Spark capital power utilities   sector update march 2012
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Spark capital power utilities sector update march 2012

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    Spark capital power utilities   sector update march 2012 Spark capital power utilities sector update march 2012 Presentation Transcript

    • Indian Ports Initiating CoverageIn the build-out phase Sector Outlook Positive Indian Power Utilities Sector Update March 2012 1
    • Power UtilitiesWith ‘no power’ comes great responsibility Sector view PositiveIndian power sector (particularly generation utilites) has gone through a complete metamorphosis, with almost Date Mar 09, 2012all aspects taking a turn for the worse, over the last 18 months. With the Government showing signs ofintervention, the extent of relief that will be felt by our coverage companies will depend on the nature of Market Datameasures adopted and the totality of such measures. Now, on to our reality checks on potential reforms: SENSEX 17120• Domestic Coal – Domestic coal supply will continue to be short of demand for power sector (~100MT in FY12E to increase to ~184MT by FY15E). Hence Coal India (CIL) likely to be compelled to make available a greater quantity of BSE Power 2165 coal to power plants with linkages and sign FSAs with a minimum guaranteed commitment of ~80% for the eligible LoAs Market Performance (%)• Imported coal and coal price pooling – Given that CIL can ramp-up production at not more than ~5% CAGR over the next few years it will be forced to consider costlier coal imports to meet the shortfall, in which case it will possibly resort 1m 3m 12m to price pooling to ensure that the incremental cost of imports is absorbed Sensex -3% 1% -6%• Domestic Gas - With gas production at KG-D6 expected to drop further even from the ~36mmscmd in Jan’12, PLFs of second-generation gas-based power plants are expected to stay adverse. With increased allocation of APM gas to the BSEPowr 2% 7% -16% power sector not materializing, the completed power projects awaiting gas allocation are unlikely to commence operations over FY13-14 BSE Power vs Sensex - Relative performance• Tariff reforms – Considering the large scale ramifications, the Government has been wary to take-up tariff reforms 15% 10% aggressively or to back the interests of private developers. Nevertheless PPA reforms (hiking tariffs) to allow a 5% reasonable pass-through of fuel costs which will go hand-in hand with consumer-level tariff is a key theme, we expect, 0% -5% will play out over the next year - the single largest reason for our positive view on power utilities as a space Closing price -10% -15%• Unlike the fossil fuel-based gencos, the hydel utilities face negligible operational risk. However the key adverse variable -20% -25% for these utilities remains project delays for multitude of reasons. PGCIL on the other hand, we believe, will increase -30% -35% capex over FY13-14, driving transmission capex May-11 Nov-11 Jul-11 Mar-11 Mar-12 Jan-12 Sep-11• Given the high importance of power sector (~30% of 11th Plan infrastructure spend and 8% of bank credit), we believe the aforesaid measures will be taken. However, we are currently unsure of the totality of these measures and time that BSE Power Sensex will be taken. Hence, in the interim, we recommend a portfolio approach to investing in utilitiesOur top Buys are Lanco, CESC and GIPCL as we believe that the current stock prices does not factor-in Vijaykumar Bupathyimprovement in business fundamentals, which we think is misplaced. While Lanco will be a focused play on vijaykumar@sparkcapital.insector fundamentals improving, the latter two names will serve as portfolio shock absorbers in case the reform +91 44 4344 0036measures are indefinitely delayed. We also turn positive on PGCIL given the low operational risk involved andimproved growth prospects. Our top shorts are Adani Power and GMR - while on Adani Power, the reason for our Bharanidhar Vijayakumar bharanidhar@sparkcapital.innegative call is because of being exposed on fuel and tied to low-priced PPAs, our view on GMR is largely on +91 44 4344 0038account of stress from non-utility assets (chiefly airports vertical). Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 2
    • Power UtilitiesViews on StocksCompany View Rating • With ~2GW at Mundra and ~2.2GW of pipeline projects (Tiroda) not having a secured coal supply, fuel supply concerns outweigh SELL the positives of strong execution capabilities TP: Rs. 46 • Given that the production at Bunyu mine has been delayed significantly Adani Enterprises is supplying coal at a much higher rate CMP: Rs. 76Adani Power (~USD 90/ tonne) compared to the contracted rate of USD 36/ tonne, thereby eroding the near term profits. Also Adani Enterprises could hike transfer price of coal to Adani Power due to the recent change in Indonesian regulations • Company is not hedged for such unanticipated increases in fuel cost as all the PPAs are on fixed levelised tariffs • Moreover, stock trades at a significant premium to our DCF valuation of Rs. 46 per share, leading to our Sell rating • Scores high on fuel security with >50% of total annual coal requirement for the operational plants being supplied from the groups BUY captive mine (ICML); firm coal linkages exist with CIL for the additional requirement TP: Rs. 350 • Has a stable fixed-RoE based business model with a full pass through of fuel costs as well as operating costs; WBERC approved CMP: Rs. 265 new tariffs for the period 2011-14 with an average tariff hike of ~13% giving good revenue visibility for this periodCESC • Pipeline projects of 1,200MW are seeing swift execution, with 600MW at Haldia and 600MW at Chandrapur expected to be commissioned by FY14. As both plants have CIL linkages for coal, coal supply risk exists • Stock trades at a steep (~31%) discount to our DCF valuation of Rs. 373 per share leading to our bullish stance on the stock due to the fixed RoE model with the ability to pass-on fuel costs. Reiterate Buy • We like the Company’s fuel security as 500MW out of the total 810MW operational capacity have captive mines supplying lignite. BUY Companys pipeline project of 500MW is also based on lignite from the captive mines. TP: Rs. 88 • Though fuel security exists for gas based generation plants (310MW) through firm fuel supply commitments from GAIL & KG D6, CMP: Rs. 71 gas shortage has affected the company’s generation during FY12 and we continue to factor-in low PLFs going forwardGIPCL • Has an attractive fixed-return business model with assured power off take agreements for the entire operational capacity with GUVNL at tariffs set by GERC enabling cost-pass through. Stabilization of the 2nd unit of the power plant at Surat implies limited risks to earnings • Stock is currently trading at low valuations (<0.7x FY13E P/B) and with an expected dividend yield of 4% it is highly attractive in our view. Reiterate Buy 3
    • Power UtilitiesViews on StocksCompany View Rating • Company’s power segment faces multiple risks such as gas shortage to operational plants, gas allocation to the merchant plant at SELL Kakinada being cut, projects under construction without gas allocation and rigid PPA tariffs TP: Rs. 25 • Also the airports segment faces multiple headwinds such as imposition of a single till regulation at Hyderabad and persistent CMP: Rs. 28 delays in getting higher airport charges sanctioned at Delhi. As a result, the segment is making significant losses, largely onGMR account of Delhi Airport • Has a complex corporate structure with multiple / unrelated infrastructure assets comprising airports, roads, power plants and SEZs • Trades close to our revised DCF valuation of Rs. 25 which factors in realistic outcomes when several stocks are trading at steep discounts. Reiterate Sell • The power segment faces multiple risks such as gas shortage to operational plants and delays in development of the captive REDUCE mine which is to supply coal to the pipeline project TP: Rs. 17 • Airports segment faces key risks such as lack of regulatory clarity on airport vertical such as suspension of ADF collection at CMP: Rs. 18GVK Mumbai, imposition of single till at Bangalore and repeated delays in real estate monetization at Mumbai airport • Also the Company depends on a fund-raise at the airport holding company level to claw out of the debt trap necessitated by stake acquisitions in Mumbai and Bangalore airports • Trades at a premium to our DCF valuation of Rs. 17 per share. Reiterate Reduce • Power segment faces multiple risks such as coal shortage (at Amarkantak I, II and Anpara), gas shortage (at Kondapalli I, II), BUY merchant plants dependent on linkage coal / gas, capacity additions awaiting gas linkage (Kondapalli III), transmission lines not TP: Rs. 32 being ready to evacuate power (Udupi Unit 2) and rigid PPA tariffs (Amarkantak II) CMP: Rs. 20 • Has fuel cost pass-through for ~63% of total operating capacities inbuilt in the PPAs (Kondapalli I supplies to APTRANSCO at tariffs having a fuel cost component, similarly Aban’s PPA with TNEB and Udupi’s PPA with Karnataka have fuel cost passLanco throughs) hedging the company against fuel cost increases for these plantsInfratech • The 1.2GW at Anpara will be a direct beneficiary a of the recent directive from PMO obligating CIL sign FSAs for all plants that have turned operational by Dec’2011 • Has strong growth opportunity in the power segment which will grow to ~3.9GW of capacity by FY13 and eventually to ~9GW from 2.7GW now • Has strong EPC capabilities with timely project execution as well as exposure to a resource play in Griffin. Trades at a steep discount to our SoTP valuation of Rs. 32/ share and we believe the risks are more than priced into the CMP. Reiterate Buy 4
    • Power UtilitiesViews on StocksCompany View Rating • Has fuel security from Singareni Collieries for the plants in Andhra Pradesh and the projects under construction (64MW at Orissa BUY and 150MW at Paloncha). Risks exist for the existing 64MW at Orissa on fuel shortage from CIL and the tariff hike sought with TP: Rs. 247 OERC not being approved CMP: Rs. 195 • Has tied-up merchant contracts at attractive rates of Rs. 4.7 levels for the period Jan-May 2012 and >Rs. 4 thereafter. AllNava Bharat merchant sales are through intermediaries in the short term market where NBVL does not take up receivable riskVentures • At Maamba, high-grade coal sales will commence from April 2012 and the company expects to sell ~0.4mn tons, 0.6mn tons and 1.0mn tons in FY13E, FY14E and FY15E respectively, thereby driving >20% consol profits by FY15E • Will transform itself into a diversified infra player with operations across Africa, India and South East Asia. Consolidated profits expected to grow to Rs. 3.4bn in FY14 (45% CAGR over FY12-14E), with a high RoE profile. Trades inexpensive at P/E of ~7x and ~0.7x of book value (FY13E). Reiterate Buy • Faces consistent delays in commissioning of expansion projects due to various external / other factors; only ~150MW expected to REDUCE be commissioned in FY12 (of the initial target of ~560MW) and ~700MW during FY13 TP: Rs. 22 • ~1.2GW of capacity is at risk of being transferred to Jammu & Kashmir CMP: Rs. 21NHPC • High proportion of capital stuck in CWIP leading to low capital efficiencies; Actual RoE is only ~8% as compared to the regulated RoE of 15.5% • Situation of high CWIP and low RoE unlikely to reverse until FY14, leading to our negative outlook on the company’s financials • Trades at rich valuations with FY13E P/E of ~11x and P/B ratio at ~0.9x, for a below-par RoE. Reiterate Reduce • Although we like the Company’s captive lignite mining capabilities scores poorly on execution track record and growth potential REDUCE with a visible pipeline of only ~500MW at TPS-2 TP: Rs. 84 • Faces continued delays (due to technical reasons) in the commissioning / stable operations of the new plants (totaling 750MW CMP: Rs. 87 including TPS-2) representing a serious risk to the profitability of the company, particularly during FY13ENLC • Has to part with 26% of its mining profits (~80% of company level profits) assuming the Mining Bill is passed, representing a significant risk to the company’s profitability • Given these risks to near term profitability, we remain negative on the stock and value the stock at 1.1x FY13E P/BV. Reiterate Reduce 5
    • Power UtilitiesViews on StocksCompany View Rating • Has achieved ~88% of the Rs. 550bn target capex additions in the 11th plan despite the expected yoy fall in capex in FY12E. ADD Robust growth outlook exists as the management has guided for a 12th Plan target spend of Rs. 1tn, which will represent a >80% TP: Rs. 124 jump vs. the corresponding 11th plan target CMP: Rs. 108 • Backlog of orders awarded in the last two years which has to be commissioned stands at ~Rs. 250bn which we expect to bePGCIL commissioned over the next two years, driving capitalization, revenues and profitability. Hence, compared to the 9% yoy earnings growth expected during FY12E, earnings is expected to grow at a high 14% CAGR over FY12-14E • Coupled with the improved earnings growth outlook it has negligible operational risks with a fixed-RoE model, availability based revenue model, and limited receivable risks. Upgrade to Add from Sell with a target price of Rs. 124/ share • Growth in trading volumes faltering as supply to TNEB has been stopped from Oct 2011. PTC is still supplying power to UP which REDUCE already has ~Rs. 3bn in dues and has stopped payment from 2QFY12. Supply-freeze to UP is also a possibility – hence further TP: Rs. 52 risk to volumes CMP: Rs. 57 • Flawed risk management practices evident as they allowed the TNEB receivables situation to worsen to the extent of Rs. 7bnPTC (~30% of net worth) • Outlook on the company’s long term volumes not encouraging as almost all the thermal plants with which PPAs have been signed will face execution delays due to either coal shortage/ uncertain coal linkage • Trades at a premium to our SoTP valuation of Rs. 52 per share. Upgrade to Reduce from Sell due to the recent stock correction • Well placed on gas supply for its operational plants (YTD PLF of >80%) but is exposed to gas shortage with respect to capacities REDUCE under construction (UnoSugen 382MW and D-Gen 1.2GW) TP: Rs. 200 • Earnings at risk if the recent directive from the MoPNG, asking the power ministry to stop supplying gas from KG D6 to power CMP: Rs. 217 plants selling power in the merchant market, is implemented. (>300MW of operational capacity is sold in the merchant marketTorrent Power from Sugen) • Also the risk of inadequate / delayed increases in consumer-level tariff persists • We fear that cash generation is being utilized towards potentially unrewarding projects. We value the company giving 1.5x multiple to our FY13E P/BV yielding a TP of Rs. 200 per share. Upgrade to Reduce from Sell due to the recent stock correction 6
    • Power UtilitiesEstimate Revisions FY12E, Rs. mn Revision, % FY13E, Rs. mn Revision, %EstimateRevisions Revenues EBITDA PAT Revenues EBITDA PAT Revenues EBITDA PAT Revenues EBITDA PATAdani Power 40,559 13,301 2,866 0% 0% 0% 100,138 35,774 5,392 0% 0% 0%CESC 60,174 7,787 2,697 0% 0% 0% 67,644 9,215 3,675 0% 0% 0%GIPCL 13,851 4,446 1,321 0% 0% 0% 15,258 4,625 1,608 0% 0% 0%GMR 57,614 20,010 (1,373) 0% 0% 0% 80,141 29,737 587 -24% -28% -87%GVK 18,678 5,520 1,448 0% 0% 0% 21,266 6,430 1,286 0% 0% 0%Lanco Infratech 94,250 18,661 (1,108) 0% 0% 0% 109,150 20,811 2,070 0% 0% 0%Nava Bharat 9,377 2,111 1,609 0% 0% 0% 13,351 3,655 2,563 0% 0% 0%NHPC 59,871 39,443 23,630 0% 0% 0% 65,566 42,944 24,876 0% 0% 0%NLC 46,254 15,069 10,763 0% 0% 0% 57,352 19,419 12,105 0% 0% 0%PGCIL 92,646 78,143 29,531 0% 0% 0% 111,924 94,641 33,736 0% -1% -5%PTC 84,913 1,406 1,062 0% 0% 0% 120,530 1,960 1,371 0% 0% 0%Torrent Power 73,640 18,012 10,779 0% 0% 0% 80,430 21,252 11,003 0% 0% 0% 7
    • Power UtilitiesValuation MatrixCompany Revenues, Rs.bn EBITDA, Rs.bn PAT, Rs.bn RoE FY11-14E CAGR FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E Revs EBITDA PATAdani Power 4.3 21.4 40.6 100.1 2.4 12.2 13.3 35.8 2.4 5.1 2.9 5.4 6% 9% 5% 10% 22% 61% 44%CESC 42.8 51.0 60.2 67.6 5.3 8.7 7.8 9.2 1.6 3.1 2.7 3.7 3% 7% 5% 7% 6% 13% 12%GIPCL 9.5 10.9 13.9 15.3 2.3 3.1 4.4 4.6 1.1 1.6 1.3 1.6 9% 12% 9% 10% 10% 15% 3%GMR 51.2 57.7 57.6 80.1 13.6 15.6 20.0 29.7 2.3 (9.3) (1.4) 0.6 3% -7% -1% 0% 2% 33% NMGVK 17.9 19.1 18.7 21.3 4.7 5.1 5.5 6.4 1.6 1.5 1.4 1.3 5% 4% 3% 3% 8% 45% -14%Lanco 81.8 77.8 94.2 109.2 16.0 18.9 18.7 20.8 4.6 4.5 (1.1) 2.1 14% 11% -2% 4% 8% 15% -2%Nava Bharat 11.7 11.0 9.4 13.4 5.6 3.1 2.1 3.7 5.0 3.2 1.6 2.6 31% 19% 8% 11% 13% 20% 2%NHPC 51.6 51.4 59.9 65.6 41.3 36.3 39.4 42.9 21.8 23.2 23.6 24.9 8% 8% 8% 8% 8% 8% 3%NLC 41.3 39.5 46.3 57.4 13.6 12.9 15.1 19.4 12.4 13.0 10.8 12.1 13% 12% 9% 10% 9% 14% -2%PGCIL 71.3 83.9 92.6 111.9 58.7 70.5 78.1 94.6 20.4 27.0 29.5 33.7 13% 14% 13% 14% 6% 17% 12%PTC 77.9 90.0 84.9 120.5 0.8 1.4 1.4 2.0 0.9 1.4 1.1 1.4 6% 7% 5% 6% 10% 28% 18%Torrent Power 58.3 65.4 73.6 80.4 17.1 17.7 18.0 21.3 8.4 10.7 10.8 11.0 21% 22% 20% 17% 24% 29% 21%Company Net Debt to Equity (x) CMP Shares M.Cap P/E (x) Price / BV (x) Target Rating FY10 FY11 FY12E FY13E Rs. (mn) Rs. bn FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E P/BVx Rs.Adani Power 2.3 3.2 3.7 4.1 76 2,180 165.5 70.3 32.2 57.7 30.7 3.0 2.8 2.7 2.4 SoTP 46 SellCESC 0.5 0.7 0.9 1.1 265 125 33.1 21.1 10.5 12.3 9.0 0.7 0.7 0.6 0.6 0.80 350 BuyGIPCL 0.9 0.7 0.6 0.4 71 151 10.8 10.1 6.6 8.2 6.7 0.9 0.8 0.7 0.6 0.80 88 BuyGMR 3.2 1.9 2.0 2.0 28 3,892 108.4 48.1 NM NM 184.6 2.0 0.9 0.8 0.8 SoTP 25 SellGVK 1.0 0.9 1.4 1.3 18 1,579 27.9 17.9 18.0 19.3 21.7 0.9 0.7 0.6 0.6 SoTP 17 ReduceLanco 2.2 3.1 4.2 4.5 20 2,408 47.6 10.4 10.7 NM 23.0 1.4 1.0 1.1 1.0 SoTP 32 BuyNava Bharat (0.2) 0.0 0.5 0.8 195 89 17.3 3.5 5.4 10.8 6.8 1.1 0.9 0.8 0.8 SoTP 247 BuyNHPC 0.4 0.5 0.4 0.4 21 12,301 257.1 11.8 11.1 10.9 10.3 1.0 1.0 0.9 0.9 0.90 22 ReduceNLC 0.3 0.3 0.2 0.2 87 1,678 146.1 11.7 11.3 13.6 12.1 1.4 1.3 1.2 1.1 1.10 84 ReducePGCIL 2.1 1.9 1.9 2.0 108 4,630 500.9 25.0 18.9 17.3 15.1 3.2 2.4 2.2 2.0 2.00 124 AddPTC (0.5) (0.3) (0.0) (0.1) 57 295 16.9 18.0 12.2 15.9 12.3 0.8 0.8 0.8 0.7 SoTP 52 ReduceTorrent Power 0.8 0.8 0.7 1.0 217 472 102.7 12.3 9.6 9.5 9.3 2.6 2.2 1.9 1.6 1.50 200 Reduce 8
    • Industry Scenario 9
    • Power UtilitiesIndustry Scenario – Reconciling promises and reality!Over the last 8 months (when we first downgraded the coal-based power utilities), the issues of tightness in coal supply, high imported coal prices as well asinadequate pass-through mechanisms in PPAs (Case 1 bids) have exacerbated alarmingly, resulting in escalation of the issues up to the level of the PMO. Giventhe importance of the power sector (~30% of 11th Plan infrastructure spend and 8% of bank credit), the PMO has reciprocated by promising a deadline-basedapproach to solving the power crisis even as they directed CIL to sign FSAs that assure 80% coal supply for power plants and to import coal to meet shortages.While the mentioned event has triggered a wave of positive sentiment towards the power generation sector, we got down to performing a reality check, the keyconclusions of which are as follows#1 – Scarcity of indigenous coal to continue - India’s indigenous coal production likely to remain a key concern, although efforts (increased impetus on execution andfaster clearances) are afoot to increase production at a CAGR of >10% over the next 3 years. However, we assume that CIL’s production will grow only at a CAGR of ~5%over FY12-15E, which will peg the total coal shortage for the power sector at >180MTPA by FY15E (from ~100MTPA currently). Thus, the pressure on CIL linkage willremain, resulting in ~40-60% supply from indigenous sources vis-à-vis actual linkage.#2 – Importing coal the only option and move towards coal price pooling a possibility – Given the tight coal supply conditions that are expected to prevail over themedium-long term, CIL is being forced to consider costlier coal imports to meet shortfall. Given that current prices of CIL coal would be at a significant discount (~30-40%) toimported coal of comparable quality, CIL will possibly resort to price pooling to ensure they absorb the incremental cost of imports.#3 – Increased gas allocation to power plants unlikely while supply issues could persist, depressing PLFs low – Consistent decline in production at KG-D6 (from60mmscmd in 2010 to ~36mmscmd recently) has significantly impacted the PLFs of second-generation gas-based power plants. With gas production at KG-D6 expected todrop further and the increased allocation of APM-gas not being sanctioned for the power sector, fundamentals of these plants are expected to stay adverse.#4 – Reforms in PPA tariffs to allow fuel cost pass through – PPA reforms to allow a reasonable pass-through of fuel costs is a key theme we expect will play out overthe next year, the single largest reason for our positive view on power utilities as a space. Such reforms will however, need to be backed up with regular increases inconsumer-level tariffs for sustainability.#5 – Merchant power still lucrative but will not drive investments as the fuel tap for these plants remain at risk – Although merchant tariffs have stabilized at levels>Rs. 4, coal / gas linkages to the merchant plants will come under increased scrutiny. For ensuring such plants remain operational, the utilities will need to demonstrate theexistence of short term / medium term contracts with state utilities. Thus we expect merchant tariffs to remain in a tight band of Rs. 4-4.5 for the foreseeable future.#6 – Despite delays in commissioning, operational risks to hydel assets and transmission assets remain low – Unlike the fossil fuel-based gencos, the hydel utilitiesas well as the transmission utilities face negligible operational risk. However the key adverse variable for these utilities remains project delays for multitude of reasons.#7 – Logistical bottlenecks will likely remain on the fronts of both railways as well as ports – We see little / no steps being taken to address the issues of wagonshortage (railways) and inadequate coal handling capacities at ports. Both issues pose operational risks to power plants in the long term, but as structural issues likefeedstock availability and viability of private power plants take centre stage we believe these concerns will be underplayed until the structural issues are resolved.#8 – Reduction in borrowing costs coupled with policy initiatives will drive investments into the sector – Coupled with some / all of the aforesaid positivedevelopments, lower borrowing costs (1yr forward spreads have moved into negative territory after more than a year), we expect, will lead to improved private sector interestin the power sector.Weighing these expectations in balance, we anticipate that power utilities will, by and large, benefit from the amelioration of sector fundamentals over the nextyear even as increased pressure may be mounted on CIL to absorb the incremental cost of coal imports, at least partly. 10
    • Power UtilitiesIndustry Scenario – Focus charts #1 Coal shortage for power sector to become ~184MT in FY15E Coal price pooling the most logical solution - tariff impact <80paise by FY15 Particulars Unit FY12E FY13E FY14E FY15E Demand Supply (MT), FY12 Demand Supply (MT), FY15E Deficit Linkage Coal Supply (Proj.) MT 310.0 391.0 449.6 522.8 mainly met by Production avbl for power MT 323.2 339.4 355.6 374.2 105 imports 184 Import requirement MT 0.0 51.6 94.0 148.6 Realisation of linkage Rs. / tonne 1,225 1,274 1,325 1,378 520 653 415 Realisation of import Rs. / tonne 4,125 4,331 4,548 469 Incremental cost of imports Rs. bn 212.7 407.0 675.7 Price of linkage coal – Pooling Rs. / tonne 1,650 1,953 2,279 method Demand Supply Demand Supply Rs. / System level cost increase 376 628 901 tonne Source: CEA, Spark Capital Research Source: Spark Capital Research Gas supply to remain tight - bleak outlook for gas-based plants persists Outlook on SEB financials not encouraging either, unless tariffs increase Natural Gas, mmscmd FY10 FY11 FY12E FY13E FY14E FY15E All India State Distribution Utilities FY11 FY12E FY13E FY14E FY15E On-shore 23 23 23 23 23 23 Revenues, Rs. bn 1,893 2,087 2,293 2,517 2,763 Mumbai High 48 48 47 46 45 44 Total Expenditure, Rs. bn 2,498 2,724 2,960 3,213 3,489 KG - D6 42 56 43 28 24 40 Total Units Supplied, bn units 689 751 816 885 961 Adjustments (9) (7) (3) 1 5 10 T&D Loss, bn units 163 171 179 187 195 Total Indigenous Supply 105 120 110 98 97 117 T&D Loss, % 24% 23% 22% 21% 20% Power 57 62 62 60 65 68 Total Units Consumed, bn units 526 580 637 698 765 Fertilizers 38 40 39 40 43 53 Avg. Cost per Unit Sold 4.75 4.70 4.65 4.60 4.56 Refinery & Petchem 23 21 26 28 32 42 Avg. Realization per Unit 3.60 3.60 3.60 3.61 3.61 CGD 12 14 18 21 25 29 Others 8 17 12 6 7 9 GAP before subsidy*, Rs. /unit 1.15 1.10 1.05 1.00 0.95 Total Demand 137 154 157 155 172 201 Subsidies and Grants 327 361 395 430 469 Deficit 32 34 47 58 75 84 GAP after subsidy*, Rs. /unit 0.53 0.48 0.43 0.38 0.33 Source: Spark Capital Research *Assuming no Commercial Losses, Source: Shunglu Committee Report 11
    • Power UtilitiesIndustry Scenario – Focus charts #2 Merchant market realizations have stabilized at ~Rs. 4/ unit in a year PGCIL’s Capex to grow substantially till FY15 after a subdued year in FY12 8.0 200 7.0 6.2 5.7 5.6 6.0 150 5.0 4.9 4.7 4.7 4.8 4.5 Rs. /unit 5.0 4.2 4.2 4.3 4.2 4.0 3.9 4.0 4.0 Rs. bn 3.8 3.9 3.9 4.0 100 204 4.0 185 187 145 3.0 123 128 50 109 100 84 2.0 68 Nov-10 Dec-10 Nov-11 Dec-11 Apr-10 Oct-10 Apr-11 Oct-11 Feb-11 Mar-11 Jul-10 Jul-11 Jun-10 Aug-10 Sep-10 Jan-11 Jun-11 Aug-11 Sep-11 May-10 May-11 0 FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E Rate in Bilateral trading market PGCIL capex Source: CERC Source: CERC Hydel power capacity in the country – State sector plays a major role Expect interest rates to dip over the next year Salient Developers MW 4% 2,559 , 3% NHPC 3,767 7% NHDC 1,520 2% 11,852 , 30% Satluj Jal Vidyut 1,500 1% Jaypee Karcham Wangtoo 1,000 0% Tata Power 447 -1% Jaiprakash Power Venture 400 -2% 24,438 , 63% Jaiprakash Hydro 300 -3% Allain Duhangan 192 -4% Dec-08 Dec-09 Dec-10 Dec-11 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Feb-09 Feb-10 Feb-11 Feb-12 Jun-09 Jun-10 Jun-11 Aug-09 Aug-10 Aug-11 Everest Power Company 100 Central State Private Malana Power Company 86 Spread between Overnight rate and 12m OIS rate Source: CEA Source: Bloomberg 12
    • Reality Checks 13
    • Power Utilities#1 – Indigenous coal shortage set to worsen over the next 3 years, driving increased dependence on coal imports India’s power capacity additions largely skewed towards coal Conservatively, coal-based capacities expected to grow at a CAGR of ~7% Coal - Private 127.8 Total, MW Coal, % 140 120.8 Sector, % 113.8 120 104.8 Current Capacity in India 187,550 56% 93.7 100 84.2 76.0 77.6 Capacity Addition in FY10 11,433 57% 65% 80 GW 60 Capacity Addition in FY11 15,791 60% 60% 40 20 Capacity Addition YTD FY12 12,361 90% 61% 0 FY08 FY09 FY10 FY11 YTD FY12 FY13E FY14E FY15E Capacity addition last 3 years 39,584 69% 62% Coal based Capacity in India Source: CEA Source: CEA, Spark Capital Research • 90% of capacity additions during Total Coal Supply/Demand, FY12 Coal shortage for power sector to become ~184MT in FY15E FY12 were coal based, with private Coking Coal Demand 69 players contributing nearly 2/3rd Demand Supply (MT), FY12 Demand Supply (MT), FY15E • CAGR of coal-based capacity Non-Coking Demand, Power 520 Deficit addition has been ~11% during mainly FY09-12 Non-Coking Demand, Others 125 met by 105 imports 184 • We expect CIL to ramp-up production Total Demand, MT 713 at a CAGR of 5% over FY12-15E, their long term average CIL Supply 441 653 • Based on the pipeline, coal-based 520 capacities will grow at >7% CAGR SCCL Supply 47 415 469 over the same period Captive Blocks and Others 96 • Coal shortage for power sector including captives (excluding Total Domestic Supply, MT 584 lignite plants) will likely scale Demand Supply Demand Supply 184MT by FY15E Total Shortage, MT 129 Source: CEA, Spark Capital Research 14
    • Power Utilities#2 – CIL to be pushed to convert LoAs into valid FSAs driving the need to import and most possibly, price pooling Background CIL’s production to increase only by 60-70MT over the next 3 years In October 2007, the New Coal Distribution Policy (NCDP) introduced the concept 600 of “Letter of Assurance” (LoA), which assured supply of coal to developers, 511 provided they met stipulated time-critical milestones. 486 500 463 49 431 431 441 47 Once the milestones were met, the LoA holders were entitled to enter into Fuel 404 44 379 41 42 400 361 28 34 Supply Agreements (FSAs) with CIL for long-term supply of coal. 25 24 MT CIL had signed FSAs for 306MT (total of 370MT for all sectors) for power sector by 300 March 2009. Due to the lackadaisical ramp-up in production, CIL has signed only a 200 limited number of FSAs since. Of the 550 LoAs issued for a total of 378MT, FSAs have been signed for only 55MT, of which only ~19MT pertains to power. 100 Given recent PMO’s directive pushing CIL to sign FSAs (where required) and meet shortfall through imports, CIL will need to sign the pending FSAs (and supply) an 0 additional ~150MT for the power sector alone by FY15E even if we assume only 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E half of the power plants in pipeline meet the relevant milestones. Coking Coal Non-Coking Coal Source: CEA, Spark Capital Research CIL’s supply commitments, on the other hand, are daunting!!! Coal price pooling the most logical solution – tariff impact <80paise by FY15 Total FSAs and MoUs Before NCDP (March 2009) Quantity, MT Particulars Unit FY12E FY13E FY14E FY15E signed Power Sector 131 306 Linkage Coal Supply (Proj.) MT 310.0 391.0 449.6 522.8 Other Sectors 1,189 64 Production avbl for power MT 323.2 339.4 355.6 374.2 Import requirement MT 0.0 51.6 94.0 148.6 Total FSAs/ MoUs signed 1,320 370 # FSAs/ Realisation of linkage Rs. / tonne 1,225 1,274 1,325 1,378 After # LoAs Quantit, # FSAs Pending, MoUs Quantity, MT NCDP issued MT Pending MT signed Realisation of import Rs. / tonne 4,125 4,331 4,548 Power 133 312 21 19 112 293 Incremental cost of imports Rs. bn 212.7 407.0 675.7 Others 417 65 284 36 133 29 Price of linkage coal – Pooling Rs. / tonne 1,650 1,953 2,279 method Total 550 378 305 55 245 323 System level cost increase Rs. / tonne 376 628 901 Source: Ministry of Coal, Coal India Ltd., Spark Capital Research Source: Spark Capital Research 15
    • Power Utilities#3 – Gas supply likely to remain under severe pressure, adversely affecting the gas-based plants • Of the total gas requirement of ~66mmscmd for the existing power plants, KG- Gas for 75% PLF, Gas based plants MW Developer D6 alone has an allocated supply quantity of ~32mmscmd (50%) mmscmd Central Sector 6,253 - 25.01 • But the dwindling supplies from KG-D6 has been the biggest sore point. State Sector 3,932 - 15.73 Production fell to 36mmscmd in Jan’2012 with only ~18mmscmd being Vatwa CCPP 100 Torrent Power 0.40 supplied to power sector Trombay CCPP 180 Tata Power 0.72 • Our Oil & gas analyst believes that KG-D6 supplies will fall over the next two Rithala CCPP 108 North Delhi Power 0.43 years, before potential improvement in subsequent years Baroda CCPP 160 GIPCL 0.64 • Increased pressure on EGoM to cut gas allocation to plants selling to Essar CCPP 515 Essar 2.06 merchant market is a key risk to merchant gas-plants. GMR (235MW), Lanco Peguthan CCPP 655 GPEC 2.62 (670MW) and Torrent Power (300MW) are companies with exposure in Sugen CCPP 1,148 Torrent Power 4.59 this bucket Gautami CCPP 464 GVK Power & Infra 1.86 GMR Energy Ltd – Kakinada 220 GMR Infra 0.88 Natural Gas, mmscmd FY10 FY11 FY12E FY13E FY14E FY15E Godavari CCPP 208 0.83 Jegurupadu CCPP 455 GVK Power & Infra 1.82 On-shore 23 23 23 23 23 23 Konaseema CCPP 445 KGPL 1.78 Kondapalli CCPP 716 Lanco Infratech 2.86 Mumbai High 48 48 47 46 45 44 Peddapuram CCPP (Samalkot) 220 Reliance Power 0.88 KG - D6 42 56 43 28 24 40 Vemagiri CCPP 370 GMR Infra 1.48 Karuppur CCPP (Aban) 120 Lanco Infratech 0.48 Adjustments (9) (7) (3) 1 5 10 P.Nallur CCPP 331 PPN Power 1.32 Total Private Sector 6,492 25.97 Total Indigenous Supply 105 120 110 98 97 117 Total 16,676 66.71 Bleak outlook for gas-based power plants persists Power 57 62 62 60 65 68 • Due to the structural deficit in domestic gas the need to import LNG is inevitable. Fertilizers 38 40 39 40 43 53 In the current system State EBs has to recommend use of RLNG by the power producers if domestic gas supply is not sufficient Refinery & Petchem 23 21 26 28 32 42 • RLNG is highly priced at >USD 12/MMBTU as compared to the USD 5.2/MMBTU CGD 12 14 18 21 25 29 pricing for KG-D6 gas and APM gas. Thus, we expect R-LNG to be used only during the summer months, to limit power outages Others 8 17 12 6 7 9 • Although power is considered as a priority sector, the EGoM has not increased allocation of APM gas to the power sector, citing the low quantum available as a Total Demand 137 154 157 155 172 201 key reason. Thus we expect the PLF scenario to remain bleak for gas-based Deficit 32 34 47 58 75 84 power plants over the next 2-3 years Source: CEA, Spark Capital Research 16
    • Power Utilities#4 – High losses and peaking subsidies forcing SEBs to hike tariffs; PPA reforms inevitable as well SEB financials have worsened substantially over the last 5 years Outlook on SEB financials not encouraging, unless consumer tariffs increase Rs. bn FY06 FY07 FY08 FY09 FY10 Total All India State Distribution Utilities FY11 FY12E FY13E FY14E FY15E Revenues 950 1,120 1,250 1,400 1,570 6,290 Revenues, Rs. bn 1,893 2,087 2,293 2,517 2,763 Total Expenditure/ ARR 1,120 1,350 1,560 1,910 2,140 8,080 Total Expenditure, Rs. bn 2,498 2,724 2,960 3,213 3,489 Loss before Subsidy (170) (230) (310) (510) (570) (1,790) Total Units Supplied, bn units 689 751 816 885 961 Subsidy 120 130 170 250 300 970 Loss after Subsidy (50) (100) (140) (260) (270) (820) T&D Loss, bn units 163 171 179 187 195 T&D Loss, % 24% 23% 22% 21% 20% • The Shunglu Committee report observes that the situation of the power sector Total Units Consumed, bn units 526 580 637 698 765 remains largely unresolved when compared to 2003 Avg. Cost per Unit Sold 4.75 4.70 4.65 4.60 4.56 • Accumulated losses are Rs. 820bn (after subsidy) for the period FY06-10 attributable to the gap of ~Rs. 0.60/ unit between average power cost and Avg. Realization per Unit 3.60 3.60 3.60 3.61 3.61 average realization. Apart from lack of tariff revisions the panel also holds the GAP before subsidy*, Rs. /unit 1.15 1.10 1.05 1.00 0.95 high AT&C losses (average ~26%) and operational inefficiencies of Subsidies and Grants 327 361 395 430 469 transmission utilities a major reason for this large gap GAP after subsidy*, Rs./ unit 0.53 0.48 0.43 0.38 0.33 *Assuming no Commercial Losses, Source: Shunglu Committee Report SEBs with highest cumulative losses – Many have resorted to tariff hikes Strong rationale for PPA reforms to pass-through coal cost, at least partly State Loss, Rs. mn Recent Tariff increases? Tariff Hike • Several private developers entered into Case 1 bids / Case 2 bids, which do Tamil Nadu (238,500) Yes Nov 2011 ~50- 150% proposed not allow fuel costs to be passed through. Given their weak finances, SEBs are Uttar Pradesh (194,750) No - - not open to renegotiating their PPA tariffs (mostly between Rs. 2.2 and 3.0) upwards Madhya Pradesh (89,690) Yes Jun, 2011 Upto ~6% • The Case 1 / Case 2 bids are likely to incorporate a ‘Force Majeure’ clause Rajasthan (77,250) Yes Sept, 2011 Upto ~28% protecting developers from factors beyond their control such as regulatory Punjab (51,420) Yes May, 2011 Upto ~12% changes in Indonesia and unavailability of domestic coal Haryana (45,200) No - - • Retrospective changes to PPAs allowing marginal tariff increases are, in our Bihar (44,730) Yes Jun, 2011 NA view, likely. Our view is based on four key reasons (1) CIL will be forced to Jharkhand (35,280) No - - import large volumes of coal to meet their FSAs and will most likely resort to coal price pooling, (2) PPA tariff increases are unlikely to increase by >25 Maharashtra (28,110) No - - paise immediately and by >75 paise even through to FY15, (3) lack of such Karnataka (16,790) No - - reasonable PPA tariff increases would make several power plants unviable and Others (3,570) - - - (4) tariff hikes at the end-consumer level will help soften the blow on SEB Total (825,290) - - - financials Source: Shunglu Committee Report, Spark Capital Research 17
    • Power Utilities#5 – Merchant power opportunity to remain intact but unlikely to be a growth driver Merchant market realizations have stabilized at ~Rs. 4/ unit in a year Merchant volumes have stagnated with increased power outages 8.0 8,000 7.0 6.2 5.7 5.6 6.0 6,000 5.0 4.9 4.7 4.8 4.5 mn Units 4.7 Rs. /unit 5.0 4.2 4.2 4.3 4.2 4.0 3.9 4.0 4.0 3.8 3.9 3.9 4.0 4,000 4.0 2,000 3.0 2.0 0 Nov-10 Dec-10 Nov-11 Dec-11 Apr-10 Oct-10 Feb-11 Mar-11 Apr-11 Oct-11 Jun-10 Jul-10 Jan-11 Jun-11 Jul-11 Aug-10 Sep-10 Aug-11 Sep-11 May-10 May-11 Jul-10 Jul-11 Jun-10 Jan-11 Jun-11 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Feb-11 Mar-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Apr-10 Apr-11 May-10 May-11 Rate in Bilateral trading market Bilateral Exchanges UI Source: CERC Source: CERC Highest loss making SEBs top the power purchasers list • During Apr-Dec 2011,~55% of short term trades were via Traders and States (data for Apr-Dec 2011) mn units purchased % Exchanges (IEX & PXIL). Given states like UP, Tamil Nadu, Punjab have the Uttar Pradesh 10,085 14% highest merchant volumes, receivable risk is high for the traders Punjab 8,061 12% • PTC, Tata Power Trading Co., NTPC Vidyut are the 3 largest traders by Tamil Nadu 8,042 11% market share Maharashtra 6,629 9% Haryana 4,767 7% Rajasthan 4,597 7% Merchant market remains lucrative for incumbents Andhra Pradesh 3,855 6% • States like Tamil Nadu, Uttar Pradesh and Punjab are resorting to massive Delhi 2,866 4% load-shedding in the current year for want of funds to buy power in the merchant market Madhya Pradesh 2,854 4% • We expect merchant market incumbents to benefit from the stable prices, West Bengal 2,640 4% driven by limited merchant capacities. However, given that feed stock supply to Others 15,697 22% such plants will come under increased scrutiny, we expect the merchant power Total 70,092 100% prices to remain in a tight band of Rs. 4 – 4.5 over the foreseeable future Source: CERC 18
    • Power Utilities#6 – Hydel power and transmission sectors remain relatively unscathed by operational uncertainties, but delays prevail Hydel power capacity in the country – Private sector remains insignificant Hydel projects to be commissioned under 11th plan - ~3000MW per year 3,500 Salient Developers MW 2,559 , NHPC 3,767 3,000 7% NHDC 1,520 11,852 , 2,500 30% Satluj Jal Vidyut 1,500 2,359 Jaypee Karcham Wangtoo 1,000 2,000 MW Tata Power 447 1,500 2,353 2,800 Jaiprakash Power Venture 400 24,438 , 1,000 63% Jaiprakash Hydro 300 Allain Duhangan 192 500 981 Everest Power Company 100 0 160 Central State Private Malana Power Company 86 FY13E FY14E FY15E NHPC Others Source: CEA Source: CEA, Spark Capital Research PGCIL - We expect growth of 76% in capex in 12th plan over 11th plan … consequently the yearly capex will increase significantly over FY13-17E 1,200 90% 200 1,000 85% 150 800 Rs. bn Rs. bn 600 88% 85% 100 204 185 187 1,000 400 850 145 123 128 50 109 100 550 483 84 200 68 0 80% 0 XI th plan XII th plan Expected FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E FY16E FY17E PGCIL Capex Target Capex Achieved PGCIL capex Source: PGCIL, Spark Capital Research Source: PGCIL, Spark Capital Research 19
    • Power Utilities#7 – Support logistics such as ports and rail capacities will likely remain inadequate, but not a focus area now 65% of thermal capacity is dependent on railways for coal delivery Railways operating at its peak capacity Coal despatched in 2011 from CIL Freight haulage of Indian Railways (total 921MT) in 2011 Avg. Capacity of a 60 Coal for Power Wagon (tonnes) 3% 8% 4% Coal for other sectors 20% No. of Wagons 219,931 4% Steel 35% 31% 5% Iron Ore Avg. turn around for 6 a Wagon (days) 51% 4% Cement Freight Capacity Food Grains 883 65% 11% (mn tonnes) 26% Fertilizers Freight Originated in 15% Mineral Oil 921 2011 (mn tonnes) 13% 5% Containers All india thermal capacity getting coal by Railways Utilization, % 104% Rail Road MGR Others Others Getting coal by other means Source: CEA, CIL Source: Ministry of Railways Coal Imports likely to grow due to high requirement for power Upto 45% of Indian ports’ bulk capacities used to import coal Port Thermal Coal Coking Coal Capacity, MT Remarks Paradip 13 6 20 250 224 Ennore 9 0 21 205 27 Tuticorin 5 0 6 200 With more than 175 25 Mumbai 4 0 18 45% of existing 23 Visakhapatnam 4 7 31 bulk capacities at 150 129 MT Kandla 3 0 17 India’s key ports 24 Haldia 2 6 7 used for importing 92 coal, port 100 198 Chennai 2 1 0 70 180 capacities are 61 28 152 Mormugao 2 5 7 likely to remain 50 23 26 105 Cochin 0 0 9 inadequate to 64 38 44 Kolkata 0 0 7 handle the surge 0 New Mangalore 0 3 15 in coal imports FY09 FY10 FY11 FY12E FY13E FY14E FY15E Mundra (Adani Ports) 15 0 35 Coking Coal imports Non Coking Coal imports Total 59 28 193 Source: Ministry of Coal, Spark Capital Research Source: Indian Ports Association 20
    • Power Utilities#8 – Renewed impetus to the power sector coupled with lower interest rates should increase power sector spend Credit deployment by Scheduled Commercial banks falls in FY12… …though PFC and REC have continued to lend more in FY12 1,467 462 425 1,099 Credit Deployment 329 935 814 251 Rs. bn Rs. bn Loans 646 634 617 176 153 157 120 294 71 40 21 2 FY09 FY10 FY11 FY12Ann FY09 FY10 FY11 FY12Ann To Infrastructure by Scheduled Commercial banks To Power Sector PFC REC IDFC (for Energy) Source: RBI, Spark Capital Research Source: PFC, REC, IDFC, Spark Capital Research One-year forward interest rates likely to be lower Expect funding scenario for power plants to improve starting FY13E • Fuel supply issues, financial condition of distribution utilities and increased 4% prices of coal / gas, were all issues that exacerbated during FY12 3% 2% • In response, many pipeline projects were shelved and execution of ongoing projects slowed down, reflecting in lower bank credit to the power sector 1% 0% • With key SEBs resorting to tariff hikes, banks have re-opened their lines of -1% credit to the distribution utilities. Also, the expectations of fuel cost being passed through to SEBs, has revived the developer interest in the sector -2% -3% • With fundamentals expected to take a turn for the better and interest rates -4% expected to come down, we believe that funding scenario with respect to the Dec-08 Oct-09 Dec-09 Oct-10 Dec-10 Oct-11 Dec-11 Feb-09 Apr-09 Feb-10 Apr-10 Feb-11 Apr-11 Feb-12 Jun-09 Aug-09 Jun-10 Aug-10 Jun-11 Aug-11 power sector will likely improve over the next 12-18 months. Lack of funds or the unwillingness to lend, we believe, will not hinder the development of power capacities Spread between Overnight rate and 12m OIS rate Source: Bloomberg 21
    • Company Section 22
    • Power UtilitiesRisks persist even as there is hope for policy actionAll the utilities within our coverage with the exception of PGCIL and NHPC have been severely impacted by the adverse fuel supply scenario that has emergedover the last 12-18 months. The utilities have, in turn, focused on near term capacity additions, put many pipeline projects on the backburner and resorted toheavy lobbying with the Government for intervention. Such intervention, they hope, will lead to greater coal availability as well as PPA tariff hikes. In this section,we assess the position of each coverage company in the light of prevailing adverse fuel supply scenario and low, rigid PPA tariffs.We turn positive on PGCIL in the large-cap space and remain positive on Lanco, CESC and GIPCLWe turn positive on PGCIL partly as we expect the significant execution backlog of >Rs. 130bn of orders given in FY11 and current year order awards of >Rs. 160bn to drivethe capitalization at the company. Moreover the company’s business model is virtually devoid of any operational risk, rendering the business highly predictable. We expect14% earnings CAGR over FY12-14E. On the back of such an improved growth outlook we upgrade PGCIL to Add from Sell.In CESC, we like the flagship generation-cum-distribution business that has, inter alia (1) the ability to pass through higher fuel costs, (2) reasonable growth of >7% and (3)mid-teen RoE profile. Even as the fuel supply to operational plants is relatively secure, the development projects (1.2GW) are potential beneficiaries of improved coal supply aswell as PPA tariff reforms. In GIPCL, we like their captive mining capabilities that can cater to the operational plants of 500MW and a development pipeline of 500MW. A fixedRoE business model and stabilization of the 2nd unit of the power plant at Surat implies limited risks to earnings. Both stocks are trading at attractive valuations (<0.7x FY13EP/B) leading us to reiterate our Buy ratings.Although Lanco is exposed to multiple risks such as coal / gas shortage, merchant plants dependent on linkage coal / gas, capacity additions awaiting gas linkage and rigidPPA tariffs, we believe the risks are more than priced into the stock. At Nava Bharat we expect a doubling of capacities by FY13E, resolution of operational issues at theOrissa plants and strong merchant realizations to help improve the company’s financials and drive stock performance.Our top sells are Adani Power and GMRAdani Power remains under high risk with no clarity on coal supply (slow ramp-up at Bunyu mines even as Tiroda II remains without linkage). On the other hand, the companyhas entered into several Case 1 PPAs at low tariffs without fuel cost pass through, placing key projects of the company at significant risk. GMR also faces multiple related riskssuch as gas shortage, merchant plants dependent on linkage gas, capacity additions awaiting gas linkage and rigid PPA tariffs. Ailing airports vertical only adds to the woes forGMR. Reiterate Sell on both names.GVK though exposed only to the risk of gas shortage at operational power plants faces other key risks such as lack of regulatory clarity for the airport vertical and overall highdependence on external capital leading to our negative view. Although we like NLC’s captive lignite mining capabilities perennial delays in stabilization of the expansionprojects and the overhang of Mining Bill remain key deterrents. Torrent Power though well placed on gas supply for its operational plants (YTD PLF of >80%) is exposed togas shortage with respect to capacities under construction (UnoSugen 382MW and D-Gen 1.2GW). Also the risk of inadequate / delayed consumer-level tariff hike persists.PTC has been impacted significantly due to the adverse financial conditions of key SEBs. With the top two customers – Tamil Nadu SEB and Uttar Pradesh SEB – stopping /deferring payments risks on near-term revenues and collection cloud the company’s future. Moreover, steep increases in imported coal cost has rendered the coal-tollingprojects of the company unattractive.As regards NHPC, risks abound with the Jammu & Kashmir government asking NHPC to handover two projects (Salal and Uri I) to the State. Until the issue is settled in favorof NHPC it will remain a key overhang. Moreover, incessant project execution delays implies the RoEs will remain suppressed over the next two years. We remain negative.Overall, we prefer playing predictability in the large-cap space and attractively valued stocks within the mid-cap space. Our detailed scenario analysisdemonstrates that Adani Power and GMR will be the key beneficiaries (although not adequate to change our ratings thereof) of ameliorating sector fundamentals,along with CESC and Lanco. 23
    • Power UtilitiesSummary of risks for the power utilities in our coverage GVK Power & Lanco Nava Bharat NeyveliPlants at risk Adani Power CESC GIPCL GMR Infra Torrent Power Infra Infratech Ventures Lignite Amarkantak I, II, Orissa 64MW Surat I, II, II KamalangaCoal shortage All Plants All Plants - III having CIL - - Expansion Emco Energy Anpara linkage for pipeline for pipelineNo coal linkage Tiroda Phase II - - - - - - projects projects Udupi (thoughDependence on Mundra Phases ~15% of ~10% of - - - FSA exists with - -Imported Coal I, II, III Capacity Capacity supplier) Jegurupadu I, IIGas shortage - - Vadodara I, II Vemagiri Kondapalli I, II - - Sugen Gautami Vemagiri UnoSugenNo gas allocation - - - - Kondapalli III - - Expansion D-Gen Mundra PhasesFuel price risk All plants All plants All plants All plants All plants All plants All plants All plants I, II, III All plants as no Orissa’s All plants (ifSEB & PPA Tariff Kamalanga Amarkantak II fuel pass through All plants - - revocation of - tariffs are notissue Emco Energy (Haryana SEB) exists open access increased)Risks associated Kondapalli II (risk Sugen (risk of Kakinada (risk of Low merchantwith Merchant - - - - of gas supply - gas supply cut gas supply cut) realizationsPower cut) for ~300MW)Legend High Risk Moderate Risk 24
    • Power UtilitiesScenario Analysis – A low-balled base case and the blue-sky Company Base Case Assumptions Base Case DCF, Rs. /share Blue-sky Assumptions Blue-sky DCF, Rs./ share Current PPA tariffs PPA reforms Adani Power 46 99 Slow coal production at Bunyu Faster coal production at Bunyu Current coal supply Higher coal supply CESC 373 473 Current tariffs Tariff reforms Gas supply constraint continues Gas supply constraint continues GIPCL SLP-2 operates at low PLFs during 108* SLP-2 operates at higher PLFs 111* FY13 during FY13 Existing PPA tariffs PPA reforms GMR Infra 25 34 Low PLFs Higher coal supply PLFs at Goindwal at 85% assuming Restricted mining at Tokisud, GVK Power & Infra 17 incremental mining at Tokisud is 18 limiting Goindwal’s PLFs to 75% permitted Current PPA tariffs PPA reforms Lanco Infratech 32 42 No improvement in coal availability Higher coal supply Existing gas supply continues Existing gas supply continues Torrent Power 171 200 No fresh gas allocation Gas allocation for new plants Current tariff for 64MW (Orissa Nava Bharat Tariff increase for 64MW GridCo) 247 283 Ventures Higher merchant realizations Low Merchant Realizations Historical trend of PLFs Historical trend of PLFs Neyveli Lignite 76* 76* Mining bill not passed Mining bill not passed *valuation based on multiple on forward book Values 25
    • Company Profiles 26
    • Power Grid Corporation CMP Target RatingRating: Target price: Rs. 108 Rs. 124 AddCAPEX improvement on the cards as we roll forward to FY14 Company Update•CAPEX: PGCIL’s capex in FY12 is expected to be only Rs. 100bn (only ~Rs. 60bn for YTDFY12) vs. Rs. 123bn in Date Mar 09, 2012FY11, rounding off the first year of capex de-growth. Despite the expected yoy fall in capex, PGCIL would have achieved Market Data~88% of its target capex additions for the 11th plan (~Rs. 483bn capex over FY07-12 vs. a target of Rs. 550bn). SENSEX 17120•Company management has guided for a 12th Plan target spend of Rs. 1tn, which will represent a >80% jump vs the Nifty 5205corresponding 11th Plan target. Even if we assume only a ~80% achievement-plan ration, it gives a robust growth outlookover the long term. Bloomberg PWGR IN•Order Awards robust, execution backlog to play-out: Our analysis of PGCIL’s order awards indicate a ~Rs. 193bn of Shares o/s 4,630mnorders been given-out in FY11 (~Rs. 123bn in FY10). Although award of projects has been healthy, actual execution has Market Cap Rs. 501bnlagged significantly (only ~Rs. 60bn of assets commissioned during 9MFY12) - one likely reason for the tepid execution is 52-wk High-Low Rs. 115-94that ~30% of these orders went to fringe players with low execution capabilities. Moreover, obtaining right-of-way tends todelay commissioning of transmission assets. With order awards remaining healthy during 9MFY12, at Rs. 113bn (will 3m Avg. Daily Vol Rs. 407mnlikely settle at ~Rs. 150-160bn) we expect this backlog of >Rs. 250bn to be commissioned over the next two years, Index member Niftydriving capitalization, revenues and profitability. Latest shareholding (%)•We tweak our FY13E estimates marginally and introduce FY14 estimates. Compared to the 9% yoy earnings growth Promoters 69.4expected during FY12, we forecast a 14% earnings CAGR over FY12-14E. Institutions 21.3Valuation Discussion Public 9.1Coupled with the improved earnings growth outlook, we see negligible operational risks to the company’sbusiness with a fixed-RoE model, availability based tariffs and limited receivable risks. Driven by the solid Stock performance (%)growth outlook, we believe the stock will continue outperforming the key benchmark indices (Sensex and Nifty) 1m 3m 12mand deliver absolute returns over the next 1 year. Rolling forward our valuation to FY14E, we attribute a 2.0x P/B PGCIL 1% 9% 11%multiple yielding a revised price target of Rs. 124/ share (earlier Rs. 101). The stock has traded above thismultiple for >75% of the time over the last 4 years. Upgrade to Add from Sell. Sensex -3% 4% -7% Nifty -3% 5% -6%Financial summary Vijaykumar Bupathy vijaykumar@sparkcapital.inYear Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) BV (Rs.) P/BV (x) +91 44 4344 0036FY12E 92,646 78,143 29,531 50.5 2.2 Bharanidhar VijayakumarFY13E 111,924 94,641 33,736 55.7 2.0 bharanidhar@sparkcapital.inFY14E 133,672 113,408 38,316 62.0 1.8 +91 44 4344 0038 Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 27
    • Power Grid Corporation CMP Target RatingFinancial Summary Rs. 108 Rs. 124 AddAbridged Financial Statements (Standalone) Key metricsRs. mn FY11 FY12E FY13E FY14E FY11 FY12E FY13E FY14EProfit & Loss Growth ratiosRevenues 83,887 92,646 111,924 133,672 Revenues 17.7% 10.4% 20.8% 19.4%EBITDA 70,513 78,143 94,641 113,408 EBITDA 20.1% 10.8% 21.1% 19.8%Other Income 7,111 6,660 7,085 7,841 EBIT 30.4% 8.2% 24.3% 23.1%Depreciation 21,994 24,635 26,943 29,202 PBT 45.6% 0.3% 25.7% 13.6%EBIT 55,630 60,168 74,783 92,047 PAT 32.1% 9.5% 14.2% 13.6%PBT 38,247 38,352 48,194 54,737 Performance ratiosPAT 26,969 29,531 33,736 38,316 RoA (%) 4.5% 4.2% 4.3% 4.1%Balance Sheet RoE (%) 14.5% 13.2% 13.7% 14.1%Net Worth 213,670 233,722 257,978 286,815 RoCE (%) 9.3% 8.7% 9.4% 9.9%Total debt 432,302 487,051 581,808 707,923 Total Assets Turnover (x) 0.1 0.1 0.1 0.1Deferred Tax 11,467 12,742 12,742 12,742 Fixed Assets Turnover (x) 0.2 0.2 0.2 0.2Total Networth & Liabilities 657,439 733,514 852,529 1,007,480 Working capital Turnover (x) 15.9 15.5 57.5 21.9Gross Fixed assets 505,940 580,400 656,349 733,817 Financial stability ratiosNet fixed assets 372,240 422,065 471,071 519,338 Net Debt to Equity (x) 1.85 1.85 2.05 2.18CWIP 266,246 291,786 365,837 468,369 Current ratio (x) 1.05 1.05 1.02 1.04Investments 13,650 13,650 13,650 13,650 Working capital days 23 23 6 16Inventories 3,815 4,241 5,147 6,169 Inventory & Debtor days 152 103 94 94Sundry Debtors 31,621 22,190 23,938 28,693 Creditor days 429 428 398 440Cash and bank balances 36,800 53,812 53,825 84,029 Interest cover (x) 3.20 2.76 2.81 2.47Other Current Assets 32,935 36,014 42,806 50,451 Valuation metricsCurrent liabilities 99,893 110,269 123,769 163,242 Fully Diluted shares (mn) 4,630 4,630 4,630 4,630Net current assets 5,278 5,989 1,946 6,100 Fully diluted M. Cap (Rs.mn) 500,936Deferred Tax / Misc. Exp. 24 24 24 24 Fully Diluted EPS (Rs.) 5.83 6.38 7.29 8.28Total Assets 657,439 733,514 852,529 1,007,480 P/E (x) 19.1 17.4 15.2 13.4Cash Flows EV (Rs.mn) 909,401Cash flows from Operations 63,236 92,358 90,131 130,044 EV/ EBITDA (x) 12.9 11.6 9.6 8.0Cash flows from Investing (133,814) (99,051) (149,051) (179,051) BV/ share (Rs.) 46.2 50.5 55.7 62.0Cash flows from Financing 74,603 23,704 58,932 79,211 Price to BV (x) 2.4 2.2 2.0 1.8 28
    • Adani Power CMP Target RatingFraught with coal supply risks but best pure-play on potential PPA tariff reforms Rs. 76 Rs. 46 Sell PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareMundra Phase I Imported Coal USD 36/ tonne 76% with Case 1 • Slower-than-expected ramp-up • Target production of 10MTPA from Bunyu 13 51(4x330) (Adani CIF escalated GUVNL Rs. 2.81 at Bunyu and insufficiency of expected only by FY14Operational Enterprises) by 10% once Bunyu coal for the total 4.6GW • Continued dependence on high cost every 5 years capacity (>USD 90/tonne) imported coal to takeMundra Phase II 76% with Case 1 • Increased dependence on high variable costs upwards of Rs. 2/ unit (as(2x660) GUVNL Rs. 2.35 cost imported coal seen during 3QFY12) impacting profitsOperational • 3/4th of the capacity tied-up • On the positive side, the plant can sell through Case 1 bids ~25% of power generation in the merchant market that remains lucrative • Adani Enterprises could hikeMundra Phase 75% with Case 1 transfer price of coal due to • Valuation increases manifold assuming anIII Haryana SEB Rs.2.35 change in Indonesian laws incremental PPA tariff of Rs. 50 paise per(4x660) unit is sanctioned • Transmission lines not yetUnder ready for the last phaseConstructionTiroda Phase I CIL CIL price/ e- 70% with Case 1 • Allocated coal block cancelled • Lohara coal block has been cancelled due 16 18(2x660) auction price Maharashtra Rs. 2.64 by Ministry of Environment to proximity to a Tiger ReserveUnder SEB and Forests • With only 50% linkage available, the plantConstruction • Seeking allocation of an needs to source remaining coal throughTiroda Phase II No Linkage NA NA - alternate coal block / coal imports / e-auction(1x660) linkage, both of which are • Phase II has no coal linkage as well asUnder uncertain PPAConstruction • SEB not agreeing to hike • We assume PLFs of only ~75% for these tariffs or terminate the PPA plants and high dependence on imported coalTiroda Ph III No Linkage NA NA - • No coal availability • High risk of capacity being significantly 15 20(2x660) • No PPA delayedUnder • Here again we assume low PLFs and highConstruction dependence on imported coal 29
    • CESC CMP Target RatingCore business largely unscathed even as upsides exist for development assets Rs. 265 Rs. 350 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareBudge Budge 55% from ICML ~Rs. 2,400/ Supplies to Fixed RoE • Coal supply from CIL being • Fuel supply risk exists only to the tune of 434 445(3x250) 15% imports tonne Kolkata and basis with reduced to 50% of Annual ~30% of the capacity supplied by CILOperational Howrah fuel cost Contracted Quantity • Can buy coal from e-auction and petition 30% CIL distribution pass • Price risk of coal due to the for higher tariffs based on increased costsTitagarh 55% from ICML ~Rs. 4,400/ circle through imports and e-auction • Only major risk is the West Bengal SEB’s(4x60) 45% CIL tonne unwillingness to raise the tariffsOperational Average • WBERC not approving tariff now sufficient and timely tariff • Tariff approval for 2011-14 has beenSouthern 70% from ICML ~Rs. 3,100/ ~Rs. 5.8/ increases obtained with ~13% average hike in tariffs(2x67.5) 30% CIL tonne unit after the • No significant difference in blue-sky as weOperational recent tariff only assume tariff revision will be timely hikeNew Cossipore CIL ~Rs. 7,100/ • Since it is a very old plant • Small capacity that is being operated only(100) tonne (CoD in 1950) it will likely to meet peak loads and hence no majorOperational cease operating by FY15E threat to earningsHaldia CIL - MCL and ~Rs. 2,500/ 75% to (same as • Coal supply from CIL being • Can buy coal through e-auction and 48 104(2x300) Imported coal tonne Kolkata and above) reduced to 50% of Annual petition for higher tariffsUnder Howrah Contracted Quantity • Greater coal availability (at higher prices)Construction resulting in higher PLFs is captured in our blue-sky scenarioDhariwal CIL – SECL and ~Rs. 1,800/ 50% to MSEB NA • Coal supply from CIL being • Exposed to offtake risk as well as risks that 20 53(2x300) Imported coal tonne reduced to 50% of Annual coal allocation being cancelled as PPAUnder Contracted Quantity pertains to only 50% of capacityConstruction • Only 50% of the capacity have • Once coal availability is ascertained, we PPA believe that inking PPAs for both units • Final PPA yet to be inked should not pose a challengeICML – Integrated Coal Mining Ltd. also known as Sarshatali mine; apart from these plants the Company has ~2GW of pipeline projects all coal based and none of it having linkage of coal 30
    • Gujarat Industries Power Corporation CMP Target RatingSecure business even though financials impacted by gas shortage Rs. 71 Rs. 88 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareSurat I, II Captive Lignite ~Rs. 900/ GUVNL Fixed RoE • Minimal risk on fuel supply as • We expect Surat I to have PLFs of ~75% 108 111(4x125) Mines tonne basis with lignite is bought from captive • Expect lower PLFs at Surat II due to boilerOperational fuel cost mines issues that have impacted generation over pass the last 12 months through • Our blue-sky scenario assumes higher PLFsVadodara I Natural Gas Domestic Gas: V1 - MoW Fixed RoE • PLFs hit due to fall in KG-D6 • Requires ~1.55mmscmd of gas for(3x32 GT, from GAIL, KG USD 5.2/ with Companie basis with output operations at 85% PLF1x49MW ST) D6 and R-LNG MMBTU s in Gujarat fuel cost • Also, given the age of the • Has linkage of 0.6mmscmd allocation fromOperational from GAIL and RLNG Gas: pass plant, frequent maintenance KG D6 and the remaining is from GAIL GSPC USD 12/ V2 – PPA with through shut downs lead to lower PLFs under the APMVadadora II MMBTU GUVNL(1x106 GT, during at least 1 quarter each • Low PLFs to persist over FY13-14 (63% for1x54MW ST) year V-I and 55% for V-II during FY12E)Operational • No difference here between our base case and blue-sky scenariosSurat Expansion Captive Lignite ~Rs. 900/ GUVNL NA • Execution delays • We expect this plant to be ready only by(2x250) Mines tonne FY16UnderConstructionNote: Base case and blue-sky represent FY13E book value 31
    • GMR Infrastructure CMP Target RatingFuel supply remains a key issue; another potential beneficiary of PPA tariff reforms Rs. 28 Rs. 25 Sell PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareGMR Power Diesel >Rs. 9/ unit TNEB >Rs. 11/ • P&L risk minimal as this is a • Predictable revenues as well as profits 0.4 0.4Corp unit fixed cost recovery model • Receivable situation could turn adverse if(1x200) • Balance sheet risk exists as TNEB’s financials fail to improveOperational payments from TN have • No difference here between our base case slowed down and blue-skyVemagiri Power Natural Gas USD 5.2/ APTRANSCO Rs. 3.86 • Gas supply shortage and • Supply from KG D6 has been less for the 1.8 1.8Generation from KG D6 MMBTU One-part consequent low PLFs plant in FY12 (65% PLF for YTD FY12)(1x388) (Rs. 2.03/unit) tariff with • Requires ~2.4mmscmd of gas • Expect PLFs to remain under pressureOperational fuel cost for operations at 85% PLF but • No difference here between our base case pass- has only ~1.5mmscmd and blue-sky scenarios through allocation from KG D6Vemagiri Exp. No gas Unknown Merchant As per short • No gas allocation • We expect both the units to be (1.8) (0.9)(2x384) allocation term commissioned by 1QFY13 but we do not1st unit contracts expect gas allocation for FY13 and FY14synchronized • In the blue-sky scenario we factor-in gas allocation in FY14 itselfGMR Energy Natural Gas USD 5.2/ Merchant As per short • Gas supply shortage and • Supply from KG D6 has been less for the 2.7 2.7(1x235) from KG D6 MMBTU term consequently low PLFs plant in FY12 (62% PLF for YTD FY12)Operational (Rs. 2.09/ unit) contracts • Requires ~1.4mmscmd of gas • Expect PLFs to remain under pressure for operations at 85% PLF but • Entered into bilateral contracts to sell has only 0.9mmscmd linkage power to Andhra Pradesh for the next 1 from KG D6 year hence no risk to gas supply during • Additional fuel supply risks as this period plant supplies power in the • Here as well, base case scenario is the merchant market same as blue-skyKamalanga CIL - MCL CIL price 25% Orissa, ~Rs. 2.86 • Low PLFs due to coal • Profits / cash flows to come under pressure 0.6 5.7(3x350) 34% Haryana shortage • Our blue-sky assumes greater coalUnder • High input cost and firm Case availability (at higher prices) and Case 1Construction 1 tariffs tariff increase of ~30 paiseEmco Energy CIL - SECL CIL price 33% ~Rs. 2.88 • Low PLFs due to coal • Profits / cash flows to come under pressure (2.4) 0.6(600) Maharashtra shortage • Our blue-sky assumes greater coalUnder rest merchant • High input cost and firm Case availability (at higher prices) and Case 1Construction 1 tariffs tariff increase of ~30 paise 32
    • GMR Infrastructure CMP Target RatingFinancial Summary Rs. 28 Rs. 25 SellAbridged Financial Statements Key metricsRs. mn FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13EProfit & Loss Growth ratiosRevenues 51,234 57,738 57,614 80,141 Sales 14.5% 12.7% -0.2% 39.1%EBITDA 13,643 15,555 20,010 29,737 EBITDA 27.9% 14.0% 28.6% 48.6%Other Income 1,634 1,573 528 (596) PAT -19.3% -512.4% -85.2% -142.7%Depreciation 6,122 8,609 10,206 12,468 Margin ratiosEBIT 9,155 8,519 10,332 16,674 EBITDA 26.6% 26.9% 34.7% 37.1%PBT 1,932 (2,241) (2,105) 70 PAT 4.4% -16.1% -2.4% 0.7%PAT 2,254 (9,296) (1,373) 587 Performance ratiosBalance Sheet RoA 0.8% -2.3% -0.3% 0.1%Net Worth + Minority 66,694 125,363 138,770 149,013 RoE 3.4% -7.4% -1.0% 0.4%Total debt and grants 216,528 283,190 307,598 310,232 RoCE 3.2% 2.1% 2.3% 3.6%Total Networth & Liabilities 283,222 408,553 446,367 459,244 Total Assets Turnover (x) 0.2 0.1 0.1 0.2Gross Fixed assets 146,112 255,712 334,266 369,699 Fixed Assets Turnover (x) 0.4 0.3 0.2 0.3Accumulated depreciation 22,518 33,205 43,411 55,878 Working capital Turnover (x) 2.3 0.7 0.9 1.5Net fixed assets 123,594 222,508 290,856 313,821 Financial stability ratiosCWIP 103,829 71,612 53,463 57,281 Net Debt to Equity (x) 3.2 1.9 2.0 2.0Investments 32,283 33,370 33,370 33,370 Current ratio (x) 9.6 20.4 16.4 9.7Inventories 2,148 2,790 3,165 4,697 Working capital days 156 503 427 244Sundry Debtors 3,653 5,736 6,474 9,846 Inventory & Debtor days 41 54 61 66Cash and bank balances 1,632 42,296 29,393 12,257 Creditor days 122 208 208 150Loans & Advances 17,085 32,837 32,837 32,837 Interest cover (x) 1.3 0.8 0.8 1.0Current liabilities 2,557 4,091 4,391 6,130 Valuation metricsNet current assets 21,962 79,567 67,477 53,508 Fully Diluted shares (mn) 3,663 3,893 3,893 3,893Misc. Expenditure & Def. Tax 1,554 1,496 1,201 1,266 Fully diluted M. Cap (Rs.mn) 108,433Total Assets 283,222 408,554 446,367 459,244 Fully Diluted EPS (Rs.) 0.62 (2.39) (0.35) 0.15Cash Flows P/E (x) 45.3 nm (78.9) 184.7Cash flows from Operations (1,457) (10,481) 7,329 9,834 EV (Rs.mn) 353,268Cash flows from Investing (112,446) (77,952) (59,887) (38,731) EV/ EBITDA (x) 25.9 22.7 17.7 11.9Cash flows from Financing 100,342 69,233 25,164 2,634 Price to BV (x) 1.8 1.0 0.8 0.9 33
    • GVK Power & Infrastructure CMP Target RatingGas supply concerns cloud the outlook that is further dented by coal supply concerns Rs. 18 Rs. 17 Reduce PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareGVK Industries Natural Gas USD 5.2/ APDISCOM One-part • Gas supply shortage and • Supply from KG D6 has been affected 1.8 1.8Phase I, II from KG D6 MMBTU tariff with consequent low PLFs severely (74% PLFs for YTDFY12)(1x217, 1x220) fuel cost • Requires ~3mmscmd of gas • Expect PLFs to remain under pressureOperational pass- for operations at 85% PLF but • No difference here between our base case through has allocation of only and blue-sky scenarios ~2mmscmdGautami Power Natural Gas USD 5.2/ APDISCOM One-part • Gas supply shortage and • Supply from KG D6 has been affected 3.3 3.3(1x464) from KG D6 MMBTU tariff with consequent low PLFs severely (77% PLFs for YTDFY12)Operational fuel cost • Requires ~3mmscmd of gas • Expect PLFs to remain under pressure pass- for operations at 85% PLF but • No difference here between our base case through has allocation of only and blue-sky scenarios ~1.9mmscmdGoindwal Sahib Captive mines CIL Price PSEB Fixed RoE • Delays in starting commercial • Expect the power plant to be ready by end 4.5 5.5(1x540) (Tokisud & Landed cost of with fuel operations of the mines as of FY13Under Seregraha in nearly Rs. cost pass well as the plant • We expect the Tokisud mine to be readyConstruction Jharkhand) 2,400 per through during FY13 tonne • In our blue-sky scenario, we factor in higher PLFs of 85%, assuming additional mining of 0.4MTPA from Tokisud is permitted XXXX 34  xxxxx
    • Lanco Infratech CMP Target RatingExposed to virtually all concerns on the fuel front but concerns more than priced in Rs. 20 Rs. 32 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareKondapalli I Natural Gas USD 5.2/ APTRANSCO One-part • Gas supply shortage and • Supply from KG D6 has been affected 2.8 2.8(1x368) from KG D6 MMBTU tariff with consequent low PLFs severely (60% PLFs for YTDFY12)Operational ~Rs. 2.2/ unit fuel cost • Expect PLFs to remain under pressure pass- • No difference here between our base case through and blue-sky scenariosKondapalli II Natural Gas USD 5.2/ Merchant As per short • Gas supply shortage and • Entered into bilateral contracts to sell 0.5 0.5(1x366) from KG D6 MMBTU term consequent low PLFs power to Andhra Pradesh for the next 1Operational ~Rs. 2.1/ unit contracts • Additional fuel supply risks as year hence no risk to gas supply during plant supplies power in the this period merchant market • Supply from KG D6 has been affected severely (75% PLFs for YTDFY12) • No difference here between our base case and blue-sky scenariosAban Power Natural Gas USD 5.2/ TNEB One-part • Gas supply shortage and • Gas supply has been impacted during 1.4 1.6(1x120) under the APM MMBTU tariff with consequent low PLFs FY12 (75% PLF for YTDFY12)Operational ~Rs. 1.2/ unit fuel cost • We expect PLFs to remain under pressure pass- throughAmarkantak II 70% CIL from CIL ~Rs. 1400/ 65% to Case 1 • Coal shortage resulting in low • Company has petitioned to HERC for a (2.1) 3.4(1x300) SECL tonne Haryana Rs. 2.32 PLFs new tariff but our base case assumes noOperational 30% e-auction ~Rs. 2700/ • SEB (Haryana specifically) not tariff increase tonne e-auction 35% to Rs. 2.70 open to hiking tariffs • Our blue-sky assumes greater coal Chhattisgarh availability albeit at a higher price coupled with a tariff hike as petitionedAmarkantak I 70% CIL from CIL ~Rs. 1400/ Merchant As per short • Coal shortage resulting in low • Receivable situation could turn adverse if 2.2 2.5(1x300) SECL tonne term PLFs UP SEB’s financials fail to improveOperational 30% e-auction ~Rs. 2700/ contracts • Receivable risk as power is • PLFs to remain in the 70s due to the tonne e-auction currently being sold to UP persistent coal shortage situation • Additional fuel supply risks as • Our blue-sky assumes greater coal plant supplies power in the availability albeit at a higher price merchant market 35
    • Lanco Infratech CMP Target RatingExposed to virtually all concerns on the fuel front but concerns more than priced in Rs. 20 Rs. 32 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareUdupi I, II Imported Coal ~USD 140/ 99% to MoU route – • Imported coal cost increase • Final tariff approvals from KERC expected 5.8 5.8(2x600) from Indonesia tonne Karnataka fixed RoE • SEB not agreeing to tariff by 1QFY131st unit increases • After the MoEF clearance, transmissionoperational line construction for Unit 2 is progressing - • Delays in commissioning transmission line for Unit 2 we expect it by 2QFY13Anpara I, II CIL – NCL CIL ~Rs. 1400/ 92% to Uttar Case II • Coal shortage and high coal • Both units are commissioned and awaiting 4.1 5.8(2x600) e-auction coal tonne Pradesh with fuel cost CIL’s coal allocation for FY13Operational for shortage ~Rs. 2700/ cost pass • SEB not permitting tariff hike • We expect low PLFs in FY13 on coal tonne e-auction through shortage and as Uttar Pradesh would find • Receivable risk from UP it difficult to pay high tariffs if e-auction coal is blended • Our blue-sky scenario factors-n greater coal availabilityKondapalli III No gas Unkown Not applicable NA • No gas allocation • Construction of all the units except the (2.1) 0.2(732MW) allocation steam turbine of the second unit isUnder completeConstruction • Plant will be commissioned by 2QFY13 • Interest payments / repayments to commence from FY14 and could pose a significant risk to cash flowsCompany also has 3.9GW of coal based capacities and ~600MW of hydel capacities under construction which are expected to be commissioned in FY15 and beyond 36
    • Nava Bharat Ventures CMP Target RatingFuel supply not the key concern; attractive low-cost model but operational issues persist Rs. 195 Rs. 247 Buy PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ SharePaloncha, AP • ~60% from • Singareni ~50% Captive ~Rs. 2.85/ • Minimal fuel risk • Coal supply is not expected to be an issue 121 149(1x50, 2x32) Singareni ~Rs. 1800/ unit for • Frequent plant shutdowns due with Singareni Collieries honoring theOperational Collieries tonne inter- to maintenance supply commitment • Rest from e- • e-auction segment • Low realization in the • Merchant market has stabilized with auction and ~Rs. 2300/ transfer of average rate at ~Rs. 4.0/ unit for a year; merchant market imports tonne power with total cost of ~Rs. 2.8/ unit including fixed cost the Company is in a position to Merchant be profitable rates as per • In our base case scenario we have Rs. short term 3.9/ unit as merchant realization for the contracts next 3 years while we make it Rs. 4.2/ unit for the blue-sky scenarioDharmavaram Imported coal ~USD 90/ Merchant As per short • Imported coal cost increase • We expect the plant to operate at PLFs of(1x20) from Indonesia tonne term • Low realization in the ~80% as coal importing is not a majorOperational contracts merchant market issue given the small size of the plantOrissa  ~60% from  CIL ~Rs. ~30MW for ~Rs. 4.75/ • Coal shortage from CIL and • Company will buy coal via e-auction on(1x30, 1x64) CIL - MCL 1800/ tonne ferro-chrome unit for coal cost increase shortage of CIL coal supplyOperational  Rest from e-  e-auction conversion to ferro- • SEB issue as Orissa revoked • We expect the first 64MW to remain idle till auction and ~Rs. 2300/ Tata Steel chrome open access to the first 64MW the tariff petition is approved by OERC, imports tonne conversion also to be conservative we consider tariff of ~20MW to • Minimal fuel risk Rs. 2.75/ unit for sale to GridCo while weOrissa 80% Washery Washery Orissa GridCo Rs. 2.75 - • Delay in commissioning the make it Rs. 3.05/ unit for blue-sky scenario(1x64) rejects for the rejects ~Rs. 3.05/ unit for 2nd 64MWReady to be 2nd 64MW 1400/ tonne • We expect the second unit to start rest Merchant GridCocommissioned operations in 2QFY13Paloncha 80% Washery Washery Merchant As per short • Minimal fuel risk • We expect the second unit to start 56 64(1x150) rejects from rejects ~Rs. term • Low realization in the operations by the end of FY13Under Singareni 1400/ tonne contracts merchant marketConstruction 37
    • NHPC CMP Target RatingAlmost no operational risk but execution delays compensate Rs. 21 Rs. 22 ReduceOperational Plants State Under construction Key issues faced / status OutlookBaira Siul Himachal Pradesh Chamera III • Execution delays - diversion Tunnel • We expect all units to be commissioned by April(3x60) (3x77) has been clogged, hence 2012 commissioning is delayedLoktak Manipur(3x35)Salal Jammu & Kashmir* Chutak • Execution delays due to harsh • We expect all units to be commissioned by Nov(6x115) (4x11) weather conditions and manpower 2012 issuesTanakpur Uttarakhand(3x40) Uri II • Execution delays – heavy rainfall and • We expect all units to be commissioned by AugUri I Jammu & Kashmir* (4x60) snowfall affecting final works 2012(4x120) Nimmo Bazgo • Execution Delays – delay in awarding • We expect all units to be commissioned by AprilChamera I Himachal Pradesh (3x15) Hydro Mechanical works due to high 2013(3x180) price bidRangit Sikkim(3x20) Parbati III • Though almost complete, operations • Commissioning of first few units to take place in (4x130) will not commence until the upstream FY13 and proportional cost to be capitalizedChamera II Himachal Pradesh Parbati II is completed (expected only • Depreciation and interest cost to flow though the(3x100) in FY15) P&L with no meaningful generationDhauliganga Uttarakhand(4x70) Teesta Low Dam III • Execution delays due to the recent • We expect all units to be commissioned by AprilDulhasti Jammu & Kashmir (4x33) earthquake 2013(3x130) Teesta Low Dam IV • Execution delays due to the recent • We expect all units to be commissioned by AugustTeesta V Sikkim (4x40) earthquake 2013(3x170)Sewa II Jammu & Kashmir Subansiri • Execution delays Issue of downstream • We expect all units to be commissioned only by(3x40) (8x250) Impact study & demand for stoppage January 2016 of works by anti dam activitiesNHDC – Indira Sagar Madhya Pradesh(8x125) Parbati II • Execution delays due to flashfloods • We expect all units to be commissioned only byNHDC – Omkareshwar Madhya Pradesh (4x200) and contractual issues May 2016(8x65)*J&K trying to get these projects transferred to the state, weperceive this as a huge risk 38
    • Neyveli Lignite Corporation CMP Target RatingMining bill the key overhang in an otherwise risk free business model Rs. 87 Rs. 84 Reduce PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareNeyveli TPS I Mine 1 of Lignite transfer 79% to TNEB Fixed RoE • Minimal fuel risk • Given the negligible fuel availability risks, 76 76(6x50, 3x100) Neyveli Lignite price of ~Rs. 9% to NLC with fuel • Risk to 26% of mining profits if we expect PLFs to follow the historicalOperational 1,265/ tonne townships cost pass the Mining bill gets passed trend through • Our base case and blue-sky scenarios areNeyveli TPS I Mine 1A of Lignite transfer 46%to TNEBExp Neyveli Lignite price of ~Rs. 22% to one and the same, where we do not(2x210) 1,556/ tonne Karnataka assume risks to earnings from the miningOperational 14% to Kerala bill 3% to PondicherryNeyveli TPS II Mine 2 of Lignite transfer 30%to TNEB(7x210) Neyveli Lignite price of ~Rs. 19% toOperational 1,556/ tonne Andhra Pradesh 14% to Karnataka 10% to Kerala 5% to PondicherryBarsingsar Barsingsar NA 100% toLignite Lignite mine Rajasthan(2x25)OperationalNeyveli TPS II Mine 2A of Lignite transfer 100% to TNEBExp Neyveli Lignite price of ~Rs.(2x250) 1,556/ tonneUnderConstructionBase case and blue-sky scenarios represent FY13E book value 39
    • Torrent Power CMP Target RatingConcentrated exposure to gas supply shortages, which show no signs of ameliorating Rs. 217 Rs. 200 Reduce PPA/ PPA Tariff Base Case Blue-SkyPlant/ Status Source of Fuel Price of Fuel Key issues faced / risks involved Outlook Merchant Rs. /unit Rs. /Share Rs./ ShareSugen Natural Gas USD 5.2/ Ahmedabad Fixed RoE • Gas supply shortage and • Requires ~5.5mmscmd of gas for 64 64(3x382.5) from KG D6 MMBTU and Surat basis with consequent low PLFs operations at 85% PLF but hasOperational distribution fuel cost • GERC not approving sufficient 3.31mmscmd allocation from KG D6 circle pass and timely tariff increase • Supply from KG D6 has been affectedVatva through(2x32.5, 1x35) • Additional fuel supply risks as during FY12 (80% PLF for YTDFY12) ~300MWOperational Merchant Average plant supplies power partly in • We expect gas supply to remain under the merchant market pressure and hence, the PLFs and tariff now merchant volumes as well ~Rs. 5/ unit • Although supplying to merchant market, Merchant the plant has not been seriously taken up rates as per for gas allocation cuts, which is a positive short term • Our base case and blue-sky assumptions contracts are one and the same hereSabarmati ~70% from CIL CIL ~Rs. 3300/ Ahmedabad (same as • Coal shortage as well as • Because of the fuel pass through(1x60, 1x120, – SECL tonne and Surat above) increased cost of imported mechanism we don’t see cost of coal /2x110) Rest through Imports ~USD coal availability being a significant risk as PLFsOperational imports 120/ tonne • GERC not approving sufficient have been reasonably good at ~80% and timely tariff increase during YTDFY12 • We expect the scenario to remain the same, going forward • Given the fixed RoE revenue model, our blue-sky scenario is no different from our base caseUnoSugen No gas NA ~665MW to NA • No gas allocation • We expect UnoSugen to be ready by FY14 0 29(1x382.5) allocation Ahmedabad & and D-Gen to be ready by FY15Under Surat • We don’t expect any gas allocation fromConstruction EGoM for these plants ~400MW forD-GEN • In our base case, we do not value these Dahej SEZ by(2x400) plants whereas we attribute a value in our FY15EUnder blue-sky scenarioConstruction 40
    • Rating InterpretationBuy Stock expected to provide positive returns of >15% over a 1-year horizonAdd Stock expected to provide positive returns of >5% – <15% over a 1-year horizonReduce Stock expected to provide returns of <5% – -10% over a 1-year horizonSell Stock expected to fall >10% over a 1-year horizonAnalyst CertificationThe Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subjectcompanies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing thespecific recommendation(s) or view(s) in this report.Spark DisclaimerThis document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed asinvestment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document.Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in thisdocument (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely foryour information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose.This document does not constitute or form part of any offer for sale or subscription or incitation of any offer to buy or subscribe to any securities. This material should not be construed as anoffer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital Advisors (India) Private Limited makes norepresentation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital Advisors (India) PrivateLimited, its affiliates, and the employees of Spark Capital Advisors (India) Private Limited and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal asprincipal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or otherbusiness from, any company referred to in this report. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through theindependent analysis of Spark Capital Advisors (India) Private LimitedCopyright in this document vests exclusively with Spark Capital Advisors (India) Private Limited.