January 2015

Power

Key Sector Drivers

Industry variables

Power demand growth rate and corresponding supplies

Capacity utilization of plants

SEBs financial health

Domestic fuel availability

Regulatory issues

Coal block auctioning and FSAs

Tariff hike

Impact of financial restructuring of SEBs

Implementation of revised SBD for case 1 and 2 bids

Bailout of unviable PPAs

Executive summary

J curve to come in play: We believe power demand growth is set for high growth as GDP growth
would not be constrained by power capacity and deficits. Past relationship of power demand/GDP
growth multiplier is unlikely to hold true as the underlying parameters of power availability has changed.
Power Generation growth in YTD December 2014 growth is 9.9%(highest in the last decade). Coal
availability be however critical in current environment.

SEBs to see better tidings on higher industrial volume, however tariff hike not inspiring : Once
demand from the industrial (incl city commercial) side picks up (39% of volumes, 58% of revenues),
SEBs would be in better situation to cater to the overall power demand . However, tariff hike across
states has been muted in FY15 (6 states no tariff hike).TNERC suo-motu tariff hike is a welcome trend.

Coal block auctioning to improve coal availability with the objective to keep tariff under control:
Governments transparent and speedy process of coal blocks auctioning (first trench to be awarded by
Feb15) would gradually improve coal availability for the generators winning coal blocks. Reverse
auctioning method to award coal blocks to IPPs will keep a check on power tariff. While opening space
for commercial mining would gradually improve coal availability in the system.

Steps taken by new government encouraging: Schemes such as 5:25 financing, no CRR/SLR
requirement for Infra bonds, faster environmental clearances, one-go 3 year extension of tax
exemption, reintroduction of incentives on wind power is positive.

Demand growth can receive a major fillip with economic revival

Strong growth in demand-supply while power deficit
largely remain flat YoY..

..as Industrial activities are picking-up..

..hence, power demand growth to be higher than GDP growth with the revival in economy

Past relationship of power

demand / GDP growth
rate not valid as power
deficits were high

Source : CSO, RBI, CEA, I-Sec research

Improving industrial demand to help SEBs health

Discoms suffering a 20% cost gap$

Industries + commercial, which subsidize other

segments, is now witnessing improvement

as % of costs

resulting in PLFs started improving

Improving premium customer that is

industrial & commercial demand to improve
health of SEBs and help in building power
demand.

Source : CEA,I-Sec researchYTD Apr-Dec

Revenue gap is 25%

Capacity additions to support demand growth

Despite of adding ~12.6GW

(~5%) power generation
capacity in Apr-Dec14;
power supply increased by
robust 9% during the same
period.

PLF for thermal plants

improved during Apr-Dec14
to 65.1% (vs. 64.6% in AprDec13).

Power deficit remain high in

the states like Andhra
Pradesh,
Tamil
Nadu,
Karnataka,
and
Uttar
Pradesh (~40% of Indias
power demand)

Generation capacity addition(ex renewables)

Source : CEA,I-Sec research

FY11
811
562
103
665
26
120

FY13
912
692
69
761
33
119

FY14E
967
746
46
792
34
140

FY15E
1,066
875
31
906
34
126

FY16E
1,175
977
21
998
43
134

Average calculated PLF based on average capacity)

Coal
72%
68%
65%
Gas and other thermal
63%
57%
39%
Total thermal
70%
66%
61%
Nuclear
64%
77%
78%
Hydro
37%
40%
34%

62%
24%
57%
82%
40%

66%
15%
59%
75%
35%

67%
10%
60%
81%
36%

India generation (bu)

Coal
Gas and other thermal
Total thermal
Nuclear
Hydro

Source : CEA,I-Sec research

FY12
877
613
96
709
32
136

CAGR
FY17E
12-17E
1,287
8.0%
1,082
12.0%
21
-26.1%
1,103
9.2%
46
7.5%
138
0.3%

69%
10%
62%
79%
36%

Capacity additions to support demand growth (contd)

Capacity addition and thermal PLFs
Capacity (MW)
Coal
Gas
FY04
64,956 11,840
FY05
67,791 11,910
FY06
68,519 12,690
FY07
71,121 13,692
FY08
76,049 14,656
FY09
77,649 14,877
FY10
84,198 17,056
FY11
94,653 17,706
FY12
112,022 18,381
FY13
130,221 20,110
FY14
145,273 21,782
FY15 (till Dec'14) 154,171 22,971

Diesel Total Thermal Nuclear

1,173
77,969
2,720
1,202
80,902
2,770
1,202
82,411
3,360
1,202
86,015
3,900
1,202
91,907
4,120
1,200
93,725
4,120
1,200
102,454
4,560
1,200
113,559
4,780
1,200
131,603
4,780
1,200
151,530
4,780
1,200
168,255
4,780
1,200
178,342
4,780

Hydro
29,507
30,942
32,326
34,654
35,909
36,878
36,863
37,567
38,990
39,491
40,531
40,867

Others
2,488
3,811
6,191
7,761
11,125
13,242
15,521
18,455
24,503
27,542
29,463
31,692

Total
112,684
118,426
124,287
132,329
143,061
147,965
159,398
174,361
199,877
223,343
243,029
255,681

Addition Thermal PLF

72.7
5,742
74.8
5,861
73.6
8,042
76.8
10,732
78.6
4,904
77.2
11,433
77.5
14,963
75.1
25,516
73.3
23,466
70.1
19,686
65.6
12,653
65.1

Source : CEA,I-Sec research

Capacity additions in FY14 is mainly driven by Coal-based power plant

Future capacity addition targets hinging on adequate supply of domestic coal and having
environment and forest clearances

Marginal cost to decide utilization levels

Merit order of dispatch (PPA + open): variable cost of various supply sources

Source: I-Sec research

For 75% PLF for coal

projects, demand needs
to grow at 9% p.a.
Players with PPA to see
higher PLFs as for them
only variable costs matter
Generator winning coal
block would benefit from
higher fuel availability at
relatively cheaper
variable cost
Given seasonality and
peak / non-peak demand
pattern, complete
cost/capacity optimization
is not possible. Hence,
gas and other expensive
plants would operate at
low PLFs as peak power
projects, which would
impact overall PLFs of
other projects

Higher Power demand Higher merchant rates

Merchant rates have improved on the back of strong power demand growth. In Apr-Oct14,
merchant prices increased ~9% YoY.

Coal availability is critical - Number of plants with less than 7days coal inventory increased
sharply driven by improvement in thermal-PLFs, and slower growth of coal dispatches and cut in
e-auction volumes by CIL

Merchant rates improved

Source : CERC, I-Sec research

No. of coal plants with less than 7 days stock

sharp increase

Source : Coal India, I-Sec research

SEB performance improved despite Industrial slowdown

SEBs losses came down to Rs0.83/unit from Rs0.94/KwHR with Overall losses at Rs 689bn vs
Rs766.3bn on

Sharp tariff hike in FY13 overall ~15% ( TN took 37% tariff hike)

AT&C loss reduction by 1.25% on better collection efficiency

98% subsidy recovery vs 85% in FY12 from state government

Industrial consumption dropped from 33.1% to 30%in line with industrial slowdown (Adverse mix
Impact on SEB losses Rs 35bn)

Four states Rajasthan, UP, AP and TN accounted for 78.5% of losses in the system

Loan from bank/FIs and bondsgrew 18% to Rs 4541bn : 5-6% of total India credit

Increase in capex Rs711bn in Fy12 to Rs843bn in Fy13 ( 18% capex growth)

Aggregate book losses (on accrual basis)

Source PFC

Region-wise AT&C losses (%)

10

SEBs financial health can be improve only if financial /

operational discipline is maintained
Profitability statement of discoms
(Rs bn)

FY11

FY12

FY13P

FY14P

FY15E

FY16E

704

763

795

843

929

1,024

26.0%
521

26.6%
560

25.4%
593

24.4%
637

23.9%
707

23.4%
785

FY17E Comments
1,122 Based on historical proportion of Discom proportion as % of
India generation
22.9%
865

2,287

2,676

3,176
12.0%
6.0%

3,617
6.0%
7.5%

4,306
7.0%
10.9%

5,177
8.0%
11.0%

6,183 Based on tariff and volume increase

8.0% Actual as per tariff hikes till FY14, assumed thereafter
10.2% Derived based on realised power growth

203

361
40%
(245)
-191%
3,782
42%

379
5%
70
-129%
3,927
4%

398
5%
78
11%
4,627
18%

418
5%
86
11%
5,509
19%

439 FY13 Actual, assumed thereafter

5%
95 FY13 Actual, assumed thereafter
10%
6,527
18%

Discom Input of power(mu)

AT&C losses
Realised power(mu)

Revenue w/o subsidy(Rsbn)

Tariff increase
Volume increase

Tariff hikes a
must to
achieve cash
profits (precapex)

Subsidy received
Growth
Unrealised revenue
Growth
Cash Revenue
Growth

2,323
16%

258
27%
270
64%
2,663
15%

Total expenditure
Growth

2,918
19%

3,621
24%

4,140
14%

4,702
14%

5,377
14%

6,195
15%

7,075 FY13 actual, rest derived

14%

Total Expenditure
(Excluding int. & dep. )

2,674

3,317

3,769

4,276

4,995

5,727

6,524 Derived based on inflation and volume

84

93

113

128

143

160

160

211

258

298

239

307

(461)
(584)

(875)
(955)

(256)
(975)

(661)
(1,098)

(622)
(1,086)

(544)
(1,036)

271

280

323

332

355

384

(732)

(1,154)

(580)

(992)

(978)

(929)

165

Depreciation
Interest
Realised cash profit
Reported Discom Loss

Capex gap in
funding to be
there, filling it is
imperative for
improvement in
finances

Discom capex
Cash deficit Post Capex

Source : PFC, SEBs, I-Sec research

11

178 FY13 actual, thereafter based on Capex estimates

Assumed external funding at 10% State funding Free,
372 weighted cost 7%. FRP loan transfer assumed in FY15.
(392)
(914)
413 FY13 actual, assumed based on revenues
(805)

..however, SEB Tariff hike picture is not so optimistic in FY15

Tariff hike %
State

% of India
demand

FY12A

FY13A

FY14A

Delhi

2.6%

27

28

8.3

Haryana

4.2%

19

13

Punjab

4.7%

12

2.7

Rajasthan

5.7%

20

19

11

UP

9.1%

18

8.9

Chhattisgarh

1.7%

14

18

15.0

Gujarat

9.2%

Madhya Pradesh

5.2%

Maharashtra

12.5%

10

16

Andhra Pradesh

10.0%

12

23

15

Petitioned

Karnataka

6.7%

5.8

Kerala

2.2%

30

24.0

Tamil Nadu

9.2%

37

15.0

Bihar

1.6%

17

12

Orissa

2.6%

25

12

West Bengal

4.3%

13

Petitioned

Himachal

0.9%

12

13.1

13

Uttarakhand

1.1%

5.7

93.3%

7.2

15.4

6.7

Total

FY15A/P FY15 Comments

Increase tariff to meet revenue gap.
No tariff increase proposed by DISCOMs for FY15. Raised power tariffs for a section of industrial users (2 lakh out of a total 50
lakh power consumers) but the increase has been offset by other measures. There will be no impact on domestic, tubewell and
small, non-domestic consumers.

Marginal tariff hike to meet revenue gap for FY15

Petitioned Petition for tariff revision is under process
Five DISCOMs in UP have sought rate hike from 9.25% to 11.78%. Besides, the incremental slabs that increase rates for
individual consumers are also proposed to be re-jigged, which would again increase power bills.
Commission arrived at cumulative revenue gap of Rs8.07bn for FY15 and revise tariff schedule to fund the gap.
Projected surplus for FY15 but tariff (for UGVCL, DGVCL, MGVCL and PGVCL) did not reduced as there are certain changes
likely in the energy sales of high value consumers due to Open access, uncertainty in the sale of surplus power in the market
and probility of increase in tariff pertains to Mundra UMPPs.
DISCOMs didn't seek for tariff hike and expect to improve operational efficiency by way of reduction in technical and commercial
losses as a result of the various capital investments undertaken in recent years.

Petitioned Commission directed MSPGCL to submit mid-term review petition by Nov'14. Granted interim relief to MSEDCL worth Rs
50.22bn for the period of Mar'14 to Feb'15, which shall be recoverable as interim charge.
Petition for tariff revision is under process
KERC hiked average tariff by Rs 0.32/u (vs Rs0.66/u proposed by escoms) ranging from Rs 0.10/u to Rs0.50/u for different
categories of consumers other than Irrigation Pump Sets and Bhagya Jyothi / Kuteer Jyothi households.
Hiked tariff by 24% for domestic consumers from 16th Aug14
TNERC suo-motu hikes electricity tariff by 15% (vs 21.1% proposed) for all the category of customers. The State government
will absorb tariff hike for the customer consuming electricity up to 500KwHR bimonthly, while the free power supply would
continue for hut, handloom, power loom, agriculture and places of worship
T&D losses (~40%) were disalowed as huge investments are being made to replace worn out conductors and to strengthen the
network, and surplus of FY13 worth Rs12.7bn is adjusted. Hence revenue gap at existing tariff came at Rs1.02bn.
DISCOMs have proposed to reduce the revenue gap through revision in Retail tariff, reduction in BST and/or Govt. subsidy or
combination of any of these measures. However, Commission do not revise tariff but ask DISCOMs to identify high loss prone
areas (distribution loss is >30%) and engage revenue sharing model franchisees.
WBSEDCL has sought a 2 paise reduction in average tariff for FY15 due to the expected increase in internal efficiency.
Realigned for certain category upto 30paise/unit but no major revision in tariff
UPCL expect revenue deficit worth Rs8.16bn for FY15 which necessitates a tariff hike of 19.42%. However Commission doesn't
hiked tariff but asked UPCL to take immediate action in reducing the unmetered/ghost/electromechanical meters/NA/NR/IDF
cases which are impacting commercial & financial viability.

Source: SERCs, SEBs petition, I-sec Research

12

Sector/ Stock Calls

13

Investment Determinants?

View on

Reforms: Impact of SEB restructuring, Bailouts of unviable PPA, fast tracking of

clearances

Coal India production and realisation growth and coal availability

Merchant prices

Imported coal prices

INR appreciation/depreciation

Gas availability

14

Coal India

Governments move of lowering e-auction volumes is a dampener, however, the company

may contemplate a price hike in the supply of FSA (85%of volumes) coal to offset the same.

Lower volumes in e-auction can further provide a fillip to realisations (already showing
improvement)

The diktat of lowering volumes may not be fully implementable as e-auction coal is
often sold on as is where is basis and there many not be usable by power companies

Ground feedback suggests 30-50% improvement in e-auction realisations

Recent coal mine cancellation event can improve profitability in the short term as the
company is expected to operate mines post Mar15.

Clarity over method, profit sharing and time period is not available and best case
scenario is Rs24bn addition to profit (Rs400/te for 60mnte coal) but modalities of the
operation and profit sharing need to be clear

Reforms such as splitting Coal India may have mixed results as higher focus on production
growth at the subsidiaries level would help, but at the same time splitting of company may
lead to internal competition so far as pricing is concerned

We assign BUY rating on Coal India with a price target of Rs 420/share based on 7.5x
FY17E adjusted EV/EBITDA multiple

Key risks: i) Lower than expected production growth, and ii) Less than meaningful
improvement in e-auction realizations.

15

Coal India Financial snapshot

Key assumptions
Particulars
Sales volumes (mnte)
Production volumes (mnte)
Average realisation (Rs/te)

FY15E
492
486
1,477

FY16E
526
520
1,507

FY17E
560
555
1,535

40.9
21.6
30.8
20.8

39.5
23.0
31.9
21.4

38.6
23.4
31.1
20.9

Employee cost as % sales

EBITDA margin (%)
PBT margin (%)
PAT margin (%)

Financial Snapshot
Year to March
Revenue (Rs mn)
Rec Net Income (Rs mn)
DREPS (Rs)
% Chg YoY
P/E (x)
P/BV
EV/E (x)
Dividend Yield (%)
RoCE (%)
RoE (%)

FY14
688,100
151,116
23.9
(12.9)
15.9
32.3
9.6
7.6
35.5
35.6

FY15E
725,905
150,685
23.9
(0.3)
16.0
32.6
9.4
4.5
33.3
33.5

FY16E
791,833
169,770
26.9
12.7
14.2
36.5
10.0
5.0
35.3
35.4

FY17E
859,159
179,267
28.4
5.6
13.4
38.7
9.0
5.3
35.0
35.1

Valuation summary
Particulars (Rs mn)
EBITDA
Add: OB removal and other operating income related adjustments
Adjusted EBITDA
EV/EBITDA multiple on FY17
EV (FY17)
Net cash (Average FY16)
Equity value
No. of shares
Fair value (Rs/sh)

FY15E
156,930
58,501
215,432

FY16E
181,774
63,702
245,476

FY17E
201,320
67,927
269,247
7.5x
2,019,349
630,909
2,650,258
6,316
420

16

NTPC

After the negative surprise on the regulatory norms change, NTPC has been unscathed in the
recent coal block de-allocation event.

The petition of NTPC on the matter of difficult operating norms under the new regulatory regime is
sub-judice.

Impact of fuel charges on the received basis will be key

Under a scenario of better power demand, NTPC stands to gain on PLF linked incentives a
change in norms for the period FY15-FY19, which were earlier linked to availability of the power
plants.

Increase in PLFs can help stem the decline in profitability under the new norms to an extent as
the quantum of incentive (Rs0.5/unit) is significant.

Further, while NTPC is witnessing challenges over the development of its captive mine,
satisfactory development in other coal mines to assuage concerns.

With close to 14GW of capacity addition in the 12th Plan period, NTPC can witness decent growth
in profitability in FY16/FY17.

We assign HOLD on NTPC with a price target of Rs147/share based on a P/E of 11x FY17E EPS

Key risks : i) higher than anticipated impact of the new CERC norms, and ii) slow progress in
development of allocated mines

17

NTPC Financial snapshot

Financial Snapshot
Year to March

FY14

FY15E

FY16E

FY17E

Revenue (Rs mn)

766,403

804,494

886,799

950,305

Net Income (Rs mn)

109,703

86,503

101,586

110,470

EPS (Rs)

13.3

10.5

12.3

13.4

% Chg YoY

(0.2)

(21.1)

17.4

8.7

P/E (x)

10.7

13.6

11.6

10.7

CEPS (Rs)

19.0

17.0

19.8

21.5

EV/E (x)

9.4

10.2

8.7

8.0

Dividend Yield (%)

4.0

2.9

3.3

3.5

RoCE (%)

9.1

7.4

8.3

8.7

13.2

9.8

10.9

11.2

RoE (%)

18

Power Grid Corporation

While Powergrid (PGCIL) is a derivative on the power demand play, we believe the
company should see healthy earnings growth on the back of strong execution and
capitalisation.

Completion of large capex projects can significantly provide a bump in capitalisation and aid
accrual to regulated equity in FY15 and FY16.

Management expects to capitalise Rs70bn in Agra- North-East UHVDC project and total
capitalisation in FY15 could go upto Rs 220-230bn (Street Estimate ~Rs180bn)

Diversification in verticals such as distribution management, smart grids and green

corridors to provide long-term growth visibility.

Change of deferred tax accounting policy can aid reported earnings by almost 8-9%

We have BUY rating on PGCIL with a price target of Rs170/share based on PER of 13x
FY17E EPS

Key risks: i) slower than expected capitalisation, and ii) earlier than expected dilution to
fund incremental capex

19

Power Grid Financial snapshot

Capex and capitalisation (Rs bn)
Capex
Capitalisation
Capitalisation rate

FY10
68.1
27.7
41%

FY11
104.2
69.7
67%

FY12
161.7
117.3
73%

FY13
206.2
154.7
75%

Financial snapshot
Year to March

FY14

FY15E

FY16E

FY17E

Revenue (Rs mn)

151,527

176,763

206,379

234,548

Net Income (Rs mn)

44,974

52,381

59,564

68,612

8.6

10.0

11.4

13.1

% Chg YoY

(5.0)

15.9

13.7

15.2

P/E (x)

17.0

14.7

12.9

11.2

CEPS (Rs)

16.3

19.4

22.5

26.0

EV/E (x)

12.6

11.5

10.3

9.4

Dividend Yield (%)

1.8

1.8

1.8

1.9

RoCE (%)

6.1

6.7

7.0

7.2

14.9

14.4

14.8

15.2

EPS (Rs)

RoE (%)

20

FY14E
223.0
159.0
71%

FY15E
190.0
200.0
105%

FY16E
178.5
199.0
111%

FY17E
187.4
197.9
106%

Tata Power

The honorable supreme court staying theAPTEL order of paying the compensatory tariff for
the Mundra UMPP prospectively (starting from March 2014) till the completion of hearing is a
negative. Recently, SC stayed APTEL proceedings and has decided to hold fresh hearing.

Litigation was expected in the judgment and it may be some till actual cash flows start coming to the
company

SC judgement on coal block allocation highlights that SC favours legal angle of the case than
the economic viability. Reduces the possibility of bailout being allowed by SC eventually as
the bailout is based on economic reasoning and may not have strong legal argument

Mundra operating performance is expected to improve but given that the bailout is to be
reviewed every third year, there could be some benefit sharing with SEBs as well.

Supreme court order of cancellation of coal blocks, brings uncertainty over two coal based
projects of the company. While we were not assigning any vale to the same, it is a
sentimental negative

Stake sale in Arutmin and timely rights issue to help in repairing the balance sheet and the
company would be growth-ready (Debt/Equity to 1.4x FY16). Further, reversal of impairment
provision at Mundra can improve net worth.

Exposure to global coal assets in the current scenario of weak coal prices is not very positive.

We have ADD rating on Tata Power with a price target of Rs88/share based on SoTP and
discount of 50% of value of bailout to factor in the possible delay

Key risks: i) prolonged litigation for bailout of Mundra, ii) further decline in global coal prices
21

Tata Power Financial snapshot

Financial Snapshot
Year to March

FY14

FY15E

FY16E

FY17E

356,487

364,592

383,282

389,605

5,291

8,268

21,604

21,330

DEPS (Rs)

2.2

3.0

7.7

7.6

% Chg YoY

Revenue (Rs mn)

Net Income (Rs mn)

(44.4)

32.4

161.3

(1.3)

P/E (x)

42.2

27.8

10.6

10.8

CEPS (Rs)

13.7

11.9

16.0

16.2

EV/E (x)

7.6

6.3

5.3

5.0

Dividend Yield (%)

1.5

1.7

1.7

1.7

RoCE (%)

3.6

4.4

7.7

7.4

RoE (%)

4.7

5.9

12.4

11.2

Tata Power SOTP valuation summary

Entity
Standalone(Mumbai, Haldia, Renewables, IPP)
Bumi and Mundra
Maithon
IEL
NDPL
Powerlinks
Power trading
Cash, investments net of unallocated debt
Discount to factor delays in bailout
Compensation for bailout
Total value
Source : I-sec Research

Method
P/E of 10x FY17E +
Regulatory assets
FCFE (15% and 12.5%)
FCFE (Disc rate 12.5%)
FCFE (Disc rate 12.5%)
PE of 8x FY17E
FCFE (Disc rate 12.5%)
PE FY17E 10x
FY15E
50% of value of the bailout

*considered FY14 reported numbers

22

Value
(Rs mn)

Stake (%)

Value for
TPWR

Per
share (Rs)

139,402

100

139,402

50

151,539
28414
6151
22,739
11,019
3,817

30 &100
74
74
51
51
100

76,293
21,026
4,552
11,597
5,620
3,817

27
8
2
4
2
1
3
(11)
2
88

PTC India

PTCs business model is most aligned to sharp revival in the power sector demand through:

Reducing risk of open contracts as the PTC will be able to lock in more open capacity in
PSA with improving demand

More supply under long-term PPAs to help improve margin as the long-term contracts
typically have higher margin than short term and exchange based contracts.

Volume growth in the power sector to aid the trading business volumes.

Improving power sector health would ease monetise minority stakes in various power
projects at attractive values

Power sector reforms to help timely project execution for both investment projects and project
wherein company has PPAs.

We have BUY rating on PTC, with SoTP-based target price to Rs144/share, valuing the
standalone operations at 10x FY17E EPS and investments in PFS at 40% discount to market
value, and other investments at 0.8x FY14 P/BV

Key risks: i) risk of contractual obligations, as PPA quantum is higher than for PSAs, ii) delay
in realisation of dues from SEBs (TN SEB outstanding dues of ~Rs2.6bn), iii) deployment of
cash in long-gestation / low-RoE projects, and iv) delay in project completion/monetization

23

PTC India Financial snapshot

Volumes and margins assumptions
FY15E
40,777
1,963
42,740
0.043
0.25

Trading volumes (mu)

Tolling converted segment (Simhapuri and Meenakshi PPA) (mu)
Total volumes (mu)
Trading volumes margins (Rs/u)
Tolling converted segment (Simhapuri and Meenakshi PPA) (mu)

FY16E
59,205
2,103
61,308
0.044
0.15

FY17E
70,377
2,103
72,480
0.043
0.10

Financial Snapshot
Year to Mar
Revenue (Rs bn)
Adjusted NI (Rs bn)
DEPS (Rs)
% Chg YoY
P/E (x)
CEPS (Rs)
EV/E (x)
Dividend Yield
RoCE (%)
RoE (%)

FY14
115,107
2,469
8.3
91.8
11.1
8.5
7.1
2.2
10.0
9.8

FY15E
141,580
2,138
7.2
(13.4)
12.9
7.4
8.4
2.2
8.1
8.0

FY16E
200,272
2,589
8.7
21.1
10.6
8.9
6.6
2.4
9.1
9.1

FY17E
235,603
2,801
9.5
8.2
9.8
9.6
5.9
2.6
9.2
9.2

PTC SoTP values comes at Rs144/sh

Rs (mn)

Value /sh

2,464

8.3

10x

10

Standalone value

24,635

83

Investment in PFS (40% discount to market value)

14,224

48

3,736

13

42,595

144

Particulars
PTC FY17 avg. adjusted stand-alone EPS*
P/E multiple (x)

Strategic investments (0.8 x FY14)

Value per share (Rs/sh)
Source: I-Sec research

* ex-dividend from subsidiary

24

CESC

Growing annuity business:

Continuous growth of regulated businesses (regular annual capex of Rs6-8bn in Kolkata discom)

Haldia (600MW) to boost regulated return business on recurring basis.

Further improving power demand in India creates opportunity for tying-up capacity of Chandrapur
(600MW) and possibility of tying up supply with Noida power (sister concern) under regulated
model from Chandrapur would further enhance regulated return businesses

Turnaround in non-power businesses to lead value creation

Turnaround of Firstsource (Stock more than 3.5x since acquisition)

Improving operating parameter of Retail business Spencers is creating value and revenue
stream out of idle real estate is further boosting profitability

Sharp earnings growth ahead:

Growth in power segment through augmentation of 1.2GW capacity and turnaround of nonpower business would lead to sharp earnings growth for the company and the company is likely
to see earnings CAGR of ~35% between FY14-17

We have BUY on CESC with SoTP-based target price of Rs900/share

Key risks: i) low coal availability and penalty pertains to coal mining for Haldia plant (coal block deallocated and penalty imposed), ii) coal availability for Chandrapur plants (transfer of coal linkage
disallowed by the Coal ministry) and delay in locking PPA for remaining 500MW, iii) delayed
turnaround in retail operations, and iv) expensive acquisition of power assets or further expansion in
non-related businesses

25

CESC Consolidated financial snapshot

Consolidated Earnings
Consolidated profit

FY12

FY13

FY14

FY15E

FY16E

FY17E

Standalone
Haldia , Chandrapur and Holding company

5,543
(333)

6,185
(312)

6,519

6,878

7,189

7,509

(2,554)
(12)
(329)

(2,091)
(18)
(432)

(765)
(1,658)
(199)

(3,664)
(966)
105

2,928
(247)
224

3,041
250
237

Spencers
Realty
Music World & Au Bon

(162)

(162)

(162)

(162)

303

1,081

1,255

1,352

1,646

143

959

2,459
19.6

4,594
36.6

101
4,916

3,447

11,284

12,520

36.9

25.9

84.7

94.0

FSL
Eliminations & Other subsidiaries
Consolidated
EPS

SOTP Valuations
Entity
Standalone operations
Chandrapur 600MW
Haldia 600MW
Retail (Spencers)
FSL
Real estate (Quest)

Methodology
12x FY17 Standalone earnings
P/BV 1x (PPA to be signed)
P/BV 1.3x ( regulated business on
full invested basis)
EV to sales at 50% discount to
Pantaloon
based on market cap
10x FY17 adjusted

Stake
(%)

Value
(Rs mn)

Value/share
(Rs)

100.00
100.00

90,104
8,875

676
67

100.00

13,650

102

100.00
56.86
100.00

5,888
12,698
2,000

44
95
15

Conglomerate discount (10%)

100

Total

900

Source: I-sec Research

26

Adani Power

Supreme courts order on staying the compensatory tariff payment is negative. The company had
already started accounting for the same. Recently, SC stayed APTEL proceedings and has decided
to hold fresh hearing.

Going by SC judgment on coal block allocation, the bailout appears to be on weaker footing as and
when it reaches SC.

Adani Power has got bailout for fuel cost for its various unviable PPAs and it has applied for bailout
for increase in fixed cost on account of higher project cost and INR depreciation which is under
evaluation

Key concerns around fuel cost bailout

Current high fuel cost should come down and that will bring down the element of
compensation tariff

Despite fuel cost bailout , the projectis still not making profit

Litigation around fuel cost bailout is ongoing and there is uncertainty w.r.t. to the final judgment

The company should benefit from merchant power exposure (~15% of portfolio) in power sector
demand revival and that should help in overall utilisation and should aid profitability

Win in mine auctions (as and when they happen) at decent valuation have the potential to address
fuel concerns.

We have SELL on Adani Power with a price target of Rs35/share as the stock price already reflects
bailout and improvement in power sector fundamentals

Key upside risks: i) speedy judgment on bailout from unviable PPAs, ii) equity dilution at attractive
prices boosting financials, and iii) higher plant utilisation
27

Adani Power: Financial snapshot

Financial Snapshot
Year to March
Revenue (Rs mn)

FY14E

FY15E

FY16E

FY17E

157,540

192,659

223,010

227,620

(2,906)

(2,256)

11,909

15,660

DREPS (Rs)

(1.0)

(0.8)

4.1

5.5

% Chg YoY

(89.6)

(22.4)

(627.9)

31.5

P/E (x)

(46.4)

(59.8)

11.3

8.6

2.1

2.1

1.8

1.7

12.0

8.5

6.8

6.3

8.5

Rec Net Income (Rs mn)

P/BV
EV/E (x)
Dividend Yield (%)
RoCE (%)
RoE (%)

1.1

6.1

8.7

9.4

(5.4)

(3.5)

17.2

20.5

Adani Power SoTP valuation summary

Project
Mundra
Tiroda
Kawai
Transmission business
(now demerged)
Cash FY15
Project creditors
Total
Bailout compensation for
FY13-FY14
50% discount to bailout to
factor possible delays
Total value

Capacity
(MW)
4,620
3,300
1,320

CoD
FY11-FY13
FY13-14
FY14

Cost of
equity (%)
13.0
13.0
13.0

FY13

14.0

Value
(Rs mn) Stake (%)
64,809
100
4,917
100
100
28,213
22,564

100

Value/share
(Rs)
22.6
1.
9.8
7.9
5.7
(7.5)
39.5
3
(8)
35

Source : I-sec Research

28

JSW Energy

JSW Energy (JSWEL) stands to benefit from uptick in power demand especially in the South wherein it has
sizeable merchant capacities (36% of total capacity).

Recent coal block allocation event could potentially drive merchant prices and JSW stands to be a key
beneficiary

JSWEL to agreed to acquire JPVLs hydro assets (300MW Baspa II and 1091MW Karcham Wangtoo) at
reasonable valuation EV of Rs97bn.

Valuation of ~1.8x to invested equity appears largely fair for operational assets

Value accretion for JSWEL will mainly depend upon i) Decline in interest rates ((a 100bps drop in interest rate will increase
FY17E EPS by 8%), ii) increase in merchant rate (176MW of Karcham Wangtoo increase by Rs.0.50/KwHr will increase
FY17E EPS by 3.2%), iii) clearing regulatory hurdles for Karcham Wangtoo project.

Recent allowance of extra mining from the one operational lignite mine of the Barmer project assuages concern
over the underutilization of the project.

We believe, despite the onset of transmission capacity in South India and linkage with the rest of the countrys
grid network, power demand would be steady in the region in the event of pickup of industrial demand

With ~4GW of transmission capacity to be added in the South, a mere 8% increase in supply would lead to
the new capacity to be fully utilised.

We have HOLD rating on JSW Energy with a price target of Rs94/share.

Key risks: i) Low PLF environment coupled with muted merchant realization, ii) increase in landed imported fuel
prices, and iii) acquisition of further assets will increase risk of dilution.

29

JSW Energy: Financial snapshot

Financial snapshot
Year to March
Revenue (Rs mn)
Rec Net Income (Rs mn)
DREPS (Rs)
% Chg YoY
P/E (x)
P/BV
EV/E (x)
Dividend Yield (%)
RoCE (%)
RoE (%)

FY14
87,054
10,569
6.4

FY15E
94,552
12,518
7.6

FY16E
97,690
14,013
8.5

(3.9)
17.1
2.7
8.2
1.8
12.0
16.5

18.4
14.4
2.4
7.6
1.8
13.0
17.9

11.9
12.9
2.1
7.0
1.8
13.4
17.6

FY17E
101,275
14,939
9.1
6.6
12.1
1.9
6.5
1.8
13.5
16.6

JSWEL SoTP valuation summary

Project
Vijayanagar (SBUs 1 &2)
Ratnagiri-1
Barmer-1
Jaigad transmission
Kutehr Hydro
Cash in hand end FY15E

Capacity
860
1,200
1,080
580 CKm
160

Status
Operational
Operational
Operational
Operational
FY17-18

Cost of equity
(%)
13
13
13
13
1x FY15 BV

Coal creditors above three

months of consumption
Total value

Value for
JSWEL
56,247
59,519
20,825
1,985
1,511
18,616
(4,473)
154,209

Source : I-sec Research

30

Value
(Rs/ share)
34
36
13
1
1
11
(3)
94

Reliance Power

While the continuation of mining from captive coal blocks associated with the Sasan UMPP is
a respite, there is uncertainty over the diversion of excess coal from these mines. The excess
coal was a key value driver for its cash cow project (Chitrangi/Sasan Expansion), which is now
in a limbo.

Key issues for Reliance Power (RPWR) is not from demand but from systemic issues such as:
i) Gas availability, ii) Tariff revision of existing project (Sasan UMPP), and iii) Clearances/land
acquisition clarity (for Tilaiya UMPP and Chitrangi/Sasan Expansion projects).

While one can factor faster clearances and can fathom timely execution of the projects under
the new government, concerns regarding other systemic issues remain.

Execution by the company has been steady on the under-execution projects and the company
is expected to reach 6GW of generation capacity by 2014-end.

We have HOLD rating on Reliance Power with SoTP-based target price of Rs58/share.

Key risks: i) Availability of cheap gas for the Samalkot project, and ii) Tariff revision of the
Sasan UMPP giving higher than expected returns 3) coal diversion from Sasan project for
other projects

31

Reliance Power: Financial snapshot

Financial snapshot
Year to March
Revenue (Rs mn)

FY14
51,748

FY15E
74,925

FY16E
97,194

FY17E
97,292

Net Income (Rs mn)

EPS (Rs)
% Chg YoY
P/E (x)
CEPS (Rs)
EV/E (x)
Dividend Yield (%)
RoCE (%)
RoE (%)

10,267
3.7
1.8
17.2
5.0
22.2
3.4
5.4

6,873
2.5
(33.1)
25.6
5.9
17.1
3.2
3.5

8,362
3.0
21.7
21.1
8.9
11.3
3.9
4.1

11,983
4.3
43.3
14.7
10.2
12.7
4.5
5.5

Reliance Power SoTP valuation summary

Particulars
Sasan
Rosa (all phases)
Butibori
Tilaiya
Chitrangi
Samalkot
Solar and others renewables
Subtotal
Cash adjusted for unallocated debt
Total

Size
(MW)
3,960
600
600
4,000
3,960
2,400

CoD
Q4FY13-Q3FY15
Operational
Operational
FY18
FY18

Cost of equity (%)

/Valuation
14.0
13.0
13.5
15.5
16.5
0.3x BV as option
value
1x BV

Source : I-sec Research

32

Value
(Rs mn)
28,194
28,103
14,509
28,645
38,622

Valuation
(Rs/share)
10
10
5
10
14

6,000
8,700
2,23,954
11,015
2,38,915

2
3
54
4
58

Thanks

33