We are lower than consensus at the topline & bottomline level, as we expect lower merchant realization. Exhibit 21: Karvy vs. Consensus
Karvy Revenue (Rs. in mn) FY12E FY13E EBIDTA (Rs. in mn) FY12E FY13E PAT (Rs. in mn) FY12E FY13E 75,716 121,920 45,909 63,308 23,946 25,011 Consensus 73,017 1,32,948 45,814 74,064 22,891 31,010 Difference (%) 3.6 (8.2) (14) 4.6 (19.3)
Source: Bloomberg & Karvy Institutional Research
Exhibit 22: Revenue Assumption

Consolidated Capacity (MW) Sales Volume (MU) PPA Merchant Total As a % of total PPA (% of total) Merchant (% of total) Tariff PPA Merchant Blended Coal Requirement Imported Coal (MT) Domestic Coal Total As a % of total Imported Coal Domestic Coal
Source: Bloomberg , Karvy Institutional Research
FY11 1,980 3,504 2,992 6,496 53.9 46.1 2.6 4.5 3.5 3.2 0.0 3.2 100 0.0
FY12E 3,960 6,942 11,628 18,570 37.4 62.6 2.7 4.5 3.8 9 0.0 9.0 100 0.0
FY13E 6,600 31,901 8,709 40,610 78.6 21.4 2.8 4.1 3.1 15.2 4.8 20.0 76 24
FY14E 6,600 36,730 11,438 48,167 76.3 23.7 2.8 3.6 3 16.3 7.5 23.8 68.6 31.4
FY15E 6,600 36730 11438 48,167 76.3 23.7 2.8 3.6 3 16.3 7.5 23.8 68.6 31.4
Downside & Upside Risks

In our view, the key downside risks are: I. II. III. Lower availability and/or poor quality of imported coal from AEL, Increase in the price of spot imported coal, and More than anticipated fall in merchant power rates in the long run.
In our view, the key upside risks are:

I. II. Speedy execution of projects, and Higher than expected rates in the near to medium term.
41
July 1, 2011
Adani Power
Financial Overview
Profitability to peak in FY13E

APL is set to witness a stupendous rise in its end-capacity of 660MW in FY10. Its capacity which currently stands at 1,980MW is likely to touch 3,960MW in FY12E and 6,600MW in FY13E. As a result of this huge capacity addition, APL's topline is likely to soar from Rs. 4,349 mn to Rs. 121,920 mn over FY1013E. We estimate APLs earnings would peak in FY13E with the commissioning of all under construction projects.
Ex 23: Merchant Profits / Total Profit
3000 2500 2000 1500 1000 500 0 FY11 Profits FY12 FY13 Merchant profits(%) (Rs mn) (%) 80 60 40 20 -
Exhibit24: Topline Set To Grow at CAGR of 200% (FY10-13)

150000 100000 50000 0 FY10 FY11 Net Sales (Rs mn) Source: Karvy Institutional Research FY12 E Growth (%) FY13 E (Rs mn) (%) 500 400 300 200 100 0
Operating Margins to contract post-FY13E

We expect APL to enjoy healthy operating margins in excess of 50% till FY13E due to high volume of merchant sales. However, the margins are likely to show a substantial decline (870 bps) in FY13E due to higher PPA sales in its overall sales volume. Exhibit 25: Robust Growth in Ops Profits & Healthy Ops Margins
80000 60000 40000 20000 0 FY10 FY11 Operating profits (Rs mn) Source: Karvy Institutional Research FY12E FY13 E OPM (%) (Rs mn) (%) 65.0 60.0 55.0 50.0 45.0
42
July 1, 2011
Adani Power
Bottomline to witness Robust Growth with Strong Operating Performance

APL's bottomline is expected to grow from Rs. 1700 mn in FY10 to Rs. 25011 mn in FY13E, primarily driven by growth in its operational profit. APL's interest and depreciation costs are also set to surge post the commissioning of plants. Exhibit 26: Net Profit to grow at 143% CAGR FY10-13E
30,000 25,000 20,000 15,000 10,000 5,000 0 FY10 FY11 Net Profits (Rs mn) FY12 E NPM (%) FY13 E (Rs mn) (%) 50.0 40.0 30.0 20.0 10.0 0.0
Return Ratios RoE to peak in FY13E

We estimate Return-on-Equity (RoE) would peak in FY13E, and would decline subsequently capex in FY10-11 will get capitalized. Exhibit 27: Healthy Return Ratios
40.0 30.0 20.0 10.0 0.0 FY10 FY11 ROCE (%) Source: Karvy Institutional Research FY12 E ROE (%) FY13 E (%)
43
July 1, 2011
Adani Power
Exhibit 28: Profit & Loss Statement

Y/E March (Rs mn) Net revenues % Growth Raw Material Staff Operating Expenses Operating expenses EBIDTA % Growth EBIDTA margin (%) Other income Interest Depreciation Profit Before Tax % Growth Provision for tax Effective tax rate (%) Adjusted Net Profit % Growth Net Margin (%) Reported Net Profit % Growth
FY09 0 0 0 55 55 (55) 0.0 0.0 0.0 (55) 0.0 0.0 (55.4) (55) -
FY10 4,349 1,667 46 198 1,911 2,438 56.1 319 377 353 2,027 327 16.1 1,700 39.1 1,700 -
FY11 21,352 391 7,213 322 1,612 9,147 12,205 400 57.2 180 2,366 1,886 8,132 301 3000 36.9 5,132 202 24.0 5,132 202
FY12E 75,716 255 25,435 0 4,373 29,807 45,909 276 60.6 340 10,054 6,288 29,906 268 5960 19.9 23,946 366 31.6 23,946 366
FY13E 121,920 61 49,573 0 9,039 58,612 63,308 38 51.9 220 19,546 12,745 31,237 4.4 6225 19.9 25,011 4.4 20.5 25,011 4.4
Exhibit 29: Balance Sheet

Y/E March (Rs mn) Equity capital Reserves & surplus Shareholders funds Minority Long Term Loans Total Loans Deferred tax liability Total Liabilities Gross block Depreciation Net block Capital WIP Investments Inventory Cash Loans & advances Current Assets Other current liabilities Curre nt Liabilities Net current assets Deferred expenditure Total Assets FY09 18,420 4,467 22,887 699 49,897 49,897 0 73,483 3,472 104 3,368 65,889 0 0 5,585 4,163 9,749 5,620 5,620 4,129 97 73,483 FY10 21,800 35,980 57,780 1,023 105,705 105,705 120 164,664 28,549 678 27,871 127,691 1 2,658 11,654 9,406 23,718 14,617 14,617 9,101 0 164,664 FY11E 21,800 41,111 62,911 1,023 135,705 135,705 0 199,639 101,460 2,564 98,897 80,190 1 2,513 11,098 9,406 23,017 2,465 2,465 20,552 0 199,639 FY12E 21,800 65,057 86,857 1,023 245,220 245,220 0 333,100 190,560 8,852 181,708 124,587 1 6,321 18,296 9,406 34,023 7,218 7,218 26,805 0 333,100 FY13E 21,800 85,708 107,508 1,023 300,715 300,715 0 409,247 289,660 21,597 268,063 124,049 1 15,395 6,177 9,406 30,978 13,845 13,845 17,134 0 409,247
44
July 1, 2011
Adani Power
Exhibit 30: Cash Flow Statement

(Rs mn) EBIT (Inc)/Dec in working capital Cash flow from operations Other income Depreciation Interest paid Dividends paid Tax paid Net cash from operations Capita l expenditure Free Cash Flows Inc/(Dec) in LT borrowing Inc/(Dec) in Equity capital Others Cash from financial activities Opening Cash Closing Cash Change in Cash FY2009 (5.5) 5,042 5,037 0.0 0.0 0.0 0 0.0 5,037 (4,475) 562 3,978 852 0.0 4,831 192 5,585 5,393 FY2010 208 7,916 8,124 319 353 377 0 327 9,502 (7,967) 1,534 5,580 3,425 554 9,561 558 11,653 11,095 FY2011E 1,031 1,009 2,041 179 1,885 2,366 0 3,000 9,474 (2,541) 6,932 3,000 0.0 0.0 3,000 1,165 11,098 9,932 FY2012E 3,962 (7,456) (3,494) 340 6,288 10,054 436 5,960 19,584 (13,349) 6,235 10,951 0.0 0.0 10,952 1,109 18,296 17,186 FY2013E 5,056 (35,575) (30,519) 220 12,745 19,546 436 6,225 8,653 (9,856) (1,203) 5,549 0.0 0.0 5,550 1,829 6,177 4,347
Exhibit 31: Key Ratios (%)

Raw Material Cost / Sales Manpower Cost / Sales Operating & Other cost / Sales Revenue Growth EBIDTA Margins PAT Margins ROCE ROE Core ROCE Core RoE FY2009 (0.1) (0.3) 0.0 0.0 FY2010 38 1 5 435 56.1 39.1 1.8 4.2 15.3 19.1 FY2011 34 2 8 391 57.2 24.0 5.7 8.5 15.4 19.2 FY2012E 34 0 6 255 60.6 31.6 14.9 32.0 26.5 44.8 FY2013E 41 0 7 61 51.9 20.5 13.6 25.7 21.6 28.1
Exhibit 32: Valuation Parameters

EPS (Rs) PER (x) Book value per share P/B (X) EV/EBIDTA (x) Fixed assets turnover ratio (x) Debt/Equity (x) EV/Sales (x) FY2009 (0.0) 12 8.9 0.0 1.9 FY2010 0.8 141.1 27 4.2 136.9 0.3 1.6 76.8 FY2011 2.4 46.7 29 3.8 29.9 0.3 2.0 17.1 FY2012E 11.0 10.0 40 2.8 9.2 0.5 2.6 5.6 FY2013E 11.5 9.6 49 2.2 7.7 0.5 2.7 4.0
45
POWER
July 1, 2011
June 30, 2011
CESC
Bloomberg: CESC IN Reuters: CESC.BO
CESC
BUY

Rupesh Sankhe +91-22-22895022 rupesh.sankhe@karvy.com
Correction is Overdone Expect Stock to Rise
The stock price of CESC has corrected almost 17% since Jan11, while the BSE Power Index corrected by 13% during the same period. We believe that the correction is overdone and stock is currently trading at attractive levels and trading below its book value. Looking forward, w e believe that CESCs earnings from power business being used to fund losses of its retail arm i.e. Spencer's would decline as its retail business has started showing positive EBITDA at the store levels.
Recommendation
CMP: Target Price: Upside (%) Rs 299 Rs 381 27%
Stable & Regulated Biz with Assured RoE
CESC operates under regulated business model, which provides the Company with strong and steady income flow. Currently, CESC caters mainly to Kolkata region and with a capacity of 1,225MW with assured RoE at 15.5% & RoE of 15% on distribution. We expect the equity base of the regulated business to grow to Rs. 34 bn by FY14E from Rs. 26 bn in FY11. With commissioning of 600MW capacity each at Chandrapur (Maharashtra) & Haldia (West Bengal), CESC would touch 2,450MW capacity mark by FY14E from 1,250MW currently. It plans to sell 500MW-300MW power from Chandrapur on merchant basis & 200MW power from Haldia as merchant in FY14E, but we believe it is still long away.
Stock Information
Market Cap. (Rs bn / US$ mn) 37/831 52-week High/Low (Rs) 433/252 Shares Outstanding (mn) 125 3m ADV Rs mn 31.3/USDmn 0.7 Beta 0.96 Sensex 18,846 Nifty 5,647
Capacity seen at 2,450MW by FY14E Four Mega Power Projects in the Offing
Loss in Retail Biz to Decline Profits Expected by FY14E
CESCs retail business has been incurring losses, which peaked in FY09 at Rs. 2.5 bn. It has closed 60 loss making stores over FY09-11 to reduce loss. We expect the losses in its retail business to reduce from Rs. 1.4 bn in FY11 to Rs. 710 mn in FY13E & Rs. 70 mn profits in FY14E. We expect CESC would register positive EBITDA by FY13E with the rerating of its power business as it would cease to fund retail business out of its income from core business.

1M Absolute 7.1 Rel. to Sensex 5.2 3M 12M YTD (3.8) (20.6) (18.2) (0.7) (27.1) (10.1)
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Jun-10 Oct-10 Dec-10 Aug-10 Feb-11 Apr-11 Jun-11 2x 1.5x 1x 0.5x
Apr/07 Apr/08 Apr/09 Apr/10 Apr/11
Outlook & Valuation
At its current price, the stock is trading at 0.7x FY13 BV, which in our view does not reflect the strength in its core assured RoE power business, progress on expansion and the expected turnaround of retail business. We expect peak value to be created for CESC in FY14-15E, when its future projects would start commercial production. We have valued power business on FCFE methodology to arrive at Rs. 296 per share. Valuing Spencer's on EV/sales basis, we have assigned Spencers EV/sales ratio of 0.4x FY12E sales. Thus, the total value of its retail business works out to Rs. 22 per share. Valued CESCs mall in Central Kolkata and land in Mulajore on NAV basis, we have arrived at a price of Rs. 8 per share for its realty business. We initiate coverage on the stock with a Buy recommendation. Exhibit 1: Key Financials
Y/E March (Rs. in mn) Net Sales EBIDTA Net Profit EPS (Rs) PER (x) EV/EBITDA (x) FY09 41,083 2,250 763 6.1 49.4 22.9 FY10 42,662 4,308 1,564 12.4 24.1 14.2 FY11 49,420 7,520 2,980 23.7 12.6 8.3 FY12E 58,757 7,963 3,938 31.4 9.6 9.7 FY13E 65,885 8,661 5,309 42.3 7.1 10.4
475 425 375 325 275 225
Sensex (LHS)
CESC (RHS)
1 Year Forward P/B

1,200 1,000 800 600 400 200 0
(Rs)
46
June 30, 2011
CESC

Rs. in mn Net revenues EBIDTA Interest Depreciation Profit before Tax Provision for tax Adjusted Net Profit Reported Net Profit Profit and Loss Ratios EBIDTA Margins (%) PAT Margins (%) EV/EBIDTA (x) PER (x) P/B(X) FY2011E 49,420 7,520 2,990 3,160 3,510 530 2,980 2,980 FY2012E 58,757 7,963 2,571 3,364 4,818 880 3,938 3,938 FY2013E 65,885 8,661 2,339 3,614 6,072 763 5,309 5,309
Company Background CESC is generating and distributing power in Kolkata and Howrah since 1899. It is the sole distributor of electricity within an area of 567 square kms of Kolkata & Howrah serving 2.3 mn consumers, which includes domestic, industrial and commercial users. CESC owns and operates four thermal power plants generating 1,225MW power. These are Budge Budge Generating Station (750MW), Southern Generating Station (135MW), Titagarh Generating Station (240MW) and New Cossipore Generating Station (100MW). More than 50% of the coal requirement is sourced from captive mines. CESC owns and operates the T&D system comprises of 474 kms circuit of transmission, and 85 distribution stations; 3,837 kms circuit of HT lines further linking distribution stations with LT substations, large industrial consumers and 9,867 kms circuit of LT lines connecting the LT substations to LT consumers. Consolidated Cash Flow
15.2 6.3 8.3 12.6 1.1 FY2011E 47,006 41,300 14,490 102,796 79,846 4,170 5,810 102,796 8.5 6.3 0.9 1.3
13.6 7.4 9.7 9.6 0.8 FY2012E 62,644 50,484 14,490 127,619 80,539 4,374 5,417 127,619 7.0 6.3 0.8 1.2
13.1 8.1 10.4 7.1 0.7 FY2013E 67,365 62,968 14,490 144,823 79,209 4,374 5,294 144,823 6.6 7.9 0.9 1.2

Rs. in mn Shareholders funds Total Loans Deferred tax liability Total Liabilities Net block Investments Net current assets Total Assets Balance Sheet Ratios ROCE (%) ROE (%) Debt/Equity (x) EV/Sales (x)
Rs. in mn EBIT (Inc)/Dec in working capital Cash flow from operations Other income Depreciation Interest paid Tax paid Net cash from operations Capital expenditure Free Cash Flows Cash from Financial Activities Opening Cash Closing Cash Change in Cash
FY2011E 4,360 415 4,775 2,140 3,160 2,990 530 6,555 7,486 (931) 1,540 11,680 12,290 610
FY2012E 4,598 5,212 9,810 2,791 3,364 2,571 880 12,514 28,376 (15,862) 9,977 12,290 6,405 (5,885)
FY2013E 5,048 39 5,087 3,363 3,614 2,339 763 8,961 20,941 (11,980) 11,917 6,405 6,342 (63)
Shareholding pattern (March 2011)

Public 11% FIIs 19%
Revenue split by product FY11
Retail segment, 20% MFs 17%
Promoters 53% Source: Company Source: Company
Power Segment, 80%
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Outlook & Valuation
As the stock trades at significant discount to fair-value and its peers, we prefer CESC as a safe bet at the current valuation on account of:
I. Low Risk-Low Return model of regulated power business Strong II. Doubling Capacity by FY14 Significant improvement in III. Fuel linkages in Place IV. Recovery in Spencers retail business We see a break-even in FY14E
At the CPM, the stock trades at 0.8 x FY12E and 0.7x FY13E P/ABV, respectively (adjusted book value is networth adjusted for the revaluation reserve of Rs. 16.2 bn in the books), and 7.4x EV/EBIDTA of FY12E and 7.7x FY13E, which we believe is at a significant discount to its fair value. Going forward, we expect discount to narrow due to improving financials of Spencers and capacity addition. operational assets cash-flows aid execution in expansion plans
Key Triggers for further valuation spikes:
I. Lower losses in retail business II. Part or full divestment of stake in retail business III. Substantial progress in under developments projects than anticipated We have arrived at a SOTP-based target price of Rs. 381 for the stock, by independently valuing CESCs power business, investments and other JVs. We have valued power business on FCFE methodology to arrive at Rs. 296 per share, Spencer's on EV/sales basis ratio of 0.4x FY12E sales. Thus, the total value of its retail business works out to Rs. 19 per share. We have valued CESCs mall in Central Kolkata and land in Mulajore (35 acres) on NAV basis and have arrived at a price of Rs. 8 per share for its real estate business. Our Buy recommendation on the stock implies 27% upside form current levels. Exhibit 2: SOTP Valuation
Project Kolkata License area Chandrapur Haldia Spencer Real Estate Cash on books (Adjusted for(FY11) Total Rs. per share
Capacity 1250 600 600 -
COD Operational Under construction Under construction -
Cost of Equity 14% 14% 15%
Val method FCFE FCFE FCFE EV/Sales NAV
Stake% 100 100 100 95 100
Milestone CESC's Discount Value 0 28,193 0 5291 0 3643 0 2427 0 966 7189
Rs per share 225 42 29 19 8 58 381
CESC is trading at P/B of 0.7x & P/E 7.1x based on FY13E, which at significant discount at 50% & 73% to its historical average of 1.4X P/B & 26.9X P/E respectively. CESC has traded at P/B of 1.5-2x during FY09-11, when earning growth of 4% during FY09-11. We expect earning CAGR growth of 33% during FY11-13E. Exhibit 3: 1 Yr. Forward P/E
825 725 625 525 425 325 225 125 25 Apr-07
(Rs) Max Min Mean 77.3 8.1 26.9
Exhibit 4 : 1 Year Forward P/B

1,200 20x 15x 10x 5x 1,000 800 600 400 200 0 Apr/07 Apr/08 Apr/09 Apr/10 Apr/11 (Rs)
2x 1.5x 1x 0.5x
Dec-07
Apr-08
Dec-08
Apr-09
Dec-09
Apr-10
Dec-10
Aug-07
Aug-08
Aug-09
Aug-10
Apr-11
Source: Bloomberg, Karvy Institutional Research 48
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CESC
Strong cash flows from the Regulated Business with Assured Returns expansion plans can get executed without sweat Signigifcant Expansion in Operational Assets - Doubling Capacity by FY14E Valuation of Operational /Construction Assets
Fuel Linkages Retail business to Breakeven in FY14E Valued at Rs.19/- per share
Real-estate business expected to see activity Valued at Rs. 8/- per share
I. Strong cash-flows from the Regulated Business with Assured Returns Expansion plans can get executed without sweat
We believe that the regulated business model provides CESC with steady income flow. CESC with a capacity of 1,225MW (1,600MW peak load) has assured Return-on-Equity (RoE). We expect the equity base of the regulated business to grow to Rs. 34 bn by FY14E from Rs. 26 bn in FY11. This should provide the Group with sufficient additional cash and equity to execute its existing expansion plans. The Companys next phase of capacity addition involves the construction of 132-MW facility in Orissa and 600MW facility in Jharkhand, and 1,320MW facility in Balagarh. These under-construction & under-developments projects would require equity contribution of over Rs. 41 bn over FY12-14E. The operating cash flows generated expected to be Rs. 31 bn over the same period thereby requiring fund raising.
Exhibit 5: Cashflow to remain healthy
15,000 10,000
Exhibit 6: Funding Requirement (FY12-14E) Parameters

Construction Under developments Distribution Total Power Business Retail (Losses + Capex) Total Funding requirements Cash in hand + Internal accrual (FY12-14) Net funding requirements
Rs mn
(X)
1.0 0.9
Rs mn
15000 20000 750 35750 5500 41250 33000 8250
5,000 0
0.8 0.7 FY2010 FY2011E FY2012E FY2013E Cashflow from Operation Net Debt/Equity
Exhibit 7: Operational Project Details Projects

Operational Budge Budge New Cossipore Titagarh Southern Total
Source: Company, Karvy Institutional Research 49
Capacity (MW)
750 100 240 135 1225
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CESC
Demand pattern in the Licence Area

The current peak demand in the Kolkata license area is 1,500MW, which has been rising by 5-7% annually over the past few years. As a result, the Budge Budge generating station is operating consistently at above a 100% PLF. CESC meets Kolkata power demand largely through its own generating stations. However, during peak load, CESC buys power from WBSEB and other sources, while during off-peak hours it sells power to maintain high PLFs at generating stations. Its power business has been driven by robust demand in Kolkata and steady growth in customer base over past 10 years. Its operating performance has improved steadily over the years, with its PLF improving from 72% in FY01 to 98% in FY11. We believe that CESC will see significant expansion beyond West Bengal once its Chandrapur & Haldia plants become operational in FY14E. CESC has 3.3GW new projects in the pipeline in Orissa, Jharkhand and Bihar. We have not included them in our valuation as these projects are still under developments stages. However, we believe that on commissioning, these projects would provide upside to CESCs earnings post FY15E.
II.Signigifcant Expansion in Operational Assets Doubling Capacity by FY14E

We believe that CESC will see significant expansion beyond West Bengal once its Chandrapur & Haldia plants become operational in FY14E, as it intends to transform from a regional to a national player in the Indian power utilities. To begin with, CESC plans to commission at Chandrapur (Maharashtra) & Haldia (West Bengal) 600MW. The project pipeline includes: Orissa: For 1.3GW project in the state having high probability for 12 th Plan coal linkages substantial land has been acquired, Jharkhand: For 1GW project in the state with a captive coal mine the land acquisition has commenced, Bihar: For 1GW project in the state, land acquisition has started, and West Bengal: For 1.3GW expansion in Haldia, the TOR has been approved.
Exhibit 8: Projects Details

Project Chandrapur (600) Haldia Phase1 (600) Orissa 1320 Balagarh 1320 Jharkhand 600 Land acquisition Land acquired Land acquired Land acquired Land acquired Land acquired Environment clearance Completed Completed Completed Completed Completed Equipment Order placed Order Placed Not placed Not placed Not placed Fuel Arrangement Linkage 70% linkages Awaiting for linkage Awaiting for linkage Awaiting for linkage Off-take 50% MSEDCL,50% Merchant 75% state & 25% merchant 50% MSEDCL,50% Merchant Pending Pending Financial
Achieved Not achieved Not achieved Not achieved
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III. Valuation of Operational / Construction Assets

Exhibit 9: Financials & Valuation for Kolkata License Area Exhibit 10: Sensitivity Analysis Ke/Terminal Growth
12% 13% 14% 15% 1% 252 230 213 198 2% 267 242 222 205 2.5% 273 246 225 208 3% 285 256 232 214 3.5% 252 230 213 198
A. Kolkata License Area (1,250MW) - (Operational & valued @ Rs. 225)

FY12E 1225 8,554 43,691 33,101 10,589 2,928 2,267 7,661 791 4,389 3,388 3,389 28,193 100% 225 FY13E 1225 8,628 46,684 36,348 10,336 3,116 2,074 7,220 683 4,225 3,214 2,819 FY14E 1125 8,195 47,885 37,284 10,600 3,304 2,020 7,296 678 4,339 3,680 2,832 FY15E 1125 8,151 50,343 39,445 10,898 3,481 2,019 7,417 670 4,446 4,220 2,848
Source : Karvy Institutional Research
Capacity Sales Volume (mn units) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit Period FY12-20E) CESC's stake (%) Per Share
B. Haldia Power Project Under Construction Commissioning FY15E Valued at Rs. 29 per share
The 600MW Haldia Power Project (Phase-I) had been delayed due to landacquisition issues, and is set to start construction in Sept11 and CoD is expected by May14. CESC has already secured environmental and other clearances including water consumption for the project, while the coal linkage has also been obtained. Given that Haldia PhaseI has been classified as a coastal project, CESC can use only 70% of available coal linkage from Mahanadi Coalfields, and 30% of the required coal would have to be imported. Exhibit 11: Financials & Valuation for Haldia Project
Capacity (MW) Sales Volume (mn units) Realization Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV(Explicit Period FY15-40) CESC's stake (%) Per Share
FY15E 600 4,336 2.9 11,641 7,435 3,945 1,175 430 2,340 466 1,874 (969.0) (482) 3,643 100% 29.0
FY16E 600 4,730 3.0 12,972 8,111 4,569 1,282 620 2,668 532 2,136 1,928.1 834
FY17E 600 4,730 3.0 13,019 8,111 4,616 1,282 590 2,744 547 2,197 2,158.0 811
FY18E 600 4,730 3.1 13,068 8,111 4,663 1,282 561 2,821 562 2,259 2,218.7 725
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C. Chandrapur-Dhariwal Infrastructure: Under Construction Commissioning FY14E - Valued at Rs. 42 per share
The plant is located 150 kms from Nagpur and has secured land totaling 450 acres from MIDC, received water linkages, and received LoA from Coal India for supply of coal. The plant has signed a PPA for 300MW with MSEDCL on a cost-plus basis, allowing CESC to sell the balance 300MW through Case-I bids / power exchange / traders. The plant has also achieved financial closure, and the BTG and BOP orders have been given to Shanghai Electric and Punj Lloyd, respectively. Exhibit 12: Financials & Valuation for Chandrapur-Dhariwal Infrastructure
Capacity (MW) Sales Volume (mn units) Realization Per Unit (Rs) Net Sales (Rs mn) Operating Expenses (Rs mn) EBITDA Depreciation Interest PBT Tax PAT (Rs mn) FCFE PV NPV (Rs mn) CESC's stake (%) Per Share
FY14E 600 2,819 3.5 8,969 6,473 2,294 1,011 354 929 180 750 (1,615) (839) 5,291 100 42
FY15E 600 4,257 3.4 13,345 9,547 3,498 1,102 553 1,842 356 1,486 830 378
FY16E 600 4,730 3.4 14,846 10,541 3,971 1,102 547 2,321 449 1,873 1,635 653
FY17E 600 4,730 3.5 15,012 10,541 4,133 1,102 524 2,506 484 2,022 1,977 693
IV. Fuel Linkages

CESC has increased generation capacity by over 25%. It depends on domestic coal for most of its fuel requirements. About 50% of its coal requirements are met through Integrated Coal Mining (ICML), which is a group company, while 40% is linkage from Eastern Coalfields & Bharat Coking Coal (Coal India arms), and the balance is imported from Indonesia. Exhibit 13: Coal Supply Matrix
Fuel Requirements Imported Coal (MT) Domestic Coal (MT) Total Fuel requirements Supply Arrangements ICML (Captive mines) Eastern coalfields (Linkage) Imported Coal
FY10 0.48 4.63 5.10 2.55 2.0 0.51
FY11 0.48 5.26 5.73 2.87 2.3 0.57
FY12 0.48 6.14 6.62 3.31 2.6 0.66
FY13 0.48 6.23 6.70 3.35 2.7 0.67
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V. Retail Business to Breakeven in FY14E Valued at Rs. 19 per share

CESC forayed into retail business with acquisition of Spencers Retail in 2007, and currently it holds 94.70% in Spencers, which loss declined 36% to around Rs. 1.4 bn in FY11, as against Rs. 2.2 bn loss in FY10. Spencers has about 216 stores with total area of 8.9 lakh square feet. Notwithstanding several steps CESC has taken to curtail losses mainly closing small unviable stores and changing product mix, the retail business is likely to continue to register loss in FY12E and FY13E. Its retail arm is expected to register about Rs. 1.1 bn loss in FY12E and Rs. 700 mn loss in FY13, while it is likely to post Rs. 70 mn profit in FY14E helped by the restructuring initiatives taken by the Company. Its gross margins expected to improve by 400 bps from 14% to 18% on the back of increased sales from the high margin non-food segment. We expect Spencers to breakeven only by FY14E on the back of increase in volumes and margin expansion. The Government is mulling a proposal to allow Foreign Direct Investment (FDI) in multi-brand retail. In case the Government allows FDI in multi-brand retail and any strategic partner stake sale in CESCs retailing business, it would be a big positive trigger for CESC.
Retail Business Spencers Key Assumption

Exhibit 14: Spencers Key assumption
No. of Stores* Area (mn square feet) * Sales Sales per square feet Gross Margin Gross Margin per square feet Employee Cost Employee Cost per square feet Rental Cost Rental Cost per square feet EBITDA EBITDA per square feet
FY12E 218 1.27 12,901 10,028 2,097 1,630 949 737 732 569 (905) (703)
FY13E 256 1.79 17,171 10,212 2,974 1,769 1,116 664 957 569 (438) (261)
FY14E 293 2.16 23,076 10,860 4,445 2,092 1,269 597 1,089 512 870 409
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VI. Realty Business expected to see activity Valued at Rs. 8 per share
CESC formed CESC Properties, a 100%-owned subsidiary in Apr07. Land was leased by CESC to CESC Properties for 30 years. The Company has got huge land bank due to closure of its age old plant at Mulajore and office spaces in and around Kolkata. The Company has a land bank of 35 acres after closing down its Mulajore plant, which it intends to develop as a commercial or residential property in the future. It has got another 3 acres of land in central Kolkata in which it is planning to construct a mall of 4 lakh square feet construction area. For valuing the mall, we have assumed a conservative rental of Rs. 70 per square feet per month, occupancy rate of 80% and capitalization rate of 12%. Accordingly, the mall property NAV works out to Rs. 1.3 bn, which translates into Rs. 7.2 per share of CESC after considering a 30% share to power consumers and holding company discount of 25%. The Mulajore land bank of 35 acres would be developed in the future. We have assumed Rs. 250 per square feet for valuing the land bank. Accordingly, the value of the land comes to Rs. 229 mn. We expect the mall to generate Rs. 230 mn cash per year from FY13E.
CESC Properties Key Assumptions

Exhibit 15: CESC Properties Key Assumptions
Mall - Central Kolkata
Square feet area (in mn) Occupancy Rate (%) Occupancy area (mn square feet) Rental per square feet (Rs per month) Annual revenue (Rs. mn) Capitalization rate Value of property (Rs mn) Development and other expenses Net Asset Value (Rs. mn) Per share value (Rs.) CESC's share (at 67%) Rs.(A) 0.4 80% 0.32 65 250 12% 2,080 40% 1,248 10 6.7 35 1,524,600 150 229 1.8 1.2 984 8
Mulajore land
Area (in Acres) Total Square feet Value (Rs per square feet) Total land value (Rs mn) Rs per share of CESC CESC's share (Rs) (B) Total value of real estate per share (Rs) (A+B)
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FY10
Operational Parameters Capacity (MW) Sales Volume (MU) PPA Merchant JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Tariffs Avg realisation (Rs/unit) PPA Fuel cost Avg Fuel Cost (Rs/unit) Imported Coal (MT) Domestic Coal (MT) Financial Forecasts Sales (Rs mn) Power Retail 975 8,696 8,696 0 0 7,299 6,676 8,374 9 97 94 4.97 4.97 1.3 0.48 4.63 1100 9,027 9,027 0 0 8,275 7,573 8,688 9 89 95 5.20 5.20 2.0 0.48 5.26 1225 9,384 9,384 0 0 9,342 8,554 9,045 9 95 95 5.43 5.43 2.3 0.5 6.1 1225 9,755 9,755 0 0 9,424 8,628 9,416 9 105 95 5.74 5.74 2.5 0.5 6.2 12.8 3.8 3.8 11.4 4.0 4.0 0.0 We expect Installed capacity to remain at the same level 4.0 Volumes to grow at 4% on PLF improvements 4.0 100% PPA with Kolkata licence area No merchant based Capacity 100% stake in operational projects 0.9 We expect FY12 volumes to be higher on account of stabilization of Budge Budge plant 0.9 We expect same level of aux. consumption 4.1 0.0 We dont expect any improvement - PLF to improve on higher fuel availability - PAF to remain at the same level 5.7 Avg realization to improve on account of recent tariff revision by WBSEB 5.7 100% PPA with Kolkata licence area 8.1 Fuel costs to gone up on rising coal prices 0.0 No additional requirements of imported coal 1.4 Domestic cola expected to gone up on higher generation
Estimates FY11E FY12E
FY13E
FY11E
Growth (%) FY12E
FY13E
Comments
13.4 13.4 3.7 0.0 4.5 4.5 50.8 0.0 13.6
12.9 13.0 4.1 0.0 4.5 4.5 16.7 0.0 16.8
33,144 9,518
39,370 10,048
46,464 12,293
49,523 16,362
18.8 5.6
18.0 22.3
Total Sales Operating Expenses (Rs mn) EBIDTA (Rs mn)
42,662 38,354 4,308
49,418 41,900 7,520
58,757 50,795 7,963
65,885 57,224 8,661
15.8 9.2 74.6
18.9 21.2 5.9
6.6 We expect 14% CAGR growth in sales on account of 7% volume & 5.5% higher tariff 33.1 We expect reta il business to grow at 22% CAGR on account of higher per sq ft revenue & increase in trading area. 12.1 Consolidated sales to grow at 16% CAGR driven by higher capacity & trading area. 12.7 We expect operating expense grow at higher pace tan sales on account of higher fuel cost 8.8 We expect growth in EBITDA higher than sales growth on better operating performance in retail business -3.0 We expect margins to improve mainly because of higher retail business -9.0 Net interest expenses to come down of loan repayment 0.8 Interest cost to go up marginally on higher interest on working capital 34.8 PAT to grow at a CAGR of 50% on account of higher capacity & lower losses from retail business. 20.2 PAT margins to see improvement on lower losses. 34.8 EPS to grow on lower losses of retail business & capacity additions. -28.4 CFO to improve on the back of capitalization of power asset -26.2% Capex for Chandrapur & Haldia projects 19.4% Debt financing for Chandrapur & Haldia projects
EBIDTA margin (%) Net Interest Expense (Rs mn) Avg. Interest rate (%) PAT (Rs. mn)
10.1 2,614 10 1,564
15.2 2,990 11 2,980
13.6 2,571 11 3,938
13.1 2,339 11 5,309
50.7 14.4 1.5 90.6
-10.9 -14.0 0.9 32.2
PAT margin (%) EPS (Rs.) Cash Flow forecast CFO (a) CFI (b) FCF(a -b) CFF - Total Changes in cash (a+b+c)
4 12
6 24
7 31
8 42
64.5 90.6
11.2 32.2
3,620 13,342 (9722) 8,329 (1393)
6,555 7,486 (931) 1,540 610
12,514 28,376 (15862) 9,977 (5885)
8,961 20,941 (11980) 11,917 (63)
81.1 -43.9% -81.5%
90.9 279.1% 547.7%
Source: Compa ny, Karvy Institutional Research 55
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CESC
We are above consensus estimate on topline for FY12E due to higher PLF assumption; however we are in-line with consensus for FY13E.
Exhibit 17: Karvy vs. Consensus
Karvy Revenue (Rs. mn) FY12E FY13E EBIDTA (Rs. mn) FY12E FY13E PAT (Rs. mn) FY12E FY13E 7,963 8,661 8,737 11,836 (8.8) (26.8) 58,757 65,887 Consensus 56,668 63,959 Difference (%) 3.6 3.0
3,938 5,309
3,428 5,128
14.8 3.5
Source: Bloomberg , Karvy Institutional Research
Key Risks:
Execution risks for power projects under development, which could affect the Companys revenues.
Higher than expected losses in the retail business; if it persists could affect valuations.
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Financial Overview
Our View: Topline to Register Healthy Growth on the back of Capacity Addition
We expect 15% revenue CAGR over FY10-13E helped by capex for Budge Budge Unit-III, hike in average tariffs to compensate for rising fuel costs and 21% CAGR growth in retail business. Exhibit 18: Topline Growth at CAGR of 15%
80,000 60,000 40,000 20,000 0 FY2010 FY2011
Net revenues
Exhibit 19 : Segment-wise Revenue Breakup

(%) 25 20 15 10 5 60000 50000 40000 30000 20000 10000 0 FY2010 FY2011
Power Segment
Rs mn
(Rs mn)
FY2012E
FY2013E
% Growth
FY1012E
Retail Segment
FY1013E
Source: Compa ny, Karvy Institutional Research
Operating Margins to improve over FY10-13E

CESCs operating margins to show gradual improvements from 10% in FY10 to 14% in FY13E, on account of higher margins in retail business. We expect its gross margins to improve by 500 bps from 13% to 18% on the back of increased sales from the high margin non-food segment. Exhibit 20: Operating Margins
10,000 8,000 6,000 4,000 2,000 0 FY2010 FY2011
Operating Profits
Exhibit 21: Operating Performance (%)

(%) 20 15 10 5 FY2012E FY2013E
OPM %
Rs mn
60 40 20 (20) (40)
Power margins (%) Spencer Retail (%)
20 15 10 FY10 FY11 FY12E FY13E 5 Consolidated Margins (%)
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Bottomline Performance to Improve

We expect consolidated PAT of Rs. 4.4 bn and Rs. 5.4 bn for FY12E and FY13E, respectively, helped by reducing retail losses. We expect the losses in its retail business to reduce from Rs. 1.4 bn in FY11 to Rs. 700 mn in FY13E & Rs. 70 mn profits in FY14E.
Exhibit 22: Bottomline Performance

6000 5000 4000 3000 2000 1000 0 FY2010 FY2011
Net profits
Rs mn
(%)
10 8 6 4 2 -
FY2012E
NPM (%)
FY2013E
Return Ratios to Improve

We estimate Return-on-Equity (RoE) would improve capitalisation of asset and lower losses from retail business. on account of
Exhibit 23: Return Ratios to Improve

10 8 6 4 2 FY2010 FY2011 ROCE (%) Source: Compa ny, Karvy Institutional Research FY2012E ROE (%) FY2013E (%)
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Y/E March (Rs mn) Net revenues % Growth Raw Material Staff Operating Expenses Other expenditure Operating expenses EBIDTA % Growth EBIDTA margin (%) Other income Interest Depreciation Profit Before Tax Provision for tax Effective tax rate (%) Reported Net Profit % Growth Net Margin (%) Share in Associate profit (Net) Extra-Ordinary Inc/(Exp) Adjusted Net Profit % Growth EPS (Rs) % Growth DPS (Rs)
FY09 41,083 14% 13,959 5,183 12,705 6,986 38,833 2,250 -48 5.5 2,202 2,088 2,158 206 -557 -270 763 -71 1.9 763 6.1 -71 4
FY10 42,662 4% 17,399 5,450 11,536 3,969 38,354 4,308 91 10.1 2,558 2,614 2,514 1,739 175 10 1,564 105 3.7 1,563 105 12.4 105 4
FY11 49,420 16% 20,930 5,640 8,660 6,670 41,900 7,520 75 15.2 2,140 2,990 3,160 3,510 530 15 2,980 91 6.0 10.0 (210) 2,780 78 23.7 91 4
FY12E 58,757 19% 35,627 6,810 1,846 6,511 50,795 7,963 6 13.6 2,791 2,571 3,364 4,818 880 18 3,938 32 6.7 10.0 3,948 42 31.4 32 4
FY13E 65,885 12% 41,462 7,540 1,385 6,837 57,224 8,661 9 13.1 3,363 2,339 3,614 6,072 763 13 5,309 35 8.1 10.0 5,318 35 42.3 35 4

Y/E March (Rs mn) Equity capital Reserves & surplus Shareholders funds Minority Short term Loans Long Term Loans Total Loans Share appln money Deferred tax liability Total Liabilities Gross block Depreciation Net block Capital WIP Investments Inventory Debtors Cash & Bank Bal Loans & Advances Current Assets Sundry Creditors Other current liabilities Provision for dividend Other provisions Current Liabilities Net deferred tax Net current assets Deferredexpenditure Total Assets FY09 1,256 43,749 45,005 0 8,234 23,124 31,358 5 8,206 84,574 98,422 39,053 59,369 13,515 4,343 3,776 4,257 13,074 3,310 24,417 3,914 13,749 500 749 18,911 1,745 5,505 98 84,574 FY10 1,256 44,127 45,383 9 11,594 28,062 39,665 10 8,959 94,017 120,857 42,407 78,450 4,422 4,374 3,739 5,176 11,680 2,971 23,566 4,483 13,597 500 749 19,329 2,463 4,238 71 94,017 FY11 1,256 45,750 47,006 20 13,454 27,826 41,300 14,490 102,796 123,065 43,219 79,846 9,700 4,170 4,080 5,820 12,290 3,050 25,240 5,450 12,110 500 1,370 19,430 3,210 5,810 60 102,796 FY12E 1,256 61,389 62,644 20 13,804 36,660 50,484 14,490 127,619 127,122 46,583 80,539 34,019 4,374 7,644 6,301 6,405 4,000 24,350 6,686 10,434 500 1,313 18,933 3,210 5,417 60 127,619 FY13E 1,256 66,109 67,365 20 17,654 45,294 62,968 14,490 144,823 129,406 50,197 79,209 52,676 4,374 7,865 6,704 6,342 4,500 25,411 6,844 11,459 500 1,313 20,116 3,210 5,294 60 144,823
Source: Company, Karvy Institutional Research 59
June 30, 2011
CESC
Exhibit 26: Cash Flow statement

(Rs mn) EBIT (Inc)/Dec in working capital Cash flow from operations Other income Depreciation Interest paid Tax paid Net cash from operations Capital expenditure Free Cash Flows Inc/(Dec) in LT borrowing Inc/(Dec) in ST borrowing (Inc)/Dec in investments Others Cash from Financial Activities Opening Cash Closing Cash Change in Cash FY2009 93 4,117 4,209 2,202 2,158 2,088 (557) 7,038 13,786 (6,748) 7,172 1,523 956 9,651 10,170 13,073 2,903 FY2010 1,795 (457) 1,338 2,558 2,514 2,614 175 3,620 13,342 (9,722) 4,938 3,359 31 8,329 13,073 11,680 (1,393) FY2011 4,360 415 4,775 2,140 3,160 2,990 530 6,555 7,486 (931) (236) 1,860 (204) 120 1,540 11,680 12,290 610 FY2012E 4,598 5,212 9,810 2,791 3,364 2,571 880 12,514 28,376 (15,862) 8,834 350 204 589 9,977 12,290 6,405 (5,885) FY2013E 5,048 39 5,087 3,363 3,614 2,339 763 8,961 20,941 (11,980) 8,634 3,850 (567) 11,917 6,405 6,342 (63)

FY2009 Raw Material Cost / Sales Manpower Cost / Sales Operating & Other cost / Sales Revenue Growth EBIDTA Margins PAT Margins ROCE ROE Core RoCE Core RoE 34.0 12.6 30.9 14.2 5.5 2.0 3 2 6.1 3.0 FY2010 40.8 12.8 27.0 3.8 10.1 4.1 5.1 3.4 7.6 4.0 FY2011 42.4 11.4 17.5 15.8 15.2 6.3 8.5 6.3 10.3 7.1 FY2012E 45.3 11.6 18.5 18.9 13.6 7.4 7.0 6.3 11.1 8.1 FY2013E 47.8 11.4 17.3 12.1 13.1 8.1 6.6 7.9 12.3 11.5

EPS (Rs) PER (x) Book per share P/B(x) EV/EBIDTA (x) Fixed assets turnover ratio (x) Debt/Equity (x) EV/Sales (x) FY2009 6.1 49.4 360 1.20 22.9 0.7 0.7 1.3 FY2010 12.4 24.1 363 1.19 14.2 0.5 0.9 1.4 FY2011 23.7 12.6 376 1.13 8.3 0.6 0.9 1.3 FY2012E 31.4 9.6 501 0.77 9.7 0.7 0.8 1.3 FY2013E 42.3 7.1 539 0.70 10.4 0.8 0.9 1.4
60
POWER
July 1, 2011
July 1, 2011
JSW Energy
Bloomberg: JSW.BO Reuters: JSW IN
JSW Energy
HOLD

Rupesh Sankhe
Merchant Power Player with High Fuel Risks

JSW Energy (JSWEL) stands lower in our fuel security theme due to its high exposure to merchant market and excessive dependence on imported coal. Our view also factors cancellation of mine allotted to Sungi Belati (SB) that was supposed to supply 2 MTPA of coal at US$36 per MT (FoB) and sharp rise in spot prices in global markets. We believe that this will further increase JSWELs exposure to imported coal.
Recommendation
CMP: Target Price: Upside: Rs 67 Rs 75 12%
High Exposure to Merchant Power Leading to Earnings Volatility

Out of JSWELs total capacity of 3,140MW, 55% would be under the merchant route which would make JSWEL susceptible to merchant rates. In our opinion the merchant rates would soften further on the back of incremental capacity and back-out of the SEBs. We assume merchant rates of Rs. 4 per KWh in FY12E, declining to Rs. 3.5 per KWh in FY13E, and remaining at this level until FY15E, and would rise 2% thereafter.
Stock Information
Market Cap. (Rs bn / US$ mn)109/2443 52-week High/Low (Rs) 136/64 Shares Outstanding (mn) 1640 3m ADV Rs mn 99.3/USDmn 2.2 Beta 0.72 Sensex 18,846 Nifty 5,647
Excessive Dependence on Spot Imported Coal Pricing Risk Ahead

A major chunk of JSWEL's FY13E capacity (65%) would operate on imported coal. Given the huge demand from India & China, the spot coal prices are likely be above US$120 per tonne till FY14E. We believe high fuel cost dents the IRR of the projects to 19%.
Capacity Growth to taper off beyond FY12E

We expect JSWEL to hike capacity to 3,140MW in FY13E from 2,000MW currently. The next major rise in capacity will not take place until FY15E, when we expect addition of 300MW from West Bengal-I and Phase-I of 1,320MW from Ratnagiri-II. Again, the visibility on JSWELs pipeline projects is low, as these projects still await certain clearances. The cashflow from 3.1GW (operational by FY12E) capacity suggests potential need for equity dilution of 15-20% in FY14-15E for total capex of Rs. 413 bn provided all the projects go on stream.

1M Absolute (4.6) Rel. to Sensex (6.4) 3M 12M YTD (6.7) (46.7) (32.9) (3.6) (53.1) (24.8)
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Aug-10 Dec-10 Feb-11 Jun-10 Oct-10 Apr-11 Jun-11 155 135 115 95 75 55
Valuation
At the CMP, JSWEL is trading at 1.6x and 1.4x its FY12E and FY13E P/BV, respectively, and at EV/EBITDA of 7.4x on FY13E. We have arrived at a fair price of Rs. 75 for JSWEL by valuing 7,960MW of capacity under the FCFE methodology. Our fair price implies an upside of 12% from the CMP, and we initiate coverage on the stock with a HOLD recommendation. Exhibit 1: Key Financials
Y/E March (Rs mn) Net Sales EBIDTA Net Profit EPS (Rs) PER (x) EV/EBITDA (x) FY2009 18,350 5,318 2,766 5.1 13.2 17.4 FY2010 23,551 12,134 7,455 4.5 14.7 14.9 FY2011E 42,944 15,641 8,418 5.1 13.1 10.9 FY2012E 68,327 26,762 12,051 7.3 9.1 7.0 FY2013E 71,855 24,885 10,179 6.2 10.8 7.4
Sensex (LHS)
JSW Energy (RHS)
1 year forward P/B

200 150 100 50 0 Apr-10 Dec-10 Aug-10 Apr-11
(Rs) 4x 3x 2x 1x
61
July 1, 2011
JSW Energy

Consolidated Profit & Loss
Rs. in mn Net revenues EBIDTA Interest Depreciation Profit before Tax Provision for tax Adjusted Net Profit Reported Net Profit Profit and Loss Ratios EBIDTA Margins (%) PAT Margins (%) EV/EBIDTA (x) PER (x) P/B FY2011E 42,944 15,641 4,325 2,668 9,979 1,562 8,065 8,418 36.4 19.6 10.9 13.1 1.9 FY2012E 68,327 26,762 6,953 6,303 15,856 3,805 11,751 12,051 39.2 17.6 7.0 9.1 1.6 FY2013E 71,855 24,885 7,778 6,888 13,219 3,040 9,829 10,179 34.6 14.2 7.4 10.8 1.4
Company Background JSW Energy a part of the JSW Group having presence in the steel, power, cement, aluminium, software and infrastructure sectors is the first independent power producer to be set up in Karnataka. The Company was formed in 1994 as a JV between the Jindal Group & Belgium-based Tractebel SA under the name Jindal Tractebel Power Company. It commenced its commercial operations on January 18, 2000. Following the exit of Tractebel SA, the Company's shares were fully owned by the Jindal Group. JSWEL has proven execution capabilities, which stand to its advantage. It has so far implemented five separate projects with a total generation capacity of 1,150MW, with project management oversight for most of the projects being performed internally. Consolidated Cash Flow
FY2012E 16,401 92,128 1,562 161,795 134,003 9,842 3,427 161,795 FY2013E 16,401 89,128 1,562 167,529 130,115 9,842 5,024 167,529 Rs. in mn FY2011E FY2012E 20,459 7,907 28,365 2,350 6,303 6,953 1,434 3,805 25,126 (13,364) 11,762 (9,547) 9,778 11,993 2,215 FY2013E 17,997 (1,241) 16,755 3,000 6,888 7,778 1,434 3,040 14,742 (11,026) 3,716 (3,350) 11,992 12,359 366 16,401 96,376 1,562 155,427 64,385 4,842 9,120 155,427 EBIT 12,973 (Inc)/Dec in working capital (2,564) Cash flow from operations 10,409 Other income 1,332 Depreciation 2,668 Interest paid 4,325 Dividends paid 1,434 Tax paid 1,562 Net cash from operations 7,440 Capital expenditure (28,368) Free Cash Flows (20,928) Cash from Financial Activities 24,658 Opening Cash 6,048 Closing Cash 9,778 Change in Cash 3,730

Rs. in mn Shareholders funds Total Loans Deferred tax liability Total Liabilities Net block Investments Net current assets Total Assets Balance Sheet Ratios ROCE (%) ROE (%) Debt/Equity (x) EV/Sales (x) Debt/Equity(X) 9.2 15.4 1.5 4.0 1.5 12.9 18.9 1.2 2.8 1.2 10.9 13.7 1.0 2.6 1.0 FY2011E
Shareholding Pattern FY11

Revenue Split by Product FY11

Project management fees 4% Operator fee 1%
Promoters 77%
Power business 95% Source: Company 62
Source: Company
July 1, 2011
JSW Energy
Outlook & Valuation
Why we have HOLD Recommendation on the Stock?

We believe that JSWEL should trade at a discount to Adani Power & Tata Power due to:
I. High exposure to imported spot coal & merchant sales II. Capacity growth to taper off beyond FY12E III. Low IRR of the Projects
During FY10-11, JSWEL reported strong performance on the back of higher merchant realization, which enables the Company to enjoy higher valuation. However, we believe that the growth momentum will slow down beyond FY12E due to: I. Lower Merchant Realization, II. Slowdown in Capacity Addition, and III. Higher Fuel Cost. At the CMP, JSWEL is trading at 1.6x and 1.4x its FY12E and FY13E P/ BV, respectively, and at EV/EBITDA of 7.4x on FY13E. We have arrived at an SOTPbased target price of Rs. 75 for the stock by independently valuing 7,960MW of capacity and the other businesses valued at book value. We initiate coverage on the stock with a HOLD recommendation that implies 12% upside from the current levels. Exhibit 2: SOTP Valuation
Project Details Capacity Date of (MW) Commission ing 860 1200 1050 3200 1600 Operational Operational Operational FY16 FY15 Cost of Equity (Ke) 14% 14% 14% 15% 15% Val method FCFE FCFE FCFE FCFE FCFE Equity Value (Rs mn) 29,160 21,480 20,984 18,168 13,588 Stake Milestone % Discount 100 100 100 100 74 0 0 0 50% 50% JSWEL Value (Rs mn) 29,160 21,480 20,984 9,084 6,794 14,620 20,179 13,031 Per share value 17.9 13 13 5.5 4.1 9 12 75
Vijayanagar I &II Ratnagiri I Barmer I Ratnagiri II West Bengal Cash & investment in hand FY11E Terminal value of the projects (10% of Capital Cost) Total (Rs Per Share)
JSW Energy is trading at P/B of 1.4x & P/E 10.8x based on FY13E, which at significant discount at 48% & 35% to its historical average of 2.7x P/B & 16.5x P/E respectively. In the last 2 yrs JSWEL has traded at P/B of 3-3.5x on account of higher RoE from merchant business. Exhibit 3: One Year-Forward P/E
185 165 145 125 105 85 65 45 25 Apr-10 (Rs)
Max Min Mean 23.5 9.4 16.5
Exhibit 4: One Year-Forward P/B

20x 15x 10x 5x 200 150 100 50 0 Dec/10 Apr/10 Aug/10 Apr/11 (Rs)
4x 3x 2x 1x
Aug-10
Dec-10
Apr-11
July 1, 2011
JSW Energy
High exposure to merchant power leading to earnings volatility Pricing risk ahead Excessive dependance on spot imported coal Valuation of operational and under-construction assets Issues pertaining to Indonesian coal supplies & PPA with MSEDCL Captive Lignite Mines: Major positive for RWPL, but regulated RoE Capacity growth to taper off by FY12E Healthy operational cash flows from FY12 to FY15E Equity dilution expected if all development projects go on stream but unlikely Other businesses creating insignificant current value
I. High Exposure to Merchant Power Leading to Earnings Volatility

Exhibit 5: Rs.0.5 per unit fall in merchant price to earnings sensitivity
20,000 15,000 31 10,000 5,000 0 FY12E Current Revised FY13E % Change Rs mn (%) 43 50 40 30 20 10 -
JSWEL is set to hike its capacity to 3,140MW by FY13E-end from 1,730MW currently. Out of the total capacity of 3,140MW, 54% would be under the merchant route that will enable it to high exposure merchant rates, which expected till FY13E. As per our estimates, JSWEL s imported coal constitutes 83% in FY11, and we expect imported spot coal to constitute 70% of total fuel consumed in FY12. The biggest risk with JSWELs projects is the lack of fuel on a long-term basis, causing the Company to have significant exposure to imported coal. We expect JSWEL to source majority of coal from South Africa the FOB price is currently US$100 per tonne, leading to a landed cost of US$138 per tonne and fuel cost at Rs 2.6 per unit thereby putting significant pressure of operating performance. We estimate FOB price at US$115 per tonne in FY12. We assume merchant rates of Rs. 4 per KWh in FY12, declining to Rs. 3.5 per KWh in FY13, and remaining at this level until FY15 & 2% hike thereafter as the recent competitive bids have already set a price band of about Rs. 2.7-3.2 per KWh. We expect merchant rates to be at a premium of at least 10-15% to long-term PPA rates considering the risks associated with the business.
Exhibit 6: Avg Realization v/s Fuel cost

6 5 4 3 2 1 0 FY10 FY11 FY12 FY13 Fuel cost per unit FY14 Realization Per Unit (Rs) Gross margin per unit
Exhibit 7: Operational Matrix Consolidated

Capacity (MW) Sales Volume (MU) Competitive PPA Merchant Total As a % of total Competitive PPA Merchant
FY2011
1400 0 2836 5927 8764 32 68
FY2012E
2740 1364 9020 8854 19238 7 47 46
FY2013E
3140 2046 10425 10286 22757 9 46 45
FY2014E
3140 2273 11282 10042 23596 10 48 43
FY2015E
3140 2273 11282 10042 23596 10 48 43
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JSW Energy
II. Pricing Risk Ahead Excessive Dependence on Spot Imported Coal

A major chunk of JSWEL's FY13E capacity (65%) would operate on imported coal, which would be a mix of Indonesian coal from SB (based on RB Index) and coal bought on spot basis. The huge reliance on imported coal leaves JSWEL open to pricing risk, as 55% of its FY13E capacity is based on merchant rates. Currently, at US$120 per tonne, the global spot coal prices not likely to decline significantly.
Exhibit 8: Spot vs. Long-term Coal Arrangement
100 80 60 40 20 0 FY11E FY12E Spot Sungai Belati
Exhibit 9: Coal Requirement & Supply *

mn tonne
Vijayanagar-I (260 MW) Coal requirement Supply arrangement - JSWSL Vijayanagar-II (600 MW) Coal requirement Supply arrangement Imported under contract from Sungai Belati (SB) Supply fromSACMH Purchase under spot basis Raj West I (1050 MW) Coal requirement Supply arrangement Tapering linkage from MCL & SECL Supply from SACMH Captive lignite mines Imported under contract from SB Purchase under spot basis Ratnagiri I (1200 MW) Coal requirement Supply arrangement - SB Purchase under spot basis Total Requirements Imported under contract from Sungai Belati Spot Domestic Source: Company, Karvy Institutional Research 0 0 3.0 10.0 0 7.1 2.9 0 0 3.3 12.1 0 7.8 4.3 1.11 1.11 4.1 14.0 0 5.9 8.1 1.5 0 2.6 2.7 0 3.5 6.2 0 0 0.3 0 -
FY12E
0.8 0.8 1.8 0.3 1.5 4.4
FY13E
0.8 0.8 1.8 0.3 1.5 6.2
FY14E
0.8 0.8 1.8 0.3 1.5 6.2
(%) 16.7 20.8 29.0 0.0 35.3 0.0 64.7
62.5
71.0
FY13E Domestic
We are of the view that high dependence on the imported coal and lower merchant realizations leading to low IRRs of operational projects.
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III. Valuation of Operational / Under-construction Assets

1. Vijayanagar-I (Operational since 2000) & II (Operational since Sept09) Valued @ Rs. 17.8 per share
Exhibit 10: Financials & Valuation for Vijayanagar I & II
(Rs. in mn)
Capacity (MW) Sales Volume (Mn units) Realization Per Unit (Rs) Net Sales (Rs mn) Operating Expenses (Rs mn) EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit period FY12-29E) Per Share Source: Karvy Institutional Research
FY12E
860 6,656 3.99 25,934 19,309 6,624 1,659 1,748 3,217 641 2,576 1,521 1,521 29,160 17.8
FY13E
860 6,656 3.81 24,802 20,605 4,197 1,659 1,575 963 192 771 433 380
FY14E
860 6,586 3.74 24,094 19,525 4,569 1,659 1,351 1,558 310 1,247 1,120 861
FY15E
860 6,586 3.75 24,137 20,032 4,106 1,659 1,162 1,284 256 1,028 1,012 683
2. Ratnagiri-I (1,200MW) Expected to be commissioned by FY12E A mix of PPA & Merchant play Valued @ Rs. 13 per share
Exhibit 11: Financials & Valuation of Ratnagiri-I
(Rs. mn) Capacity Sales Volume (Mn units) Realization Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit period (FY13-37) Per Share IRR
FY12E 800 5,455 3.8 20,273 12,672 7,600 1,543 991 5,064 979 4,085 (1,291) (1,291) 21,480 13 18%
FY13E 1,200 8,182 3.6 28,595 19,616 8,979 2,315 2,361 4,302 831 3,470 1,508 1,323
FY14E 1,200 9,091 3.8 33,392 22,347 11,045 2315 4,030 4,699 908 3,791 2,995 2,305
FY15E 1,200 9,091 3.7 32,479 23,127 9,351 2,315 3,780 3,255 629 2,626 2,362 1,595
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3. Raj West Power Valued @ Rs. 13 per share

Exhibit 12: Financials & Valuation of Raj West Power
Capacity Sales Volume (Mn units) Realization Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV(Explicit Period FY12-36) Per Share
Source: Company and Karvy Institutional Research
FY13E 1,080 7,918 2.38 18,441 7923 10,517 2,297 3,841 4,378 846 3,532 4,515 3,960 20,984 13
FY14E 1,080 7,918 2.36 18,261 8,207 10,053 2,297 3,568 4,187 809 3,377 3,258 2,507
FY15E 1,080 7,918 2.34 18,124 8,502 9,621 2,297 3,296 4,027 778 3,248 3,125 2,109
4. Assets under pipeline

Exhibit 13: Projects under pipeline
Project Ratnagiri-II (3,200MW) Water Availability Sea Water Land Environment acquisition clearance Acquired Pending Equipment Pending Fuel Arrangement Imported coal to be source from SACMH Off-take 50% with MSEDCL & balance to be tiedup. Financial Tie-up Pending COD FY16
Chhattisgar (1,320MW)
Mahanadi river
Partly acquired
Pending
Pending
JSWEL has an 11% interest in a consortium that has been allotted a coal block from Utkal A Gopalprasad (West) West mines near Talcher, Orissa, from the Ministry of Coal on November 29, 2005. Captive mines Applied for linkage Applied for linkage -
Up to 35% Pending to state. Balance to be tied up
FY15
W.Bengal (1,600 MW) Jharkhand (1,620 MW) Raj West (270 MW) Kutcher (240 MW)
Pending Pending Allocation available -
Acquired Pending Available In progress
Pending Pending Pending Completed
Bids Invited Pending Pending Pending
Mix Pending 100% merchant 12% free power & balance merchant
Pending Pending Pending
FY15 FY16 FY15
Completed FY16
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JSW Energy
IV. Issues Pertaining to Indonesian Coal Supplies & PPA with MSEDCL
JSWEL had signed 300MW PPA with Maharashtra State Electricity Distribution Company (MSEDCL) for sale of power at levelised tariff of ~Rs. 2.7 per kWh for 25 years. It also signed fuel supply contract with PT Sungai Belati for supply of ~2 MTPA coal with GCV of 4,300-4,500 @ base price of US$36 per tonne. As per the Management, JSWEL had first priority over other customers for supply of coal from the mines. However, following the cancellation of SB mine license by the Indonesian Supreme Court, PT Sungai Belati has invoked a force majeure clause in the FSA. Separately, JSWEL has approached Maharashtra Electricity Regulatory Commission (MERC) for permission to hike power tariff after the MSEDCL refused its request. According to JSWELs Management, the FSA for coal supply was one of the principal agreements in PPA with MSEDCL and invoking of force majeure clause in FSA has led to force majeure in PPA.
V. Captive Lignite Mines: Major positive for RWPL with regulated RoE
Raj West Power (RWPL) a WOS of JSWEL is implementing the 8X135MW lignite-based thermal power plant in Bhadresh village in Barmer district of Rajasthan at a total estimated cost of Rs. 60.85 bn. The project is expected to be fully commissioned in FY12 in phases. Barmer Lignite Mining Company (BLMCL) will meet the entire fuel requirement of the power plant. The entire fuel requirement for 1,080MW Raj West-I plant will be met by Kapurdi and Jalipa mines, which JSWEL is developing jointly with Rajasthan State Mines & Minerals. The Raj West-I project when fully operational have an annual coal requirement of 6.2 MTPA. Currently, 270MW (Units I&II) of Raj West-I is operational, while the entire project is expected to be operational by FY12E.
VI. Capacity Growth to taper off beyond FY12E

We expect JSWEL to hike capacity to 3,140MW in FY12 from 2,000MW currently. We do not expect any capacity addition in FY12-14E. As regards the 8,930MW capacity that will remain under construction/development, none of the projects have secured financial closure or placed BTG/EPC orders. The next major increase in capacity will not take place until F Y15E, when we expect the addition of 300MW from West Bengal-I and Phase-I- 3,200MW from Ratnagiri, while other players like Tata Power, Adani Power and CESC to hike capacity significantly. Exhibit 14: Cumulative Installed Capacity (MW)
3500 3000 2500 2000 1500 1000 500 0 FY2011 FY2012 FY2013 FY2014 FY2015 (MW) 3140 2740 3140 3140
1400
VII. Healthy Operational Cash Inflows from FY12E-FY15E Expect Equity Dilution if all under-development projects go on stream , which is unlikely
JSWEL, with 3,140MW of operational capacity by FY13, is likely to enjoy healthy cash inflows going ahead. Its next phase of capacity addition involves the construction of 240MW Kutehr hydel project, 3,200MW Ratnagiri-II project, 1,320MW project in Chhattisgarh and 1,600MW project in West Bengal. These
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JSW Energy
under-construction projects would require equity contribution of over Rs. 117 bn over FY12-15E. The operating cash flows generated would be expected to be Rs. 78 bn over the same period, which would not be sufficient to fund the equity contribution of under-construction projects, thereby requiring equity dilution of around 15-20% in FY14-15E provided all the projects come on stream, but we believe JSWEL might phase it out in such a way that equity contribution wont be required at one go.
Exhibit 15: Cash Flow / Debt Equity
30000 20000 10000 0 FY2010 FY2011E FY2012E FY2013E Cash flow from Operation Net Debt/Equity Source: Company, Karvy Institutional Research (Rs mn) (%) 2.0 1.5 1.0 0.5 0.0
Exhibit 16: Equity Requirement (Rs. mn)

Project Expected Commissioning Date FY16 FY16 FY16 Total Cost 7500 1,9500 6,5000 9,2000 Equity Cost 900 5850 1,9500 2,7600 Already Deployed 800 350 2800 To be Deployed 900 5050 1,9150 2,4800
BLMCL (JV with RSMML) Kutehr (240 MW) Chhattisgarh (1320 MW) West Bengal(1600 MW) Ratnagiri-II(3200 MW) Jharkhand(1620 MW) Total
FY16 FY17
15,0000 7,9500 41,3500
4,0000 2,3850 11,7700
3950
4,0000 2,3850 11,3750
VIII. Other Business Models Creating Insignificant Current Value

1) Expansion Across Power Value Chain
JSWEL has foot prints in the other segments of the power value chain such as coal mining, power transmission, equipment manufacturing and power trading. It is also developing the Jalipa and Kapurdi coal mines in JV with RSMML for its Raj West-II power project. It has also entered into a JV with MSEDCL for constructing two 1,200MW, 400KV transmission lines. The total cost of the project is estimated at Rs. 5.8 bn out of which Rs. 2.91 bn has already been spent.
2) JV with Toshiba Corp for Steam Turbines & Generators Biz in India
JSWEL holds 75% stake in Toshiba JSW Turbine & Generator (TJTGL) a JV between JSW Group & Toshiba Corporation that will manufacture and market steam turbines and generators (TG) in India. The JV would have a total investment of US$250 mn with an initial capitalization of US$50 mn. The JV will manufacture and market mid-to large-size steam turbines and generators, ranging in size from 500MW to 1,000MW for highly efficient supercritical thermal power plants in India. Keihin Operations Toshiba's power equipment production facility in Yokohama will support Toshiba JSW in ramping up manufacturing, and in working toward establishing an independent production scale of 3,000MW per year. While the Blade shop equipment installation is 75% complete, the manufacturing of TG sets is likely to begin in FY12.
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JSW Energy
Exhibit 17: Key Financial Assumption

FY10 Operational Parameters Capacity (MW) Sales Volume (MU) PPA Merchant Competitive JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Tariffs Avg realisation (Rs/unit) PPA Merchant Competitive Blended Fuel cost Avg Fuel Cost (Rs/unit) Imported Coal (MT) Domestic Coal (MT) Financial Forecasts Sales (Rs mn) Sales (Rs mn) Total Sales Operating Expenses (Rs mn) EBIDTA (Rs mn) EBIDTA margin (%) Net Interest Expense (Rs mn) Avg. Interest rate (%) PAT (Rs. mn) PAT margin (%) EPS (Rs.) Cash Flow forecast (Rs mn) CFO (a) CFI (b) FCF(a-b) CFF - Total Changes in cash (a+b+c) Source: Karvy Institutional Research 860 1,505 3,511 0 5,426 5,016 7 72 95 Estimates FY11 FY12E 2,000 3,250 6,815 1,976 12,947 12,041 7 47 95 3,140 6,730 8,247 2,039 18,297 17,016 7 67 95 FY13E 3,140 12,111 8,725 2,039 24,596 22,875 7 89 95 FY11 133 116 94 139 140 0 -35 0 Growth FY12E 57 107 21 3 41 41 0 41 0 FY13E Comments
0 No major capacity addition expected 80 Raj west & Ratnagiri to add PPA sales 6 Ratnagiri 50% based on merchant based 0 25% capacity of Ratnagiri based on competitive 34 Volume driven by capacity addition 34 Driven by higher volumes 0 Unchanged 34 PLF to improve as plant take time to stabilize. 0 Unchanged
4.1 4.86 0 4.62 1.9 0.8 0.8
3.3 4.25 3.4 3.95 1.9 4.7 0.96
3.1 4 3.5 3.65 2.1 7.1 2.9
3.1 3.8 3.6 3.43 1.7 7.8 4.3
-19 -13
-6 -6
-14 3 488 20
-8 7 51 202
-1 Lignite mining of raj west to start in FY12 -5 We expect merchant rates to come down Ratnagiri projects to be based on competitive bidding -6 On lower merchant rates -17 We expect increase in imported coal prices 10 Higher requirements on account of higher capacity 48 Raj West is based on lignite mining
23,551 23,551 11,417 12,134 51.5 2,837 4 7,455 30.8 4.5
42,944 42,944 27,303 15,641 36.4 4,325 4 8,418 18.8 5.1
68,327 68,327 41,565 26,762 39.2 6,953 8 12,051 17.2 7.3
71,855 71,855 46,970 24,885 34.6 7,778 9 10,179 13.7 6.2
82 82 139 29 -29 52 25 11 -39 13
59 59 52 71 8 61 68 46 -8 43
5 Driven by capacity addition 5 Higher volume to drives earnings 13 Higher fuel cost -7 EBITDA to track capacity addition but FY13 lower as capacity slows down -12 Lower merchant rate & higher fuel cost lower margins 12 On account of higher capacity 16 To increase on asset capitalization -16 To track capacity addition however FY13 profits lower on lower realization -20 Lower merchant rate & higher fuel cost lower margins -16 Higher fuel cost & lower realization to dent profitability -41 -17 -68 -65 -83 To increase in FY12 on earnings Lower capex capex program for upcoming projects positive operating cash-flow No major capex
4,094 35,727 -31,633 -35,931 4,298
7,440 28,368 -20,928 -24,658 3,730
25,126 13,364 11,762 9,547 2,215
14,742 11,026 3,716 3,350 366
82 -21 -34 -31 -13
238 -53 -156 -139 -41
70
July 1, 2011
JSW Energy
Karvy vs. Consensus

Our estimates for Sales & PAT for FY13E are lower than consensus on account of lower PLF assumption. Exhibit 18: Karvy v/s Consensus Karvy
Revenue (Rs mn) FY12E FY13E EBIDTA (Rs mn) FY12E FY13E PAT (Rs mn) FY12E FY13E 68,327 71,855
Consensus
74,053 77,535
% difference
(7.7) (7.3)
26,762 24,885
32,281 29,849
(17) (17)
12,051 10,179
13,324 11,562
(9.5) (12)
Key Risks
1. Project delays 2. Operational issues at Raj West 3. Risk of high coal prices 4. Lower than expected merchant realisations
71
July 1, 2011
JSW Energy
Financial Overview
Exhibit 19: Merchant Profit / Total Profit
20,000 15,000 10,000 5,000 FY11 FY12 FY13
Total Profits (Rs mn) Merchant Profits (Rs mn) Merchant Profits (%)
100 80 60 40 20 -
Growth to peak in FY13E thereafter to r emain subdued till FY16E

The commissioning of RWPL and Ratnagiri plants is expected to boost JSWEL's topline from FY11E. The Company's sales volume is likely to grow from 5,016MU to 22,757MU at a 58.6% CAGR over FY10-13E with the commissioning of Ratnagiri & Raj west plants. We expect JSWEL to register a 44% CAGR in net revenue over FY11-13E thereafter to remain muted till FY16E. Exhibit 20: 44% Topline CAGR over FY10-13E
80,000 60,000 40,000 20,000 0 FY2010 FY2011
Net Sales (Rs mn)
Rs mn
(%)
100.0 80.0 60.0 40.0 20.0 0.0
FY2012E
Growth (%)
FY2013E
Operating Margins to Shrink in FY13E despite Rise in FY12E

JSWEL's operating margin is expected to improve to 39% in FY12E due to high proportion of merchant sales in its overall capacity. However, its operating margin is likely to shrink in FY13 to 34% due to low merchant power rates. Exhibit 21: Operating Margins to Shrink
30,000 25,000 20,000 15,000 10,000 5,000 0 FY2010 FY2011
Operating Profits (Rs mn)
Rs mn
(%)
60.0 50.0 40.0 30.0 20.0 10.0 0.0
FY2012E
OPM (%)
FY2013E
72
July 1, 2011
JSW Energy
Net Profit Volatility on Merchant Power Sales

JSWEL's net profits is expected to improve from Rs. 8,418 mn in FY11 to Rs. 10,179 mn in FY13E, due to commissioning of capacity However net profit to down in FY13E from FY12E on account of lower merchant realization, higher interest, and depreciation costs. We expect 50 paisa per unit to impact 40% profits. Exhibit 22: Net Profit growth at CAGR of 11%
15,000 10,000 5,000 0 FY2010 FY2011
Net Profits (Rs mn)
Rs mn
(%)
40 30 20 10 -
FY2012E
NPM(%)
FY2013E
Return Ratios to Decline; RoE is expected to Fall by 520 bps

We expect RoE to improve from 15.4% in FY10 to 18.9% in FY12. However, the RoE is likely to witness degrowth by 520 bps in FY13E to 13.7% on account of lower merchant realization and capex for future projects. Exhibit 23: Return Ratios to Decline
25.0 20.0 15.0 10.0 5.0 0.0 FY2010 FY2011
RoCE (%)
(%)
FY2012E
RoE (%)
FY2013E
73
July 1, 2011
JSW Energy

Y/E March (Rs. mn) Net revenues % Growth Raw Material Staff Operating Expenses Operating expenses EBIDTA % Growth EBIDTA margin (%) Other income Interest Depreciation Profit Before Tax % Growth Provision for tax Effective tax rate (%) Adjusted Net Profit % Growth Net Margin (%) Extra-Ordinary Inc/(Exp) Reported Net Profit % Growth EPS (Rs) FY2009 18,350 42 11,969 271 793 13,033 5,318 (39.3) 29.0 171 1,209 602 3,677 (52) 912 24.8 2,185 (64) 11.9 581 2,766 (56) 5.1 FY2010 23,551 28 10,158 311 948 11,417 12,134 128.2 51.5 742 2,837 1,361 8,678 136 1,223 14.1 7,249 232 30.8 206 7,455 170 4.5 FY2011 42,944 82 25,056 486 1,762 27,303 15,641 28.9 36.4 1,332 4,325 2,668 9,979 15 1,562 15.7 8,065 11 18.8 352 8,418 13 5.1 FY2012E 68,327 59 38,057 825 2,683 41,565 26,762 71.1 39.2 2,350 6,953 6,303 15,856 59 3,805 24.0 11,751 46 17.2 300 12,051 43 7.3 FY2013E 71,855 5 42,293 1,238 3,439 46,970 24,885 (7.0) 34.6 3,000 7,778 6,888 13,219 (17) 3,040 23.0 9,829 (16) 13.7 350 10,179 (16) 6.2

Y/E March (Rs. mn) Equity capital Reserves & surplus Shareholders funds Minority interest Long Term Loans Total Loans Deferred tax liability Total Liabilities Gross block Depreciation Net block Capital WIP Investments Others Cash Loans & Advances Current Assets Other current liabilities Current Liabilities Net current assets Total Assets FY2009 5,466 9,331 14,797 152 59,272 59,272 815 75,035 11,691 5,349 6,342 79,251 1,705 1,692 1,751 1,958 5,400 17,663 17,663 (12,262) 75,035 FY2010 16,401 31,402 47,802 152 78,701 78,701 1,161 127,817 36,839 6,714 30,125 86,026 14,344 6,428 6,048 3,852 16,328 19,006 19,006 (2,678) 127,817 FY2011 16,401 40,364 56,765 724 96,376 96,376 1,562 155,427 74,152 9,767 64,385 77,080 4,842 12,985 9,778 6,977 29,741 20,622 20,622 9,120 155,427 FY2012E 16,401 50,980 67,381 724 92,128 92,128 1,562 161,795 150,073 16,070 134,003 14,523 9,842 9,950 11,992 1,632 23,574 20,147 20,147 3,427 161,795 FY2013E 16,401 59,715 76,115 724 89,128 89,128 1,562 167,529 153,073 22,959 130,115 22,549 9,842 10,924 12,358 1,888 25,171 20,147 20,147 5,024 167,529
74
July 1, 2011
JSW Energy
Exhibit 26: Cash Flow Statement

Y/E March (Rs mn) FY2009 FY2010 10,773 (4,928) 5,845 742 206 1,361 2,837 0 1,223 4,094 (35,727) (31,633) 19,430 (12,293) 27,255 1,540 35,931 1,751 6,048 4,298 FY2011 12,973 (2,564) 10,409 1,332 352 2,668 4,325 1,434 1,562 7,440 (28,368) (20,928) 17,675 9,503 0 (2,519) 24,658 6,048 9,778 3,730 FY2012E 20,459 7,907 28,365 2,350 300 6,303 6,953 1,434 3,805 25,126 (13,364) 11,762 (4,248) (5,000) 0 (299) (9,547) 9,778 11,993 2,215 FY2013E 17,997 (1,241) 16,755 3,000 350 6,888 7,778 1,434 3,040 14,742 (11,026) 3,716 (3,000) 0 0 (350) (3,350) 11,993 12,359 366 EBIT 4,715 (Inc)/Dec in working capital 12,692 Cash flow from operations 17,408 Other income 171 Extra-ordinary income 581 Depreciation 602 Interest paid 1,209 Dividends paid 0 Tax paid 912 Net cash from operations 16,641 Capital expenditure (52,155) Free Cash Flows (35,514) Inc/(Dec) in LT borrowing 36,545 (Inc)/Dec in investments (1,497) Inc/(Dec) in Equity capital 318 Others (1,050) Cash from financial activities 34,316 Opening Cash 2,949 Closing Cash 1,751 Change in Cash (1,199)

FY2009 Raw Material Cost / Sales Manpower Cost / Sales Operating & Other cost / Sales Revenue Growth EBIDTA Margins PAT Margins ROCE ROE Core RoCE Core RoE 65.2 1.5 71.0 41.9 29.0 15.1 8.6 17.6 18.5 35.0 FY2010 43.1 1.3 48.5 28.3 51.5 31.7 10.6 23.2 12.4 27.6 FY2011 58.3 1.1 63.6 82.3 36.4 19.6 9.2 15.4 25.6 20.5 FY2012E 55.7 1.2 60.8 59.1 39.2 17.6 12.9 18.9 20.4 20.9 FY2013E 58.9 1.7 65.4 5.2 34.6 14.2 10.9 13.7 13.6 19.6

FY2009 EPS (Rs) PER (x) Book Value/Share P/B(x) EV/EBIDTA (x) Fixed assets turnover ratio (x) Debt/Equity (x) EV/Sales (x) 5.1 13.2 27 2.5 17.4 1.6 3.8 5.1 FY2010 4.5 14.7 29 2.3 14.9 1.0 1.5 7.7 FY2011 5.1 13.1 35 1.9 10.9 0.8 1.5 4.0 FY2012E 7.3 9.1 41 1.6 7.0 0.6 1.2 2.8 FY2013E 6.2 10.8 46 1.4 7.4 0.5 1.0 2.6
75
POWER
July 1, 2011
July 1, 2011
NTPC
Bloomberg: NTPC IN Reuters: NTPC.BO
NTPC
BUY

Rupesh Sankhe
Defensive Stock with High Fuel Security & Assured RoE

National Thermal Power Corporation (NTPC) Indias largest power generation company scores well as a defensive growth option with adequate fuel security, capacity expansion, assured RoE, strong balance sheet, high earnings visibility, and lowest cost structure. Fuel Security at its Best Least Vulnerable to Coal Deficit & Rising Coal Prices NTPC offers some of the best fuel security for its projects in a scenario marked with coal deficit, and rising coal prices. Despite our assumption of significant delays, NTPC expects that the captive mines would produce 47 MTPA of coal by FY17E. NTPC operates (100%) under regulated business model, which entitles the Company to pass on fuel cost to protect from rising coal prices. Less Capacity Additions from 11th Plan Target Expect Capacity to Ramp Up Out of capacity addition plan of 23GW during the 11th Plan, NTPC has been able to add only 6GW in the first four years (FY08-11). We expect 12,710MW addition of consolidated capacity during 11 th Plan leading to 47% slippage from the capacity addition target. However, we believe the slippage in the capacity addition has already been priced-in for NTPC. Going forward, we expect NTPC would add 20GW during FY12-15E. Regulated RoE with Steady Cash-Flow Core RoE Higher Than CERC Norm NTPCs pre-tax RoE of 21-27% is one of the highest due to operational efficiency and higher incentives with less risk of higher fuel prices. We expect regulated equity to grow from Rs. 272 bn to Rs. 420 bn by FY13E. We forecast core RoE of 20-21% for FY12-15E. Robust Balance Sheet with Strong Operational Cash-flows NTPCs balance sheet is strong enough to fund ongoing capex plans, as it plans to spend Rs. 970 bn during FY12-15E period. Its capex would be funded from internal accruals and debt. Given the strength of operational performance and healthy balance sheet, we expect the f nding for the u ensuing projects would not be a major issue for NTPC in comparison to private players. Outlook & Valuation At 13.0x FY13E P/E and 1.8x FY13E P/B, NTPC trades at a 20-25% discount to the average multiples of its domestic peers. In our view, adequate fuel security and RoE as compared to IPPs, and strong balance sheet command a premium for NTPCs valuation relative to the average multiples of its peer group. At our price target of Rs. 219, the stock would trade at 16x 1year forward P/E and 2.1x 1-year forward P/B. We initiate coverage on the stock with BUY recommendation. Exhibit 1: Key Financials
Y/E March (Rs. mn) Net Sales EBIDTA Net Profit EPS (Rs) PER (x) EV/EBITDA (x) FY09 419,921 106,908 82,012 9.9 22.3 16.1 FY10 463,905 126,386 87,282 10.6 19.0 14.0 FY11 548,740 125,616 91,026 10.8 18.3 14.5 FY12E 585,544 153,912 96,150 11.7 16.0 13.7 FY13E 683,410 193,868 111,801 13.6 13.8 11.5
Recommendation
CMP: Target Price: Upside (%): Rs 187 Rs 219 17%
Stock Information
M.Cap. (Rs bn / US$ mn) 1541/34348 52-week High/Low (Rs) 222/165 Shares Outstanding (mn) 8245 3m ADV Rs mn 417.8 /USDmn 9.3 Beta 0.82 Sensex 18,846 Nifty 5,647

1M Absolute 11.1 Rel. to Sensex 9.2 3M 12M YTD (3.2) (6.4) (6.9) (0.1) (12.8) 1.3
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Dec-10 Jun-10 Oct-10 Feb-11 Apr-11 Aug-10 Jun-11 230 210 190 170 150
Sensex (LHS)
NTPC (RHS)
1 year forward P/B

400 350 300 250 200 150 100 50 0
(Rs)
4x 3x 2x 1x
Apr/07
Apr/08
Apr/09
Apr/10
Apr/11
76
July 1, 2011
NTPC

Rs. mn Net revenues EBIDTA Interest Depreciation Profit Before Tax Provision for tax Adjusted Net Profit Reported Net Profit Profit and Loss Ratios EBIDTA Margins (%) PAT Margins (%) EV/Sales (x) EV/EBIDTA (x) PER (x) FY2011 548,740 125,616 21,490 24,856 120,496 29,470 79,579 91,026 22.9 16.6 3.7 14.5 18.3 FY2012E 585,544 153,912 26,515 31,371 116,794 20,643 96,150 96,150 26.3 16.4 3.6 13.7 16.0 FY2013E 683,410 193,868 36,123 41,517 135,944 24,143 111,800 111,800 28.4 16.4 3.3 11.5 13.8
Company Background NTPC is a diversified power major with presence in the entire value chain of the power generation business. Apart from power generation NTPC has already ventured into consultancy, power trading, ash utilization and coal mining. NTPC became a Maharatna company in May10, one of the only four companies to be awarded this status. The total installed capacity of the company is 34,194 MW (including JVs) with 15 coal based and 7 gas based stations, located across the country. In addition under JVs, 5 stations are coal based & another station uses naphtha/LNG as fuel. NTPC has been operating its plants at high efficiency levels. Although the company has 17.75% of the total national capacity, it contributes 27.40% of total power generation due to its focus on high efficiency. Consolidated Cash Flow
FY2011 676,262 511,033 14,958 1,202,253 425,585 144,471 179,577 1,202,253 FY2012E 732,084 656,144 14,958 1,403,187 605,900 135,632 150,931 1,403,187 FY2013E 843,885 790,679 14,958 1,649,522 860,753 127,676 179,244 1,649,522 Rs. in mn
EBIT (Inc)/Dec in working capital Cash flow from operations Other income Depreciation Interest paid Dividends paid Tax paid Net cash from operations Capital expenditure Free Cash Flows (Inc)/Dec in investments Inc /(Dec) in LT borrowing Cash from Financial Activities Opening Cash Closing Cash

Rs. in mn Shareholders funds Total Loans Deferred tax liability Total Liabilities Net block Investments Net current assets Total Assets Balance Sheet Ratios ROCE (%) ROE (%) Debt/Equity (x) 12.2 13.0 0.6 11.0 13.7 0.8 11.3 14.2 0.8
FY2011E
100,758 (19,176) 81,582 41,228 24,856 21,490 (37,483) 29,470 122,744 (235,087) (112,342) 9,821 133,063 142,885 144,595 114,052
FY2012E
122,539 (24,112) 98,427 20,769 31,371 26,515 (40,327) 20,643 143,737 (269,791) (126,053) 8,839 145,110 153,950 114,052 86,156
FY2013E
152,350 (92,692) 59,658 19,716 41,517 36,123 (46,891) 24,143 107,517 (267,495) (159,977) 7,955 134,534 142,490 86,156 103,643
Change in Cash
30,542
27,896
(17,487)
Shareholding pattern

Others 3%
Promoters 84% Source: Company
Power supply 97%
Source: Company
77
July 1, 2011
NTPC
Outlook & Valuation

We believe NTPCs significant underperformance due to delays in capacity addition and Lower PLF of some plants on account of fuel shortages over the past 6 months are largely captured in its current stock price. As the stock is trading at historically low valuation, we prefer NTPC as a safe bet at the current valuation due to: I. Higher Fuel Security Invulnerable to Coal Deficit & Rising Coal Prices fuel supply agreements signed with Coal India. II. The Company would add 20GW during FY12-15 period, despite Less Capacity Additions from 11th Plan Target III. Regulated RoE led by efficient operations and favorable regulations, Steady Cash-Flow IV. Robust Balance Sheet with and debt Strong Operational Cash-flows; Ability to fund capex from internal accruals At the CMP, NTPC is trading at 2.0x and 1.8x its FY12E and FY13E P/ BV, respectively, and at EV/EBITDA of 11.1 on FY13E. We have arrived at an SOTPbased target price of Rs. 219 for the stock by under the FCFE valuation methodology. We initiate coverage on the stock with a BUY recommendation that implies a 17% upside from the current levels. The implied target multiples are within the historical long-term averages of the respective multiple. Exhibit 2: DCF Calculation
Y/e 31 Mar (Rs. in mn) Profit before tax Depreciation Tax paid Working capital ? Operating cash flow Capital expenditure Free cash flow Cost of Equity (Ke %) Discounting factor Present value NPV (Explicit period FY12-21) Investment (FY1 1) Cash in hand FY11 Total Enterprise Value Debt Outstanding FY11 Equity Value No of outstanding shares Per share Value Source: Karvy Institutional Research FY12E 116,794 31,372 (20,644) 749 128,272 (63,506) 64,766 13.3 1.00 64,766 2,055,201 144,471 114,053 2,313,725 511,033 1,802,692 8,250 219 FY13E 135,944 41,517 (24,144) (10,826) 142,492 (88,911) 53,581 13.3 0.88 47,283 FY14E 159,280 54,210 (27,965) (10,093) 175,432 (96,102) 79,331 13.3 0.78 61,777 FY15E 179,441 64,507 (31,703) (8,068) 204,176 (68,693) 135,483 13.3 0.61 82,160 FY16E 202,096 73,166 (35,878) (13,076) 226,308 (69,900) 156,408 13.3 0.54 83,700 FY17E 226,607 81,900 (40,371) (14,333) 253,804 (69,900) 183,904 13.3 0.47 86,846 FY18E 249,958 89,697 (44,649) (12,395) 282,611 (54,900) 227,711 13.3 0.42 94,894 FY19E 276,664 97,026 (49,522) (13,928) 310,240 (62,400) 247,840 13.3 0.37 91,142 FY20E 305,294 104,824 (54,734) (14,841) 340,543 (62,400) 278,143 13.3 0.32 90,263 FY21E 337,724 113,091 (60,622) (16,884) 373,308 (69,900) 303,408 13.3 0.29 86,888
NTPC is trading at P/B of 1.8x & P/E 13.8x based on FY13E which at significant discount at 28% & 25% to its historical average of 2.5X P/B & 18.4X P/E respectively. NTPC has traded at P/B of 3-4x during FY08-09 when earning growth of 7% during FY09-11. We expect earning CAGR growth of 19% during FY11-13E thereby re-rating the stock.
Exhibit 3: 1 Yr. Forward P/E

325 275 225 175 125 75 25 (Rs)
Max Min Mean 27.9 12.6 18.4
Exhibit 4 : 1 Yr. Forward P/B

25x 20x 15x 10x 400 350 300 250 200 150 100 50 0 Apr/07 (Rs)
4x 3x 2x 1x
Dec-07
Dec-08
Dec-09
Dec-10
Apr-07
Aug-07
Apr-08
Aug-08
Apr-09
Aug-09
Apr-10
Aug-10
Apr-11
Apr/08
Apr/09
Apr/10
Apr/11
July 1, 2011
NTPC

Best placed in terms of fuel security Least Vulnerable to Coal Deficit & Risisng Prices Lower capacity addition in the 11 th Plan Expect Capacity to Surge Regulated RoE and firm cash flows; Core RoE higher than CERC norms Superior operating performance Robust balance sheet with strong operational cash flows
I. Higher Fuel Security Least Vulnerable to Coal Deficit & Rising Prices
Despite the instances of coal shortage in a few plants, we believe NTPC is one of the best placed companies in terms of fuel security, as almost all its capacity off-take will continue to be through long-term PPAs. The plants commissioned before Apr09 are part of supply arrangement with Coal India and are better placed than its forthcoming plants. The FSA with Coal India for new capacities is to the extent of 70% of the requirement, and balance would be blended with imported coal. We see about 16GW of standalone coal-based capacity to be commissioned during FY11-15, which would require about 64MTPA of coal. Exhibit 5: Fuel Requirement / Supply
Total coal consumed (mn tonne) Domestic Imported Total gas consumed (MMSCMD) Source: Company & Karvy Institutional Research
FY08
120.2 120.2 11.8
FY09
129.8 124.4 5.4 10.8
FY10
136.2 129.9 6.3 13.9
FY11
139.8 127.2 12.6 12.5
FY12E
146.0 133.7 12.3 12.5
FY13E
164.3 152.2 12.1 17
FY14E
172.4 160.5 11.9 17
FY15E
175.7 164.1 11.6 17
FY16E
199.2 187.8 11.4 17
FY17E
222.6 211.4 11.2 17
II. Lower Capacity Addition in 11 th Plan Period

We believe the slippage in the addition of capacity has already been priced-in for NTPC. During the 10th Plan period, NTPC added 7,200MW of capacity on standalone basis. We expect 12,710MW addition in consolidated capacity in the current plan period leading to 44% slippage from the target.
Exhibit 6: Plans vs. Achievements

Coal FY08 FY09 FY10 FY11 FY12E Total 1,000 2,320 2,800 2,820 8,640 17,580 Plans Gas 1,300 1,300 2,600 Hydro 800 1,120 1,920 Total 1,000 2,320 3,600 4,120 11,060 22,100 Achievement / Expectation Coal Gas Hydro 1,740 1,000 1,560 2,490 4,320 11,110 600 600 Total 1,740 1,000 1,560 2,490 4,920 12,710 Achievement % 74 -57 -57 -40 -56 -44
Based on our estimates, the major portion of NTPCs planned capacity addition during FY10-FY11E is likely to be commissioned in FY12E and FY13E, which will result into higher earnings in FY13E. NTPCs capacity-addition plan for 11 th Plan is 23GW , while in the first four years (FY08-11); the Company has been able to add only 6GW. Going forward, we expect a ramp-up in capacity and expect the Company to add 20GW over the next five years (FY12-15).
79
July 1, 2011
NTPC
Expecting lower commercial capacity addition, we expect large capacities to be commissioned in FY13E & FY14E.
Exhibit 7: Capacity Addition in 11 th Plan (GW)
50 40 30 20 10 0 FY10 FY11 FY12 FY13 Installed Capacity Capacity Addition FY14 1.5 2.5 5.0 5.3 5.0 31 34 38 44 46
Exhibit 8: Details of under-construction Projects (MW)

Standalone Entities Sipat-II unit II Kahalgaon-II Unit II Kahalgaon-II Unit VII NCTPP-II, Dadri Sipat-I, Unit I Korba-III Unit VII NCTPP-II, Unit-II, Dadri Farakka-III Simhadri-II, Unit III Sipat-I, Unit II Sipat-I, Unit III Simhadri-II, Unit IV Bongaigaon, Unit I Bongaigaon, Unit II Bongaigaon, Unit III Mauda-I, Unit I Mauda-I, Unit II Barh-II, Unit I Vindhyachal-IV, Unit I Vindhyachal-IV, Unit II Rihand-III, Unit I Rihand-III, Unit II Barh-I, Unit I Barh-I, Unit II Barh-II, Unit II Barh-I, Unit III Joint Ventures Ratnagiri (Dhabol) JV Indira Gandhi STPP, Unit I Indira Gandhi STPP, Unit II Indira Gandhi STPP, Unit III Nabinagar, Unit I Nabinagar, Unit II Nabinagar, Unit III Nabinagar, Unit IV Vallur - Phase-I, Unit I Vallur - Phase-I, Unit II Vallur - Phase-II Muzzafarpur-II, Unit II Source: Karvy Institutional Research
FY08
FY09
1000 500 500
FY10
1490 0 0 500 490 500
FY11
1990 0 0 0 0 0 500 490 500 500
FY12E
2320 0 0 0 0 660
FY13E
4570 0 0 0 0
FY14E
4230 0 0 0 0
FY15E
4660 0 0 0 0
660 0 500 250 250
660
250 500 500 660 500 500 500 500 660 660 660 740 740 0 0 500 500 500 500 250 250 250 250 500 500 500 195 80 2000 1390 500 660 0
July 1, 2011
NTPC
III. Regulated RoE with firm Cash-Flow; Core RoE Higher Than CERC Norm
NTPCs core business RoEs stand at about 23% far higher than the norms of regulated RoE of 15.5%. However, the investments on NTPCs books depress reported RoE. The Central Electricity Regulatory Commission (CERC) has determined the tariffs for NTPCs plants for the period from FY09 to FY14. Hence, NTPCs tariff would be reviewed only after FY14. With NTPCs increasing capex, we believe a larger portion of its equity will be deployed on capital works in progress (CWIP). However, we do not expect this to affect the core ROE materially , which we forecast to range from 20-21% until FY15E. Exhibit 9: RoE Trends (%)
30 25 20 15 10 5 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Exhibit 10: Regulated Equity Base (Rs mn)

700000 600000 500000 400000 300000 200000 100000 0 FY11 FY12 FY13 FY14 FY15
With fuel-supply agreements in place, scheduled imports and captive coalblock development would help NTPC maintain a high plant-load factor and availability. This would enhance its RoE, as stipulated in the new tariff policy for 2009-14. Exhibit 11: Cost Break-up (Rs per unit)
1.64 0.27 0.31 0.24 0.08 0.11 0.14 0.16 0.24 0.05 0.06 0.05 0.02 Implied incentives 0.01 Depreciation Other incentives UI income O&M RoE 0.06 Interest FY12 FY13 1.50 1.00 0.50 0.00 1.68 81 2.00
IV. Superior Operating Performance
In terms of operations, NTPC has always been considerably above the national average. T availability factor for coal-based power stations has increased he from 89.32% in FY99 to 91.62% in FY11. The PLF has increased from 76.6% in FY99 to 88.29% in FY11. Moreover, NTPC accounts for 20% (27.9GW) of Indias generation capacity and 29% of countrys electricity generation. NTPC has an efficiency-linked incentive-based tariff structure to boost its core business RoE to 24%, which is significantly higher than the allowed RoE of 15.5%. However, higher cash balance & the investments consisting of 8.5% tax-free bonds issued to NTPC to settle past dues from its customers have depressed NTPCs reported RoE to 14% levels as the yield from the investments are significantly lower (7-8%).
Fuel cost
July 1, 2011
NTPC
Exhibit 12: Operational Performance

100.0 95.0 90.0 85.0 80.0 FY05 FY06 FY07 FY08 FY09 PLF Source: Compa ny, Karvy Institutional Research FY10 PAF FY11 FY12 FY13 FY14 FY15
Exhibit 13: Operational Matrix

FY09 Nameplate capacity (MW) Standalone entity (MW) JV's (MW) Commercial capacity (MW) Standalone entity (MW) JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Avg realisation (Rs/unit) Avg Fuel Cost (Rs/unit)
FY10 31,704 28,840 2,864 31,704 28,840 2,864 218,840 218,439 205,091 6.5 90.8 93.2 2.2 1.4
FY11 34,044 30,680 3,364 34,044 30,680 3,364 231,795 231,370 217,232 6.5 88.3 95.0 2.4 1.6
FY12E 38,364 33,000 5,364 38,364 33,000 5,364 244,378 243,930 229,024 6.5 85.8 95.5 2.5 1.7
FY13E 43,814 37,060 6,754 43,814 37,060 6,754 272,326 271,827 255,216 6.5 85.3 95.5 2.6 1.7
FY14E 46,294 39,040 7,254 46,294 39,040 7,254 287,123 286,596 269,084 6.5 85.3 95.5 2.8 1.8
30,144 27,850 2,294 29,706 27,412 2,294 206,939 206,156 193,688 6.4 91.1 92.5 2.1 1.4
V. Robust Balance Sheet with Strong Operational Cash-flows

Positive operating cash-flows, investments and cash balance provide comfort as far as funding for the forthcoming projects of the Company. NTPC plans to spend Rs. 1018 bn capex during FY12-15 period. Low gearing (debt-equity of 0.8 in FY12) and healthy cash balance (Rs. 80 bn at FY12). Given the strength of operational performance and healthy balance sheet, we expect the financing for the forthcoming projects would not be a major issue, in contrast with private independent producers.
Exhibit 15: Cash Flow to remain healthy
200,000 150,000 100,000 50,000 0 FY10 FY11E FY12E FY13E
Exhibit 14: Strong operating cash-flow

Capex Capex (Rs mn) Capitalization - RoE business (Rs mn) Equity portion (30%) Debt portion (70%) Total Debt (Rs mn) Repayment Est. year ending debt Actual Debt Operating cash-flow (Rs mn)
(Rs mn)
(x)
1.0 0.8 0.6 0.4 0.2 0.0
Cashflow from Operation (Rs mn) Net Debt/Equity
FY12E 269,791 211,687 63,506 188,854 699,887 43,743 656,144 656,144 127,805
FY13E 267,495 296,371 88,911 187,247 843,391 52,712 790,679 790,679 141,911
FY14E 248,508 320,339 96,102 173,956 964,635 60,290 904,345 904,345 174,761
FY15E 232,236 228,977 68,693 162,565 10,669,10 66,682 10,002,28 10,002,28 203,281
82
July 1, 2011
NTPC

FY10 Operational Parameters Capacity (MW) Sales Volume (MU) PPA Merchant Competitive JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Tariffs Avg realization (Rs/unit) PPA Merchant Competitive Blended Fuel cost Avg Fuel Cost (Rs/unit) Imported Coal (MT) Domestic Coal (MT) Financial Forecasts Sales (Rs mn) Sales (Rs mn) Total Sales Operating Expenses (Rs mn) EBIDTA (Rs mn) EBIDTA margin (%) Net Interest Expense (Rs mn) Avg. Interest rate (%) PAT (Rs. mn) PAT margin (%) EPS (Rs.) Cash Flow forecast(Rs mn) CFO (a) CFI (b) FCF(a-b) CFF - Total Changes in cash (a+b+c) 28,840 Estimates FY11 FY12E 30,680 33,000 FY13E 37,060 FY11 6 Growth (%) FY12E 8 FY13E Comments
12 We expect higher capacity addition in FY12-13 11 Company mainly operates in regulated business 26 11 Generation growth in line with capacity growth 11 11 0 Unchanged -1 We expect lower PLF for new capacity 0 Unchanged
218,840 2,864 218,840 218,439 205,091 7 90.81 93
231,795 3,364 231,795 231,370 217,232 7 88.31 95
244,378 5,364 244,378 243,930 229,024 7 85.81 95
272,326 150 6,754 272,326 271,827 255,216 7 85.31 95
6 17 6 6 6 0 -3 2
5 59 5 5 5 0 -3 1
2.2 -
2.4 -
2.5 4 -
2.6 3.5 -
8 -
5 -
5 Regulated tariff based on cost structure (12.5) Small capacity based on merchant
1.4 6.30 129.9 463,905 463,905 339,801 119,449 26.1 18,089 9 81,276 18.8% 10.6
1.6 12.60 128.0 548,740 548,740 425,635 125,616 22.9 21,491 9 79,580 16.6% 10.8
1.7 12.35 134.5 585,544 585,544 434,402 146,242 25.3 26,515 8 96,150 16.4% 11.7
1.7 12.10 151.7 683,410 683,410 492,171 186,047 27.5 36,123 8 111,801 16.4% 13.6
10 100 -1
5 -2 5
2 90% linkage from Coal India -2 13
20 25 5 -12 19 -4 -2 -12 2
5 2 16 11 23 -3 21 -1 8
17 Sales to track capacity addition 13 Fuel cost expected to remain under control 27 9 EBITDA margin to improve 36 Higher debt requirements 0 Unchanged 16 0 Higher interest 16 EPS to show higher growth in FY13 on Higher Capacity
96,130 101,731 (5,601) 23,722 18,121
122,972 235,088 (112,116) 142,885 30,542
144,037 269,791 (125,754) 153,950 27,897
108,100 267,495 (159,395) 142,490 (17,487)
28 131 1902 502 69
17 15 12 8 -9
-25 Strong operating cash-flow -1 27 -7 -163
83
July 1, 2011
NTPC
Sensitivity Analysis
Based on sensitivity analysis our upper value for NTPC is R s 257 at 5% terminal growth & 12% cost of equity, while lower value for NTPC Rs 166 at 2% terminal growth & 14% cost of equity. Exhibit 17: Cost of Equity vs. Terminal Growth Sensitivity
12 196 211 231 243 257 Cost of Equity (Ke) (%) 12.5 13 188 175 203 189 222 207 233 217 246 230 13.5 173 186 204 214 226 14 166 179 195 205 217
Terminal Growth (%)
2.0% 3.0% 4.0% 4.5% 5.0%
Exhibit 18: Cost of Equity & Terminal Growth Assumption

Beta (x) Risk free rate (%) Market Premium (%) Cost of Equity (%) Terminal Growth Rate (%)
0.7 9.0 6.0 13.3 4.5
Exhibit 19: Karvy vs. Consensus

Karvy Revenue (Rs mn) FY12E FY13E EBIDTA (Rs mn) FY12E FY13E PAT (Rs mn) FY12E FY13E 585,544 683,410 153,912 193,868 96,150 111, 801 Consensus 632,661 725,860 167,122 198,724 991,10 111,853 Difference in % (7.4) (5.8) (7.9) (2.4) 2.9 0
We are lower than consensus estimate on the topline for FY12E, as we factor MAT rate (19.93%) to gross-up the regulated RoE thereby lowering tariff.
Key Risks:
In our view, the downside risks to our recommendation include: I. Execution delays, and II. Lower fuel availability leading to lower incentives
84
July 1, 2011
NTPC
Financial Overview
Net Sales - CAGR forecast of 14% for FY10-13E
We expect net sales to grow at 14% CAGR in FY10-13E on the back of the robust 12.7GW of capacity additions and higher equity base from Rs. 237 bn in FY10 to Rs. 419 bn in FY13E. We estimate 6% rise in tariff and 7% rise in net generation volume over the same period. We use the MAT rate (19.93%) to gross-up the regulated RoE thereby lowering tariff. Exhibit 20: Topline to grow at 14% CAGR
800000 600000 400000 200000 0 FY10 FY11
Net sales (Rs mn)
(Rs mn)
(%)
25 20 15 10 5 -
FY12E
Growth %
FY13E
Operating Margins to Remain Healthy

NTPCs operating margin is expected to improve from 23% in FY11 to 28% in FY13E due to better operational performance. Exhibit 21: Robust Growth in Operating Profits & Healthy OPMs
200000 150000 100000 50000 0 FY10 FY11
EBIDTA
(Rs mn)
(%)
30 25 20 15 10 5 0
FY12E
EBIDTA Margin (%)
FY13E
85
July 1, 2011
NTPC
Net Profit to Improve

Due to the slow pace of execution we estimate the net profit to grow at 11% CAGR over FY10-13E however net profit growth expected to be lower than sales growth on account of higher interest & depreciation costs. Exhibit 22: Net Profit to lag Capacity Growth
120000 100000 80000 60000 40000 20000 0 FY10 FY11
Reported Net Profit
(Rs mn)
(%)
20 15 10 5 (5)
FY12E
Growth (%)
FY13E
Return Ratios to Remain Healthy

We estimate RoEs to improve by 160 bps by FY13E due to decline in CWIP and deployment of excess cash into projects under development. Exhibit 23: Return Ratios to Improve
15.0 14.0 13.0 12.0 11.0 10.0 FY10 FY11
ROCE (%)
(%)
FY12E
ROE (%)
FY13E
86
July 1, 2011
NTPC

(Rs mn) Net revenues % Growth Raw Material Staff Operating Expenses Operating Other Income Operating expenses EBIDTA % Growth EBIDTA margin (%) Other income Interest Depreciation Profit Before Tax Provision for tax Reported Net Profit % Growth Net Margin (%) Extra-Ordinary Inc/(Exp) Adjusted Net Profit % Growth EPS (Rs) FY09 419,921 14% 271,107 24,631 18,438 1,163.0 314,176 106,908 -7 25 44,246 19,962 23,645 107,547 25535 82,012 11 20 12,870 69,142 -8 9.9 FY10 463,905 10% 294,628 24,124 21,049 2,282.0 339,801 126,386 18 27 32,286 18,089 26,501 114,082 26800 87,282 6 19 6,006 81,276 18 10.6 FY11 548,740 18% 353,738 27,897 44,000 2,510.2 425,635 125,616 -1 23 41,228 21,491 24,857 120,496 29470 91,026 4 17 (11,446) 79,579 -2 10.8 FY12E 585,544 7% 378,061 29,471 26,861 2,761.2 434,394 153,912 23 26 20,770 26,515 31,372 116,794 20644 96,150 6 16 0.0 96,150 21 11.7 FY13E 683,410 17% 430,168 32,439 29,558 2,623.2 492,165 193,868 26 28 19,717 36,123 41,517 135,944 24144 111,801 16 16 0.0 111,800 16 13.6

Y/E March (Rs mn) Equity capital Reserves & surplus Shareholders funds Long Term Loans Total Loans Deferred tax liability Total Liabilities Gross block Depreciation Net block Capital WIP Investments Inventory Debtors Cash & Bank Bal. Loans & Advances Current Assets Other provisions Current Liabilities Net current assets Total Assets FY09 82,455 491,246 573,701 345,678 345,678 16,249 935,628 623,530 294,153 329,377 264,049 147,014 32,434 35,842 162,716 71,082 302,074 32,495.0 74,391 195,188 935,628 FY10 82,455 541,920 624,375 377,970 377,970 14,958 1,017,303 668,501 320,888 347,613 321,043 154,293 33,477 66,514 144,595 57,349 301,935 30,705.0 76,876 194,354 1,017,303 FY11E 82,455 593,807 676,262 511,033 511,033 14,958 1,202,253 772,012 346,427 425,585 452,620 144,471 38,184 75,866 114,053 65,413 293,516 35,022.4 78,917 179,577 1,202,253 FY12E 82,455 649,629 732,084 656,144 656,144 14,958 1,403,187 983,699 377,799 605,900 510,724 135,632 40,142 79,757 86,156 66,595 272,650 38,756.1 82,964 150,931 1,403,187 FY13E 82,455 761,430 843,885 790,679 790,679 14,958 1,649,522 1,280,069 419,316 860,753 481,849 127,676 46,851 93,087 103,643 77,726 321,308 45,233.6 96,830 179,244 1,649,522
Source: Company , Karvy Institutional Research 87
July 1, 2011
NTPC

(Rs mn) FY2009 FY2010 99,886 (60,267) 39,619 32,286 6,006 26,501 18,089 (36,608) 6,006 26,800 96,130 (101,731) (5,601) 32,292 (7,279) (1,291) 23,722 162,716 144,595 18,121 FY2011E 100,759 (19,176) 81,583 41,228 (11,446) 24,857 21,491 (37,484) 5,145 29,470 122,745 (235,088) (112,343) 133,063 9,822 142,885 144,595 114,053 30,542 FY2012E 122,540 (24,112) 98,428 20,770 31,372 26,515 (40,328) 20,644 143,738 (269,791) (126,054) 145,111 8,840 153,950 114,053 86,156 27,897 FY2013E 152,351 (92,692) 59,659 19,717 41,518 36,123 (46,892) 24,144 107,518 (267,495) (159,978) 134,535 7,956 142,490 86,156 103,643 (17,487) EBIT 83,263 (Inc)/Dec in working capital (122,787) Cash flow from operations (39,524) Other income 44,246 Extra-ordinary income 12,870 Depreciation 23,645 Interest paid 19,962 Dividends paid (34,700) Others 12,870 Tax paid 25,535 Net cash from operations 30,440 Capital expenditure (131,351) Free Cash Flows (100,911) Inc/(Dec) in LT borrowing 73,772 (Inc)/Dec in investments 13,795 Others (40) Cash from Financial Activities 87,527 Opening Cash 149,332 Closing Cash 162,716 Change in Cash (13,384)

FY2009 Raw Material Cost / Sales Manpower Cost / Sales Operating & Other cost / Sales Revenue Growth EBIDTA Margins PAT Margins ROCE ROE Core RoE Core RoCE 65 6 4 14 25 20 13.1 12.6 20.9 14.9 FY2010 64 5 5 10 27 19 12.9 13.6 24.2 17.2 FY2011 64 5 8 18 23 17 12.2 13.0 19.5 16.8 FY2012E 65 5 5 7 26 16 11.0 13.7 20.9 16.4 FY2013E 63 5 4 17 28 16 11.3 14.2 20.4 15.9

FY2009 EPS (Rs) PER (x) Book value per share P/B EV/EBIDTA (x) Fixed assets turnover ratio (x) Debt/Equity (x) EV/Sales (x) 9.9 22.3 70 2.7 16.1 1.3 0.3 4.1 FY2010 10.6 19.0 76 2.5 14.0 1.3 0.4 3.8 FY2011 10.8 18.3 82 2.3 14.5 1.3 0.6 3.7 FY2012E 11.7 16.0 89 2.1 13.7 1.0 0.8 3.6 FY2013E 13.6 13.8 102 1.8 11.5 0.8 0.8 3.3
88
POWER
July 1, 2011
July 1, 2011
Tata Power Company

Bloomberg: TPWR IN Reuters: TTPW.BO
Tata Power
BUY
Initiating Coverage
Power Generation to treble to 8,200 MW by FY13E

Tata Power Company (TPC) India's largest private sector power producer with ~3,000MW of power generation assets has a notable project portfolio with over 5,000MW of projects under construction resulting in robust 65% CAGR in topline over FY11-13E. Mumbai License Area: TPC to Benefit from Open Access Approvals TPCs current capacity stands at 2,127MW in Mumbai Licence Area with under regulated return of 14.5% (71% of current capacity), and 548MW captive power plant with a long-term PPA at RoE 20% provides visibility steady cash flow. Derivative Play on Coal: Ensures Hedge for Mundra UMPP TPC has 30% stake each in Bumi Resources' (Bumi) two unlisted coal mines i.e. KPC & Arutmin. Further, as per the independent coal supply pact with Bumi, TPC would get coal from these mines for firing its 4,000 Mundra UMPP. When total production at the mines reaches the targeted 100 MTPA, TPC will have net long position of 23 MTPA in Indonesian coal, which would coincide with the Mundra UMPP becoming fully operational. The Mundra UMPP will require 12.3 MTPA of coal, out of which 45% (5.6 MTPA) can be passed on, while the rest 55% (6.7 MTPA) would be subject to price volatility. Debt Service Obligations: to Help Managing Rs. 250 bn Capex Plan TPC has ~6,125MW of projects in the pipeline entailing total capex of Rs. 250 bn with equity contribution of ~ Rs. 50 bn. Moreover, TPC would also generate adequate internal accruals owing to total ~8,000MW operational capacity, which is likely to get operational by FY13E. TPC owns substantial investment to the tune of ~Rs. 68 bn, which it can monetize to fund its growth plans. Outlook & Valuation At the CMP, the stock trades at 1.9x and 1.6x FY12E and FY13E P/BV respectively, and 7.5x FY13E EV/EBITDA. We have arrived at SOTP-based target price of Rs. 1,503 for the stock, by independently valuing TPCs power business, investments, stake in Bumi and the other JVs. The power generation business has been valued at Rs. 738, while TPCs stake in Bumi has been valued at Rs. 370 per share. We initiate coverage on the stock with a Buy recommendation.
Analyst Contact
Rupesh Sankhe
Recommendation
CMP: Target Price: Upside: Rs. 1308 Rs. 1503 15%
Stock Information
Market Cap. (Rs bn / US$ mn)310/6919 52-week High/Low (Rs) 1468/1132 Shares Outstanding (mn) 237 3m ADV Rs mn 314/USDmn 7.0 Beta 0.92 Sensex 18,846 Nifty 5,647

1M Absolute 6.2 Rel. to Sensex 4.4 3M (2.0) 1.1 12M YTD (0.0) (4.2) (6.5) 3.9
Performance
22,000 21,000 20,000 19,000 18,000 17,000 16,000 Aug-10 Dec-10 Feb-11 Jun-10 Oct-10 Apr-11 Jun-11 1500 1400 1300 1200 1100
Sensex (LHS)
Tata Power (RHS)
1 year forward P/B

3,000 2,500 2,000 1,500 1,000 500 0 Apr-07
Exhibit 1: Key Financials

Y/E March (Rs. in mn) Net Sales EBIDTA Net Profit EPS (Rs) PER (x) EV/EBITDA (x) FY09 180,570 30,828 12,987 55 23.8 13.6 FY10 189,303 37,806 21,386 83 15.8 12.5 FY11 193,482 44,349 22,561 87 15.1 11.6 FY12E 255,235 63,244 28,399 109 12.0 8.5 FY13E 321,893 80,205 32,118 124 10.6 7.1
(Rs)
4x 3x 2x 1x
Apr-08 Apr-09 Apr-10 Apr-11
89
July 1, 2011
Tata Power

Consolidated Profit & Loss
Rs. in mn Net revenues EBIDTA Interest Depreciation Profit Before Tax Provision for tax Adjusted Net Profit Reported Net Profit Profit and Loss Ratios EBIDTA Margin (%) PAT Margin (%) Mcap/Sales (x) RoCE (%) ROE (%) FY11 193,482 44,349 8,102 9,802 32,317 9756 20,596 22,561 22.9 10.6 1.4 9.6 15.6 FY12E 255,235 63,244 14,728 12,812 40,571 12171 25,926 28,399 24.8 10.2 1.1 12.0 17.1 FY13E 321,893 80,205 17,416 18,850 47,582 15464 26,931 32,118 24.9 9.1 0.9 12.8 16.7
Company Background Tata Power Company (TPC) is India's largest private sector power utility with operations across the power value chain. It has ~3,000MW of operational projects and is executing the country's first 4,000MW UMPP at Mundra. It also has projects with 6,125MW capacity under development. TPC has interests in coal mining through its 30% stake in Bumi, apart from allocation of domestic coal blocks to the Company. In the T&D segment, TPC has a presence through its JVs i.e. Powerlinks & NDPL. TPC has 1,100 circuit km (ckm) of transmission network in the Mumbai License Area (MLA) comprising 973ckm of 220 kV/110 kV overhead lines and 124ckm of 220 kV/110 kV underground cables. Its transmission system connects its Trombay and hydel stations to 17 receiving stations spread across the MLA. The transmission lines are used by BEST, Rel Infra and TPCs own distribution business. To meet the growing demand in Mumbai, TPC is in the midst of augmenting its existing transmission capacities. Consolidated Cash Flow

Rs. in mn Shareholders Funds Total Loans Deferred Tax Liability Total Liabilities Net Block Investments Net Current Assets Total Assets Balance Sheet Ratios ROCE (%) ROE (%) Debt/Equity (x) EV/Sales (x) 9.6 15.6 1.4 2.7 12.0 17.1 1.5 2.1 12.9 15.4 1.5 1.8 FY11E 140,334 234,469 4,308 393,173 162,923 30,823 36,751 393,173 FY12E 162,919 264,469 4,308 448,232 240,360 30,823 46,372 448,232 FY13E 186,509 294,469 4,308 504,392 255,511 30,823 58,058 504,392
Rs. in mn
FY11E
FY12E 50,432 (6,086) 44,346 4,867 12,812 14,728 3,341 12,171 31,785 (58,250) (26,465) 30,000 30,000 31,468 35,003 3,535
FY13E 61,356 (14,233) 47,122 3,642 18,850 17,416 3,341 15,464 33,393 (63,323) (29,930) 30,000 30,000 35,003 35,072 70
EBIT 34,546 (Inc)/Dec in Working Capital (2,662) Cash Flow from Operations 31,885 Other Income 5,872 Depreciation 9,802 Interest Paid 8,102 Dividends Paid 3,341 Tax Paid 9,756 Net Cash from Operations 26,361 Capital Expenditure (68,000) Free Cash Flows (41,639) Inc/(Dec) in LT borrowing 50,000 Cash from Financial Activities 50,000 Opening Cash 23,107 Closing Cash 31,468 Change in Cash 8,361
Shareholding pattern
Public 16% FIIs 23%

Others 1% Coal business 34% Power business 65%
Promoters 32%
MFs 29%
Source: Company
Source: Company
90
July 1, 2011
Tata Power
Outlook & Valuation

As the stock is trading at historically low valuation, we prefer Tata Power as a safe bet in private space at the current valuation due to
I. Higher Fuel Security 30% stake in Bhumi Resources gives net long II. 65% CAGR growth in Capacity addition-Power Generation to treble to III. Regulated RoE for 40% of asset portfolio ensure Steady Cash-Flow. IV. Robust Balance Sheet with and debt Strong Operational Cash-flows;
Ability to fund capex from internal accruals At the CMP, Tata Power trades at 1.7x and 1.6x FY12E and FY13E P/BV, respectively, and 7x FY13E EV/EBITDA. We have arrived at SOTP-based target price of Rs. 1,503 for the stock, by independently valuing the Company's power business, investments, stake in Bumi and the other JVs. The power generation business has been valued at Rs. 738 per share. The Company's stake in Bumi has been valued at Rs. 370 per share. We initiate coverage on the stock with a BUY recommendation that implies 15% upside from the current levels. The implied target multiples are within the historical long-term range of the respective multiple. Exhibit 2: SOTP Valuation
Project Details Mumbai License Area Mundra UMPP Maithon Power JV Powerlinks Transmission NDPL Tata Power Trading Indonesian coal mines Investments Total Value per share Source: Company , Karvy Institutional Research Capacity (MW) 3,000 COD Operational Cost of Equity (Ke) 14% 14% 14% 13% 13% Value method FCFE FCFE FCFE P/E FCFE FCFE Equity Value (Rs mn) 143980 21,228 10762 6329 17,917 705 122,021 68,431 Stake % 100 100 76 51 51 30 Milestone Per share Discount value 0 0 0 0 0 0 0 599 92 47 27 76 3 370 289 1,503
position in the rising coal deficit & prices.
8,200 MW by FY13E & lower merchant portion.
4,000 Under construction 1,050 Under construction Operational Operational Operational Operational -
Tata Power is trading at P/B of 1.6x & P/E 10.6 based on FY13E, which at significant discount at 24% & 29% to its historical average of 2.1x P/B & 14.9x P/E, respectively. Tata Power has traded at P/B of 2.5-3x during FY09-11. Exhibit 3: 1-year Forward P/E
2,525 2,025 1,525 1,025 525 25 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 (Rs)
Max Min Mean 30.4 7.8 14.9
Exhibit 4: 1-year Forward P/B

3,000 20x 15x 10x 5x 2,500 2,000 1,500 1,000 500 0 Apr/07 Apr/08 Apr/09 Apr/10 Apr/11 91 1x (Rs)
4x 3x 2x
July 1, 2011
Tata Power
Capacity to treble by FY13E Mumbai License Area with steady cash flows New UMPPs to ensure future cash flows Established fuel security Well placed in terms of fuel security for upcoming projects Adequately funded growth plans Bluechip investmetns could be monetised Other business of distribution well-established
I. Capacity to Treble to 8,200MW by FY13E

TPC, the country's largest private sector power player with ~3,000MW of power generation assets, has over 5,000MW of projects under construction and expects to commission its flagship projects such as the Mundra UMPP and Maithon Project on scheduled. Work at the first of the UMPPs awarded to the Company at Mundra in Gujarat is progressing well, with 70% of the work completed. First unit of the Mundra UMPP is expected to commence operations in Q2FY12, while the other units would be commissioned in intervals of 4-5 months thereafter. At the Maithon project, close to 100% of completion, the first unit is expected to get commissioned in Q1FY12. Overall, we believe that the Company's massive power capacity addition will drive its growth going ahead. The share of the coal-based plants in the Company's overall capacity is also expected to increase. Exhibit 5: Existing Capacity
Plant Trombay Capacity (MW) 1,580 Fuel type Coal/oil/gas Beneficiary Mumbai Licence Area (1,480MW) Merchant capacity (100MW) Tata Steel IPP/ Multiple Beneficiaries Mumbai License Area Mumbai License Area Mumbai License Area Hoogly Metcoke Tata Steel Multiple beneficiaries Multiple beneficiaries Multiple beneficiaries Multiple beneficiaries Multiple beneficiaries Multiple beneficiaries Multiple beneficiaries
Jojobera Belgaum Khopoli Bhivpuri Bhira Haldia Jamshedpur Supa Khandke Barmanvel Gadag Samana Sadwaghapur Visapur Total
Source: Company
428 81 72 75 300 120 120 17 50 11 50 50 18 28 2,999
Coal Gas Hydro Hydro Hydro Waste gas Production gas Wind Wind Wind Wind Wind Wind Wind
92
July 1, 2011
Tata Power
Exhibit 6: Projects Under Implementation

Project Mundra Maithon Capacity 4,000 1,050 Fuel Fuel Supply Agreement Off-take % Completion COD 85 Unit1 by Sept11 All units by FY13 95 Unit 1 in FY12, Unit 2-4 months after Unit1 Imported coal Off-take agreement with Indonesian coal PPAs have been signed for 10.11 MTPA (+20%) for 3,800 MW Coal Linkage Domestic coal 100% linkage sanctioned FSA with Bharat Coking Coal for 1.65 MTPA Central coalfields has provided LOA for 1.97 MTPA FSA with Tata Steel for 0.05-1 MTPA Dagacchu Mithapur Lodhivali Wind 126 25 40 148 Hydro Solar Diesel NA NA NA NA TPTCL 25 years PPA FY13 FY12 FY12 FY12 PPA's have been signed for 1,050 MW
Exhibit 7: Projects in pipeline

Project Phase-I Coastal Maharashtra Naraj Marthapur IPP Fuel Source Imported coal Capacity 1,600 Status Land acquisition in progress Land acquisition in progress, Main clearance obtained, environmental clearance process has begun, PPA to be signed To be executed in phases. Land acquisition in progress Won Bid for project Exploration has commenced Advance stages of planning Under Planning Under Planning Under Planning Under Planning Under Planning Under Planning Under Planning
Partially met through Mandakini coal 660 block Partially met through Tubed coal block Geothermal Wind Solar Domestic Coal Imported coal Coal/Gas Hydro Wind Gas 1,980 236 240 88 10 1,050 1,600 600 880 200 450
Tiruldih IPP Dugar Hydro -Electric Hydro Sorik Marapi Visapur Solar Phase-II Maithon Phase-II Mundra Phase-II Kalinganagar Tamakoshi Wind Bhivpuri CCGT Source: Company, Karvy Institutional Research
Exhibit 8: Year-wise Projected Power Capacity Addition (MW)

10,000 8,000 6,000 4,000 2,000 FY2010 Source: Karvy Institutional Research FY2011E FY2012E FY2013E 2,971 3,127 5,990 8,516
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II. Mumbai License Area with Steady Cash-flow: TPC to Benefit from Open Access Approvals
Tata Power has currently 2,127 MW in Mumbai License Area, which are under regulated return at 14.5% (71%), while CPP 548 MW with a long term PPA at RoE 20% provides steady cash-flow. Out of 458MW to be released from its existing allocations, 100MW of this was tied up with BEST and 358MW was expected to be available to be sold under a new long-term PPA and/or in the short-term/trading market. With Rel Infra license to distribute power to Mumbai expiring Aug11 for 1,500MW, Tata Power is well-placed to outbid others.
Maharashtra Electricity Regulatory Commission (MERC) ruling in Oct09 allowing open access helped TPC, as it witnessed a number of customers willing to shift from Rel Infras network to TPC. The MERC has slashed the tariff rates of BEST consumers by 10% to 15%. As for TPC consumers, the households consuming up to 300 units have got 719% reduction in rates. However, the tariff for higher slabs for TPC consumers has increased by an average 5% to 8% per unit. The revised power tariffs make it convenient for people consuming 0-100 & 100-300 units every month to migrate to BEST and TPC. This has become an especially profitable proposition for the around 12 lakh low-end consumers. TPC, with this new tariff structure in place from September 1, has emerged as the cheapest power supplier in Mumbai. So far around 70,000 low-end consumers have benefited by the switchover to TPC. TPC-Distributions existing demand is met partly from its own generating station at Trombay and hydel power plants in Raigad district of Maharashtra as per the PPA signed between the TPC-Generation (TPC-G) and TPC-D. Capacity available to TPC-D from TPC-G is 647MW under the existing arrangement. TPC-D has planned to procure additional 198MW of capacity from TPC-G from Apr11. The total capacity available with TPC-D will be at around 845MW considering the additional capacity from TPC-G. TPC- D would face the peak shortfall about 411MW in FY16 after considering the additional capacity available with TPC-D. To meet peak shortfall TPC is doing a capex of Rs. 23 bn. Exhibit 9: Power Procurement Requirements (MW)
1500 1000 500 0 FY11 FY12 FY13 FY14 FY15 GAP FY16 Peak Demand (MW) Contarct Power at Bus Bar
Significant capacity has been tied up in the long-term PPAs / Contracts provide stable cash flows.
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Exhibit 10: Significant capacity tied up-Long term

Model Regulated returns Renewable CPP Capacity (MW) 1927 231 668 % of overall capacity 62 7 21 Returns Tata Power Projects Fixed return of Mumbai equity Operations Fixed Tariff + PLF driven PPA driven (14-19%) Wind, Solar Jojobera Jamshedpur IEL Merchant 200 6 No cap on returns PPA driven Haldia (100 MW) Unit 8 (100 MW) MoU/Bilateral 20 1 Haldia (20 MW) Till 2018 West Bengal State Electricity Distribution Source: Company, Karvy Institutional Research Contract (Yrs) Till FY18 Off-take Best (1000 MW), TPCTCL(400MW), TATA Power distribution (527 MW)
101 MW-Till GUVNL, Tata Power Dist, Tata Motors, FY28-29 BESCOM Till 2039 Till 2027 Till 2041 NA TATA Steel TATA Steel TATA Steel
Exhibit 11: Generation Capacity by Business Model

Business Model TPC's projects FY10 capacity (MW) Regulated Mumbai Licence Area, Maithon, 2,122 wind-based plants Captive power Jamshedpur (PH6), Jojobera 548 Merchant Haldia unit (8), Trombay 200 Case 1 Haldia unit 20 Case 2 Mundra UMPP, Belgaum 81 Source: Company, Karvy Institutional Research FY13E capacity (MW) 2,873-3,073 668 200-400 20 4,081
III. Ultra Mega Power Projects (UMPPs)

A. Mundra UMPP
Project Status: Coastal Gujarat Power (CGP) a Special Purpose Vehicle (SPV) owned by TPC will build, own and operate this 4,000MW ultra mega imported coal and supercritical technology-based power plant. This Rs. 170 bn project is being funded via debt-equity ratio of 75:25 and the equity portion is Rs. 42.5 bn, and we expect the first unit to be commenced by Q1FY13. Fuel Tie-up: The project would require 12.3 MTPA of coal, which would be procured from Kaltim Prima Coal (KPC), Indonesia. Though TPC has 30% stake in KPC, the coal supply agreement is independent of TPCs stake in the mines. Power Off-Take Agreement: With respect to power off-take, the project is expected to supply power to a number of northern and western states. The levelised tariff for the project is fixed at Rs. 2.26 per unit, which is higher than the three other UMPPs awarded till-date. As per the terms of the Mundra UMPP, half its coal requirement (~6 MTPA) would adhere to CERC-determined escalation clauses, while the other half has been contracted at fixed prices.
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Valuation: We have arrived at a value of 92 for the Mundra project. Exhibit 12: Financials & Valuation of Mundra UMPP
(Rs mn) Capacity Sales Volume (Mn units) Realisation per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit period FY12-FY37E) Per Share FY12E 667 3,574 2.34 8,330 5,707 2,623 1408 1208 7.7 1.5 6 (4,165) (4,165) 21,228 92 FY13E 3,000 14,933 2.40 35,588 25,867 9,721 4435 5243 42.5 8.5 34 (7,925) (6,952) FY14E 4,000 30,632 2.33 71,102 53,705 17,397 8448 13110 (4,160) (4,160) (9,507) (7,315) FY15E 4,000 30,632 2.33 71,102 53,905 17,197 8448 12144 (3,394) (3,394) (3,463) (3,463)
Exhibit 13: Mundra UMPP Details

Project capacity Ownership structure Business model Customers 4,000MW (5X800 MW) Owned by Coastal Gujarat Power a WOS of TPC Regulated Gujarat (1,805MW), Maharashtra (760MW), Punjab (475MW), Haryana (380MW), Rajasthan (380MW) Project cost: Rs. 170 bn Debt/Equity: 75:25 Financial closure completed in Apr08 - lenders include IFC, ADB Completion Targeted by 2012 Source: Company, Karvy Institutional Research
Funding
B. Maithon Power
Project Status: The 1,050MW Maithon Project is at an advanced stage of commissioning in the current quarter. The project has been funded at debt equity ratio of 70:30. Fuel Tie-up: The coal requirement for the Maithon Project has been fully secured. Long-term coal linkage has been allotted from the nearby Bharat Coking Coal (BCCL) mines, while the initial supply will be done by Damodar Valley Corporation (DVC). Power Off-Take Agreement: Maithon Project the 74:26 JV of TPC and DVC has signed Power Purchase Agreements (PPAs) with DVC, North Delhi Power (NDPL), West Bengal State Electricity Board (WBSEB) and Punjab State Electricity Board (PSEB). Maithon Project has obtained open access from Power Grid Corporation of India (PGCIL) to transmit power through their infrastructure to the power deficit northern states. All the PPAs have been signed and power evacuation arrangement is in place.
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Exhibit14: Maithon Project Details

Project Capacity Ownership Structure Business Model Customers Funding 1,050MW (2X525MW) Owned by Maithon Power Regulated DVC (300MW), NDPL (300MW), WBSEB (150MW), PSEB (300MW) Project Cost: Rs. 44.5 bn Debt/Equity: 70:30 Debt Syndication Completed Phase-I: Q1FY12, Phase-II Q1FY12
Completion
Exhibit15: Financials & Valuation of Maithon Project

(Rs mn) Capacity Sales Volume (Mn units) Realisation Per Unit (Rs) Net Sales Operating Expenses EBITDA Depreciation Interest PBT Tax PAT FCFE PV NPV (Explicit Pe riod) Per Share Source: Karvy Institutional Research FY12E 438 2,107 3.70 7,554 2,364 5,190 934 651 3,604 718 2,886 (1,708) (1708) 10,762 47 FY13E 1,050 6,614 2.17 13,768 7,096 6,672 1,602 1,819 3,250 647 2,603 (353) (310) FY14E 1,050 7,782 2.00 14,980 8,163 6,816 1,602 1,751 3,462 690 2,772 1,220 1070 FY15E 1,050 7,782 1.99 14,881 8,163 6,718 1,602 1,653 3,462 690 2,772 1,562 1371
IV. Established Fuel Security

I. Derivative Play on Coal: TPC owns 30% stake in Bumis two mines
In Mar07, TPC acquired 30% stake each in the two unlisted coal blocks of KPC & Arutmin mines, along with a related trading company from Bumi Resources (Bumi) for US$1.1 bn. TPC also kept aside US$200 mn to meet the working capital requirements of the mines. Bumi estimates the coal resources of the mentioned mines at ~9.5 bn tonne (BT) of which 2.1 BT would be marketable. The mines are strategically located to serve the important coal markets of Asia, Europe and South America. The mines use the open cut mining method and have captive coal processing facilities including dedicated off-loading coal terminals and port facilities.
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Exhibit 16: Indonesian mines Holding Structure

Tata Power Company Ltd.
Bhivpuri Investment (Cyprus)
Bhira investments (Mauritius)
Indocoal (Cayman Islands)
KPC (Indonesia)
Arutmin (Indonesia)
Bumi Resources (Indonesia)
II. KPC, Arutmin Enjoy Substantial Share in Indonesian Coal Output

KPC & Arutmin the two subsidiaries of Bumi combined accounted for a high 28% market share of Indonesia's coal production in 2007. Together the companies are the second largest exporters of thermal coal globally. They sold 54.2 MMT and 53.2 MMT of coal in CY07 and CY08, respectively. TPC is entitled to annual dividend on account of its stake in the mines. Exhibit 17: KPC & Arutmin
(MT) KPC Sangatta Melawan North Pinang Bengalon Total Arutmin Senakin Satui Batulicin Sub Bituminous Total Grand total 411 269 216 2047 2,943 7,367 43 84 25 407 557 2,119 454 353 241 2454 3,502 9,489 Coal Resource 3,447 977 4,424 Coal Reserve 160 337 920 146 1,562 Total 3,607 337 920 146 5,987
Exhibit 18: Indonesian Coal Mines: Operating Performance

Operating Performance Quantity Mined (MT) Sales (MT) Average Selling Price (US$ per tonne) Production Cash Cost (US$ per tonne) EBITDA from Operations (US$) Source: Company CY09 63 58.1 62 30 815 CY08 53 51.5 73 33 1,131
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III. TPC to Enjoy Net Long Position of 23 MTPA in Indonesian Coal

TPC would have a net long position of 23 MTPA in Indonesian coal, when total production in the mines reach the targeted 100 MTPA level and the Mundra UMPP becomes fully operational. TPC's share in the total production would be 30 MTPA. The Mundra UMPP would require 12.3 MTPA of coal, of which 45% (5.6 MTPA) can be passed on in the tariff, while the remaining 55% (6.7 MTPA) runs the risk of price volatility. Thus, the Company's net long position on coal would be 23.3 MTPA. Exhibit 19: TPC - 23 MTPA net long on Indonesian mines
Particulars Production of Indonesian mines TPC's share (long position) Consumption in Mundra Protected by tariff escalation Unprotected Net Long position (MTPA) 100 30 12.3 5.6 6.7 23 Comments FY14E production 30% of Bumi's production
IV. Dividend from Bumi to Aid Repayment of Debt

TPC acquired stake in the mines through two off-shore Special Purpose Vehicles (SPVs) set up in Mauritius and Cyprus. The acquisition was funded through a mix of debt and equity, with non-recourse debt of US$590 mn to be repaid by May14 through bullet payments. With the coal price showing upward trend, the Company would enjoy healthy cash flows by way of divided, which would allow it to repay the debt incurred for acquiring the mine. Exhibit 20: Debt Repayment Schedule
Type Non-Recourse Recourse Loan amount (US$ in mn) 590 270 Outstanding (US$ in mn) 400 270 Interest rate 1M Libor + 3.25% 6M Libor + 0.9% Maturity 14-May May14, May15 Repayment details Bullet payment of US$175 mn Two equal installments at the end of sixth and seventh year Bullet payment in Jul10
Short-term Recourse
70
70
6M Libor + 3%
10-Jul
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Exhibit 21: Tata Power stake in Bumi Resources - Valued @ Rs.370

KPC Estimated Production (MTPA) Implied value per tonne (US$) Estimated Reserves(mn tonne) Assigned value per tonne (US$) EV for reserves (1) Estimated Resources Assigned value per tonne (US$) EV for resources (2) Total EV (1+2) TPC'S stake % Value for TPC Holding discount % Net value for TPC Debt at hold co level Net value for TPC Rs. / US$ Equity Value (Rs mn) Rs Per share of TPC Source: Karvy Institutional Research ARUTMIN 69.3 192.52 2,157 5 10,785 7,343 0.2 1,468.6 12,253 0.3 3,676 0.3 2,757 764 1,993 44 87,694 370
1,600 5 8,000 4,400 0.2 880 8,880 0.3 2,664 0.3 1,998
557 5 2,785 2,943 0.2 588.6 3,372 0.3 1,012 0.3 759
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Exhibit 22 Secure Fuel Linkage

Project Fuel requirement Trombay 3 MTPA of coal Source of fuel Purchase Agreements Contract details PT Adaro1 MTPA PT Adaro1 MTPA Samtan 0.65 MTPA Oil 1 MMSCMD of Gas Jojobera Coal From nearby refineries, delivered by Gail pipeline West Bokaro coal fields (TATA Steel) Mahanadi Coalfields (MCL) Tata Steel West Bokaro Coal fields (Tata Steel) Purchase Agreement Coal Linkage Indocoal 10.11 MTPA 1.66 MTPA from Bharat Coking coal 1.98 MTPA from Central Coal Fields 0.05-1 MTPA from Tata Steel Lodhivali DG sets Haldia Hot flue gases Source: Company, Karvy Institutional Research Tata Steel Till 2021 Term 5 yrs 10 yrs Till FY14
IEL
Furnace and Coke Coal
Belgaum Furnace Oil Mundra Maithon 12 MTPA of Coal 4.5 MTPA of Coal
Exhibit 23: Peer Comparison of Coal Reserves

Country Resource Reserve Production Mine life Calorific Value Sales Volume ASP Cash Cost (Excl Royalty) Cash profit per tonne Net profit per tone Market Cap (USD mn) EV (USD mn) P/E x EV/EBITDA x EV/Resources (US $) EV/Reserves (US $) EV/Production (US $) Source: Bloomberg, Karvy Institutional Research MT MT MT yr kcal/kg MT (US$ per tonne ) (US$ per tonne ) (US$ per tonne ) (US$ per tonne ) Coal India 64,218 52,546 463 113 5,000 463 24 18 6 5 55,741 45,923 23 13 0.72 0.87 99 Bumi Indonesia 7,343 2,157 65.3 33 5,645 65.3 65 32.7 30.4 4.9 7,285 11,341 21 9 1.54 5.26 173 Adaro Indonesia 3,444 889 41 22 5,200 41 59 30 29 10 8,890 9870 32 11 2.87 11.1 240 Shenhua China 17,760 11,303 210 54 5,544 213 59 22 37 21 91,419 94406 16 7 5.32 8.35 449 SAR Singapore 1,432 123 9 14 6,100 9 73 41 32 15 2665 2847 22 7 2.0 23 316
Overall, we believe that TPC's acquisition of stake in the Indonesian coal mines is a good backward integration move, as it will act as a perfect hedge for its power generation business.
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V. Well-placed in terms of fuel security for upcming projects

TPC has secured its coal requirements for the upcoming projects through multiple routes such as domestic coal linkages, captive coal blocks and equity stakes in Indonesian mines. The Mundra UMPP has assured fuel supply, while for the Maithon project TPC has obtained domestic coal linkage for its entire requirement. TPC is also part of the two JVs, which have been allotted the Tubed and Mandakini coal blocks. Combined these mines have total capacity of 13.25 MT, while TPC accounts for 4.8 MT. TPC's stake in the coal blocks apart from assuring availability of coal also acts as a hedge against any rise in costs.
VI. Adequately-funded Growth Plans

Exhibit 24: Mandakini, Tubed Coal Blocks
Block Mandakini Reserves (MTPA) 7.5 TPC's share (MTPA) 2.5 Other JV partners Jindal Photo Film, Monnet Ispat & Energy Hindalco Status Mining plan approved by the MoC acquisition for the coal block is expected by Mar12 and 6i notifications have already been issued. Mining plan has been approved and submitted to the Government of Jharkhand; Land acquisition activities are at early stages COD
Mid-2014
Tubed
5.75
2.3
FY13
Source: Company, Karvy Institutional Research Exhibit 25: Cash Flow to remain healthy
35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 FY10 FY11 FY12E FY13E Net Debt/Equity
Rs mn
(%)
1.6 1.5 1.5 1.4 1.4 1.3 1.3 1.2
TPC which has ~3,000MW of operational capacity has another ~5,000 of under construction capacity. It also has ~6,125MW of pipeline projects. TPCs pipeline projects would involve a total capex of Rs. 250 bn, with equity contribution being ~ Rs. 50 bn. We believe that the Company would generate adequate internal accruals to fund its pipeline projects.
VII. Bluechip Investments could be Monetised

TPC owns substantial investments to the tune of ~Rs. 80 bn, which it can monetize to fund its growth plans. For instance, the Company holds 11% stake in Tata Teleservices (TTSL), which we have valued at Rs. 7.94 bn, after providing 50% discount to the TTSL-DoCoMo deal valuation. TPC also holds stake in other Tata group companies such as TTSL & Tata Communication.
Net cash from Operation
Exhibit 26: Investment Details

Holding (%) Tata Tele Services (Maharashtra) Tata Communication Nelco Tata Teleservices 7.4 0.9 50 11 No. of Shares 137,263,174 2,575,837 11,099,630 711,360,000 Basis of Valuation 80% discount on CMP of Rs. 16 At CMP of Rs.184 At CMP of Rs.67 50% promoter discount to TTSL-DoCoMo deal valuation Value (Rs. in mn) 1779 820 595 3,6660
Holding in Tata Communications through Panatone Finvest Holding in TCS Other unquoted investments Total Value Per Share Value Source: Company, C-line, Karvy Institutional Research
4263 3600 21,534 68,431 Rs. 289
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VIII. Other well-established Distribution Business

Powerlinks Transmission Inter-state Distribution of power
TPC holds 51% stake in Powerlinks Transmission, a JV with PGCIL that holds the balance 49% stake, to carry out inter -state transmission of power between Bhutan & India. Powerlinks operates under the regulated business model, and as per the CERC regulations, it is eligible for RoE of 15.5% on pre-tax basis. Powerlinks net revenue and net profit stood at Rs. 3 bn and Rs. 1.08 bn, respectively in FY10. Exhibit 27: Powerlinks Transmission
Rs mn Net sales PAT PAT Margin (%) PAT FY10 3000 1080 36 550 FY11 3230 1180 37 600 FY12E 3470 1280 37 650 FY13E 3730 1380 37 700
NDPL Power distribution in North & North -West Delhi

North Delhi Power (NDPL) a JV between TPC & Delhi Government distributes electricity in North & North-West Delhi. TPC holds 51% in the JV, while the balance 49% is held by the Delhi Government. NDPL which was set up in Jul02 successfully brought down AT&C losses from 53.4% to 15.2% in FY10, as against the regulated target of 20.4%. Exhibit 28: NDPL Financials (Rs mn) Sales Revenue FY08
Sales Power purchase cost O&M expenses EBITDA Depreciation EBIT EBT Minority Interest EAT 23,426 17,561 2,196 3,669 854 2,816 2,816 1,380 1,436
25,775 19,053 2,528 4,195 1,034 3,161 3,161 1,549 1,612
FY09
33,927 24,355 4,905 4,667 1,159 3,509 3,509 1,719 1,790
FY10
FY11 E
36,025 25,789 5,800 4,437 1,240 3,196 3,196 1,566 1,630
FY12 E
37,667 27,068 6,090 4,508 1,240 3,268 3,268 1,601 1,667
FY13 E
39,682 28,226 6,151 5,305 1,090 4,215 4,215 2,065 2,149
FY14 E
42,418 30,241 6,458 5,718 1,240 4,478 4,478 2,194 2,284
FY15 E
45,350 32,777 6,781 5,792 1,240 4,552 4,552 2,230 2,321
Source: Karvy Research
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FY10 Operational Parameters Capacity (MW) Sales Volume (MU) PPA Merchant Competitive JV's (MW) Gross generation (MU) Commercial generation (MU) Energy sold (MU) Aux. consumption (%) Avg PLF (%) Avg PAF (%) Tariffs Avg realization (Rs/unit) PPA Merchant Competitive Fuel cost Avg Fuel Cost (Rs/unit) Imported Coal (MT) Domestic Coal (MT) Financial Forecasts Sales (Rs mn) Power division Coal division Total Sales Operating Expenses (Rs mn) EBIDTA (Rs mn) EBIDTA margin (%) Net Interest Expense (Rs mn) Avg. Interest rate (%) PAT (Rs. mn) PAT margin (%) EPS (Rs.) Cash Flow forecast (Rs mn) CFO (a) CFI (b) FCF(a-b) CFF - 2971 20,565 20,565 20,565 7 88 95 Estimates FY11 FY12E 3127 19,750 19,750 19,750 7 79 95 5990 34077 2242 34077 34077 7 67 95 FY13E 8516 49776 49776 49776 7 59 95 FY11 5 22 22 22 0 Growth (%) FY12E 92 128 128 128 0 Comments FY13E 42 Maithon, Mundra to commissioning 46 Growth will be driven by capacity addition - Maithon to have pre-PPA merchant sale 46 Driven by capacity addition 46 Driven by capacity addition 0 To remain unchanged To remain lower as plant to get stabilized
4.9 1.4 2.2 8.9
5.0 1.4 2.3 9.4
5.2 3.70 2.3 1.5 10.0 12.5
5.5 2.4 1.6 19.4 12.5
4 4 5
5 7 328 33
4 Generation, distribution combines Maithon tariff - Mundra projects under competitive 4 Higher coal prices 95 Higher mainly for Mundra projects 0
138,476 50,827 189,303 151,497 37,806 20.0 7,818 10 21,386 10.3 82.9
129,620 63,862 193,482 140,874 44,349 22.9 8,102 10 22,561 10.6 86.8
182,777 72,459 255,235 191,991 63,244 24.8 14,728 10 28,399 10.2 109.3
238,551 83,342 321,893 241,687 80,205 24.9 17,416 10 32,118 9.1 123.6
-6 26 2 -7 17 15 4 0 5 3 5
41 13 32 36 43 8 82 0 26 -5 26
31 Growth driven by Maithon, Mundra projects 15 Growth on higher realization & volumes 26 26 27 Growth driven by Maithon, Mundra projects 1 To remain the same level 18 Debt repayment 0 13 FY13 margins lower on account of Mundra projects -10 To remain at the same level 13
25,754 70,285 (44,532) 55,859
26,361 68,000 (41,639) 50,000
31,785 58,250 (26,465) 30,000
33,393 63,323 (29,930) 30,000
2 -3 -6 -10
21 -14 -36 -40
5 Commissioning of capacity 9 13 0
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Karvy vs. Consensus

We are broadly in line with consensus at the topline level. Our estimates for PAT for FY13E are higher than consensus on higher PLF. Exhibit 30: Karvy vs. Consensus
Karvy Revenue (Rs. in mn) FY12E FY13E EBIDTA (Rs. in mn) FY12E FY13E PAT (Rs. in mn) FY12E FY13E 63,244 80,205 28,399 32,118 58056 69479 23387 24986 8.9 15.4 18.9 28.5 255,231 321,893 236447 286274 7.9 12.4 Consensus Difference in %
Key Risks
The key risks to our recommendation are: Delay in the capacity addition to affect the Company's revenues Any further changes in the Indonesian mining laws would restrict coal exports
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Financial Overview
A. Topline to Register Growth on the back of Capacity Addition
TPC is poised to post healthy growth in top-line over FY10-13E primarily on the back of volume growth in the power generation business arising out of the capacity addition at the Mundra & Maithon plants. Accordingly, we expect topline to increase at a CAGR of 1 9% to Rs. 3,21,893 mn over the aforementioned period. Exhibit31: Segment wise break-up
300000 250000 200000 150000 100000 50000 0 FY10 FY11 Power Segment FY12E Coal Segment FY13E (Rs mn)
Exhibit 32: Topline Growth at CAGR of 19%

400,000 300,000 200,000 100,000 0 FY10 FY11 Net revenues Source: Compa ny, Karvy Institutional Research FY12E FY13E % Growth (Rs mn) (%) 40 30 20 10 -
B. Operating Margin to Improve over FY10-13E

We expect TPC to post 24.8% CAGR in operating profit over FY10-13 on the back of higher topline. Its OPM is expected to improve by a marginal 500 bps to 25% over the mentioned period. The Company would not be impacted much by higher imported coal costs, as it would be able to pass-on the hike in Mumbai Licence Area plants as well as the Mundra (50%) & Maithon Projects. Exhibit 33: Operating Performance
80,000 60,000 40,000 20,000 0 FY10 EBIDTA Source: Compa ny, Karvy Institutional Research FY11 FY12E FY13E EBIDTA margin (%) (Rs mn) (%) 50 40 30 20 10 -
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C. Bottom line performance to be muted but to Peak seen at FY14

However, performance on the bottom line front is expected to be muted going ahead due to higher interest costs and lower other income. Thus, we expect TPC to post a moderate 14.4% CAGR in bottom line over FY10-13E. We expect Company to show strong growth in earning in FY14E, as the plants are expected to get stabilized.
Exhibit 34: Bottom-line Performance

40,000 30,000 20,000 10,000 0 FY10 FY11 Reported Net Profit Source: Compa ny, Karvy Institutional Research FY12E FY13E % Growth (Rs mn) (%) 100 80 60 40 20 -
RoE and RoCE to improve on project commissioning

As large part of capital would be tied up in work in progress, Tata Power RoCE & RoE were suppressed. However with commissioning of Maithon & Mundra projects we expect significant improvements in RoCE & RoE going forward.
Exhibit35: Return Ratios to Improve

20.0 15.0 10.0 5.0 0.0 FY10 FY11 ROCE (%) Source: Compa ny, Karvy Institutional Research FY12E ROE (%) FY13E (%)
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Tata Power

(Rs mn) Net revenues % Growth Raw Material Staff Operating Expenses Operating expenses EBIDTA % Growth EBIDTA margin (%) Other income Interest Depreciation Profit Before Tax Provision for tax Effective tax rate (%) Reported Net Profit % Growth Net Margin (%) Share in Associate profit (Net) Adjusted Net Profit % Growth EPS (Rs) % Growth DPS (Rs) FY09 180,570 66% 98,274 6,437 45,032 149,743 30,828 54% 17.1 8,490 8,129 6,565 22,809 11637 47.3 12,987 10% 5.7 275.7 10,372 28% 55 15% 13.5 FY10 189,303 5% 92,342 9,095 50,061 151,497 37,806 23% 20.0 6,446 7,818 8,777 27,509 6271 22.7 21,386 65% 10.3 616.6 19,520 88% 83 51% 15.6 FY11 193,482 2% 96,784 10,095 44,090 140,874 44,349 17% 22.9 5,872 8,102 9,802 32,317 9756 30.2 22,561 5% 10.6 0.0 20,596 6% 87 5% 14.1 FY12E 255,235 32% 136,368 11,811 55,623 191,991 63,244 43% 24.8 4,867 14,728 12,812 40,571 12171 30.0 28,399 26% 10.2 0.0 25,926 26% 109 26% 14.1 FY13E 321,893 26% 174,999 14,291 66,688 241,687 80,205 27% 24.9 3,642 17,416 18,850 47,582 15464 32.5 32,118 13% 9.1 0.0 29,320 13% 124 13% 14.1

Y/E March (Rs mn) Equity capital Reserves & surplus Shareholders funds Minority Long Term Loans Deferred tax liability Total Liabilities Gross block Depreciation Net block Capital WIP Investments Cash & Bank Bal. Loans & Advances Other Assets Current Assets Current Liabilities Net current assets Total Assets FY09 2,214 91,415 93,629 9,444 141,434 5,154 249,661 210,399 68,079 142,320 63,461 32,512 11,780 27,988 40,382 80,150 68,789 11,361 249,661 FY10 2,373 120,706 123,079 12,097 184,469 4,308 323,953 225,024 74,549 150,475 116,927 30,823 23,108 28,305 49,384 100,796 75,068 25,728 323,953 FY11E 2,373 137,961 140,334 14,062 234,469 4,308 393,173 247,274 84,352 162,923 162,677 30,823 31,468 28,930 51,273 111,671 74,920 36,751 393,173 FY12E 2,373 160,546 162,919 16,536 264,469 4,308 448,232 337,524 97,164 240,360 130,677 30,823 35,003 33,181 61,256 129,441 83,069 46,372 448,232 FY13E 2,373 186,526 188,899 19,105 294,469 4,308 507,009 371,524 116,014 255,511 160,000 30,823 35,072 41,846 83,692 160,611 99,936 60,675 507,009
108
July 1, 2011
Tata Power

(Rs mn) FY2009 FY2010 29,029 4,642 33,671 949 148 8,777 7,818 3,703 6,271 25,754 (70,285) (44,532) 37,614 2,047 16,198 55,859 11,780 23,108 11,327 FY2011E 34,546 (2,662) 31,885 5,872 0 9,802 8,102 3,341 9,756 26,361 (68,000) (41,639) 50,000 0 0 50,000 23,107 31,468 8,361 FY2012E 50,432 (6,085) 44,346 4,867 0 12,812 14,728 3,341 12,171 31,785 (58,250) (26,465) 30,000 0 0 30,000 31,468 35,003 3,535 FY2013E 61,356 (14,233) 47,122 3,642 0 18,850 17,416 3,341 18,081 33,393 (63,323) (29,930) 30,000 0 0 30,000 18,954 35,072 70
EBIT 24,263 (Inc)/Dec in working capital 12,919 Cash flow from operations 37,182 Other income 8,490 Extra-ordinary income 1,815 Depreciation 6,565 Interest paid 8,129 Dividends paid 2,987 Tax paid 11,637 Net cash from operations 31,300 Capital expenditure (74,703) Free Cash Flows (43,403) Inc/(Dec) in LT borrowing 50,298 (Inc)/Dec in investments (1,260) Inc/(Dec) in Equity capital 521 Cash from Financial Activities 49,560 Opening Cash 5,623 Closing Cash 11,780 Change in Cash 6,157

FY2009 Raw Material Cost / Sales Manpower Cost / Sales Operating & Other cost / Sales Revenue Growth EBIDTA Margins PAT Margins ROCE ROE Core RoCE Core RoE 54 4 25 66 17.1 5.7 11.2 11.8 15.1 24.0 FY2010 49 5 26 5 20.0 10.3 10.1 18.0 16.2 24.6 FY2011 50 5 23 2 22.9 10.6 9.6 15.6 18.0 17.4 FY2012E 53 5 22 32 24.8 10.2 12.0 17.1 20.9 19.4 FY2013E 54 4 21 26 24.9 9.1 12.8 16.7 20.6 19.8

FY2009 EPS (Rs) PER (x) Book (Rs) P/B (x) EV/EBIDTA (x) Fixed assets turnover ratio (x) Debt/Equity (x) EV/Sales (x) 55 23.8 423 3.1 13.6 0.9 1.4 2.3 FY2010 83 15.8 519 2.5 12.5 0.7 1.3 2.5 FY2011E 87 15.1 589 2.2 11.6 0.6 1.4 2.7 FY2012E 109 12.0 682 1.9 8.5 0.7 1.4 2.1 FY2013E 124 10.6 749 1.6 7.1 0.7 1.4 1.8
109
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110
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111

Fuel Security Is The Theme: - Key Differentiator & Determinant of Profitability

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Fuel Security Is The Theme: - Key Differentiator & Determinant of Profitability

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POWER SECTOR

Fuel Security is the Theme

Power Deficit to Persist till FY15E despite Rise in Supply

Fuel Security is the Theme: Coal Deficit to Continue

Merchant Rates at Rs. 3.5/unit levels to yield ~22% RoEs in FY13E

Differentiating Parameters over the Near -term

FY11 46.7 12.6 13.1 18.3 15.1

FY13E 9.6 7.1 10.8 13.8 10.6 1

31-45 46-60 61-75 76-88 89-109

Demand-Supply Gap to Narrow Down by FY15E

Source: Industry, Karvy Institutional Research

Source: Industry, Karvy Institutional Research

Exhibit 4: India's Per Capita Power Consumption

Low per capita power consumption shows high growth potential

Substantial investments to bolster T&D segment

Source Industry: Karvy Institutional Research

Execution has improved in the 11 th Plan

Private Sector to Augment Power Supply

7,480 3,500 1,980 1,200 2,000 540 1,920 730 -

2,640 1,200 12,210 23,190 2,20,565

Exhibit 8: Equipment Capacity Expansion Plans (In MW)

BHEL L&T JSW Bharat Forge Gammon Thermax BGR

NA Mitsubishi Toshiba Alstom Ansaldo Babcock Hitachi

5,000 4,000 3,000 4,000

5,000 4,000 3,000 5,000 2,000 4,000

FY13 FY11-12 FY12-13 FY12-14 FY12-13

20,000 4,000 3,000 5,000 2,000 3,000 4,000

Source: Industry, Karvy Institutional Research

Expect the power deficit to narrow by FY15E

Exhibit 10: India Power Deficit

Fuel Security A Concern & Key Determinant of Profitability

Source: CEA, Karvy Institutional Research

Exhibit 12 : Of the 201 captive blocks allotted, only 25 are operational

II. Ongoing environmental concerns - Go & No-go zones

Too much regulatory approvals required

Source: Industry, Karvy Institutional Research

Exhibit 13: Thermal coal imports (mtpa)

Source: Karvy Institutional Research

Source: Karvy Institutional Research

Exhibit 17: Imports Requirement Sensitivity

Coal Production growth (%) 82

V. Key Issues for Coal Imports: Poor Infrastructure a Major Constraint

FY08 156 153 3

FY09 163 156 8

FY10 165 155 10

FY11E 185 155 30

FY12E 204 164 39

FY13E 226 174 52

FY14E 248 185 64

FY15E 271 196 75

CIL ups prices by 12% in Feb11 for non-regulated sectors

VIII. RoE Sensitivity to Coal Prices & Tariffs

Key Issues for the Power Sector

Exhibit 22: Cash Losses of SEBs

Source: 13 th Finance Commission, Karvy Institutional Research

Exhibit 23: Total Financing Requirements of Power Sector (Rs. crore)

FY10-11 Source: 13th Finance Commission

Exhibit 24: Losses Estimates for Maharashtra SEB (Case Study)

II. Capacity Additions to Soften Rates

Exhibit 25: Merchant Power Rates vs. Power Deficit (FY06-14E)

Merchant Rates (LHS) Source: Karvy Institutional Research

Power Deficit (RHS)