Sector Update

September 25, 2012

Sector View
Neutral

Power SEB restructuring at last; implementation key

The Cabinet committee on Economic Affairs (CCEA) has approved restructuring of | 1.9 lakh crore debt of state electricity boards in a move to turn around the near-bankrupt power distribution companies. Under the scheme approved by the CCEA, 50% of the short-term outstanding liabilities would be taken over by state governments. The balance 50% loans would be restructured by providing a moratorium on principle and best possible terms for repayments. The gap between average revenue/kwhr and expenses/kwhr should be eliminated within a specified time period (meaning average revenue average expense). In addition to this, there should be fuel cost adjustment to the tariff (equivalent of a complete pass thorough of increase in fuel costs) and upfront subsidy payment by the state to the respective SEBs.

BSE Power Index has underperformed Nifty by 9% YTD

145 135 125 115 105 95 Jun-12 Aug-12 Feb-12 Jul-12 Mar-12 May-12 Sep-12 Jan-12 Apr-12

NIFTY

BSE Power

SEB losses ( | crore) without subsidy .

0 (10000) (20000) (30000) (40000) (50000) (60000) (70000)

FY07 (26727)

FY08

FY09

FY10

(32066) (52627) (63549) Profit/(Loss) W/O Subsidy

Source : PFC

Gap between power realised and power procured has increased since FY07
0.8 paise per kwhr 0.6 0.4 0.2 0 FY07 FY08 FY09 FY10 Gap w/o subsidy (in paise per kwhr)
Source: PFC

However, we would like to see how the implementation takes place. If we assume that it takes place as it is laid out then we would see 1) reduced working capital cycle for utilities (PSUs & private) leading to increase in cash generating and free up capital (equity) for capacity expansion, 2) improvement in PLF on account of lower backdown and fuel adjustment in tariff 3) open up franchise opportunities for private companies, which would lead to reduction in AT&C losses and improve efficiency (current AT&C losses on an all-India level is ~ >25%) and 4) improve financials of SEBs thereby enabling them to undertake capex for transmission and distribution within the state.
Impact on the sector Assuming correct implementation in the sector, we believe one leg of the sectors woes has effectively been solved. The other issues to watch out would be 1) fuel shortages (coal & gas), 2) bailout/tariff revision for unviable PPAs for private utilities and 3) speedy environment clearances for power plants/coal blocks. Key highlights of restructuring/bailout package Total 50% of outstanding short term liabilities up to March 31, 2012 to be taken over by state governments. This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by state governments guarantee Takeover of liability by state governments from Discoms in the next two to five years by way of special securities & repayment and interest payment to be done by state governments till the date of takeover Restructuring the balance 50% short term loan by rescheduling loans and providing moratorium on principal and the best possible terms for this restructuring to ensure viability of this effort The restructuring/rescheduling of loan is to be accompanied by concrete and measurable action by the Discoms/states to improve the operational performance of distribution utilities For monitoring the progress of the turnaround plan, two committees at state and central levels, respectively, are proposed to be formed Central government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under RAPDRP and capital reimbursement support of 25% of principal repayment by state governments on the liability taken over by state governments under the scheme

| crore

0.75 0.38 0.48

0.74

Analysts name
Chirag Shah shah.chirag@icicisecurities.com Darshan Dodhia darshan.dodhia@icicisecurities.com

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Exhibit 1: Majority of losses (~85%) contributed by seven SEBS

| crore Haryana Punjab Rajasthan UP TN Madhya Pradesh Andhra Pradesh Total losses of 7 SEBS Total Losses Total losses of 7 SEBS as % of total losses Profit/(Loss) W/O Subsidy FY07 FY08 FY09 FY10 -1965 -2901 -4056 -4697 -3050 -4238 -3242 -4446 -1744 -3805 -8885 -12717 -5367 -6343 -8122 -9355 -2549 -4969 -8964 -11353 -1399 -2396 -4068 -5170 -1697 -2526 -7628 -6285 -17771 -27178 -44965 -54023 -26727 -32066 -52627 -63549 66.5 84.8 85.4 85.0

Exhibit 2: Gap without subsidy in paisa per kwhr

| crore Haryana Punjab Rajasthan UP TN Madhya Pradesh Andhra Pradesh All India level FY07 0.83 NA 0.54 1.03 NA 0.02 0.35 0.38 FY08 1.2 NA 1.04 1.19 NA -0.02 0.48 0.48 FY09 1.44 NA 1.98 1.12 NA 0.17 1.25 0.75 FY10 1.44 NA 2.68 1.27 NA 0.14 0.91 0.74

Source: PFC, ICICIdirect.com Research

Source: PFC, ICICIdirect.com Research

Exhibit 3: Domestic Commercial Agricultural and High tension industrial forms bulk of the power sold by 7 SEB in focus
| crore Haryana DHBVNL UHBVNL Punjab PSEB AVVNL JDVVNL Rajasthan UP DVVN MVVN Pashci.VVN Poorv VVN KESCO TN Madhya Pradesh MP Madhya Kshetra VVCL MP Paschim Kshetra VVCL MP Purv Kshetra VVCL Andhra Pradesh APSPDCL BESCOM GESCOM HESCOM MESCOM FY08 FY09 FY10 Domestic Commercial Agricultural Industrial HT Domestic Commercial Agricultural Industrial HT Domestic Commercial Agricultural Industrial HT 19.6% 16.4% 7.1% 4.7% 30.6% 43.8% 28.2% 13.2% 20.2% 17.3% 6.9% 5.1% 27.6% 45.6% 27.5% 15.8% 19.7% 16.8% 8.7% 4.9% 27.6% 48.3% 26.2% 14.8%

21.4% 16.8% 18.3% 20.9%

6.3% 4.9% 5.5% 8.5%

33.4% 36.2% 43.0% 26.3%

28.8% 26.9% 20.5% 27.0%

20.2% 18.0% 17.6% 20.4%

5.9% 4.9% 5.1% 8.0%

28.8% 36.5% 46.0% 30.6%

26.5% 31.3% 18.7% 30.3%

22.0% 18.8% 16.3% 20.9%

6.5% 4.7% 4.4% 7.4%

32.1% 37.9% 51.1% 31.4%

26.4% 22.6% 15.6% 24.8%

37.8% 48.2% 35.1% 41.4%

7.6% 8.9% 6.1% 14.0%

22.1% 14.4% 18.9% 21.2%

16.0% 10.5% 32.0% 11.2%

38.3% 46.6% 35.5% 41.9% 49.3% 25.8%

6.8% 8.6% 7.0% 8.6% 12.4% 12.5%

22.2% 14.6% 17.3% 20.0% 0.0% 21.7%

6.9% 12.5% 32.0% 11.6% 0.0% 26.8%

35.6% 33.9% 44.9% 41.8% 34.5% 22.0%

7.0% 6.8% 9.3% 8.6% 7.3% 6.4%

18.3% 34.2% 15.5% 20.6% 15.8% 3.6%

18.4% 0.0% 10.9% 7.4% 33.9% 52.5%

24.6%

11.7%

20.3%

29.2%

0.0% 0.0% 0.0%

0.0% 0.0% 0.0%

24.5% 19.0% 21.1%

5.9% 4.5% 10.4%

22.7% 20.0% 22.7%

6.1% 4.9% 4.9%

33.5% 33.5% 20.8%

20.5% 25.9% 26.4%

23.0% 20.0% 22.7%

6.9% 5.2% 5.3%

34.6% 33.3% 21.3%

19.8% 29.7% 31.7%

27.5% 25.1% 14.4% 17.6% 29.5%

6.1% 19.3% 3.7% 4.8% 11.5%

30.1% 18.9% 52.8% 55.3% 27.7%

21.6% 21.9% 18.3% 10.7% 19.7%

27.6% 22.8% 15.2% 17.7% 30.4%

6.1% 5.9% 4.2% 5.1% 11.8%

29.0% 25.0% 48.9% 55.4% 28.9%

20.7% 36.4% 20.5% 10.4% 18.2%

27.0% 23.4% 18.5% 16.1% 18.2%

6.2% 18.8% 6.2% 4.7% 5.5%

31.3% 25.0% 44.3% 48.7% 54.2%

19.0% 20.3% 13.8% 17.6% 11.1%

Source: PFC, ICICIdirect.com Research

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Exhibit 4: Impact on companies under our coverage universe

Company Issues The company has faced back down by state Discoms due to their inability to pay high cost power The company witnessed increase in debtor days from 49 days to 72 days on account of non payment of dues from SEBs (more than 60 days) Qualitative impact post SEB restructuring With the proposed restructuring it is expected that state discoms will have the financial resources to buy power from entities like NTPC and also pay the generators on time (within 30 days)

NTPC

NHPC

As on Q1FY13, accumulated debtors stood at | 2075 crore. Of It will improve the working capital for the company as the company would get these | 916 crore (44%) was more than 60 days the payment on time leading to reduction in Debtor days The company had stopped doing business with state discoms Once the financial position of UP and Tamil Nadu improves, PTC will get ~| like Tamil Nadu and UP, which did not have the ability to pay 1100 crore dues (which is ~54% of the companys market cap) and can resume thus affecting the short term volumes of the company trading with these entities (thus improving short term trading volumes) With the proposed restructuring and TNSEB being bailed out, we expect the The company's debtors position has deteriorated on account of debtor position to improve leading to increase in cash. This, in return, would non-payment of dues by TNSEB. Accumulated dues from TNSEB enable the company to invest in capacity expansion (equity position) and earn higher income on cash from | 2800 crore out of | 3000 crore as on Q1FY13 As on Q1FY13, debtors outstanding for more than 60 days was It will be marginally positive as accumulated debtors are not much. However, it opens investment/consultancy opportunity for the company (since the company | 266 crore has the experience) in transmission, grid strengthening space Though there would be no immediate impact on Tata Power (in terms on It will be business as usual for the company since it does not reducing working capital days and backdown), it will open up franchise do any business with any of the troubled SEBS opportunities where company can bid Though there would be no immediate impact on CESC (in terms on reducing It will be business as usual for the company since it does not working capital days and backdown), it will open up franchise opportunities where do any business outside Kolkata distribution company can bid It will be business as usual for the company. However, we have seen an increase in debtor days from 77 days in FY11 to ~ There would be a minor immediate impact on JPVL in terms of reducing working 92 days in FY12 capital days

PTC

Neyveli Lignite

Power Grid

Tata Power

CESC

JPVL

Source: ICICI direct.com research

Exhibit 5: PLF of NTPC

100 90 (%) 80 70 60 50 Q1FY11 Q3FY12 Q4FY12 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q1FY13 90 80 83 70 87 72 92 87 78 63 91 84 71 61 67 86

Exhibit 6: PLF of Neyveli Lignite

100 80 60
64

87.1 78.1 63.3

93.5

87.9

92.2 80.5 80.6 84.4

74

(%) 40 20 0 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

Coal - PLF (%)

Gas - PLF (%)

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

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Q1FY13

Exhibit 7: Debtors as % sales and networth have increased for NTPC .

NTPC 16.0 14.0 12.0 10.0 (%) 8.0 6.0 4.0 2.0 0.0 FY08 FY09 Debtors as % of Sales FY10 FY11 FY12 7.6 6.0 7.5 6.2 2.5 2.1

Exhibit 8: and NHPC

NHPC 50.0 40.0 45.2

13.8 10.7 9.0

41.1

(%)

8.0

30.0 20.0 10.0 0.0 FY08 FY09 15.2 2.0 10.8 1.6

26.7

4.9

7.8

9.2

FY10

FY11

FY12

Debtors as % of Networth

Debtors as % of Sales

Debtors as % of Networth

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Exhibit 9: Debtors as % sales and networth have increased substantially for Neyveli Lignite
Neyveli Lignite 80.0 70.0 60.0 50.0 (%) 40.0 30.0 20.0 10.0 0.0 FY08 FY09 Debtors as % of Sales FY10 FY11 FY12 15.2 4.5 23.3 15.6 8.3 39.1 30.3 19.7 51.3 74.9

Debtors as % of Networth

Source: Company, ICICIdirect.com Research

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Exhibit 10: Power tariff hikes in FY12

Date (Month) Apr-11 May-11 May-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 Oct-11 Dec-11 Jan-11 Jan-11 Mar-11 Mar-11 Mar-11 Mar-11 Mar-11 State/ Board Rajasthan Punjab MP Bihar Assam Himachal Delhi Haryana Jharkhand Gujarat Maharashtra Karnataka Power tariff hike (%) 20% 9% 6% 19% 56 paise 9% 22% 1% 19% 4% 40% / 45 paisa 30 paise /7% Status Hiked Hiked Hiked Hiked Hiked , roll back demanded Hiked Hiked Hiked Hiked Hiked Hiked Hiked Proposed Retrsopective from April 2011 Proposed Hiked Hiked across certain sections of customers Hiked Hiked Hiked

Punjab 55-60% for Industrial and bulk users WBSEDCL Chandigarh Tamil Nadu Odisha Tripura AP Bihar 10% 50% 37% 22-25% 17% 8%- 47% across categories 12%

Source: Media reports, ICICIdirect.com Research

Exhibit 11: Tariff hikes by SEBs since April 2012

30 25 20 (%) 15 10 5 0 Punjab Jharkhand Gujarat Delhi Rajasthan Maharashtra MP 7 2.0 12.1 26.0 18.1 16.1 16.0

Source: Media reports, ICICIdirect.com Research

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ICICIdirect.com coverage universe (Power) ICICIdirect.com coverage universe (Power)

Sector / Company Sector / Company CESC (CESC) Power Utilities Jai prakash Power Ven. (JAIHYD) CESC (CESC) NHPC (NHPC) Jai prakash NTPC (NTPC) Power Ven. (JAIHYD) Lanco Infratech (LANINF) Power Grid (POWGRI) Neyveli Lignite (NEYLIG) PTC India (POWTRA) NHPC (NHPC) Tata Power (TATPOW) NTPC (NTPC) Power Grid (POWGRI) Source: ICICIdirect.com Research PTC India (POWTRA) PTC India (POWTRA) Tata Power (TATPOW)

M Cap EPS (|) P/E (x) EV/EBITDA (x) CMP Target Rating M EPS (|) FY14E FY12 FY13E P/E (x) FY14E FY12 EV/EBITDA (|Cap Cr) FY12 FY13E FY13E (x) FY14E CMP (|) TP(|) (| Cr) 19.5 FY12 FY13E 4,208 31.4 FY14E 42.8 FY12 17.2 FY13E 10.6 FY14E 7.8 FY12 8.4 FY13E 8.5 FY14E 7.7 334 324 Rating Hold 9,191 1.5 3.0 3.4 22.8 11.8 10.3 16.9 12.1 10.6 35 36 Hold 2.3 2.0 2.2 8.7 9.7 8.8 10.0 10.4 9.7 19.5 23 Buy 23,986 165 171 Hold 136,050 11.2 11.3 13.0 14.7 14.6 12.7 10.0 11.6 11.0 7.0 8.0 9.1 16.7 14.7 12.9 12.6 12.0 11.3 117 123 Hold 54,159 2,032 4.7 4.1 3.7 14.7 16.9 18.6 12.1 14.0 12.2 69 65 Hold 6.0 4.5 NA 17.2 22.7 10.7 10.5 9.2 103 94 Hold 24442 -4.6

RoCE (%) (%) FY14E FY12 RoCE FY13E FY12 7.5 FY13E 7.2 FY14E 7.6 5.9 7.4 7.6 9.0 7.6 8.0 11.5 10.9 10.5 13.2 12.1 11.6 7.5 6.8 8.0 8.8 7.0 8.0

RoE (%) (%) FY14E FY12 RoE FY13E FY12 5.1 FY13E 7.9 FY14E 9.2 7.4 10.7 9.2 10.5 8.9 9.3 12.6 12.7 12.7 13.8 14.2 14.5 5.4 4.8 5.7 NA 10.2 8.6

77 25

93 36

Buy Buy

3,881 6,692

8.1 2.1

11.1 2.5

13.4 9.5 3.3 12.1

6.9 10.2

5.8 7.6

5.6 7.8

4.5 7.0

3.9 14.7 5.7 12.2

17.0 13.3

17.1 14.5 15.7 13.1

16.8 15.0

16.9 18.4

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, , Chirag Shah PGDBM and Darshan Dodhia MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
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