21 March 2013

India | Utilities | Sector update

India Power Sector

Coal Pooling excludes Non-LoA plants/Transmission congestion a reality

Subhadip Mitra subhadip.mitra@jmfl.com Tel: (91 22) 66303088 Abhishek Anand abhishek.anand@jmfl.com Tel: (91 22) 66303067 Sandeep Tulsiyan sandeep.tulsiyan@jmfl.com Tel: (91 22) 66303085

Decisions of CCEA: a) Plants commissioned after 31 Mar09 to receive imported coal at a pooled price, Pre 31 Mar09 plants get CIL coal at notified prices; b) 16GW with No LoAs and expected by FY15 not included in pooling; c) pooling effective for FY14 and FY15, further decision after review. CEAs proposed Options pooling mechanism (Exhibit 1): 1.Restricting pooling to category (a) of 60GW of projects expected by FY15 (as per CEA report of Feb12) - raises pooled coal costs by `606/T and power costs by 42p/kWh in FY14. 2.Adds category (b)-7GW (additional projects with LoAs not part of CEA list) raising pooled costs by `637/T and power costs by 45p/kWh in FY14. 3.Adds category (c)-11GW with tapering linkage raising pooled costs by `994/T and power costs by 70p/kWh in FY15. 4.Further adds category (d)-16GW NonLoA plants - raising coal costs by `1,439/T and power costs by `1.01/kWh in FY15.

Transmission Congestion a reality since CERC stipulates transmission planning to be done on basis of Long Term Open Access (LTOA) which is for 12-25 years. While for medium/short-term, no transmission system is planned, given the brief period for which STOA/MTOA is effective, making such capacities financially unviable or redundant. However, while planning the LT systems, some inherent margins are created in view of seasonal variations/margin of safety and extra system due to RoW issues, which get allocated for STOA/MTOA based on availability. However, most upcoming capacities in power surplus Chhattisgarh/Orissa region have limited LTOA creating imbalance in generation vs transmission capabilities. Moreover the Southern grid even after it is connected will be linked upto Karnataka without incremental transmission capacities to Tamil Nadu, keeping the south deficit region. These imbalances create opportunities for merchant players located especially in the South. JM View: Heightened risk for 16GW plants without LoAs (eg: Adanis Tiroda III, 2 units of Jindal Powers Tamnar II may get delayed or stranded). Transmission/coal constraints to depress supply while state elections will ensure high demand thus supporting merchant prices for 12-18 months. Remain negative on IPPs with domestic coal exposure (Adani, Lanco). Stocks: Low beta (value picks) - Power Gird (TP `128), Coal India (TP `365), NTPC (`161). High beta (near term beneficiary) - JSW Energy (TP `67) exposure to imported coal and plants located in the demand centres (South & West) insulate them from both domestic coal and transmission issues. Revise JSWEL TP to `67 factoring higher LT coal prices of $85/T and stable merchant rates of `4/kWh. We find valuations attractive at 1.1 FY15 book, given expected RoEs of 13% in FY14/15.

JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters. Please see important disclosure at the end of the report

JM Financial Institutional Securities Private Limited

India Power Sector Exhibit 1. Likely effect on increase in price of indigenous coal and cost of generation
Year Particulars Import Qty (in Million Tonnes) 2013-14 Effective increase in Price of CIL Coal in slabs GS-G17 (in ` / Tonne) Increase in per unit (kwh) cost of generation (in Paise) Import Qty (in Million Tonnes) 2014-15 Effective increase in Price of CIL Coal in slabs GS-G17 (in ` / Tonne) Increase in per unit (kwh) cost of generation (in Paise) Option-1 27 606 42 26 427 30 Option-2 28 637 45 35 573 40 Option-3 43 973 68 60 994 70 Option-4 52 1170 82 87 1439 101

21 March 2013

Source: JM Financial

Key sensitivities

Power Grid (TP `128): Despite factoring equity dilution in FY14, we believe EPS CAGR for FY13-17 will be 16% while RoEs remain stable at 16-17%. Moreover, 80-85% of capex has high visibility viz. `800-850bn of targeted `1,000bn is independent of IPPs. We find upside even in bear case scenario: 13th Plan capex at 80% of 12th Plan and post FY17 projects earning only 14% RoE gives a Bear case TP of `120.

Exhibit 2. PGCIL SOTP Sensitivity

PGCIL SOTP Sensitivity 16.0% Growth (g) 5.5% 5.8% 6.0% 6.5% 6.8%
Source: Company, JM Financial

Core RoE 16.5% 124 126 127 132 135 17.0% 129 131 133 138 141 17.5% 134 137 139 144 148

119 120 122 126 128

NTPC (TP `161): The Budget change to 80IA (extended till FY14 end) can impose MAT on NTPC, impacting core RoEs by 2-3%. In 9M13, NTPC has delivered about 23% core RoEs which includes 1.5-2% higher RoE due to tax grossing up benefit, since NTPC falls under full tax rate. Assuming that in FY14 NTPC falls in MAT (losing gross up benefit) and lower PAF in plants on coal constraints, the impact on core RoE will be 2-3%, implying sustainable RoEs of 20% and our current TP of `161. The CMP of `138 implies a sustainable RoE of 18% which we believe already factors bear case.

Exhibit 3. NTPC SOTP Sensitivity

NTPC SOTP Sensitivity 18.0% 3% Growth (g) 4% 5% 6% 7%
Source: JM Financial

Core RoE 19.0% 149 152 155 160 166 20.0% 154 157 161 167 174 21.0% 159 163 168 174 183

144 146 149 153 158

JM Financial Institutional Securities Private Limited

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India Power Sector

21 March 2013

Adani Power (valuations factor rewards not risks): APLs 4.6GW face fuel supply risk, while future capacities depend on Australian (Galilee) mine where price is yet undecided. With 55-60% dependence on spot coal imports, potential discounted supply from parents Indonesian mines remains the only game changer. Tariff hike may not be a trigger: If CERC allows a PPA tariff hike based on Indonesian law change, then it will imply that all imported coal purchases will continue perpetually on spot basis, keeping costs up. Hence a tariff hike may not add to current profit estimates/valuations (which already discount coal supply). CMP of `44 does not factor all risks: We arrive at a TP of `52 factoring all positives of a) decline in imported coal rates, b) cheap coal from Bunyu over FY14-16 (at $36/T), and c) 30% CIL supply for Mundra units. However the downside risk of no tariff hike/low coal supply from Bunyu are not factored. Our bear case scenario implies a TP of `36/share assuming no tariff hike and perpetual spot coal imports. High Debt/Equity further adds to risk: The high D/E of 9x in FY13, may well improve to 4.7x by FY15 if project cash flows are as expected with benefit of either cheap coal supply from Bunyu or an equivalent tariff hike. However if any of the above do not work out risks of over-leveraging would be imminent. Key risks to our call: a) Discounted Bunyu coal supply not commencing in FY15, b) no supply from CIL to Mundra. However, low merchant exposure and lucrative Case1 PPAs in new projects (Tiroda) may cushion some of the downside.

Exhibit 4. Sensitivity for Adani

PT `52 CoE 15%:13%:11%

45

61

PLF 75:80:85

39

61

Merchant -10p:Base:+10p

49

56

Forex: 55.5:53.5:51.5

48

56

Source: JM Financial

Coal India (BUY, TP `365): At CMP, the stock trades at sub 5x EBITDA15E (discount to international peers), and is pricing in an implied negative long term growth, as per JMFe. A 3-4% dividend yield also offers strong downside support. Our revised earnings estimate factors in conservative assumptions on prices (partial pass through of cost increases), volumes (10% below company guidance), and penalties. At CMP, we think the risk reward is favorable for investors. We upgrade CIL with TP of `365 (Mar14) implying 6x EBITDA FY14 and 11x EPS FY14 (ex-Overburden Removal provisioning).

JM Financial Institutional Securities Private Limited

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21 March 2013
India | Utilities | Company Update Price: `53 BUY Target: `67 (Mar14)
Subhadip Mitra subhadip.mitra@jmfl.com Tel: (91 22) 66303088 Abhishek Anand abhishek.anand@jmfl.com Tel: (91 22) 66303067 Sandeep Tulsiyan sandeep.tulsiyan@jmfl.com Tel: (91 22) 66303085

JSW Energy

| JSW IN

Transmission/Coal issues near term triggers

Near Term triggers: New plants coming up before schedule and with limited LTOA in Chhattisgarh/Orissa will put pressure on the transmission system. We expect congestion in these areas to limit ability of the power surplus Chhattisgarh and Orissa to sell power to deficit regions of North and especially South. Even the transmission link to South Grid (Raichur Sholapur line) although connects Maharashtra to Karnataka, no incremental transmission capacity is coming up between Karnataka to TN/Andhra Pradesh. These regional imbalances in transmission will continue for next 1218 months. Further, the election season will mandate limited load shedding by SEBs. All of these factors point towards strong to stable merchant realisations in the near term. JSWs plants being located in Karnataka and Maharashtra are imported coal based and near to the demand centres insulating them from both constrains of coal and transmission. With coal prices stabilising at $85/T levels we believe JSWEL can continue to earn 20% plus RoEs at plant level for next 6-8 month at least. Factoring lower merchant/higher coal prices: We factor in conservative estimates for JSW as we cut merchant rates by 25p/unit (FY15:`4/unit) and increase long term assumptions for imported coal to US$85/t (from US$80/t), in-line with the current global prices. Merchant market is expected to remain strong for next 12-18 months with Southern Grid connectivity not expected before Mar14. Cut estimates by 18/22%: We cut our earnings estimate by 18%/22% respectively for FY14/15 on account of lower merchant rates and higher fuel cost. We factor a return to profitability for Barmer plant with an RoE of 5% for FY14 and 13% for FY15. Remains our preferred beta pick in the space, maintain BUY: Given favourable dynamics (delayed SBD, elections, high merchant/low coal rates) we believe JSW is in the best strategic position to take advantage of coal/merchant arbitrage. Maintain BUY with a Mar14 TP of `67. 5.
% Absolute Relative
* To the BSE Sensex

Key Data Market cap (bn) Shares in issue (mn) Diluted share (mn) 3-mon avg daily val (mn) 52-week range Sensex/Nifty `/US$ Daily Performance

` 85.3 / US$ 1.6 1,640.1 1,640.1 ` 127.2/US$ 2.3 ` 75.0/40.1 18,884/5,694 54.3

JSW Energy 80 70 60 50 40 30 20 10 0 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13

JSW Energy Relative to Sensex (RHS)

15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40%

1M -17.3 -13.5

3M -23.1 -20.2

12M -24.3 -33.4

Shareholding Pattern
Dec-1 2 Promoters FI I DII Public / Oth ers 76.7 2.3 6.1 14.8

(%)
Dec-1 1 76.7 3.9 5.7 13.6

Exhibit 5. Financial Summary

Y/E March N et sales Sales g rowth (%) E BITDA E BITDA (%) Adjusted net p rofit E PS (` ) E PS growth (%) ROIC (%) ROE (%) PE (x) Price/Book value (x) E V/EBIT DA (x) FY11A 40 ,631 75.4 15 ,641 36.4 8 ,339 5.1 11.9 9.1 16.0 10.2 1.5 10.7 FY12A 51 ,787 27.5 14 ,478 23.7 3 ,024 1.8 - 63.7 6.4 5.3 28.2 1.5 12.0 FY13E 75 ,5 36 45.9 28 ,5 61 31.5 10 ,3 88 6.3 2 43.5 11.7 17.0 8.2 1.3 6.2 FY14E 76 ,2 32 0.9 31 ,6 45 34.7 9 ,4 02 5.7 -9.5 11.3 13.7 9.1 1.2 5.3

(` mn)
FY15E 77 ,6 27 1.8 30 ,9 45 33.4 10 ,1 81 6.2 8.3 11.6 13.2 8.4 1.1 4.9
JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters. Please see important disclosure at the end of the report

So ur ce : C o m pa ny da ta , JM F in an ci al . N ote : Va l ua ti ons as o f 2 1/ 03/ 201 3

JM Financial Institutional Securities Private Limited

India Power Sector

21 March 2013

Barmer continues at 80%+ PLF in Jan-Feb, on track for turnaround: The plant delivered 81% PLF and achieved break even based on adhoc tariff revision. Management indicates Coal Ministry clearance for Kapodi expansion mine plan is expected soon. Additional 405MW capacity has been commissioned in last 2 months and will be fuelled by 3mnT of sanctioned production from Kapodi. This should suffice till 1H14 for entire 1080MW, by when clearance for the expansion should be received. However, we conservatively assume slow ramp up with optimal RoEs only by FY15-16. Key Risks: Under-recoveries in Barmer plant may continue incase of delay in supply from captive lignite mines. Any sharp fall in merchant rates or rise in coal prices can also impact earning estimates.

Exhibit 6. SOTP
Projects JSWEL-I JSWEL-II JSWERL RWPL Add: Cash for FY14 Sub-total
Source: Company, JM Financial

MW 260 600 1,200 1,080

Type Imp coal Imp coal Imp coal Lignite/ Imp coal

Holding 100% 100% 100% 100%

JSW EV 6,881 37,863 39,053 21,732 3,871 109,400

Per Share (`) (Mar14) 4.2 23.1 23.8 13.3 2.4 67

COE (%) 13.0% 13.0% 13.0% 13.0%

Exhibit 7. Estimate Change

New Estimates FY13E Net Generation (BU) Net Sales Growth (%) EBITDA Growth (%) Net adj. profits EPS (`) Growth (%)
Source: Company, JM Financial

(` mn)
Old Estimates FY15E 20,999 92,526 1.5 30,945 -2.2 10,181 6.2 8.3 FY13E 18,849 90,554 48.0 28,561 97.3 10,388 6.3 243.5 FY14E 20,053 93,291 3.0 34,346 20.3 11,496 7.0 10.7 FY15E 20,999 94,401 1.2 34,692 1.0 13,083 8.0 13.8 0 0 -18 -18 -22 -22 0 -8 -11 FY13E 0 0 % Change FY14E 0 -2 FY15E 0 -2 FY14E 20,053 91,131 0.6 31,645 10.8 9,402 5.7 -9.5

18,849 90,554 48.0 28,561 97.3 10,388 6.3 243.5

Exhibit 8. Operational Metrics

New Estimates FY13E Average Capacity (MW) Net Gen (MUs) Merchant sales (MU) Merchant Tariff (`) Average Realisation (`) Variable Cost (`) EBITDA/MU (`) PAT/MU (`) Spot Coal (US$/t) Spot blending (%) INR/USD
Source: Company, JM Financial

Old Estimates FY15E 3,140 20,999 9,633 3.93 3.70 2.09 1.47 0.48 85 100 54 FY13E 2,654 18,849 10,395 4.45 4.01 2.44 1.52 0.55 90 85 53 FY14E 3,105 20,053 9,253 4.49 3.91 2.06 1.71 0.57 85 100 53 FY15E 3,140 20,999 9,633 4.18 3.79 2.00 1.65 0.62 80 100 53 FY13E 0 0 0 0 0 0 0 0 0 0 0

% Change FY14E 0 0 0 -6 -3 1 -8 -18 0 0 2 FY15E 0 0 0 -6 -2 4 -11 -22 6 0 2

FY14E 3,105 20,053 9,253 4.24 3.80 2.09 1.58 0.47 85 100 54

2,654 18,849 10,395 4.45 4.01 2.44 1.52 0.55 90 85 53

JM Financial Institutional Securities Private Limited

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India Power Sector

21 March 2013

Financial Tables (Consolidated)

Profit & Loss Statement
FY11 A 40 ,6 31 75 .4 2 ,3 13 24 ,8 13 4 86 2 ,0 05 15 ,6 41 36 .4 28 .9 1 ,2 55 2 ,6 68 14 ,2 27 -4 ,3 25 9 ,9 02 1 ,5 63 0 0 8 ,3 39 8 ,3 39 19 .4 1 ,6 40 5.1 11 .9 1 ,9 06 FY1 2A 5 1,78 7 2 7.5 9,40 2 40,12 4 90 5 5,68 2 1 4,47 8 2 3.7 -7.4 1,46 6 5,03 3 10,91 1 -7,17 2 3,73 8 41 9 -1,61 3 0 1,70 6 3,02 4 4.9 1,64 0 1.8 -6 3.7 95 3 FY13 E 75 ,53 6 4 5.9 1 5,01 7 5 4,41 9 1,26 1 6,31 3 28 ,56 1 3 1.5 9 7.3 1,65 6 6,77 3 2 3,44 4 -9,77 4 1 3,67 0 2,74 3 -2,00 9 0 8,91 7 10 ,38 8 1 1.5 1,64 0 6 .3 24 3.5 95 9 FY1 4E 7 6,2 32 0.9 14 ,8 99 52 ,9 76 1 ,3 80 5 ,1 31 3 1,6 45 34.7 10.8 1 ,2 83 8 ,5 13 24 ,4 15 -11 ,7 24 12 ,6 91 3 ,2 89 0 0 9 ,4 02 9,4 02 10.3 1 ,6 40 5.7 -9.5 1 ,6 63

(` mn)
FY15 E 77 ,627 1.8 1 4,899 5 4,926 1,490 5,166 30 ,945 3 3.4 -2.2 2,033 8,452 2 4,526 -1 0,834 1 3,692 3,511 0 0 1 0,181 10 ,181 1 1.0 1,640 6 .2 8.3 1,801

Balance Sheet
Y/E March Sh are capital Ot her capit al Reserves an d surplu s Networth Tot al lo an s Minorit y int erest Sources of funds In tang ible asset s Fixed asset s Less: Depn. an d amort. Net block Capit al WIP In vestment s Def tax assets/- liabilit y Curren t assets In ven tories Su ndry debt ors Cash & bank balan ces Ot her curren t asset s Lo an s & advan ces Curren t liabilit ies & prov. Curren t liabilit ies Provisio ns and oth ers Net current assets Ot hers (n et) Application of funds FY11A 16,401 0 40,364 56,765 96,376 724 153,865 0 74,152 9,767 64,385 77,080 4,842 -1,562 29,741 5,348 7,637 9,779 0 6,977 20,622 20,622 0 9,120 0 153,865 FY12A 16,401 0 40,600 57,001 99,947 500 157,448 0 150,253 14,801 135,453 10,993 4,971 -1,306 41,571 7,658 4,710 6,686 22,516 0 34,235 34,235 0 7,336 0 157,448 FY13E 16,401 0 48,558 64,958 99,729 500 165,188 0 168,336 21,574 146,762 10,850 4,971 -1,306 33,993 5,591 7,261 3,871 17,270 0 30,082 30,082 0 3,911 0 165,188 FY14E 16,401 0 56,297 72,697 97,816 500 171,014 0 168,336 30,087 138,249 18,083 4,971 -1,306 37,838 5,522 7,579 9,972 14,764 0 26,821 26,821 0 11,017 0 171,014

(` mn)
FY15E 16,401 0 64,677 81,077 90,402 500 171,979 0 186,418 38,539 147,880 0 4,971 -1,306 46,524 6,180 8,190 17,682 14,473 0 26,090 26,090 0 20,434 0 171,979

Y/E March Net sales (Net o f excise) Gro wt h (%) Ot her o perat ion al in come Raw material (or COGS) Perso nnel cos t Ot her exp enses (or SG &A) EBITDA EBITDA (%) Gro wt h (%) Ot her n on-op . inco me Depreciat io n and amort. EBIT Ad d: Net int erest inc ome Pre tax profit Taxes Ad d: Ext raordinary items Les s: M in orit y interest Repo rt ed net p rofit Adju sted net profit Marg in (%) Dilut ed sh are cap. (mn ) Diluted EPS (`) Gro wt h (%) Tot al Dividen d + Tax

Source: Company, JM Financial

Source: Company, JM Financial

Cash flow statement

Y/E March Repo rt ed net p rofit Depreciat io n and amort. -Inc /dec in w orkin g cap. Ot hers Cash from operatio ns (a) -Inc /dec in inv est men ts Cap ex Ot hers Cash flow fro m inv. (b) In c/-dec in c ap it al Dividen d+T ax t hereon In c/-dec in loans Ot hers Financial ca sh flo w ( c ) In c/-dec in c as h (a+ b+ c) Op ening c as h balan ce Clos in g cash balanc e FY11 A 8 ,3 39 3 ,0 53 -4 ,9 43 5 71 7 ,0 21 9 ,5 03 -28 ,3 68 -3 ,1 25 -21 ,9 91 2 ,5 30 -1 ,9 06 17 ,6 75 4 01 18 ,7 00 3 ,7 30 6 ,0 48 9 ,7 79 FY1 2A 1,70 6 5,03 3 14,23 0 -22 4 2 0,74 6 -12 9 -10,01 4 -15,53 9 -2 5,68 2 -51 7 -95 3 3,57 1 -25 7 1,84 4 -3,09 3 9,77 9 6,68 6 FY13 E 8,91 7 6,77 3 -4,63 6 0 11 ,05 4 0 -1 7,93 9 5,24 7 -12 ,69 2 0 -95 9 -21 8 0 -1 ,17 7 -2,81 5 6,68 6 3,87 1 FY1 4E 9 ,4 02 8 ,5 13 -3 ,5 10 0 1 4,4 05 0 -7 ,2 33 2 ,5 05 -4,7 28 0 -1 ,6 63 -1 ,9 13 0 -3,5 76 6 ,1 01 3 ,8 71 9 ,9 72

(` mn)
FY15 E 1 0,181 8,452 -1,999 0 16 ,634 0 0 292 292 0 -1,801 -7,415 0 -9 ,216 7,710 9,972 1 7,682

Key Ratios
Y/E March BV/ Sh are (` ) ROIC (%) ROE (%) Net Debt/equity ratio (x ) Va luation ratios (x) PER PBV EV/EBITDA EV/Sales Turnover ratios (no.) Debt or days In ven tory days Credito r days 69 48 303 33 54 311 35 27 202 36 26 185 39 29 173 10.2 1.5 10.7 4.1 28.2 1.5 12.0 3.4 8.2 1.3 6.2 2.3 9.1 1.2 5.3 2.2 8.4 1.1 4.9 2.0 FY11A 34.6 9.1 16.0 1.4 FY12A 34.8 6.4 5.3 1.5 FY13E 39.6 11.7 17.0 1.4 FY14E 44.3 11.3 13.7 1.1 FY15E 49.4 11.6 13.2 0.8

Source: Company, JM Financial

Source: Company, JM Financial

JM Financial Institutional Securities Private Limited

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India Power Sector

History of earnings estimates and target price
Date FY13E EPS (`) % Chg. FY14E EPS (`) % Chg. Target Price Target Date % Chg.

21 March 2013
Recommendation history
45 46 48 49 48 56 82 82 Mar-12 Mar-13 Mar-13 Mar-13 Mar-13 Sep-13 Mar-14 Mar-14

13-Nov-11 23-Jan-12 2-May-12 28-Jun-12 23-Jul-12 1-Nov-12 8-Dec-12 23-Jan-13

2.2 1.7 2.1 2.2 2.3 4.6 5.2 6.3

JSW Energy
90 80 70 60 50 40 30 20 10 0 Aug-11 H H H H H H B B

-22.7 23.5 4.8 4.5 100.0 13.0 21.2

1.8 2.2 2.4 2.4 3.9 6.6 7.0

22.2 9.1 0.0 62.5 69.2 6.1

2.2 4.3 2.1 -2.0 16.7 46.4 0.0

Nov-11

Feb-12

May-12
Target Price

Aug-12

Nov-12
JSW Energy

Feb-13

JM Financial Institutional Securities Private Limited

Member, BSE Limited and National Stock Exchange of India Limited SEBI Registration Nos.: BSE - INB011296630 & INF011296630, NSE - INB231296634 & INF231296634 Registered Office: 141, Maker Chambers III, Nariman Point, Mumbai - 400 021, India Corporate Office: 51, Maker Chambers III, Nariman Point, Mumbai - 400 021, India Board: +9122 6630 3030 | Fax: +91 22 6747 1825 | Email: jmfinancial.research@jmfl.com | www.jmfinancial.in Analyst Certification
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Analyst(s) holding in the Stock: (Nil) Disclosures

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