power sector report

1. Indian Ports Initiating Coverage
In the build-out phase Sector Outlook Positive
Indian Power Utilities
Sector Update
March 2012
1

2. Power Utilities
With ‘no power’ comes great responsibility Sector view Positive
Indian power sector (particularly generation utilites) has gone through a complete metamorphosis, with almost Date Mar 09, 2012
all aspects taking a turn for the worse, over the last 18 months. With the Government showing signs of
intervention, the extent of relief that will be felt by our coverage companies will depend on the nature of Market Data
measures 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 utilities
Our top Buys are Lanco, CESC and GIPCL as we believe that the current stock prices does not factor-in Vijaykumar Bupathy
improvement in business fundamentals, which we think is misplaced. While Lanco will be a focused play on vijaykumar@sparkcapital.in
sector fundamentals improving, the latter two names will serve as portfolio shock absorbers in case the reform +91 44 4344 0036
measures are indefinitely delayed. We also turn positive on PGCIL given the low operational risk involved and
improved growth prospects. Our top shorts are Adani Power and GMR - while on Adani Power, the reason for our Bharanidhar Vijayakumar
bharanidhar@sparkcapital.in
negative call is because of being exposed on fuel and tied to low-priced PPAs, our view on GMR is largely on
+91 44 4344 0038
account of stress from non-utility assets (chiefly airports vertical).
Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset 2

3. Power Utilities
Views on Stocks
Company 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. 76
Adani 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 group's 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 period
CESC
• 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
Company's 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 forward
GIPCL • 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

4. Power Utilities
Views on Stocks
Company 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 on
GMR 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. 18
GVK 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 pass
Lanco throughs) hedging the company against fuel cost increases for these plants
Infratech • 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

5. Power Utilities
Views on Stocks
Company 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. All
Nava Bharat merchant sales are through intermediaries in the short term market where NBVL does not take up receivable risk
Ventures • 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. 21
NHPC • 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 FY13E
NLC
• 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

6. Power Utilities
Views on Stocks
Company 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 be
PGCIL
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. 7bn
PTC (~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 market
Torrent 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

7. Power Utilities
Estimate Revisions
FY12E, Rs. mn Revision, % FY13E, Rs. mn Revision, %
Estimate
Revisions
Revenues EBITDA PAT Revenues EBITDA PAT Revenues EBITDA PAT Revenues EBITDA PAT
Adani 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

8. Power Utilities
Valuation Matrix
Company 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 PAT
Adani 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% NM
GVK 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 Sell
CESC 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 Buy
GIPCL 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 Buy
GMR 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 Sell
GVK 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 Reduce
Lanco 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 Buy
Nava 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 Buy
NHPC 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 Reduce
NLC 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 Reduce
PGCIL 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 Add
PTC (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 Reduce
Torrent 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

9. Industry Scenario
9

10. Power Utilities
Industry 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 as
inadequate pass-through mechanisms in PPAs (Case 1 bids) have exacerbated alarmingly, resulting in escalation of the issues up to the level of the PMO. Given
the importance of the power sector (~30% of 11th Plan infrastructure spend and 8% of bank credit), the PMO has reciprocated by promising a deadline-based
approach 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 key
conclusions 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 and
faster 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 will
remain, 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 the
medium-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%) to
imported 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 (from
60mmscmd in 2010 to ~36mmscmd recently) has significantly impacted the PLFs of second-generation gas-based power plants. With gas production at KG-D6 expected to
drop 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 over
the 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 in
consumer-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 the
existence 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 utilities
as 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 wagon
shortage (railways) and inadequate coal handling capacities at ports. Both issues pose operational risks to power plants in the long term, but as structural issues like
feedstock 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 positive
developments, lower borrowing costs (1yr forward spreads have moved into negative territory after more than a year), we expect, will lead to improved private sector interest
in 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 next
year even as increased pressure may be mounted on CIL to absorb the incremental cost of coal imports, at least partly.
10

11. Power Utilities
Industry 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

12. Power Utilities
Industry 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

13. Reality Checks
13

14. 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

15. Power Utilities
#2 – CIL to be pushed to convert LoAs into valid FSAs driving the need to import and most possibly, price pooling
Background 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

16. 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

17. Power Utilities
#4 – High losses and peaking subsidies forcing SEBs to hike tariffs; PPA reforms inevitable as well
SEB financials have worsened substantially over the last 5 years Outlook on SEB financials not encouraging, unless consumer 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