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1/31Pleaserefertothedisclaimertowardstheendofthedocument.

IndiaEquityResearc

Utilitie

May02,2012

UtilitiesTurningpointmaybegettingcloser

SectorReport Reforms are likely to be undertaken in FY13f to revive the Indian

power sector. If left unchecked, annual losses of all stateleve

distributingcompanies

are

likely

to

reach

1.2%

of

the

GDP.

Likely

tarif

hikesbyDISCOMsneedtobesupplementedbymeasuresthatwould

ensureasteadycoalsupplytothenewthermalgeneratingcapacityo

c7GW at a stable and reasonable price. The benefits of such reform

and expected firming up of merchant tariffs are likely to improve

earnings from FY14. Even with the wellknown stress, the consensu

forecasts for the power companies FY13 and FY14 earnings growth

exceedthatoftheNifty.This is likelytopreservethepremium inthe

P/EovertheNifty.WeinitiatecoveragewithBuyratingsonNTPCand

ADANI,anAddratingonTPWRandaHoldratingonJSW.

Compellingcase

for

next

phase

of

reforms

in

FY13

If there are no reforms, DISCOM losses, as a percentage of the nominal GDP

arelikelytoreach1.2%byMar14f,aswaswitnessedearlierbetweenFY99and

FY02. As of Dec11, cINR1,627bn, i.e., 32% of the banks, POWF and RECL

exposure to the power sector faces risk. As crisis reaches a tipping point, the

next set of reforms may be initiated; this is visible with the Shunglu

committees report submission, and the presidential directive to Coal India

(COALIN,Add)tosignFSAs.

Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore

DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13f

FY14ftobridgethenetgap.DISCOMsmaybeabletoraisetheARRperunitby

aCAGRof11%inthenextthreeyears.Whilethismayreducelossesto0.8%o

thenominal

GDP

in

FY14f

from

1.0%

in

FY12f,

the

breakeven

may

need

more.

Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears

Progressonminingatallocatedcaptivecoalblockswasslowduetothego,no

gopolicyoftheMinistryofEnvironment.Thelastsixmonthsrevealsomesign

of the policys removal, but coal extraction may only begin after two years

Capacityof45GWwasapprovedin200610withfuelsuppliesfromthesecoa

blocks,andc7GWmaybecompletedinFY13andFY14.

OutlooklikelytoimproveforearningsfromFY14f

FY14fearningsofprivateutilitieswith largepipelinesmay improveduetothe

likely increase of lowercost domestic coal supply and rise in merchant tariff

forasmallperiodduetotheelectionsscheduledin1H2014.Companiessucha

NTPC and TPWR are relatively protected as a large part of their revenues are

shieldedfromcostincreases.Thestructuralimprovementinprofitabilityarising

fromanticipatedreformsmaybevisibleafterFY14f.

HigherearningsgrowthmaypreservepremiumoverNifty

Consensus forecasts for the power companies FY13f and FY14f earning

growthexceedthoseoftheNifty.Thisislikelytopreservethepremiumofthe

power indexovertheNifty.We initiatecoverageonNTPC(Buy),ADANI(Buy)

TPWR (Add) and JSW (Hold). Risk factors include a higherthanexpected

domesticcoalproduction.

AdaniPower

Rating

CurrentMarketPrice

TargetPrice

BloombergCode

Reuterscode

Avg.Vol.(3m)(mn)

Avg.Val.(3m)(INRmn)

52wkH/L(INR)

MCAP(INRbn/USDbn)

JSWEnergy

Rating

CurrentMarketPrice

TargetPrice

BloombergCode

Reuterscode

Avg.Vol.(3m)(mn)

Avg.Val.(3m)(INRmn)

52wkH/L(INR)

MCAP(INRbn/USDbn)

NTPC

Rating

CurrentMarketPrice

TargetPrice

BloombergCode

Reuterscode

Avg.Vol.(3m)(mn)

Avg.Val.(3m)(INRmn)

52wkH/L(INR)

MCAP(INRbn/USDbn)

TataPowerCo.

Rating

CurrentMarketPrice

TargetPrice

BloombergCode

Reuterscode

Avg.Vol.(3m)(mn)

Avg.Val.(3m)(INRmn)

StockChart(RelativetoSensex)

MCAP

(INRbn/USDbn)

Valuations

ADANI

JSW*

NTPC

TPWR

Hold

3.79

2.09

Buy

208

8.2

10.4

8.2

160

81

Buy

JSWE.BO

50

240

82.49/1.56

46

JSWIN

79.9/35.8

NTPCIN

NTPC.BO

192/152

P/E(x)

10.3

91.3

138.11/2.61

ADANIIN

ADAN.BO

119/59.3

653

63

8.61

9.2

13.7 13.5

48.5 12.3

13.4 12.8

03/12f

363

1,318/24.89

EV/E(x)

03/13f03/12f

Add

103

118

TPWRIN

10.2 9.3

244.55

/

4.62

TTPW.BO

5.23

565

136/80.2

03/13f

6.8

23.5

Note:* For JSW, ratios for 03/12 are on actual

numbers.

AbhayMoghe,+9102266842857

[email protected]

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India Equity Research Utilities

Utilities

2

Investmentsummary

Reforms that are necessary to rejuvenate Indias power sector may finally be undertaken in FY13. If left unchecked,

annuallossesofallstateleveldistributingcompaniesarelikelytoreach1.2%ofthegrossdomesticproduct(GDP).The

needtodefusealoomingcrisisthatcouldaffectseveralsectorswithintheeconomymaycatalyzeaseriesofstepsthat

canrestoretheviabilityofproducersandreducerisktolenderswithalowimpactonconsumers.Tariffhikesneedtobe

supplementedbymeasuresthatwouldensureasteadycoalsupplytothenewthermalgeneratingcapacityofc7GWat

a stable and reasonable price. Two elements in this effort are the supply from Coal India (COAL IN, Add) and

developmentofcaptivemines.Thebenefitsofsuchreformsandexpectedfirmingupofmerchanttariffs,are likelyto

improveearningsfromFY14.Evenwiththewellknownstress,theconsensusforecastsforthepowercompaniesFY13

and FY14 earnings growth exceed that of the Nifty. This is likely to preserve the premium in the P/E over the Nifty.

ProducerssuchasNTPC(NTPCIN,Buy)andTataPower(TPWRIN,Add)withahighproportionofrevenuesattariffthat

providepassthroughoffuelcostshavemorestableearnings.WeinitiatecoveragewithBuyratingsonNTPCandAdani

Power(ADANIIN),anAddratingonTPWRandHoldratingonJSWEnergy(JSWIN).

CompellingcasefornextphaseofreformsinFY13

Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,as

apercentage

of

the

nominal

GDP,

likely

to

reach

1.2%

by

Mar14f,

if

no

reforms

are

implemented.

Such

highlevellosses,asapercentageoftheGDP,wereearlierwitnessedinFY99FY02,whenkeyreforms

pertaining to the bailout of state electricity boards (SEBs) and formation of the Electricity Act were

initiated.Also,thepowersectorcrisismayimpactothersectorssuchasbanks.Ofthetotalloans,50%

loanstotheWIPcapacityand90%toDISCOMsare likelytobeatrisk.AsofDec11,thisamountwas

likelytobecINR1,627bn,i.e.,32%ofthebanks,PowerFinanceCorporation(POWFIN,Buy)andRural

ElectrificationCorporation (RECL IN,Buy)sexposure tothepowersectorthatfacesrisk.Asthe crisis

reaches a tipping point, the next set of reforms may be initiated, including: (1) permitting a pass

through of imported coal costs; (2) increase in tariffs by DISCOMs; and (3) approvals for already

allocatedcaptivecoalblocks.Signsofa likely initiationofthenextsetofreformsarevisiblewiththe

following: (1) submission of the Shunglu committees report addressing measures to improve

DISCOMsfinancialhealth;(2)removalofbasiccustomsdutyon importedcoal;and(3)directingCoal

India(COAL

IN,

Add)

to

sign

fuel

supply

agreements

(FSAs)

for

power

plants

commissioned

by

31Dec11.


Tobridgethewidenednetgap,DISCOMsofkeystatesneedtoraisetariffsataCAGRof13%58% in

FY13fFY14f. However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of

1.9%7.0%inFY08FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradesh

overFY09FY11,weexpectDISCOMstobeabletoraisetheirARRbyaCAGRof11%inthenextthree

years.Whilethismayhelpreducelossesto0.8%ofthenominalGDPinFY14ffrom1.0%inFY12f,the

breakeven may need more. With a CAGR of 11% in ARR, it may take nine years to achieve PAT

breakeven. The 11% increase in power costs may impact the profits of companies in various sectors

suchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupof

BSE500 companies. Some steps were taken by nonstate entities to compel DISCOMs to improve

financialhealth

such

as

preconditions

for

restructuring

loans

and

a

proposal

to

include

DISCOM

losses

intostategovernmentdeficitsaswellasaskingSERCsforasuomotoriseintariffs.


Thermal capacity of about 45GW was approved in 200610 with fuel linkage to undeveloped coal

reserves.Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdle

beingthego,nogopolicythathelduptheMinistryofEnvironmentsapproval.Inthelastsixmonths,

therehavebeensignsthatthepolicyislikelytoberemoved.Evenwiththis,coalextractionmayonly

begin after two years. Of the new capacity linked to captive mines, we estimate c7GW may be

completedinFY13andFY14;companiesmaybecompelledtooperatebybuyingcoalatmarketprices.

Crisisinthepowersector

isreaching

atipping

point

withdistribution

companies(DISCOM)s

losses,asapercentageof

thenominalGDP,likelyto

reach1.2%byMar14f,if

noreformsare

implemented.

The11%increaseinpower

costsmayimpactprofits

ofcompaniesinvarious

sectorsbyc2.5%

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3

SomeutilitiessuchasNTPCandTPWRarelikelytocommenceminingfromcaptiveminesinFY15f.As

perourestimates,capacityofc41GWmaybesupportedbycoalfromsuchcaptivemines.

ChangesunderwaytoexpandprofitabilityfromFY14f

The FY13f earnings of private utilities with large capacity in the pipeline are likely to remain under

pressureduetoINRdepreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts.

Larger and older companies such as NTPC and TPWR are relatively protected as a large part of their

revenuesfromPPAsareshieldedfromcostrises.However,theFY14fearningsofprivateutilitieswith

largepipelinesmayimproveduetothelikelygrowthinlowercostdomesticcoalsupplyandincreasein

merchant tariffs for a small period owing to the elections scheduled in 1H2014. Supply from COAL

wouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobethe

firming up of merchant tariffs preceding the general elections due in 1H2014. The structural

improvementinprofitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f.


Consensus forecasts for the power companies FY13f and FY14f earnings growth exceed that of the

Nifty. This is likely to preserve the recent premium of the power index over the Nifty. The power

indexsrelativeunderperformancetotheNiftyreducedpaceinthequarterendingMar12comparedto

the five consecutive quarters, preceding the last quarter. The power index underperformed Nifty in

Apr12. Earlier underperformance may have been led by the significant drop in the yoy growth in

consensusPATforecastsofthepowerindexinFY12.Thisbroughtgrowthforecastslowerthanthatof

theNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL,

the RoEs may reflect significant variance from ADANI and JSWs base caseforecasts. However, NTPC

andTPWRsRoEsarelessexposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsdue

to a large proportion of installed capacity under tariffs that enable passthrough of fuel costs. We

initiate coverage on NTPC (Buy, INR208), TPWR (Add, INR118), ADANI (Buy, INR81) and JSW (Hold,

INR46).Riskfactorsincludehigherthanexpecteddomesticcoalproductionandprojectdelays.

Exhibit1:CoalbasedcapacityfuelledbyCOAL

0

30

60

90

120

FY10 FY11 FY12f FY13f FY14f FY15f

40

55

70

85

100

GWof

coal

based

capacity

fuelled

by

Coal

India

%ofcoalbasedcapacityfuelledbyCoalIndia

Source:CEA,Company,AvendusResearch

Exhibit2:RelativeperformanceofpowerindextoNifty(%)

14.0

7.0

0.0

7.0

14.0

Jun10(3m) Dec10

(3m) Jun11

(3m) Dec11

(3m) Apr12

Source:Bloomberg,AvendusResearch.

Exhibit3:ValuationssummaryCMP TP Upside P/E(x) P/B(x) RoE(%)

(INR) (INR) (%) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY13f FY14f

NTPC 160 208 30 13.4 12.8 11.2 1.8 1.6 1.5 13.8 13.4 14.1

TPWR 103 118 14 13.7 13.5 17.4 1.7 1.6 1.5 12.6 12.1 8.6

ADANI 63 81 28 91.3 9.2 8.1 2.1 1.7 1.4 2.4 20.9 19.4

JSW* 50 46 9 48.5 12.3 9.6 1.4 1.3 1.2 3.0 11.3 13.2

Source:Company,Bloomberg,AvendusResearch. Note:*forJSWFY12numbersareactual

FY14fearningsofprivate

utilitieswithlarge

pipelinesmay

improve

duetothelikelygrowthin

lowercostdomesticcoal

supplyandincreasein

merchanttariffsfora

smallperiod

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TableofContents

Investmentsummary......................................................................................................................... 2CompellingcasefornextphaseofreformsinFY13 ..............................................................................2Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ...................................................2Hurdles

to

captive

mining

lifting

slowly;

benefits

after

two

years ........................................................2

ChangesunderwaytoexpandprofitabilityfromFY14f........................................................................3HigherearningsgrowthmaypreservepremiumoverNifty..................................................................3

CompellingcasefornextphaseofreformsinFY13 .......................................................................... 5DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902 ..................................................................532%ofkeylendersexposuretopowersectorfacesarisk...................................................................5FY99FY02crisislikelytohaveledtosetofreformsearlier ..............................................................6nextsetofreformsmaycomeinascrisisreachestippingpoint........................................................6Signsarevisibleforlikelyinitiationofnextsetofreforms ...................................................................7

Tariffislikelytogrowdoubledigits,butbreakevenmayneedmore ............................................... 8KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10 .................................................................8TariffCAGRof31%overFY13fFY14fneededtobridgegap ................................................................8Turnaround

may

get

delayed

due

to

lower

than

required

tariff

hikes .................................................9

Somestateshaveincreasedtariffsupto49%sinceApr10.................................................................10StepsinitiatedtocompelDISCOMstostreamlineoperations ............................................................10

Hurdlestocaptiveminingliftingslowly;benefitsaftertwoyears .................................................. 1259%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise.................................................12Captivecoalminingtosupport41GWofWIPcapacity.......................................................................12Approvalsmaypickuppace;butbenefitstokickinfromFY15f.........................................................13

ChangesunderwaytoexpandprofitabilityfromFY14f .................................................................. 14MultiplefactorshaveledtolossesforpowerproducersinFY12f ......................................................14Increaseindomesticcoalavailabilityislikelytoimproveearnings ....................................................16MerchanttariffsmayproviderespiteinFY14f....................................................................................17EarningsgrowthlikelytoreviveinFY14f.............................................................................................19Reform

led

revival

in

earnings

may

start

after

FY14f..........................................................................20

Avendusforecastsvarybetween 31%and20%fromconsensus.......................................................20HigherearningsgrowthmaypreservepremiumoverNifty............................................................ 21

UnderperformanceofpowerindextoNiftycontinuesin2012 ..........................................................21Earningsgrowthlikelytohavebottomedout .....................................................................................21PowerindexmaycontinuetotradeatpremiumtoNifty ...................................................................22Mar14fcapacityunderfixedtariffslikelytobehighestforADANI.....................................................22RoEsofADANIandJSWexposedtomerchantratesandcoallinkages ..............................................23TargetpricebasedonDCFandSOTP ..................................................................................................23InitiatecoverageonNTPC,TPWR,ADANI,JSW...................................................................................24Riskfactors ..........................................................................................................................................25

Annexures........................................................................................................................................ 26Assumptions

for

calculating

banks

exposure

to

power

segments .....................................................26

ExposureofpowerproducerstokeyDISCOMs...................................................................................27ClassificationofWIPcapacity..............................................................................................................28Hierarchyofpreferredfuelsupplyandofftakecombinations...........................................................28Approvalsrequiredbeforecoalproductionbeginsatcaptivemine ...................................................28

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CompellingcasefornextphaseofreformsinFY13

Crisisinthepowersectorisreachingatippingpointwithdistributioncompanies(DISCOM)slosses,asapercentageof

thenominalGDP,likelytoreach1.2%byMar14f,ifnoreformsareimplemented.Suchhighlevellosses,asapercentage

oftheGDP,wereearlierreportedinFY99FY02,whenkeyreformspertainingtothebailoutofstateelectricityboards

(SEBs)andformationoftheElectricityActwereinitiated.Also,thepowersectorcrisismayimpactothersectorssuchas

banks.Ofthetotalloans,50%loanstotheWIPcapacityand90%toDISCOMsarelikelytobeatrisk.AsofDec11,this

amount was likely to be cINR1,627bn, i.e., 32% of the banks, Power Finance Corporation (POWF IN, Buy) and Rural

ElectrificationCorporation(RECLIN,Buy)sexposuretothepowersectorthatfacesrisk.Asthecrisisreachesatipping

point,thenextsetofreformsmaybeinitiatedthatmayinclude:(1)permittingapassthroughofimportedcoalcosts;

(2)increaseintariffsbyDISCOMs;and(3)approvalsforalreadyallocatedcaptivecoalblocks.Signsofalikelyinitiation

ofthenextsetofreformsarevisiblewiththefollowing:(1)submissionoftheShunglucommitteesreportaddressing

measures to improve the financial health of DISCOMs; (2) removal of basic customs duty on imported coal; and (3)

directing Coal India (COAL IN, Add) to sign fuel supply agreements (FSAs) for the power plants commissioned before

31Dec11.

DISCOMlosses,as%ofGDP,mayreachlevelsofFY9902

DISCOMlosses,

as

a

percentage

of

the

nominal

GDP,

have

increased

from

a

low

of

0.6%

in

FY06

to

0.9%

in FY10. Our estimates indicate that DISCOM losses are likely to have gone up to 1% of the nominal

GDPinFY12f.Ifnoreformsarecarriedout,DISCOMlosses,asapercentageofthenominalGDP,may

riseto 1.2%, asof Mar14f. Between FY99andFY02, SEB losses,as apercentage ofthe nominal GDP

surgedhighto1.2%1.5%.Duringthesameperiod,SEBswerebailedout;subsequently,theElectricity

Act2003andTariffPolicywereformulated.Ifreformsarenotimplemented,thetippingpointislikely

tobereachedbyMar14f.

Exhibit4:DISCOMlossesforeachfiscalyear,as%ofnominalGDP,forrespectivefiscalyear(%)

0.0

0.3

0.6

0.9

1.2

1.5

FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E

CLasa%ofNGDP CLasa%ofNGDPiftariffsnothiked CLasa%NGDPiftariffhiked

Source:RBI,PlanningCommission,FinanceCommission,AvendusResearch

32%ofkeylendersexposuretopowersectorfacesarisk

Banks, POWF, and RECL had outstanding loans of INR5,031bn to the power sector, as of Dec11. Of

these, cINR981bn in loans are likely to be for the working capital needs of generation companies as

well as to transmission companies for their capital expenditure and working capital needs. Installed

capacity is likely to owe cINR1,548bn in loans to banks, POWF and RECL. Out of the remaining

INR2,502bn, 50% of the loans to the WIP capacity and 90% to DISCOMs are likely to be at risk. This

amountiscINR1,627bn,i.e.,32%ofthebanks,POWFandRECLsexposuretothepowersector.Forthe

methodologyandassumptionspertainingtotheexposureofbankstovariouspowersegments,please

refertotheAnnexureonpage26.

Ifreformsarenot

implemented,thetipping

pointislikelytobe

reachedbyMar14f.

50%oftheloanstothe

WIPcapacityand90%to

DISCOMsarelikelytobe

atrisk.

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Exhibit5:Shareofvariouspowersegmentsinkeylendersexposuretopowersector(MW,%)

Installed Generation,

1,548,30%

WIP Generation,

1,564,31%

Transmission,850,

17%

Distribution,939,19%

WCloans,130,3%

Source:Company,RBI,POWF,RECL,AvendusResearch.

FY99FY02crisislikelytohaveledtosetofreformsearlier

TheFY99FY02crisisledtotheearliersetofreforms,includingthefollowing:(1)formulationofpolicy

onultramegapowerproject(UMPP)andcompetitivebidding;and(2)allocationofcaptivecoalblocks

totheprivatesector.Thishasboostedprivate investments, leadingtogrowth intheshareofprivate

independentpowerproducers(IPPs)ininstalledcapacityfrom10%,asofMar02,to20%,asofFeb12.

There has been asignificant rise in theWIP capacity ledby the private sector. Currently, 62%ofthe

WIP capacity is beingexecuted by private companies. Keyreforms for the improvement of theSEBs

financialhealthwere:

UnbundlingofSEBsanddivisionoftheiractivitiesintogeneration,transmissionanddistributionConstitutionofaregulatoryregimetodeterminetariffsUpgrades and reforms for the urban distribution network through the introduction of the

RestructuredAcceleratedPowerDevelopmentandReformsProgramme(RAPDRP)

Introduction of the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) along with measures toaddresstheneedsoftheruralsector

ComprehensivefinancingthroughPOWFandRECLtomeettheaboverequirementsStatusofreforms

Unbundling accomplished in most states; the constitution of Central Electricity RegulatoryCommission(CERC)andstateelectricityregulatorycommissions(SERCs)havebeenundertaken

Regulatoryregimeinplacetodeterminetariffs;however,irregularfilingoftariffpetitionshadledtomoredelayedandlowerincreaseintariffsthanrequired

PartBoftheRAPDRPschemetargetedtowarddistributioncompaniesisyettobeimplemented

nextsetofreformsmaycomeinascrisisreachestippingpoint

Asthecrisisreachestippingpoint,thenextsetofreformsislikelytobeimplemented;amongothers,

thesemayincludethefollowing:

Allowing passthrough of imported coal costs: Most private power producers have securedexclusive stakes in coal mines in Indonesia and Australia to supply fuel to power plants. The

electricitygeneratedfromthesepowerplantsistiedupunderpowerpurchaseagreements(PPAs)

Currently,62%oftheWIP

capacityisbeingexecuted

byprivatecompanies.

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7

withvariousDISCOMsanddonothavepassthroughof increase incosts.However,thechange in

theIndonesianmining lawandadditionaltaxes imposedonminers inAustraliahas ledtoarise in

costs, making PPAs economically unviable. Reforms allowing passthrough of rises in fuel costs is

likelytorestoretheeconomicviabilityofprivateinvestmentsintosuchprojects.Currently,c24GW

oftheWIPcapacityistiedupunderPPAsthatmayturnunviable.

IncreaseintariffsbyDISCOMs:BetterprofitabilityofDISCOMs,ledbytariffhikes,islikelytoboostpower

demand.

This

may

lead

to

an

improvement

in

merchant

tariffs.

The

untied

capacity,

which

variesbetween8%and65%,maygeneratehigherreturns.Thus,theviabilityofprivateinvestments

wouldberestored.

Approvals for captive coal blocks: Faster processing of regulatory approvals for captive mining islikelytoleadtoanearlystartofproductionatcaptivemines.Thismayleadtohigheravailabilityof

lowercostdomesticcoal.Higherproductionfromcaptivecoalblocksmayfreeupdemandforcoal

produced by COAL. Thus, power plant capacity tied up under PPAs and fuelled through imported

coalmayreducetheoperationalcostthroughoptimalblendingofdomesticandimportedcoal.

Signsarevisibleforlikelyinitiationofnextsetofreforms

Thenext

set

of

reforms

are

likely

to

be

initiated,

indicated

by

the

following:

(1)

the

submission

of

the

Shunglu committees report addressing measures to improve the financial health of DISCOMs; (2)

removal of basic customs duty on imported coal; and (3) directing COAL to sign FSAs for the power

plantscommissionedbefore 31Dec11.Key highlights ofthe ShunglucommitteesreportonDISCOMs

areasfollows:

To setupaspecial purposevehicle (SPV) to buyout distressed debts of banks to DISCOMs;about76%ofthesharecapitalintheSPVwouldbeownedbytheReserveBankofIndia(RBI),andtherest

by POWF and RECL. The RBI would provide a line of credit to the SPV for buying distressed debt

from banks. Repayment of loans would be rescheduled, after the state governments/DISCOMs

agreetopreconditionsontariffhikes,operationalparameters, interestrates,periodofrepayment

and amount of repayment on distressed loans. DISCOMs would then repay the debt to the SPV.

State

governments

would

also

have

to

give

an

undertaking

to

the

RBI

for

debiting

accounts,

in

case

ofadefaultonanSPV.

To streamline the processes for updating and auditing accounts at the earliest; the SERC isresponsible for assigning responsibility of regular tariff revisions. Thus, in an event of incomplete

accountsofDISCOMs,SERCsshouldundertaketheexerciseoftariffrevisionsuomoto.

Regionwiselossesshouldbecomputedwithinastate.Whilefixingtariffs,alosssurchargebasedontheconsumersofaregionwithT&DlossesmorethanthebenchmarkissuggestedbySERC.

Independence of regulators should be achieved through minimizing budgetary support. Also,individualsthathaveworkedwiththestategovernment intheprecedingfiveyearsshouldnotbe

eligibleforappointmentsinSERCs.

TheRAPDRPschemeshouldbeextendedtotownswithapopulationofmorethan30,000,asperthecensusreportin2011.Thewidespreadinstallationofelectronicmeters,meterreadingthroughautomatichandheldmeteringdevices,automaticbillingprocesses,suitabletariffsacrosscategories

of consumers and proper collection are suggested for the sustainable maintenance of assets

createdthroughincrementalinvestments.

The distribution franchisee model would be extended to c255 towns with cumulative powerconsumptionofmorethan40%.

Shunglucommittees

reportissubmittedthat

addressesmeasuresto

improvethefinancial

healthofDISCOMs

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To bridge the widened net gap, DISCOMs of key states need to raise tariffs at a CAGR of 13%58% in FY13fFY14f.

However, the average realized rate (ARR) per unit is likely to have risen at a CAGR of 1.9%7.0% in FY08FY12f.

ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,weexpectDISCOMstobe

able to raise their ARR by a CAGR of 11% in the next three years. While this may help reduce losses to 0.8% of the

nominalGDPinFY14ffrom1.0%inFY12f,thebreakevenmayneedmore.WithaCAGRof11%inARR,itmaytakenine

years to achieve PAT breakeven. The 11% increase in power costs may impact the profits of companies in various

sectorssuchasmanufacturing,textiles,automobilesetc.,byc2.5%,asperouranalysisoftherelevantgroupofBSE500

companies. Some steps were taken by nonstate entities to compel DISCOMs to improve financial health such as

preconditionsforrestructuringloansandaproposaltoincludeDISCOMlossesintostategovernmentdeficitsaswellas

askingSERCsforasuomotoriseintariffs.

KeystatesnetgapwidenedtouptoINR2.6/kwhinFY10

Netgap,i.e.,thedifferencebetweenrevenueperunitpurchasedandcostperunitpurchased,roseup

to INR2.6/kwh in key states, which contributed 103% of losses in FY07FY10. These states include

Rajasthan, Tamil Nadu, Andhra Pradesh, Madhya Pradesh, Haryana, Uttar Pradesh, Punjab and

Maharashtra.The

gap

comprises

subsidy

realized

and

revenue

realized

(due

to

increase

in

debtors).

ThewidestgapwasRajasthans,whichincreasedtoINR2.6/kwhinFY10fromINR0.2/kwhinFY07.The

least gap was Maharashtras at INR0.2/kwh. In FY07FY10, the gap widened most for Rajasthan by

INR2.4/kwh,followedbyTamilNaduatINR1.3/kwh.PunjabsgapnarrowedINR0.2/kwhinFY07FY10.

Exhibit6:NetgapforkeystatesoverFY07FY10(INR/kwh)

0.1

0.5

0.2

1.1

0.00.3

0.5

0.20.3 0.3

0.7

1.1

0.0

0.6 0.7

0.2

0.5

1.8

1.2

0.9

1.2 1.3

0.50.5

2.6

1.3

0.7

1.5

1.1

0.20.30.3

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Haryana Punjab Rajasthan Uttar

Pradesh

Andhra

Pradesh

TamilNadu Madhya

Pradesh

Maharashtra

FY07 FY08 FY09 FY10

Source:POWF,AvendusResearch

TariffCAGRof31%overFY13fFY14fneededtobridgegap

The net gap in key states can be bridged by increasing an average tariff at a CAGR of 13%58% in

FY13fFY14f,and

reducing

aggregate

technical

and

commercial

(AT&C)

losses.

Lowering

AT&C

losses

mayraiserevenuesduetogrowthinbillableunits.WeestimatedtherequiredCAGRintariffswiththe

followingassumptionsforDISCOMsfromeightkeystates:

IncreaseinunitspurchasedataCAGRof7.5%overFY11fFY14fReductioninAT&Clossesby1%perannumoverFY11fFY14fRiseinpowerpurchasecostsataCAGRof7.5%overFY11fFY14fHikeinotheroperatingandadministrativecostsataCAGRof12%overFY11fFY14f

Thewidestgapwas

Rajasthans,which

increasedtoINR2.6/kwh

inFY10

from

INR0.2/kwh

inFY07.

Thenetgapinkeystates

canbebridgedby

increasinganaverage

tariffataCAGRof13%

58%inFY13fFY14f

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Capital expenditure per year over FY11fFY14f similar to that incurred in FY10; loss estimatesexcludeanysubsidyrealizationsfromstategovernments

Exhibit7:CurrentARR(INR/kwh),requiredARR(INR/kwh)inkeystates,asofFY10

0.0

1.0

2.0

3.0

4.0

5.0

Haryana Punjab Rajasthan Uttar

Pradesh

Andhra

Pradesh

TamilNadu Madhya

Pradesh

Maharashtra

CurrentARR Required

ARR

Source:POWF,AvendusResearch

Turnaroundmaygetdelayedduetolowerthanrequiredtariffhikes

FortheDISCOMsoftheeightkeystates,ARRislikelytohaverisenataCAGRof1.9%7.0%overFY08f

FY12f.ConsideringamaximumthreeyearCAGRofc11%inARRforUttarPradeshoverFY09FY11,we

expectDISCOMstobeabletoraisetheirARRbyaCAGRof11%overthenextthreeyears.Whilethis

may help reduce losses, the PAT breakeven may further get delayed. With a CAGR of 11% in ARR, it

maytakenineyearstoachievethePATbreakeven.

Exhibit8:ARRofkeystates,andthreeyearandfiveyearCAGRinARRforthesekeystatesAveragerevenuerealized(INR/kWh)

FY07 FY08 FY09 FY10 FY11e FY12e

CAGR

FY08FY12(%)

Maximumthreeyear

CAGR(%)

Periodfor

maximumthreeyear

CAGR

Haryana 2.0 2.1 2.4 2.6 2.6 2.6 6.3 10 FY08FY10

Punjab 2.0 2.0 2.3 2.2 2.2 2.4 3.9 4 FY08FY10

Rajasthan 2.2 2.2 2.4 2.2 2.2 2.8 4.9 5 FY10FY12

UttarPradesh 1.8 1.9 2.0 2.3 2.6 2.6 7.0 11 FY09FY11

AndhraPradesh 2.2 2.4 2.3 2.4 2.6 2.6 3.5 4 FY08FY10

TamilNadu 2.4 2.5 2.4 2.4 2.7 2.7 1.9 3 FY10FY12

MadhyaPradesh 2.1 2.0 2.1 2.4 2.4 2.5 4.3 7 FY09FY11

Maharashtra 2.6 2.7 3.1 3.4 3.4 3.5 6.2 9 FY08FY10

Source:POWF,SERCs,Mediareports,AvendusResearch

11%annual

increase

in

tariffs

may

dent

industry

profits

by

up

to

2.5%

Exhibit9:Impactofincreaseinelectricitytariffsby11%onfinancialsofasectionofBSE500companiesFY11Actual(INRbn) FY11Posttariffhikeof11%(INRbn) Variance(%)

Sales 24,876 24,876 0

Powerandfuelcosts 539 598 11.0

EBITDA 3,749 3,690 1.6

Interestcosts 682 682 0.0

PAT 1,726 1,682 2.5

PATmargin 6.9% 6.8% 18bp

Source:Prowess,AvendusResearch

FortheDISCOMsofthe

eightkeystates,ARRis

likelytohaverisenata

CAGRof1.9%7.0%over

FY08fFY12f.

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Tariff hikes of 11% by DISCOMs for the industry is likely to dent profits by up to 2.5%. We have

analyzed the power and fuel costs of BSE500 companies, excluding companies operating in sectors

such as financial, oil & gas, IT services and power. Power and fuel costs for the selected set are

cINR539bn,whichis2.2%ofsales.An11%increaseinpowerandfuelcostsislikelytoleadtoarisein

power and fuel expenses by INR59bn as well as a reduction in profits by INR44bn, implying a 2.5%

impactonprofitability.However,anycuts inthe interestratesmayhelpoffsetthe increase inpower

andfuelcosts.Interestcostswere2.7%ofsalesinFY11.

Somestateshaveincreasedtariffsupto49%sinceApr10

Manystateshavehikedelectricitytariffsbetween1%and49%sinceApr10.Whilethequantumofthe

riseintariffsislowerthanneededinsomecases,respectiveSERCsinthetarifforderofsomeDISCOMs

have taken cognizance of the gap; the gap is likely to be bridged in a phased manner. One such

exampleisRajasthan.TheRajasthanElectricityRegulatoryCommission(RERC)agreedthattherevenue

gapisc50%.However,thetariffwasraised23%andislikelytobehikedinaphasedmannertobridge

thegapsothatconsumersarenotburdenedwithsuddentariffhikes.

Exhibit10:StatewisetariffhikesimplementedsinceApr10State

Tariff

hike

(%)

Effective

date

AndhraPradesh 7 Aug10

Bihar 11 Jun11

Bihar 12 Apr12

Chhattisgarh 14 Apr11

Delhi 22 Aug11

Gujarat 4 Sep11

Haryana 1 Aug11

HimachalPradesh 9 Aug11

Jharkhand 19 Aug11

MadhyaPradesh 6

MadhyaPradesh 7

Maharashtra 5

Punjab 9 May11

Rajasthan

23

FY12TamilNadu 9 1Aug10

TamilNadu 37 Apr12

UttarPradesh 13 1Apr10

Uttarakhand 5

WestBengal 9

Source:SERCs,DISCOMs,Mediareports,AvendusResearch

StepsinitiatedtocompelDISCOMstostreamlineoperations

Thecentre,alongwithvariousministries,theRBIandlenders,haveeithertakeninitiativesorproposed

to take some to compel DISCOMs to streamline operations and improve financial health. The steps

such as restricting lending, preconditions for restructuring loans and proposals to include DISCOM

lossesintostategovernmentdeficitsarelikelytocompelthestategovernmenttoimplementDISCOM

relatedreforms.Otherinitiativessuchasappointingdistributionfranchisees,passthroughoffuelcost

risetoconsumers,timelyfilingoftariffpetitionsandasuomotoincreaseoftariffsbySERCsarelikely

to enhance the profitability of DISCOMs. Some key initiatives and their likely impact are outlined in

Exhibit 8 below. Additionally, the Shunglu committee has submitted a detailed plan to address the

financialhealthofDISCOMs(detailsonpage7).

Tariffhikesof11%by

DISCOMsfortheindustry

islikelytodentprofitsby

upto2.5%.

Thecentre,alongwith

variousministries,theRBI

andlenders,haveeither

takeninitiativesor

proposedto

take

some

to

compelDISCOMsto

streamlineoperationsand

improvefinancialhealth.

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Exhibit11:Controllingmeasuresthroughstateandnonstateentities,andtheirlikelyimpactControllingmeasure Likelyimpact

Staterelatedfactors

Resolutionbystatepowerministers

Regular

filing

of

tariff

petitions

Timely

tariff

hikes

AT&Clossestobereducedtounder15% Improvedprofitability

Appointmentofdistributionfranchisee Enhancedprofitability

Automaticpassthroughoffuelcostriseintothetariffs Sustainableprofitability

Stategovernmenttoclearalloutstandingsubsidiesandensure

advancepaymentofsubsidiesinthefuture

Improvementincashflowsleadingtolower

requirementofworkingcapitalloans

Loans,extendedbystategovernments,tobeconvertedintoequityBettercapitalstructure,enhancingborrowing

capacity

Non statefactors

RestrictinglendingtoDISCOMs Increasedfocusonimprovingoperatingcashflows

Preconditionsoffilingtariffpetitionsforrestructuringloans Timelytariffhikes

ProposaltoincludeDISCOMlossesinstatefiscaldeficitsLimitingtheborrowingofthestategovernment,

thereby

enhancing

political

will

to

implement

reformsTribunalorderonSERCtoincreasetariffonsuomotobasis Timelytariffhikes

Source:PublicInformationBoard,Mediareports,AvendusResearch

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Thermal capacity of close to 45GW was approved during 200610 with fuel linkage to undeveloped coal reserves.

Progressonthedevelopmentofthesecaptivemineshasbeenveryslow.Thebiggesthurdlehasbeenthego,nogo

policy,whichhelduptheMinistryofEnvironmentsapproval.Overthelastsixmonths,therehavebeensignsthatthis

policyislikelytoberemoved.Evenwiththechange,coalextractionmayonlybeginaftertwoyears.Ofthenewcapacity

linked to captive mines, we estimate c7GW may be completed in FY13 and FY14; companies may be compelled to

operate by buying coal at market prices. Some utilities such as NTPC and TPWR are likely to commence mining from

captiveminesinFY15f.Ourestimatessuggestthatnewcapacityof41GWmayeventuallybesupportedbycoalfrom

suchcaptivemines.

59%ofWIPcapacityiscoalbasedwithnopassthroughofcostrise

Out of the coalbased WIP capacity of 95GW, 31% is being executed by central and state utilities.

Power generated by central and state utilities is sold on a costplus basis to DISCOMs. Out of the

remaining69%capacityexecutedbyprivatecompanies,59%doesnothaveacostpassthrough.This

includescapacitytiedupunderPPAsandpowertobesoldonmerchantbasis.

Exhibit12:ShareofWIPcapacityonownershipbasisandoptionofcostpassthrough(%)Central

14%

State

17%

Private CPT*

10%

Private no CPT*

59%

Source:Company,CEA,SERC,AvendusResearch. Note:*Costpassthrough

Captivecoalminingtosupport41GWofWIPcapacity

Exhibit13:SchemewiseWIPcoalbasedcapacitybasedondifferentsourcesofcoal(MW)(MW) COAL Captive Imported Total

Central 3,107 8,000 2,643 13,750

State 1,015 15,625 0 16,640

Private 24,082 17,045 23,582 64,708

Total

28,204 40,670 26,225

95,098

Source:Company,CEA,AvendusResearch

Captiveminingcansupport41GWoftheWIPcapacity.Wehaveconsideredcoalproductionin50%of

theallocatedcaptivemines.Furthermore,ourassumptionincludesproductionperannumat80years

forthecurrentreservesuntiltheyexhaust.Outofthetotalcaptiveminesallocated,stateutilitiesare

allocated with a majority of mines. These mines are likely to support the WIP capacity of c16GW.

Amongcentralentities,NTPCislikelytostartproductionatPakriBarwadihin24months.Anothermine

ChhatiBariatuhasgotregulatoryapprovalsuntilforestclearancestageI.Thecoalminesallocatedto

NTPCandDVCconstitutetotalreservesofc7bntonnes.

OutofthecoalbasedWIP

capacityof95GW,31%is

beingexecutedbycentral

andstateutilities.

Outofthetotalcaptive

minesallocated,state

utilitiesareallocatedwith

amajorityofmines.

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Approvalsmaypickuppace;butbenefitstokickinfromFY15f

BenefitsfromanincreaseincoalproductionfromcaptiveminesarelikelytokickinfromFY15f.NTPCs

captive mine Pakri Barwadih and TPWRs captive mine Tubed are likely to commence production in

FY15f.Fortheremainingcaptiveminesofpowerproducers,thepaceofregulatoryapprovalsarelikely

topickupwiththegovernmentsfocusonraisingproductionfromcaptivemines.Afterthechangein

theMinisterofEnvironmentandForest(MoEF)fromMr.JairamRameshtoMs.JayanthiNatarajan,the

nogo

policy

was

removed.

The

first

such

indication

is

the

media

report

of

the

letter

to

Essar

Energy

from the Ministry of Power to seek forest clearances from MoEF for the Mahan coal block. The coal

blockwasearliermarkedunderthenogoarea.Followingallregulatoryapprovals,itislikelytotakeat

least two years to begin production from captive mines. Land acquisition may take c12 months,

whereas it would take another 12 months to commence production. Hence, we expect production

fromcaptiveminestostartfromFY15f.

NTPCscaptiveminePakri

BarwadihandTPWRs

captivemineTubedare

likelytocommence

productioninFY15f.

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ChangesunderwaytoexpandprofitabilityfromFY14f

TheFY13fearningsofprivateutilitieswithlargecapacityinthepipelinearelikelytoremainunderpressureduetoINR

depreciationagainsttheUSDaswellashighinterestratesandimportedcoalcosts.Largerandoldercompaniessuchas

NTPC and TPWR are relatively protected as a large part of their revenues from PPAs are shielded from cost rises.

However,theFY14fearningsofprivateutilitieswithlargepipelinesmayimproveduetothelikelygrowthinlowercost

domesticcoalsupplyand increase inmerchanttariffs fora smallperiodowingtotheelections scheduled in 1H2014.

SupplyfromCOALwouldsupportanadditionalc10GWbytheendofFY14.Anotherdriverofprofitabilityislikelytobe

the firming up of merchant tariffs preceding the general elections due in 1H2014. The structural improvement in

profitabilityarisingfromanticipatedreformsmaybevisibleafterFY14f

MultiplefactorshaveledtolossesforpowerproducersinFY12f

Power producers have incurred losses due to multiple factors such as muted merchant tariffs, high

importedcoalcosts,currencyfluctuationsandhighinterestrates.

Operationrelatedfactorsposingthreattoneartermearnings

Muted merchant tariffs: Average merchant tariffs have declined from a high of INR7.8/kwh inApr10

to

INR3.9/kwh

in

Sep11.

Between

Apr10

and

Sep11,

merchant

tariffs

touched

a

minimum

of

INR2/kwh.Forthe lastoneyear,merchanttariffshavestabilizedatcINR4/kwhforbilateraltrades

and cINR3/kwh at the power exchanges, i.e., Indian Energy Exchange (IEX) and Power Exchange

India LImited (PXIL). A 10% decrease in merchant tariffs (for 100% merchant capacity) impacts

earningsofa1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby27%.

Exhibit14:Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXIL(INR/kwh)

0

2

4

6

8

Apr10 Aug10 Nov10 Mar11 Jul11 Oct11 Feb12

Bilateral IEX PXIL

Source:CERC,AvendusResearch

Highimportedcoalcosts:Globallycoalpriceshave increased65%sinceApr09.SouthAfricancoalpriceshavefollowedasimilartrendasAustraliancoalprices.Australiancoalpriceshavereflecteda

sharp

rise

during

Jan07May08

and

Feb09Mar11.

Increased

dependence

on

imported

coal

and

rising coal prices worldwide are likely to lead to higher fuel costs. A 10% increase in the price of

importedcoal impactsearningsofa1,000MW importedcoalbasedpowerplantoperatingat80%

PLFby7.5%.

A10%decreasein

merchanttariffs

(for

100%

merchantcapacity)

impactsearningsofa

1,000MWimportedcoal

basedpowerplant

operatingat80%PLFby

27%.

Globallycoalpriceshave

increased65%sinceApr09

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Exhibit15:Globalmonthlyaveragecoalprices(FOBbasis)forSouthAfricaandAustralia(USDperton)

50

100

150

200

Jan07 Nov07 Sep08 Aug09 Jun10 Apr11 Mar12

Australia SouthAfrica*

Source:InternationalMonetaryFund,Bloomberg,AvendusResearch.Note:*MonthlyaverageforSouthAfricancoalprice

UnviablePPAs:MostcaseIbiddingthatwasexecuteduntilDec09werebelowINR3.25/kwh.Undercase

I

bidding,

risks

pertaining

to

execution

of

projects,

fuel

availability

and

more

lies

with

the

project developer. Between 2006 and 2009, the case I bids were bagged at an average levelized

tariff of INR2.83/kwh, excluding UMPP. A majority of these PPAs are expected to begin between

Feb12andAug14.Duetounavailabilityofcheapfuel,PPAsarelikelytohavebecomeunviable.

Exhibit16:CapacitytiedupthroughPPAbyrespectivestatesandthelevelizedtariff

0

850

1700

2550

3400

GJ2006 HR2007 MP2007 MH2008 MH2009 BH2009 RJ2009 KK2010

2.00

2.50

3.00

3.50

4.00

Capacity(MW;LHS) LevelisedTariff(INR/kwh)

Source:Company,SERCs,Mediasources,AvendusResearch

Macroeconomicfactorsposingrisktoneartermearnings

Currencymovements: The increase in costspertainingto capexand fuelrelated payables c21%depreciation

of

the

INR

against

the

CNY

and

c19%

depreciation

of

the

INR

against

USD

between

Jul11 and Dec11 is likely to raise the cash outgo for BTG equipment and coal imports. For a

1,000MW imported coalbased power plant operating at 80% PLF, a 1% depreciation of the INR

againstCNYandUSDcouldleadtoa1%decreaseinprofits.

Between2006and2009,

thecase

Ibids

were

baggedatanaverage

levelizedtariffof

INR2.83/kwh

Fora1,000MWimported

coalbased

power

plant

operatingat80%PLF,a

1%depreciationofthe

INRagainstCNYandUSD

couldleadtoa1%

decreaseinprofits.

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Exhibit17:CrosscurrencyrateforINR/USD(x)

42

45

48

51

54

Apr11 Jul11 Oct11 Jan12 Apr12

INR/USD

Source:Bloomberg

Exhibit18:CrosscurrencyrateforINR/CNY(x)

6.5

7.0

7.5

8.0

8.5

Apr11 Jul11 Oct11 Jan12 Apr12

INR/CNY

Source:Bloomberg

Higherinterestcosts:RBIhascutthereporateby50bpinApr12afterraisingitby350bpbetweenApr10 and Mar12. Since Mar10, State Bank of India (SBIN, Buy) benchmark prime lending rate

(BPLR)washikedfrom11.75%to14.75%,a300bpincreaseAriseof100bpininterestcostsislikely

toimpactprofitsfora1,000MWimportedcoalbasedpowerplantoperatingat80%PLFby1%.

Exhibit19:RBIreporateandSBIBPLR(%)

3.0

4.2

5.4

6.6

7.8

9.0

Apr09 Oct09 Mar10 Aug10 Jan11 Jun11 Nov11 Apr12

11

12

13

14

15

16

RBIReporate(%) SBIBPLR(%;RHS)

Source:Bloomberg

Increaseindomesticcoalavailabilityislikelytoimproveearnings

Production of COAL may rise 5% yoy in FY13f and FY14f. This would imply an incremental thermal

coalavailabilityofc36MToverFY13fFY14f.PresidentialdirectivehadbeenissuedtoCOALforsigning

FSAswithpowerproducers.Followingarethekeydirectivesissued:

COALwillsignFSAswithpowerplantsthathaveenteredintolongtermPPAswithDISCOMsandarecommissionedbefore31Mar15

FSAshouldbesignedforthefullquantityofcoalmentioned inthe letterofassurance(LoA)for aperiodof20years

Trigger levels for disincentives would be 80% of the FSA quantity and would be 90% of the FSAquantityforincentives

Any shortfall in fulfilling commitments as per the FSA has to be met through either imports orsuppliesfromothercentralorstatePSUsthathavebeenallocatedcoalblocks

Ariseof100bpininterest

costsislikelytoimpact

profitsfora1,000MW

importedcoalbased

powerplantoperatingat

80%PLFby1%.

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PPAsaresignedwithDISCOMsforacapacityofc28GW.ThesepowerproducershavesignedLoAs/FSAs

with COAL for the same generation capacity, which is likely to be operational by 31Mar14f.

Incremental production by COAL is likely to support c7GW of power plant capacity. While the

proportionofthecoalbasedcapacityfuelledbyCOAL is likelytoreducefrom83% inFY11to70% in

FY15f,the installedcapacityfuelledbyCOAL is likelyto increasec25GWoverFY11FY14f.Thus,with

more domestic coal available, the earnings of power producers are likely to improve. ADANI has

approved

coal

linkages

of

c12MT

for

its

power

plants

out

of

c9GW;

part

of

this

is

already

commissioned.

Exhibit20:AbsoluteandproportionofcoalbasedcapacityfuelledbyCOAL

0

40

80

120

FY10 FY11 FY12f FY13f FY14f FY15f

60

70

80

90

GWofcoalbasedcapacityfuelledbyCoalIndia %ofcoalbasedcapacityfuelledbyCoalIndia

Source:Company,AvendusResearch

MerchanttariffsmayproviderespiteinFY14f

The topsix buyers of merchant power have been DISCOMs in Tamil Nadu, Punjab, Rajasthan, Uttar

Pradesh,HaryanaandMaharashtra.Fiveofthesebuyershavehadhighercashlossescomparedtothe

respectivegrossstatedomesticproduct(GSDP)inMar10f.Reductioninannuallossesledbytariffhikes

mayenable

DISCOMs

buying

more

merchant

power

at

competitive

tariffs.

Exhibit21:Shorttermpriceforelectricitytradedthroughbilateraltrade,IEXandPXI(INR/kwh)

0

4

8

12

Oct08 May09 Dec09 Jun10 Jan11 Jul11 Feb12

Bilateral IEX PXI


Incrementalproductionby

COALislikelytosupport

c7GWofpowerplant

capacity.

Thetopsixbuyersof

merchantpowerhave

beenDISCOMsinTamil

Nadu,

Punjab,

Rajasthan,

UttarPradesh,Haryana

andMaharashtra.

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StrongdemandinthemonthsprecedingelectionsState assembly elections were held in Apr11May11 and Jan12Feb12. Merchant tariffs preceding

elections had either led to a decrease in the yoy fall in merchant tariffs (in Mar11) or yoy rise in

merchanttariffsbyupto18%(inDec11).Totalsalesthroughshorttermtradesincreased13%yoyin

Mar11and64%yoyinDec11.

Exhibit22:Averagemerchanttariff,volumesandsalesandyoychangepreceding1H2011electionsAverage

merchant

tariff

Total

merchant

volumes

Total

merchant

sales

(INR/kwh) Yoychange(%) (MU) Yoychange(%) (INRmn) Yoychange(%)

Oct10 3.60 28 3,776 11 13,608 21

Nov10 3.44 28 3,687 17 12,701 16

Dec10 3.51 25 4,063 16 14,254 13

Jan11 3.84 21 4,702 26 18,057 0

Feb11 4.16 11 4,622 32 19,248 18

Mar11 4.35 14 5,011 31 21,814 13

Apr11 4.44 27 5,304 59 23,575 15

May11 4.11 30 5,215 35 21,424 6

Jun11 3.59 31 5,513 14 19,806 21


Exhibit23:Averagemerchanttariff,volumesandsales,andyoychangepreceding1H2012electionsAveragemerchanttariff Totalmerchantvolumes Totalmerchantsales

(INR/kwh) Yoychange(%) (MU) Yoychange(%) (INRmn)) Yoychange(%)

Apr11 4.44 27 5,304 59 23,575 15

May11 4.11 30 5,215 35 21,424 6

Jun11 3.59 31 5,513 14 19,806 21

Jul11 3.75 20 7,574 40 28,402 13

Aug11 3.71 18 7,451 34 27,659 9

Sep11 3.74 10 6,210 36 23,218 22

Oct11 4.57 27 4,526 20 20,675 52

Nov11 4.24 23 4,689 27 19,881 57

Dec11

4.14 18 5,639 39

23,370 64Jan12 4.20 10 5,521 17 23,243 29


PLFsofmerchantpowerplantsimprovedbeforeelectionsTheplantloadfactors(PLFs)ofkeypowerplantsthatselltheirelectricityproducedthroughmerchant

trade have improved during the months preceding the elections. The yoy improvement has been a

maximum of 10bp for the aggregate capacity in Mar11. Plantwise, JSWs Ratnagiri plant reflected a

92bp rise in Apr11. The proportion of units generated by power plants, as a percentage of total

merchanttradevolumes,wasc52%inDec11.

Exhibit24:YoychangeinPLFsofcoalbasedmerchantpowerplants(bp)Plantname Company Jan11 Feb11 Mar11 Apr11 May11 Jun11 Jul11 Aug11 Sep11 Oct11 Nov11 Dec11 Jan12

OP

JINDAL

TPS

JSP

0 3 93

6 3 15

9

4

2 2

2

12

PATHADITPP LANCI 3 22 21 5 5 14 24 16 6 6 15 14 3

TORANGALLU

TPS(SBUI)

JSW

8 1 3 1 2 16 6 4 19 32 11 8 2

ROSATPPPhI RPWR 78 78 49 16 16 56 58 17 30 1 41 6 25

JSWRATNAGIRI

TPP

JSW

77 93 78 92 44 68 78 60 23 1 18 18 5

Total 5 6 10 3 13 3 2 8 5 7 9 2 6

Source:CEA,AvendusResearch

Totalsalesthroughshort

termtradesincreased13%

yoyinMar11and64%y

oyinDec11.

Theplantloadfactors

(PLFs)ofkeypowerplants

thatselltheirelectricity

producedthrough

merchanttradehave

improvedduringthe

monthsprecedingthe

elections.

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Elections: The general assembly elections due in 2014 and a significant number of state assembly

electionsover20122014are likelytokeeptheshorttermdemandforpowerbuoyant.Aswitnessed

in1H2009,merchanttariffstendtorisebeforeelections.

Exhibit25:Likelyscheduleofstateassemblyelectionsover201220142012 2013 2014

Goa Chhattisgarh AndhraPradesh

Gujarat JammuandKashmir ArunachalPradesh

HimachalPradesh Karnataka Haryana

Manipur MadhyaPradesh Jharkhand

Punjab Meghalaya Maharashtra

UttarPradesh Mizoram Orissa

Uttarakhand Nagaland Sikkim

NCTofDelhi

Rajasthan

Tripura

Source:www.indianelection.com,AvendusResearch.

EarningsgrowthlikelytoreviveinFY14f

Earningsgrowth

is

likely

to

revive

in

FY14f

due

to

the

likely

growth

in

lower

cost

domestic

coal

supply

and increase in merchant tariffs for a small period owing to the elections scheduled in 1H2014. The

Dec11consensus forecastsfor ADANIandJSW indicate a44%and18%yoygrowth,respectively, in

FY14fearnings.

Exhibit26:ConsensusEPSforecastsofFY13andFY14forADANI

0

5

10

15

20

25

4QFY10 2QFY11 4QFY11 2QFY12 4QFY12

5

5

15

25

35

45

FY13EPS FY14EPS FY14/FY13chg(%;RHS)

Source:Bloomberg,AvendusResearch

Exhibit27:ConsensusEPSforecastsofFY13andFY14forJSW

0

3

6

9

12

15

4QFY10 2QFY11 4QFY11 2QFY12 4QFY12

40

28

16

4

8

20

FY13EPS FY14EPS FY14/FY13chg(%;RHS)


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ReformledrevivalinearningsmaystartafterFY14f

Keyreformsthatmaybeexecutedintheneartermareasfollows:(1)regulatoryapprovalsforalready

allocatedcaptivemining;(2)tariffhikesbyDISCOMsleadingtoimprovementintheirfinancialhealth;

and(3)permittingpassthroughofhigherfuelcostsduetouseofimportedcoal(forplantspoweredby

importedcoal).ThereformsarelikelytoenhanceprofitabilityandRoEs.However,thesereformsmay

take more than 18 months to influence earnings. Hence, revival in earnings growth is likely to begin

afterFY14f.

Exhibit28:Reformsrequired,timetakenforpositivechangeandimpactSegment Reforms Timetakenforpositivechange Impact

DISCOMTariffhikesleadingtoimprovement

inprofitabilityMorethan18months

Increaseindemandforpowerat

competitivetariffs

DomesticcoalRegulatoryapprovalsforcaptive

coalminesMorethan24months

Betteravailabilityofcheaperfuel

leadingtobetteroperatingmargins

ImportedcoalAllowingpassthroughofchangein

importedcoalprices

Dependinguponthe

implementationtoearlierPPAsor

just

the

future

PPAs

Highervisibilitytoreturnon

investments

Source:AvendusResearch

Avendusforecastsvarybetween 31%and20%fromconsensus

AvendusestimatestheFY13fandFY14fPATforNTPC,TPWR,ADANIandJSWtovaryfromconsensus

forecasts between 31% and 20%. Our PAT projections are higher than consensus forecasts for JSW.

However,theseforecastsaresignificantlylowerthantheconsensusforecastsforTPWR.

Exhibit29:AvendusandconsensusPATforecastsandvariance(INRmn) NTPC TPWR ADANI JSW

FY13f FY14f FY13f FY14f FY13f FY14f FY13f FY14f

Avendusforecasts 103,389 117,465 18,177 14,047 15,011 17,084 6,719 8,573

Consensusforecasts 104738 120291 20,498 20,435 12,470 20,952 6,320 7,630

Variance(%) 1 2 11 31 20 18 6 12

Source:Company,Bloomberg,AvendusResearch

Thereformsarelikelyto

enhanceprofitabilityand

RoEs

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ConsensusforecastsforthepowercompaniesFY13fandFY14fearningsgrowthexceedthatoftheNifty.Thisislikelyto

preservetherecentpremiumofthepower indexovertheNifty.Thepower indexsrelativeunderperformancetothe

NiftyreducedpaceinthequarterendingMar12comparedtothefiveconsecutivequarters,precedingthelastquarter.

ThepowerindexunderperformedNiftyinApr12.Earlierunderperformancemayhavebeenledbythesignificantdrop

intheyoygrowth inconsensusPATforecastsofthepower index inFY12.Thisbroughtgrowthforecasts lowerthan

thatoftheNifty.OuranalysisindicatesthatwithachangeinmerchanttariffsandcoalavailabilityfromCOAL,theRoEs

mayreflectsignificantvariancefromADANIandJSWs basecase forecasts.However,NTPCandTPWRsRoEsare less

exposedtoheadwindspertainingtocoalavailabilityandmerchanttariffsduetoalargeproportionofinstalledcapacity

undertariffsthatenablepassthroughoffuelcosts.WeinitiatecoverageonNTPC(Buy,INR208),TPWR(Add,INR118),

ADANI (Buy, INR81) and JSW (Hold, INR46). Risk factors include higherthanexpected domestic coal production and

projectdelays.

UnderperformanceofpowerindextoNiftycontinuesin2012

Exhibit30:Absoluteandrelativeperformanceofpowerindex*(%) 1m 3m 6m 1y 2y 3y

Powerindex*

4.7

5.0

8.7

23.8

33.5 15.6

Nifty 1.5 0.8 0.4 8.1 0.7 50.8

PowerindexrelativetoNifty 3.3 5.7 8.3 15.6 32.8 35.2


Note:* Power index is calculated using the free float adjusted market capitalization of NTPC, TPWR,

ADANI,Reliance Power (RPWR IN,NR),Lanco Infratech (LANCI IN,NR),KSKEnergyVentures (KSK IN,

NR),JSWandTorrentPower(TPWIN,NR).

ThepowerindexhasunderperformedtheNiftyby35%overthelastthreeyears.Similarly,overthelast

threemonths,the indexhasunderperformedtheNiftyby 5.7%.Thepower indexoutperformedthe

NiftyinJan12andFeb12,likelytobeduetotheexpectationsofreformrelatedannouncementsinthe

FY13 budget. However, with the lackofannouncements on big reforms in the budget, the index has

underperformedNifty

over

the

last

one

month.

Earningsgrowthlikelytohavebottomedout

Consensusforecastsforthepowerindexindicatea22%yoygrowthinFY13fearningsafteran8%yo

y decline in FY12f earnings. There has been a significant drop in yoy growth in FY12f PAT as per

consensusforecastsinthepowerindex,leadingtoagrowthlowerthanthatoftheNifty,asofMar12.

However,asperconsensusforecasts,earningsgrowthfortheindexsPATinFY13fandFY14fishigher

thanthatoftheNifty.

Exhibit31:YoygrowthinconsensusforecastsforPAT*forpowerindexandNifty(%)(%) YoygrowthinFFadjustedPATforpowerindex YoygrowthinFFadjustedPATforNifty

FY12 FY13 FY14 FY12 FY13 FY14

Dec10

34 13

22

18

Mar11 32 18 19 18

Jun11 23 17 7 15 17 15

Sep11 15 15 12 12 16 13

Dec11 7 13 13 8 15 14

Mar12 8 22 17 7 17 12

Source:Bloomberg,AvendusResearch. Note:*PATisthefreefloatadjustedforbothNiftyandthepowerindex

Overthelastthree

months,theindexhas

underperformedtheNifty

by 5.7%

Consensusforecastsfor

thepowerindexindicatea

22%yoygrowthinFY13f

earningsafteran8%yoy

declineinFY12fearnings.

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Exhibit32:PowerindexspremiumtoNiftys1yrforwardP/E(%)

(5)

4

13

22

31

Jun09 Nov09 Ma y10 Nov10 Ma y11 Nov11 Apr12


Exhibit33:RelativeperformanceofpowerindextoNifty(%)

14.0

7.0

0.0

7.0

14.0

Jun10(3m) Dec10(3m) Jun11(3m) Dec11(3m) Apr12

Source:Bloomberg,AvendusResearch.

PowerindexmaytradeatapremiumtoNifty

The premium of the power indexs oneyear forward P/E to the Niftys oneyear forward P/E has

narrowedto4% inMar12from30% inJul10.The indexhastradedatapremiumbetweenSep07and

Apr12. A decline in the premium is likely to have been driven by the deteriorating outlook on yoy

earningsgrowthforFY12f.However,withabetteroutlookonearningsgrowthinFY13fandFY14f,the

powerindexmaytradeatapremiumtotheNifty.

Mar14fcapacityunderfixedtariffslikelytobehighestforADANI

Exhibit34:YearendcapacityundervariousofftakemodelsNTPC TPWR ADANI JSW SubTotal Industry

Asof

the

end

of

Mar12f

Totalcapacity(MW) 37,014 5,137 4,620 2,600 49,371 191,602

Asa%oftotalcapacity

PPA

Fuelcostpassthrough(1) 97 88 0 44 84 94

Fixedtariffs(2) 0 9 74 0 8 2

Merchant(3) 3 4 26 56 8 4

Total(1)+(2)+(3) 100 100 100 100 100 100

AsoftheendofMar14f

Totalcapacity(MW) 42,084 8,407 9,240 3,140 62,870 217,757

Asa%oftotalcapacity

PPA

Fuelcostpassthrough(4) 98 71 26 54 81 87

Fixedtariffs(5) 0 26 51 0 11 8

Merchant(6) 2 2 23 46 8 5

Total(4)+(5)+(6) 100 100 100 100 100 100


We have segmented the installed capacities of NTPC, TPWR, ADANI, JSW and the industry, as of the

endofMar12fandMar14f,underthreemodelsofofftake,whichare:(1)PPAfuelcostpassthrough;

(2)PPAfixedtariffs;and(3)merchanttariffs.Theearningsofcompanieswithahigherproportionof

Thepremiumofthe

powerindexsoneyear

forwardP/EtotheNiftys

oneyearforwardP/Ehas

narrowedto4%inMar12

from30%inJul10.

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installed capacity under fuel cost passthrough are likely to face lesser headwinds compared to

companies with a higher proportion under fixed tariffs. NTPC is likely to have 98% of the installed

capacityof42GW,asoftheendofMar14f,underthefuelcostpassthroughmodel.However,ADANIis

likelytohave51%oftheinstalledcapacityof9GW,asoftheendofMar14f,underfixedtariffs.

RoEsofADANIandJSWexposedtomerchantratesandcoallinkages

We have analyzedthreescenarios of theFY14f RoEfor NTPC,TPWR, ADANI andJSW (1)base case

current forecasts; (2) best case 20% increase in merchant tariffs in FY14f over FY13f, and COAL

honoring 100% FSAs signed with the respective companies; and (3) worst case 20% decrease in

merchant tariffs in FY14f over FY13f and no coal availability from COAL for the additional coal

requirements.Wehavenotconsideredanyrise inthecoalpricesforthecoalpurchasedthroughthe

spotmarket.RoEsofADANIispronetomaximumvariancefromthebasecasewithabasecaseFY14f

RoEof19%,bestcaseRoEof33%andworstcaseRoEof 20%.Similarly,JSWsRoEmayswingfroma

best case RoE of 23% to worst case RoE of 3%. However, NTPC and TPWRs RoEs are not likely to

changeduetoverylowexposuretomerchanttariffsandcoallinkages.

Exhibit35:RoEsforpowerproducersundervariousscenariosFY12f FY14f FY14f FY14f

Base

case Best

case

Worst

CaseNTPC 13.8 14.1 14.1 14.1

TPWR 12.6 8.6 8.6 8.6

ADANI 2.4 19.4 33.3 19.8

JSW 3.0 13.2 22.7 3.3

Mean 12.2 13.7 15.5 10.8


TargetpricebasedonDCFandSOTP

Wehavecalculatedthetargetprice(TP)forNTPC,ADANIandJSWthroughaDCFbasedmethodology.

For TPWR, the TP is calculated through an average of DCF and SOTPbased methodologies. During

Stage II, i.e., during FY15fFY26f, the CAGR of sales is likely to be higher for TPWR and ADANI

compared

to

JSW

and

NTPC

due

to

project

pipeline,

captive

coal

mines

and

strong

execution

capabilitiesevidentfromrecentcapacityadditions. EBITmarginsare likely toremainstablefor NTPC

andTPWRowingtoalargeproportionofbusinessunderregulatedequity,fuelledbydomesticcoaland

captivemines.HoweverADANIsmarginsare likelytoreducelargelyontheuseofimportedcoaland

largeofftakeunderfixedtariffs.

Exhibit36:ValuationssummaryCMP TP Upside P/E(x) P/B(x) RoE(%)

(INR) (INR) (%) FY12f FY13f FY14f FY12f FY13f FY14f FY12f FY13f FY14f

NTPC 160 208 30 13.4 12.8 11.2 1.8 1.6 1.5 13.8 13.4 14.1

TPWR 103 118 14 13.7 13.5 17.4 1.7 1.6 1.5 12.6 12.1 8.6

ADANI 63 81 28 91.3 9.2 8.1 2.1 1.7 1.4 2.4 20.9 19.4

JSW* 50 46 9 48.5 12.3 9.6 1.4 1.3 1.2 3.0 11.3 13.2

Source:Company,

Bloomberg,

Avendus

Research.

Note:*

for

JSW

FY12

numbers

are

actual

Exhibit37:KeyassumptionsforforecastsandtargetpriceRoE(%) SalesCAGR(%) EBITmargins(%) Grossblockturnover(x) WCdays

FY12f FY13f FY14f StageII* StageI II* StageII* StageI II* StageII* StageIII* StageII* StageIII*

NTPC 14 13 14 10 5 18 18 0.80 0.80 34 30

TPWR* 13 12 9 12 5 18 18 0.75 0.75 35 37

ADANI 2 21 19 12 5 29 20 0.45 0.65 50 50

JSW* 3 11 13 9 5 20 20 0.55 0.70 50 50

Source:Company,Bloomberg,AvendusResearch.

Note:*forJSWFY12numbersareactual.TPWRsTPiscalculatedusingtheaverageofDCF andSOTPbasedmethodologies

Wehavecalculatedthe

targetprice(TP)forNTPC,

ADANIandJSWthrougha

DCF

based

methodology.

ForTPWR,theTPis

calculatedthroughan

averageofDCF andSOTP

basedmethodolo ies.

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InitiatecoverageonNTPC,TPWR,ADANI,JSW

NTPCCapacityadditionislikelytoaccelerateto2.6GWperannumduringFY13FY15,wellabovethe2.3GW

perannuminthelastthreeyears.ByFY14f,CWIP,asaproportionoftotalassets,islikelytofallto35%.

Over98%

of

the

revenues

would

be

from

assets

with

regulated

tariff

that

provide

full

pass

through

of

higherfuelcosts;thisalongwithgrowth intheproportionofoperatingassets, is likelytoexpandthe

consolidatedRoEby30bpto14%inFY14f,despiteafallintheEBITDAmarginonariseinconsumption

ofhighercostcoal.NTPC is likelytobethepreferredpowersuppliertoDISCOMsdueto lowertariffs

comparedtopeers.StrongoperatingcashflowsinFY13fFY15fwouldsupportcapitalexpenditure.We

valueNTPCusingtheDCFmethodandinitiatecoveragewithaBuyratingandaMar13TPofINR208.

TPWRTPWRsRoE is likelytobottomoutbyFY14f.LossesattheMundraUMPPare likelytopulldownthe

consolidated RoE from 12.6% in FY12f to 8.6% in FY14f. However, from FY15f, losses at the Mundra

UMPParelikelytoreduceleadingtoanimprovementintheconsolidatedRoEevenifthecurrentPPA

remainsunchanged.TPWRs30%stakeintheIndonesiancoalJVimpliesapositivecorrelationbetween

consolidatedRoE

and

global

coal

prices.

We

have

not

assumed

any

rise

in

worldwide

coal

prices.

Cash

profits of INR68bn are likely to be generated over FY13fFY14f to support c4GW of projects under

planning.WithlikelydeclineintheRoEoverFY12fFY14f,thediscountinthecompanysP/Bcompared

topeersmayextend.Thestockamplyreflectstheseweaknesses.WeinitiatecoveragewithaMar13TP

ofINR118andanAddrating.Riskfactorsincludeadeclineinglobalcoalprices.

ADANIADANIislikelytoincreaseitsinstalledpowergenerationcapacityby2xoverFY13fFY14f.Withlower

uncertaintiesonthepowerofftakeaswellasfuelsecurityimpartedbycoallinkagesandparentADE,

ADANIs RoE is likely to expand 17% over FY13fFY14f. A potential rise in merchant sale realizations

drivenbytheelectionsin1H2014,pickupinopenaccess,andexposuretostatessuchasMaharashtra

andGujarat,arelikelytoenhanceRoEs.Higherproportionofinstalledcapacity,asofMar14f,is likely

tobetiedupunderfixedtariffs.Hence,earningsandRoEsaresensitivetopriceoffuelsourcedfrom

COALand

ADE.

Our

DCF

based

method

pegs

ADANIs

Mar13

TP

at

INR81.

We

initiate

with

a

Buy

rating.

RiskfactorsincludeupwardrevisioninpricesofcoalsourcedfromADEandCOAL.

JSWJSWsRoEislikelytochangesignificantlywithachangeinmerchanttariffs.Whilethecompanyssales

mixislikelytochangeinfavorofitsPPAswithJSWIandDISCOMs,46%oftheinstalledcapacity,asof

FY14,islikelytobesoldatmerchanttariffs.Theproportionoffuelrequirementexposedtovariations

is likely to reduce from 83% in FY12 to 39% in FY14f. A large proportion of installed capacity under

merchant and spot purchases for most of its fuel requirement leads to lower earnings visibility. This

maycaptheupsidetovaluations.WehaveusedtheDCFmethodthatpegstheMar13TPforJSWat

INR46.WeinitiatecoveragewithaHoldrating.

Capacityadditionislikely

toaccelerateto2.6GW

perannum

during

FY13

FY15,wellabovethe

2.3GWperannuminthe

lastthreeyears.

TPWRsRoEislikelyto

bottomoutbyFY14f.

Withloweruncertainties

onthepowerofftakeas

wellasfuelsecurity

impartedbyparentand

coallinkages,ADANIsRoE

islikelytoexpand17%

overFY13fFY14f

JSWsRoEislikelyto

changesignificantlywitha

changeinmerchant

tariffs.

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Riskfactors

Upsiderisks

Significantincreaseindomesticcoalproduction:Weexpectdomesticcoalproductiontoincreaseata CAGR of 5% over FY12fFY14f. A higherthanexpected increase in coal production is likely to

reducecostsforpowerproducersandleadtobetterRoEs.

NotableriseintariffbyDISCOMs:TheapprovaloftariffhikesbymostDISCOMsislikelytoimprovetheirabilitytobuyhighcostpower.Thismayraisemerchanttariffs,leadingtobetterrealizationsby

powerproducers.

Downsiderisks

Delay in project execution: A delay in project execution is likely to impact the consolidated RoEs,leadingtoadentinvaluations.

Significant increase in global coal price: A notable rise in global coal prices may increase royaltyexpensesandtaxes.ThismayimpacttheoperatingprofitsofADANIandJSW.

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Annexures

Assumptionsforcalculatingbanksexposuretopowersegments

The exposure of banks to the power sector, as of Dec11, was INR3.154bn (source: RBI Data onsectoraldeploymentofbankcreditJan12)

ExposureofPOWFandRECLtothepowersector,asofDec11,wasINR2,130bn(source:Company)Asperthefinancialstabilityreport,issueno.4,publishedbyRBI,oftheexposureofthe67banksto

thepowersector,55%wastothegenerationsegment,9%totransmission,28%todistribution,and

8%toPOWFandRECL

Inourcalculation,weexcludedtheexposureofbankstoPOWFandRECLWeassumedtheshareofvarioussegmentsfortheexposureofthe67bankstobeapplicabletothe

overallbankingsystem

Weconsidered2%ofthebankloansdisbursedtogeneratingcompaniesasworkingcapitalloansToestimatetheloanstoinstalledpowergeneratingplants,weassumedthatthecapacityaddedin

thelast

15

years

had

been

financed

through

70%

debt

and

30%

equity;

the

loan

repayment

period

is

takenas10years;Ofthetotalloans,75%arelikelytoberaisedthroughIndianbanksorthePOWF

orRECL

CapacityunderconstructionisestimatedwithdetailsoftheWIPcapacityoflistedpowergeneratingcompaniesanddocumentspublishedbyCentralElectricityAuthority(CEA)

50%oftheWIPcapacity is likelytobetiedupunderPPAand isbasedon importedcoal;wehaveassumedthatprofitableoperationofthis50%capacityislikelytobedifficult

For exposure to DISCOMs, 90% loans are likely to be disbursed to DISCOMs incurring operationallosses;hence,this90%exposureofbanks,POWFandRECLisalsolikelytobeatrisk

Exhibit38:Banks,POWFandRECL'sexposuretovariouspowersegments,asofDec11

(INRbn) POWF RECL* Banks Total %share

Generation 999 413 1,700 3,112 72

InstalledGeneration 1,548 36

WIPGeneration 1,564 36

Transmission 90 477 284 850 20

Distribution 56 0 883 939 22

WCloans 36 60 35 130 3

Total 1,180 950 2,902 5,031 100

Source:Company,AvendusResearch. Note:*RECLreportstheexposuretoT&Dsegmentandnotseparately

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ExposureofpowerproducerstokeyDISCOMs

TPWR:ShareofpowersalesfromMundraandMaithonunderPPAExhibit39:ExposuretoDISCOMsasofMar12fend

Gujarat

84%

Others

16%


Exhibit40:ExposuretoDISCOMsasofMar14fend

Gujarat

37%

Maharasht

ra

16%

Haryana

8% Punjab

16%

Rajasthan

8%

Others

15%


Note:WehaveconsideredMundraandMaithonscapacitytiedupunderPPAtoarriveattheexposure

tovarious

state

DISCOMs

ADANI:ShareofpowersalesfromMundra,TIrodaandKawaiunderPPAExhibit41:ExposuretoDISCOMsasofMar12fend

Gujarat

100%


Exhibit42:ExposuretoDISCOMsasofMar14fend

Gujarat

34%

Maharasht

ra

22%

Haryana24%

Rajasthan

20%


JSW:ShareofpowersalesfromBarmerandRatnagiriunderPPAExhibit43:ExposuretoDISCOMsasofMar12fend

Maharasht

ra

24%

Rajasthan

76%


Exhibit44:ExposuretoDISCOMsasofMar14fendMaharasht

ra

22%

Rajasthan

78%


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ClassificationofWIPcapacity

Exhibit45:YearwiseclassificationofLoAsforcoalbasedWIPcapacityonthebasisofofftake(MW)(MW) Merchant Costplus Fixedtariffs Total

FY06 63 2,480 0 2,543

FY07 2,387 4,677 3,931 10,995

FY08 2,999 16,650 9,382 29,031

FY09 5,194 14,609 11,377 31,180

FY10 2,993 1,100 11,977 16,070

FY11 1,915 0 3,365 5,280

Total 15,551 39,516 40,032 95,099


Exhibit46:YearwiseclassificationofLoAsforcoalbasedWIPcapacity(MW)(MW) COAL Captive Imported Total

FY06 1,980 500 63 2,543

FY07 1,457 6,670 2,868 10,995

FY08 5,621 20,760 2,649 29,030

FY09 7,355 12,470 11,355 31,180

FY10

6,510 5,010 4,550

16,070

FY11 5,280 0 0 5,280

Total 28,203 45,410 21,485 95,098


Hierarchyofpreferredfuelsupplyandofftakecombinations

Exhibit47:Proportionofcapacityunderdifferentfuelsupplyandofftakearrangements(%)Category Fuelsupply Offtake NTPC TPWR ADANI JSW

FY12f FY14f FY12f FY14f FY12f FY14f FY12f FY14f

IntheincreasingorderofrisktoRoE

A Captive Costplus 21 34

B Linkage Costplus 88 88 81 50 13

C Linkage Merchant 3 2 4 2 12 6

D Linkage Fixedtariffs 31 30

E Imported Costplus 9 11 7 21 13 23 19

F Imported Merchant 14 17 56 46

G Imported Fixedtariffs 9 26 43 22


Approvalsrequiredbeforecoalproductionbeginsatcaptivemine

Exhibit48:ApprovalsandrelatedauthoritiestopermitproductionatcaptivecoalblockApprovalsrequired Approvingauthority

Geologicalreport Statutorybody/central governmentministriesanddepartments

Mininglease

Central

and

state

government

ministries

and

departments

Miningplan MinistryofCoal

Forestclearance MoEFandstategovernmentdepartments

Coastalclearance Coastalregulatoryzone

Environmentclearance MoEFandstategovernmentdepartments

Landacquisition Staterevenuedepartmentandlocalauthorities


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AnalystCertification

Thefollowinganalyst(s)is(are)primarilyresponsibleforthisreportand,certifies(y)thattheopinion(s)onthesubjectcompany(ies)anditssecurity(ies)andanyotherviewsor

forecastsexpressedhereinaccuratelyreflecttheirpersonalview(s).Theyfurthercertifythatnopartoftheircompensationwas,isorwillbedirectlyorindirectlyrelatedtothe

specificrecommendation(s)orviewscontainedinthisresearchreport:AbhayMoghe.

Disclosures

MeaningofAvendusSecuritiesPrivateLimitedsequityresearchratings

Theratingrepresentstheexpectedchangeinthepriceofthestockoverahorizonof12months.

Buy:morethan+20% Add:+10%to+20% Hold: 10%to+10% Reduce: 10%to 20% Sell:lessthan 20%

Proportionofratingsineachcategoryandinvestmentbankingrelationships(%)

AttheendofMarch2012 Buy Add Hold Reduce Sell NR Total

Proportionofratingsineachcategory 29. 1 33. 3 17.4 11.6 1.4 7.2 100.0

Proportionofcompaniestowhommaterialinvestment bankingserviceswereofferedduringtheprevious12months 0.0 8.7 8.3 0.0 0.0 20.0 5.8

Analystdisclosures

None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the

company(ies)that is/arethesubjectofthisresearchreport.Noneoftheanalystsinvolved inthepreparationofthisresearchreportormembersofhis/herhouseholdholdany

financialinterestinthesecuritiesofthecompany(ies)thatis/arethesubjectofthisresearchreport.Noneoftheanalystsinvolvedinthepreparationofthisresearchreporthave

receivedorpurchasedsharesofthesubjectcompanypriortothepublicofferingofthoseshares.

DisclosuresonpotentialconflictsofinterestforAvendusSecuritiesPrivateLimitedand/oritsassociatecompanies(Avendus)ason02May2012

Companies:NTPC(NTPCIN),TataPower(TPWRIN),AdaniPower(ADANIIN),JSWEnergy(JSWIN)

Asontheabovementioneddate,theshareholdingsofAvendusdoesnotexceed5%ofthetotalissuedsharecapitalofthecompaniesmentionedabove.Avendusdoesnothold

anyotherfinancialinterestintheabovementionedcompanies thatissignificantwithregardtotheresearchrecommendation. Asontheabovementioneddate,theshareholdings

oftheabovementionedcompaniesdoesnotexceed5%ofthetotalissuedsharecapitalofAvendus.Avendusisnotamarketmakerorliquidityprovider inthesecuritiesofthe

relevantissuerorinanyrelatedderivatives.Avendushasnotbeenaleadmanagerorcoleadmanagerofapubliclydisclosedofferofsecuritiesoftheabovementionedcompanies

orinanyrelatedderivativesoverthepast12months.Overthepast12months,Avendushasnotbeenpartytoanagreementwiththeabovementionedcompanies withregardto

theprovisionofotherinvestment bankingservicesthatdonotentailthedisclosureofanyconfidential commercialinformation. Avendusisnotpartytoanagreementwiththe

subjectcompany(ies)ofthisresearchreportwithregardtotheproductionofthisresearchreport.

Sharepricehistoryandratingchanges

Buy,02May,208

140

165

190

215

May11 Jun11 Aug11 Oct11 Nov11 Jan12 Mar12 May12

NTPC(InitiatedonMay02, 12) Rating,Date,TP(INR)

7/31/2019 Utilities Av 020512

30/31


Utilities

30

Buy,02May,81

55

80

105

130


ADANI(InitiatedonMay02, 12) Rating,Date,TP(INR)

Add,02May,118

70

95

120

145


TPWR(InitiatedonMay02, 12) Ra ting,Date,TP(INR)

Hold,02May,46

30

50

70

90


JSW(InitiatedonMay02, 12) Rating,Date,TP(INR)

7/31/2019 Utilities Av 020512

31/31


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