Power

Power
December 07, 2018
Powering Past Pessimism
Swarnim Maheshwari Varun Mittal

+91 22 4040 7418 +91 22 6623 3392 Edelweiss Securities Limited
swarnim.maheshwar@edelweissfin.com varun.mittal@edelweissfin.com
Power
Executive summary
The Indian power sector has been battered by capacity

surplus, onslaught of renewable energy (RE) and lacklustre
investor sentiment, among others. While the challenges are
real, we do believe the market is misplaced, unmindful of
(Click here for
the evolving demand-supply matrix. RE will indeed stay
video clip) competitive, but it would be premature to write off thermal
energy considering India’s demand dynamics – size and
peak demand timing – and lack of preparedness to fall back on cleaner fuels
(hydro/gas/RE).
Having hit the bottom, the power sector we argue is on a recovery path,
which may be jagged but upward-sloping.
Key points to consider:

 Demand is robust – 7%/8% growth in base/peak demand is likely to sustain.
 Thermal capacity demand-supply gap is narrowing with: a) an estimated 400bps
increase in thermal plant load factor (PLF) by FY22E; and b) higher merchant rates.
These could nudge distribution companies to reconsider power purchase agreements
(PPAs).
 India’s available coal-based thermal power capacity for peak demand will hit 85–90%
utilisation by FY22E at current growth run rate of peak power demand (which only
thermal can feed).
 Given attractive valuations of stressed assets ‘up for grabs’, incipient thermal
consolidation offers a windfall for stronger players.
 Fuel security/supply is a key concern for thermal players over the next 9–12 months; a
surge in coal imports looks imperative.
 Capacity addition in RE (13% share in overall generation by FY22E) is likely to moderate

due to the recent uptick in interest rates and volatility in INR.
 Current stock prices of power companies are factoring in overly pessimistic RoE dilution
of 450bps owing to the upcoming CERC 2019–24 norms. Such pessimism is
unwarranted in our view.
 Consumer tariffs can jump ~10% on implementation of various norms.
All in all, we believe the power sector’s valuation has bottomed out. It is currently trading at
a 12% discount to its ten-year average EV/EBITDA of 9.1x. That said, an upswing in sectoral
fortunes is on the cards in our view. We prefer NTPC (TP: INR190), CESC (TP: INR840) and
TPCL (TP: INR101) in this order.
1 Edelweiss Securities Limited

Power
Thermal power continues to be India’s mainstay

A) Surge in peak demand a wakeup call – Latent power demand kicking in
A mismatch in power demand-supply in India – especially at peak demand levels and
aggravating by the day – highlights supply constraints.
The Government of India’s push for ‘24x7 Power for All’ has stirred up new hopes in the
sector with the focus shifting towards uninterrupted power supply. Besides, unlocking of
latent demand with 100% electrification could add 3%, i.e. about 40bn units to the existing
demand base. Peak demand (8% YTD) has outpaced base load demand (7% YTD), and the
ramp rate is a staggering 3MW/sec during peak hours (18:00–20:00 hours).
Out of the peak demand of 177GW, coal power meets 70–75% of the requirement while
RE’s contribution is negligible (< 5%) as India is an evening peak-load country. We estimate
the available coal-based power capacity in the country to meet peak demand would be
about 220GW at utilisation of 85–90% by FY22E.
B) Market likely to adjust into a more balanced position

We believe tapering coal capacity additions along with retirement of ageing capacity (34GW
older than 25 years) will drive the power market from overcapacity to a somewhat balanced
position. Net thermal capacity of 27GW would come on stream by FY22E (largely NTPC’s). As
power demand (6%) outgrows net coal-based capacity addition (3%), coal capacity/peak-
demand will moderate from a high of 1.2x currently. Besides, narrowing peak demand-
supply deficit and volatility in merchant prices (up 32% YoY) may impel discoms to
reconsider medium-term PPAs (a relief for stressed assets, although temporarily).
Thermal critical but renewable energy would co-exist

Whether RE has achieved grid parity or not is a matter of debate (due to its transmission
cost being 4x thermal’s). However, RE would still work out to be cost-effective given the
probable spike in thermal power cost due to implementation of environmental norms.
That said, recent macroeconomic developments such as currency depreciation and

tightening domestic liquidity are buffeting the renewable sector. These concerns are likely
to fade away in the near term, but may lead to an upward readjustment/rationalisation of
RE tariffs by 10–15% to INR2.75–3/unit. However, integration of large-scale renewables into
grid would require scaling down thermal units, which are likely to adjust to lower than 70%
coal PLFs as the new normal versus 78% in FY10 (FY18-60.7%).
All in all, PLFs of coal-based units would rise 400/800bp by FY22E assuming a demand CAGR
of 6%/7%. We expect the RE share in generation mix to rise to 13% by FY22E (from 8%
currently) fostered by a favourable policy framework and its cost effectiveness.
Coal availability – The burning issue; imports imperative

The Ministry of Power (MoP) has advised importing coal to bridge the shortfall staring the
country, and that sums up the domestic coal situation in our view.
Our base-case analysis (demand CAGR of 6.2%, RE capacity addition CAGR of 15%) indicates
power sector coal consumption could touch 739MTPA by FY22E (versus 608MTPA in FY18).
Coal India Limited (CIL) will have to build up additional dispatches by about 126MT through

FY22E (6.3% CAGR versus 5.1% in FY13-18) to meet incremental demand. Furthermore,
every 1% rise in power demand CAGR would require an additional 40MTPA of coal through
FY22E. By and large, CIL’s required dispatch could touch 581/611 MT by FY22E in a 6.2%/7%
demand growth scenario (versus 454MT in FY18). Coal imports are thus likely to soar.
Consolidation flares up amid adversity and attractive asset valuations

Consolidation seems to have kicked off with 2.5GW capacity changing hands in the two
recently announced deals. We believe this is likely to gather steam over the ensuing two-
three quarters as assets are referred to the National Company Law Tribunal. Aggregate
haircuts on the overall stressed capacity could be 55–65% with an average transaction size
of INR30–35mn/MW in a stark contrast to current greenfield capex of INR75mn/MW. This
gaping differential should fuel consolidation in our view. Bigger players with strong balance
sheets such as NTPC, JSW Energy, Vedanta, TPCL and Adani Power may particularly benefit.
Distribution reforms on the cards

Improving the health of distribution companies (discoms) is critical to reviving the
beleaguered power sector in our view. A further reduction is the ACS-ARR gap (average cost
of supply minus average revenue realised) from 50% in the past two years is likely to be
challenging owing to implementation of stricter environmental norms and fuel cost pass-
through. Therefore, big and bold reforms are a crying need.
Some reforms could be: a) segregation of carriage and content; b) formation of a national
discom; and c) subsidy disbursal through Direct Benefit Transfer (DBT). If 2007–13/2012–18
was about generation/transmission capex, the next five years are going to be marked by
reforms/capex in the power distribution space.
Impact of upcoming CERC 2019–24 norms overstated

The Central Electricity Regulatory Commission (CERC) reviews norms (including the tariffs
framework) every five years and thus defines the earnings trajectory of regulated
companies. Historically, power companies’ stocks have shown high sensitivity to
norms-related announcements.
For the upcoming 2019–24 norms, a consultation paper has been floated, which did not go
down well with investors because of the proposed two-/three-part tariffs in
transmission/generation that would be a little difficult to implement in our view. Power
companies’ stock prices are factoring in RoE dilution of about 450bps (base RoE of 15%).
However, we believe the RoE structure is unlikely to be tinkered with given the challenges
afflicting the sector, not to mention high interest rates. All in all, we do not expect more
than a 50/100bps reduction in RoE for generation/transmission.
Power sector valuations reasonable; picking winners

The power sector is trading at a 12% discount to its ten-year average EV/EBITDA of 9.1x.
Among our coverage, NTPC is the top pick (beneficiary of rise in power demand and
consolidation), followed by CESC (value enhancement, strong FCF profile) and Tata Power
(streamlining operations). We remain cautious on JSW Energy (unrelated diversification) and
Adani Power (downgrade to ‘REDUCE’ given its lofty valuation) and positive on PGCIL (but
prefer NTPC due to absence of triggers in the near to medium term for the former).

Power
Table of contents
Executive summary ......................................................................................................... 1
Investment Themes... ..................................................................................................... 5
The story in charts... ........................................................................................................ 6
India catching up to its potential .................................................................................... 8
Power demand-supply: Equilibrium to deficit again? ................................................... 10
Renewables shining through ......................................................................................... 22
Domestic coal availability a potential dampener .......................................................... 32
Powerful(l) consolidation: Attractive valuations........................................................... 36
Distribution reforms: Critical to rekindle sector ........................................................... 43
Valuations bottoming out; good hunting ground ......................................................... 47
Companies
Adani Power ........................................................................................................... 53
CESC ....................................................................................................................... 63
JSW Energy ............................................................................................................. 71
NTPC ....................................................................................................................... 81
Power Grid ............................................................................................................. 97
Tata Power ........................................................................................................... 109

Table 1: Investment themes
Company Investment theme Key triggers/overhangs
l
NTPC Reverse DCF suggests extreme pessimism built in the stock Potential dilution of RoE/incentive
price, which is unfounded; attractive valuation (1.05x P/BV- structure in upcoming CERC norms
FY20E)
l
Fixed cost under-recovery to continue in
the near term
l
Uptick in commercialisation/CWIP ratio from 1.7x to 2.2x to

aid in regulated equity and earnings growth
l
l
Best-placed to benefit from inorganic growth opportunities Government stake dilution through OFS
etc.
l
l
Upcoming capacities unlikely to be high cost. Furthermore, Government’s stake sale in SJVN to NTPC
RE bundling will push down variable charge at high valuation (ONGC- HPC demerger)
l
Ramp-up in captive coal production to fortify fuel security

l
l
CESC Kolkata regulated business offers stable FCF profile Untied capacity at Dhariwal
l
l
Demerger offers a more specific investment opportunity Further demerger of generation and
distribution businesses
l
Growth opportunities from distribution franchise

l
l
Tata Power Resolution of Mundra is in sight. Apart from a potential Successful Mundra resolution a key
valuation uptick, it will free up management bandwidth trigger
l
l
Further disinvestment of non-core assets to drive debt IPO of Tata Projects could be a key trigger
reduction
l
l
Growth avenue from scaling up renewable and distribution Debt/Equity still slightly on higher side
franchise
l
Power Grid Healthy order book imparts earnings visibility for next Potential dilution of RoE/incentive
two–three years structure by regulator
l
Renewable opportunity to keep growth ticking Incremental order-wins could slow down
with a shift towards competitive bidding
l
IRR, not market share, key criterion

l
JSW Energy Strong balance sheet position supports potential inorganic Clarity on EV business plan
growth
l
PPA tie-ups (80% capacity) imply stable cash flows International coal price volatility
l
Strong FCF profile from core business USD–INR movement

l
Entry in unrelated businesses could eat into profitability

l
Adani Power Mundra resolution, which is in sight, would contain losses Successful resolution of Mundra plant
and management bandwidth
l
SHAKTI tie-up to support Tiroda and Kawai utilisation

l
Compensation for change in law to support debt reduction Ballooning debt
Table 2: Valuation snapshot

Mkt Cap CMP TP (INR) P/E (x) P/B (x) EV/EBITDA (x) RoAE (%)
Company Reco (USD mn) (INR) Revised Earlier FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
NTPC Buy 16,267 140 190 190 9.0 8.0 1.0 0.9 8.3 7.5 11.6 12.3
CESC Buy 1,305 698 840 818 8.4 7.6 0.9 0.8 6.3 5.7 11.4 11.5
Tata Power Co Buy 3,030 79 101 87 10.3 9.5 1.1 1.0 9.7 9.3 10.7 10.6
Power Grid Buy 13,546 184 225 225 8.5 7.8 1.4 1.3 6.9 6.4 17.7 17.3
JSW Energy Hold 1,562 67 72 72 12.2 10.4 0.9 0.9 7.3 7.3 7.8 8.7
Adani Power Reduce 2,836 52 38 25 NM NM 4.6 4.9 9.4 9.2 (13.8) (8.3)
Source: Edelweiss research

Power
The story in charts

India’s electricity consumption growth among the highest... …but per capita consumption still low
9.9 1,500 7.0
10.0
8.0 1,300 6.4

6.8
6.0 5.4 1,100 5.8
(kWh)
(%)
(%)
4.0 3.1 900 5.2

2.8
2.0 700 4.6
0.8
0.3 0.2
0.0 500 4.0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
World
China
India
Japan
Europe
US
Brazil
ME
Electricity consumption CAGR 2000—17 India's per capita consumption CAGR
However, latent demand seems to be kicking in… …led by electrification drive and 24x7 power supply…
10.0
8.0
6.0
(%)
4.0
2.0
0.0
FY16
FY17
FY18
YTDFY19
Energy demand growth Peak demand growth
…which would narrow demand-supply gap… …and thus improve coal PLF by 400bp
20.0 90.0
16.0 82.0
12.0 74.0
(%)
(%)
8.0 66.0
4.0 58.0
0.0 50.0
FY19E
FY20E
FY21E
FY22E
FY14
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY22E
FY10
FY17
FY08
FY09
FY11
FY12
FY13
FY14
FY15
FY16
FY18
Coal based capacity growth YoY Implied coal based plants PLF's
Source: Enerdata, CEA, Saubhagya, Edelweiss research

Would raging peak demand bring back thermal ordering? Coal availability could be a challenge in the near term
250 700
200 620
(million tonnes)
150 540
(GW)
100 460
169
130 380
50
0 300
H2FY19 FY22E FY18 5% 6% 7% 8% 9%
Coal Hydro Gas Nuclear Non-Conventional Power demand CAGR over FY18-FY22E
Source: CEA, Edelweiss research
Stressed assets offer a windfall for stronger players Valuations have bottomed, provide a good play
15.0
14 W
No FSA.
No PPA
12.0
( EV/EBITDA)
13GW 40GW 5GW 9.0

Stresse
FSA , d FSA, no
PPA capacity PPA
6.0
Dec-14
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-15
Dec-16
Dec-17
Dec-18
7GW
No FSA,
PPA Sector 12m fwd EV/EBITDA 10Y average
+1SD -1SD
Source: MoP, Bloomberg, Edelweiss research
Picking winners – Edelweiss model portfolio for Power sector

Company Mkt cap Weightage Edel Weights CMP (INR) TP (INR) % upside Reco
(USD mn) (%) (%)
NTPC 16,267 42 50.0 140 190 35.7 Buy
CESC 1,305 3 25.0 698 840 20.3 Buy
Tata Power 3,030 8 15.0 79 101 27.8 Buy
Power Grid 13,546 35 10.0 184 225 22.3 Buy
JSW Energy 1,562 4 - 67 72 7.5 Hold
Adani Power 2,836 7 - 52 38 (26.9) Reduce
Sector 38,546 100 100

Power
India catching up to its potential
India third-largest electricity consumer, but per capita consumption lags
Electricity consumption is a key parameter of a nation’s development, and India has a long
road ahead on this count. Global electricity consumption increased at a CAGR of 3.1% over
2000–17 while emerging markets (EMs) clocked double the global average powered by
China’s 9.9% CAGR and India’s 6.8% CAGR.
India is the third largest electricity consumer, but its per capita consumption (1,149kWh in
FY18) is lower than most EMs’ (average: 2,050kWh). This is stark because India, home to
one-fifth of the world’s population, consumes less than 5% of the global electricity
consumption.
Chart 1: India: 20% of global population consumes 5% of electricity consumption: EMs outpaced global growth in last 15 years
World Electricity Consumption 9.9
10.0
China 8.0
26% 6.8
Rest of the
World 6.0 5.4
32%
(%)
4.0 3.1 2.8

Europe
2.0
15% 0.8
0.3 0.2
Japan
5% 0.0
World
China
India
Japan
Europe
US
Brazil
ME
India
5% US
17% Electricity consumption CAGR 2000—17
Source: Enerdata, Edelweiss research
Half a billion people in India have gained access to electricity since 2000. With special focus
on last-mile connectivity through various government schemes (DDUGJY, Saubhagya, etc),
India is on course to achieving 100% electricity access over the next one year. This along
with the improved industrialisation and deeper penetration of household appliances is
likely to double India’s per capita electricity consumption over the next 10–15 years. In the
long run, electricity consumption should mirror India’s GDP growth rate.

Chart 2: India: Per capita consumption rate would improve… Chart 3: …in line with long-term GDP growth
1,500 7.0 6,000
1,300 6.4 5,000
1,100 5.8 4,000

(kWh)
(BU)
(%)
3,000
900 5.2
2,000
700 4.6
1,000
500 4.0
FY08
FY06
FY07
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
0
1990
1992
1994
1998
2000
2002
2004
2006
2008
2012
2014
2016
1996
2010
India's per capita consumption CAGR Electricity Consumption China Electricity consumption India
Source: CEA, Enerdata, Edelweiss research

Power
Power demand-supply: Equilibrium to deficit again?

What’s covered in this section?
1) Causes of slump in power sector
2) Power demand catching up

3) Oversupply in thermal coal-based capacity to revert to mean
4) Peak demand-supply analysis
5) Increased probability of PPA by discoms
What we are saying is…

1) Capacity surplus, subdued demand, distressed discom financials and lack of
PPAs/FSAs have hit the power sector in the past decade.
2) Latent demand is kicking in owing to government schemes such as Saubhagya.
3) Power oversupply would balance out due to strong power demand and limited
thermal capacity addition (net 27GW) over the next four years.
4) India cannot fall back on hydro/gas power. We estimate India’s coal based
thermal capacity available to meet peak demand would continue to be about
200GW, but with different dynamics.
5) Narrowing peak-demand supply coupled with firming merchant prices likely to

nudge discoms to reconsider short-/medium-term PPAs.
A) Coal players suffer from munificent capacity addition

While large-scale capacity addition has helped narrow down the electricity deficit to less
than 1 % (10% in FY08), it ‘burnt’ coal IPPs. The sector is going through a painful transition
across the value chain with some issues getting resolved while many demand attention. The
thermal sector – traditionally stable in terms of technology – is now facing a disruption from
RE and battery storage technologies. Regulators and planning bodies are staring at serious
long-term challenges while charting out the next phase of growth.

Chart 4: Thermal capacity addition outgrows demand… Chart 5: …thereby reducing deficit
350 100.0 1,500 20.0
280 80.0 1,200 16.0
210 60.0 900 12.0

(GW)
(BU)
(%)
(%)
140 40.0 600 8.0
70 20.0 300 4.0
0 0.0 0 0.0
FY09
FY11
FY08
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY1956
FY1961
FY1966
FY1974
FY1979
FY1985
FY1997
FY2002
FY2007
FY2012
FY2017
FY1990
Installed capacity (GW) % Growth Energy requirement Energy availability Deficit
Currently, close to 15% of coal-based thermal capacity is stressed. Large capacity addition,
tepid demand growth, delayed project execution with significant cost and time overruns,
opening up of power exchanges allowing open access, RE gaining grid parity and distressed
discoms’ health among other reasons pushed thermal IPPs to the edge. PPAs dried up as
distressed discoms wanted to avoid incremental fixed-cost liability. On top of it,
cancellation of coal blocks hit the sector as projects failed to secure coal linkages. This has
put thermal IPPs in stress and consequently thermal PLFs plunged, particularly at IPPs that
suffered from both lack of PPAs and coal unavailability.
Chart 6: Peak demand deficit corrected sharply over FY08–18 Chart 7: Coal IPPs’ PLFs suffer the most
180 20.0 90.0
160 16.0 82.0
140 12.0
74.0
(GW)
(PLF%)
(%)
120 8.0
66.0
100 4.0
58.0
80 0.0
FY11
FY08
FY09
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
50.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Peak demand Peak availability Deficit Central State Private


Power
B) However, demand is gaining traction with focus shifting to reliable

power and GoI’s electrification drive gathering steam
The GoI has been aggressively pushing for 100% village and household electrification under
the Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Saubhagya schemes. As many
as 17.5mn households have been connected to the grid in the past one year alone, implying
45,000 household connections a day on average.
The MoP, having connected the last remaining village to the grid, is now focusing on full
electrification of villages (with work in progress at 38% of villages in October 2018). As a
result, electricity demand is gathering steam, evident from 6% growth in the past six
months. Given that the most of these hitherto underserved electricity consumers are
subsidised and billing recoveries are dismal, discoms have been traditionally reluctant to
supply power.
Fig 1: The stark difference in last three months highlights acceleration in electrification drive
Note: Figure 1 as on July 2018, Figure 2 as on October 2018

Source: Saubhagya portal

Fig. 2: About 18mn households have been connected to grid Chart 8: Early signs of demand pickup led by
in past one year electrification drive
13.0
9.0
(%)
5.0
1.0
(3.0)
Sep-18
Sep-17
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Energy demand growth Peak demand growth
Note: Figure 1 as on October 2018
Source: Saubhagya Portal, CEA, Edelweiss research
While all-India energy demand posted a CAGR of 4.4% over FY15–18, select states such as
Uttar Pradesh (UP), Telangana and Bihar reported higher growth due to a push from
respective state governments to provide ‘24x7 Power for All’, which led to addition of
new domestic users and spurred electricity consumption in agriculture. Similarly, Delhi
surprised with peak demand surpassing 7GW, mainly due to the state government’s
decision to penalise load-shedding.
Chart 9: High energy demand growth in select states indicates latent demand is kicking in
30.0 40.0
Energy requirement YoY growth rate Peak demand YoY growth rate
22.0 30.0
14.0 20.0
(%)
(%)
10.0
6.0
0.0
(2.0)
Andhra Pradesh
Uttar Pradesh
Telangana
Odisha
All India
Bihar
Andhra Pradesh
Odisha
Rajasthan
Uttar Pradesh
Telangana
All India
Rajasthan
Bihar
(10.0)
(10.0)
FY15 FY16 FY17 FY18 YTD FY19 FY15 FY16 FY17 FY18 YTD FY19

Power
Household latent demand could lift overall power demand 3–4%

Energy requirements are likely to rise as latent demand kicks in driven by: a) additional
electricity connections to 30mn households, translating to demand boost of 40bn units; b)
cut-down in load-shedding to an average of 7.5hours/month in FY18 could alone lift
energy demand by 11bn units.
The domestic sector accounts for about 26% consumption in electrical energy
requirement—with approximately 180mn connected households, a household on
average consumes just 140 units a month in India. On aggregate, per capita consumption
at 1,149 units is far below the global average as well as that for many EMs.
Chart 10: Load-shedding and household electrification to lift existing demand 3–4%
12.5 1,400
10.0 1,280
(Hrs/month)
7.5 1,160
(BU)
5.0 1,040
2.5
920
0.0
800
Apr-17
Sep-17
Feb-18
Mar-18
Jun-17
Dec-17
Jul-17
Aug-17
Oct-17
Nov-17
May-17
Jan-18
FY18 energy Load Connecting Total

requirement shedding unelectrified demand
Avg duration of power cuts households
Fig. 3: Demand gaining steam on the back of new users while impact of energy
efficiency measures moderates
Demand Drivers
Demand Curtailment
1. Saubhagya
1. Energy efficiency measures
2. DDUGJY, IPDS
2. Reduction in AT&C losses
3. Increasing consumer
durables penetration
4. Public transport sytem
Source: Industry, Edelweiss research

C) Market to move to a relatively balanced position
In our view, slowing capacity additions, capacity retirement and elevated demand are likely
to correct the current oversupply scenario into a relatively balanced position. During the
12th Five Year Plan (FYP), thermal capacity addition was 126% of target driven by large
private participation. Coal-based capacity rose at a CAGR of 11% during the period,
overwhelming the tepid energy demand CAGR of 4%. That said, we believe demand-supply
dynamics will finally catch up as capacity addition tapers while demand revives (signs visible).
The slowdown in thermal capacity addition is likely to be driven by: a) a structural shift
towards RE—even major thermal IPPs are now focusing on strengthening their renewables
portfolio; b) phase-out of very old capacity following the FGD norm implementation; c) high
costs for setting up thermal capacity (INR70–80mn/MW); and d) approximately 19GW of
private coal capacity that is currently stranded for lack of PPAs, which would deter capacity
additions by private players.
Thermal We expect coal-based capacity additions of about 38GW over FY18–22E(net capacity
overcapacity is addition-27GW) given the large under-construction capacity (69GW of thermal in April 2018
narrowing with according to a CEA report). NTPC, which has a strong PPA pipeline in place, accounts for the
latent demand bulk of this capacity addition.
coming to the fore
 We estimate approximately 38GW of coal-based capacity will be added over FY18–22E
with the central sector contributing 21.5GW. IPP capacity will take a hit as about 19GW
of coal-based capacity is currently stranded due to lack of PPAs.
 Capacity retirement is likely to pick up as 11–12GW may have to be phased out by
FY22E because of stricter environmental norms and introduction of FGD norms. About
34GW of capacity is more than 25 years old (at end-FY18) and another 8.3GW will cross
this threshold by FY22E, implying a total of more than 42GW.
 Thermal capacity addition is likely to lag demand growth going ahead as renewables
will remain the focus area. Net addition of ~27GW over FY18–22E (3.3% CAGR) will lag
power demand growth of 6.2% CAGR, thereby moderating the thermal capacity-to-
peak demand ratio.
Chart 11: About 27GW of net incremental capacity to be added over FY18–22E
28,000
23,000
18,000
(MW)
13,000
8,000
3,000
FY19E FY20E FY21E FY22E
Cummulative net capacity addition

Power
Chart 12: Another 8GW of capacity will age beyond 25 years by FY22E
45
42
39
(GW)
36
33
30
FY18 FY19 FY20 FY21 FY22
Capacity with age > 25 years
Chart 13: Tapering capacity addition to aid demand-supply balance

20.0
16.0
12.0
(%)
8.0
4.0
0.0
FY19E
FY20E
FY22E
FY21E
FY08
FY09
FY10
FY11
FY12
FY13
FY15
FY16
FY17
FY18
FY14
Coal based capacity growth YoY Energy requirement growth YoY

D) Peak demand: Most critical factor to look at

Peak demand is raging
While the oversupply is expected to balance out with rising demand, the talking point is the
exploding peak demand and whether India is prepared to meet it. A case in point is peak
demand touching 177GW (up 9% YoY) in September 2018 and sustaining above 170GW
since May. Another interesting related trivia is the surge in demand was a staggering
3.1MW/sec during the peak hours (18:00–20:00 hours) on 18th September, 2018.

Fig. 4: Peak time ramp rate at 3MW/sec
Ramp up rate at
3MW/sec Ramp up rate at
3MW/sec
Source: POSOCO, Edelweiss research
Chart 14: Peak demand tops 175GW in September 2018 Chart 15: Peak demand has flared up in recent months
200 15.0 13.0
180 12.0
9.0
160 9.0
(GW)
(%)
(%)
5.0
140 6.0
120 3.0 1.0
100 0.0 (3.0)

Sep-17
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Sep-18
Sep-17
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Peak demand YoY growth Energy demand growth Peak demand growth
Chart 16: Peak to base demand is widening
YTD19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
FY09
52 77 102 127 152 177
(GW)
Peak demand Base demand

Power
Coal-based generation meets 70–75% of peak demand

Given India faces evening peak demand (18:00–20:00 hours), conventional sources are
imperative to meet the peak demand requirement. A close look at the current capacity
utilisation patterns reveals 70–75% of peak demand is served by coal capacity.
With peak capacity of 164–177GW, maximum net power capacity from coal has averaged
127GW over the past one year while maximum gross power capacity averaged 138GW. Hydro
contributed 25–30GW, gas 7–8GW. Renewable peaks around noon and dwindles during the
peak-demand hours. So, while we shift towards RE, it will be naïve to undermine the
significance of thermal coal based capacities, considering India’s demand dynamics – size and
peak demand timing – and lack of preparedness to fall back on cleaner fuels (hydro/gas/RE).
Chart 17: Maximum net power generated from coal averaged 120–130GW and hydro 25–30GW
150
120
90
(GW)
60
30
0
Dec-17
Oct-17
Aug-18
Aug-18
Apr-18
Nov-17
Nov-17
May-18
Sep-17
Sep-17
Jan-18
Jan-18
Feb-18
Mar-18
Mar-18
Jun-18
Jun-18
Jul-18
Coal-Lignite Hydro Gas-Liquid Nuclear
Out of about 196GW of installed base, 136GW capacity was on stream while the rest is
explained by capacity under maintenance (8GW) and on forced outage (52GW) in last one
year, which could be either due to low schedule, coal availability issues, stressed capacity,
operational issues, etc.
Chart 18: About 60GW of coal capacity outage on average over the past year
250.0
200.0
150.0
(GW)
100.0
50.0
0.0
Monitored
Outage-FO
Outage-PM
Outage-
Capacity on
Others
Capacity
Line

Fig. 5: Coal plants meet 70% plus peak demand; RE negligible in peak time
Coal meets 70% of peak

demand
RE contribution < 5% in
peak hours
Source: POSOCO, Edelweiss research
How India will fare in FY22E

We estimate India’s thermal coal-based capacity to meet peak demand would continue to
be ~220GW and would peak 85–90% by FY22E. Assuming peak demand rises at 7.5%/year,
it would hit a peak of 220GW by FY22E. Incremental contribution from hydro/nuclear/gas
would be small as no major capacities are likely to come on stream; the shortfall, thus,
would have to be bridged by thermal capacity.
We estimate coal based thermal capacity would be 223GW in FY22E; factoring in 10GW
would be on outage and auxiliary consumption, the utilisation level during peak demand
hours could hit 85–90%. Higher outages/stressed capacity/coal issues or a spurt in demand
further aggravate the peak demand-supply mismatch, which would be difficult to address.
Chart 19 Peak hour coal capacity utilisation could hit 85–90% by FY22E
250
200
150
(GW)
100
169
130
50
0
H2FY19 FY22E
Coal Hydro Gas Nuclear Non-Conventional

Power
Chart 20: Peak demand/coal capacity to moderate from a high of 1.2x

1.5
1.2
0.9
(x)
0.6
0.3
0.0
FY22E
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY18
FY09
FY17
Peak demand/Coal based capacity
Thermal ordering debate resurfaces

Economic growth has unleashed enormous hunger for consumer durables among the Indian
middle class, many of which are power-guzzlers. Four factors that are driving growth for
home appliances in India are:
1) India’s favourable demographics (middle class population set to double over FY16–26E
to 547mn);
2) rising disposable incomes;
3) financial leverage supporting consumption growth; and
4) The GoI’s push for public infrastructure, primarily housing, power and railroad
infrastructure, among others.
Chart 21: AC volumes have doubled every five–six years; this would sustain
50
40
(mn units)
30
20
10
0
2003—07 2008—12 2014—18 2019—23E
AC units sold
Source: Companies, Edelweiss research

While growth in consumer durables has been phenomenal (e.g. AC sales have been doubling
every five–six years), it is likely to stay strong. More interestingly:
India’s peak demand kicks in the evening (18:00–20:00 hours), jumping 10–15GW. While
industrial demand is fairly stable throughout the day, residential demand surges during the
aforementioned peak hours. To put this in greater perspective, power demand in India got
created without concomitant peak supply, and this will be evident in some time.
We estimate India’s coal based thermal capacity available to meet peak demand (thermal:
135GW to 175GW) would hit a peak utilisation of about 85-90% by FY22E. Though a little
premature to assess, if the peak demand continues to grow at this pace, then thermal order
debate would resurface. It is anybody’s guess who will participate and how thermal orders
will be funded.
E) Discoms in a spot of bother, may reconsider medium-term PPAs

Discoms have been relying on open market purchases for meeting peak demand instead of
signing fresh PPAs to avoid fixed-cost liabilities (currently INR600bn per year) incrementally.
That said, merchant prices have been quite volatile in the past one year. Over the past three
years, discoms across India have inked only 4GW (including 2 GW under pilot scheme) worth
Discoms may feel of medium-/long-term PPAs. So far, their decision to avoid PPAs seemed expedient,
impelled to sign
although it came at a cost for power producers, particularly those with untied capacity.
PPAs with
merchant rates
skyrocketing thrice Merchant prices have averaged INR4.25 YTD FY19 (up 32% YoY), which is attributable to: 1)
in the past one year escalating fuel costs owing to rising international coal prices aggravated by shortage of
domestic coal and higher transportation charges; and 2) uptick in power demand fueled by
implementation of various government schemes. Thus, spot prices recently touched a nine-
year high of INR18/unit. We expect merchant prices to remain higher within INR4–4.5/unit,
on average, in the near term at least due to a strong demand scenario, fuel shortage and
stiffer coal prices. Merchant prices have been quite volatile in the last one year impacting
discom purchases in the merchant market.
Narrowing demand-supply mismatch at peak levels as power surplus balances out along
with skyrocketing merchant markets could nudge discoms to enter into short-/medium-term
PPAs. We estimate that discoms would start inking PPAs (preferably medium term) over the
next six–nine months. However, this is likely to be only a temporary relief as reduction in
discom losses becomes crucial. It will be interesting to see the rates at which PPAs could be
signed. We believe that near-term PPA rates (if signed) could still be higher around
INR4/unit primarily due to higher fuel cost.
The government launched a pilot scheme for PPA tie-ups in April 2018, totaling 2.5GW of
capacity on a competitive bidding basis for a three-year contract. Any single entity could be
allotted a maximum capacity of 600MW and assured a minimum 55% off-take of the
contracted capacity. This does not entail any tariff escalation clause for the period of
contract. Bidders subscribed to 1,900MW of capacity, and the tariff discovered was
INR4.24/kwh. The government is now considering a second round of medium-term PPAs.
This will be particularly beneficial for revival of stressed capacity vying for PPAs (19GW out
of total coal stressed capacity of 39GW sans PPAs).

Power
Renewables shining through

What’s covered in this section
1) RE is the way forward from a long-term perspective…
2) .. but near-term could be challenging

3) Why coal power would settle at lower PLFs due to integration of RE
4) Demand scenario analysis and likely impact on coal PLFs

1) RE’s contribution is likely to inch up to 13% in the generation mix by FY22E
aided by favourable policy framework and cost dynamics.
2) RE faces a near-term squeeze due to funding constraints for new projects.
Some under-construction assets too might be rendered unviable given the
recent volatility in interest rates and INR.
3) Integration of large-scale RE into grid would require scaling down thermal
units. The industry would have to thus digest lower coal PLFs (lower than 70%)
as the new normal (versus 78% in FY10).
4) PLFs would improve to 65% assuming a 6.2% power demand CAGR through
FY22E. Every 1ppt CAGR incremental demand could lift coal PLF by 400bps.
A) RE takes centre stage

Shift towards renewables a global phenomenon
RE is fast emerging as the preferred source the world over in terms of incremental capacity
addition. The key enabler for this shift has been the rapid decline in RE setup (capital) cost,
which enhance its cost competitiveness.
Furthermore, climate change is in focus globally and thus adoption of cleaner energy
sources would accelerate this transition. Technological advancements will further cut RE
generation cost as well as facilitate smoother grid integration.
Global RE capacity (solar and wind) jumped to 900GW in CY17, a 24% CAGR between 2009
and 2017 with China being the major driver.

Chart 22: RE capacity topped 15% in past decade… Chart 23: …largely driven by China
1,000 35.0 Share of renewable installed capacity
800 28.0 Others

China
30%
33%
600 21.0
(GW)
(%)
400 14.0
200 7.0
India
0 0.0 6% Japan
2011
2012
2008
2009
2010
2013
2014
2015
2016
2017
6%
Germany USA
World (Solar+Wind) installed capacity YoY growth 11% 14%
Source: IEA, Edelweiss research
India boasts among largest renewable expansion plans

Under the climate treaty called the Paris Agreement, India targets to cut its emissions
intensity by 33–35% below the 2005 levels by 2030. A key enabler for this reduction will be
the move towards non-fossil fuel-based generation with a target of more than 40%
contribution in the generation mix by 2030.
RE is at the forefront of this shift with India running one of the largest RE capacity expansion
plans in the world. The GoI has set up an ambitious target of installing 175GW of RE capacity
by 2022. There is going to be a marked shift in India’s power generation mix over the next
decade, and the government is laying down the roadmap through various schemes such as
the National Solar Mission and the Green Energy Corridor for this transition.
Chart 24: India: CO2 emissions have risen at 6% CAGR over past 15 years, third-largest contributor to global CO2 emissions
10,000 2015 CO2 emission breakdown
8,000 China
Others
(tonnes of CO2)
29%
40%
6,000
4,000
2,000
0
Federation
China
India
United States
Japan
United
Russian
Japan
States
4%
16%
Russian
Federation India
CO2 emissions -2000 CO2 emissions - 2015 5% 6%
Source: IEA, Edelweiss research

Power
Current RE installed capacity just 8% of India’s renewable potential

With current RE installed capacity of ~72GW, India is utilising a meagre 8% of its estimated
RE potential. That said, given the country’s large landmass with varied topography, there is
huge potential to harness green energy sources. According to the Ministry of New and
Renewable Energy (MNRE), India has RE potential of 900GW from commercially exploitable
sources (wind: 102GW; small hydro: 20GW; bioenergy: 25GW; and solar: 750GW).
Furthermore, the National Institute of Wind Energy has estimated the wind power potential
at 302GW (at 100 metres height). The journey to realise this potential has accelerated with
RE gaining grid parity, strong government-push with favourable policy support and
technological advancement marked by declining module prices and more-efficient
equipment.
Chart 25: MNRE pegs India’s RE potential over 900GW

1,000 125
800 100
600 75
(GW)
400 (GW)
50
200
25
0
0
Pradesh
Pradesh
Maharashtra
Madhya
Gujarat
J&K
Total
Rajasthan
Andhra
Karnataka
Gujarat
Maharashtra
Pradesh
Total
Jammu &
Tamil Nadu
Andhra
Kashmir
Solar power potential Wind power potential
Source: MNRE, MoP, Edelweiss research
The shift towards RE catching up; integrating RE not a challenge

RE capacity addition overtook thermal in FY17 and sustained the lead in FY18 as well; this
trend is likely to continue in our view. In fact, RE capacity accounted for as much as 34% of
incremental capacity over FY14–18 while thermal made up 59%. RE enjoys a must-run status,
which means RE generation is accorded top priority in Merit Order dispatch irrespective of
tariffs, which lifts its share in generation mix. Furthermore, the MoP has revised the
Renewable Purchase Obligation (RPO) targets (21% by FY22) to be implemented uniformly
for all states and union territories over FY20–22. Formalisation of the policy by the MoP for
bundling RE with thermal generation should further boost the former.
Moreover, our interactions with grid operators and policymakers suggest that
accommodating RE on the existing grid is not a challenge—it can accommodate 25% RE
versus less than 10% currently.

Chart 26: Renewable capacity addition overtook thermal, making up 34% of incremental capacity over FY13–18
40.0 FY13-18 incremental capacity addition
32.0 Renewable
34%
24.0
(GW)
16.0
Thermal
8.0 59%
0.0 Hydro
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
5%
Nuclear
Thermal Nuclear Hydro Renewable 2%
Chart 27: Solar module prices plunged 43% over FY16–18, which accelerated RE capacity addition
2.0 75.0
1.6
60.0
(USD/Watt)
1.2
45.0
(GW)
0.8
30.0
0.4
15.0
0.0
31/3/10
31/3/11
31/3/12
31/3/14
31/3/15
31/3/16
31/3/17
31/3/18
31/3/13
0.0
FY 14 FY 15 FY 16 FY 17 FY 18
Silicon solar module spot price Small Hydro Wind BioPower Solar
Source: Bloomberg, CEA, Edelweiss research
Chart 28: RPO target revised to 21% by FY22
25.0
20.0
RPO trajectory (%)
15.0
10.0
5.0
0.0
FY20 FY21 FY22
Non solar Solar
Source: MoP, Edelweiss research

Power
B) But…capital constraints could create short-term squeeze

While we expect a marked shift towards RE over the long term, the sector is likely to
experience near-term pain amid a capital squeeze. Installing 100GW of the remaining RE
capacity would roughly require INR5.5tn of capital (at INR55mn/MW); factoring in debt of
70%, the renewable sector would need to borrow about INR4tn.
Over and above this, capital would be required to fund evacuation projects and working
capital. In the backdrop of NPA scare in the thermal space, lenders would be skeptical about
lending to power sector projects, not to mention the poor financial health of discoms, which
raises questions on their ability to honour RPO obligations and timely payments.
Recent liquidity
crisis in India and
It’s worth noting that RE projects in India are largely funded by non-banking financial
adverse currency
movement coupled companies (NBFCs) and external money (both debt and equity); with the bank funding on
with stiff interest the lower side as it generally takes them more than six months to disburse loans, whereas
rates are likely to project development ranges from 12–18 months.
cause a short-term
squeeze PFC, REC and IREDA (NBFCs) have been the top financiers for RE projects among public
entities while L&T Finance Holdings (an NBFC) and Yes Bank have been the major lenders for
RE projects on private side. Currently, 18–20GW of RE capacity is under construction, which
would entail capital advances of about INR1tn (18GW@INR60mn/MW), implying debt
funding of about INR700bn (70% debt levels). Indicative RE exposure for major financers
stands as follows: PFC (INR160bn); REC (INR85bn); IREDA (INR152bn – H2FY18 loan book);
L&T Finance Holdings (INR180bn); and Yes Bank (INR11bn).
Chart 29: NBFCs lead RE funding
200
160
120
(INR bn)
80
40
0
PFC REC IREDA L&T Finance Yes Bank
Indicative RE exposure
Source: Industry, Edelweiss research
We take note of our strategy team’s recent update (Impact of liquidity tightening), which
cautions that India’s recovery is still nascent while interest rates are moving ahead of the
growth cycle; this may jeopardise recovery and thus potentially tighter liquidity conditions
are here to stay in the near term.
To make matters worse, the recent default by IL&FS, which spooked India’s bond and equity
markets, is the manifestation of tightening domestic liquidity that has been in the works for

some time amid the ongoing stress on Balance of Payments inflicted by trade wars, global
liquidity tightening and volatility in crude oil price.
The recent market volatility put a spanner in the works of leading renewable power
companies’ plans to go public. Raising capital for projects is at risk, and we believe this could
pose a challenge to upcoming projects. The steep fall in tariffs in conjunction with a rising
interest rate scenario and a depreciating rupee (foreign borrowings) does not help either.
Consequently, a capital squeeze over the next six–nine months in the renewables space is
likely as tariffs are likely to stabilise only over the medium term.
We believe there is a strong possibility of renewable tariffs rationalising to

INR2.75–3.00/unit over the medium term owing to the recent macroeconomic
developments and, importantly, lower competitive intensity.
Tariffs discovered in recent bids have been largely in the range of INR2.5-3/kwh, which is
lower than average cost of supply by conventional sources of INR3.25/kwh-plus, and are
likely to go up with implementation of flue gas desulphurisation (FGD) norms. The weighted
average tariff for the last three months for 5.7GW of tendered capacity is INR2.72/kwh.
Chart 30: Tariff bids of INR2.5–3/kwh over last 12 months

4.0
3.4
(INR/kwh)
2.8
2.2
1.6
1.0
Apr-18
Feb-18
Sep-18
Sep-18
Sep-18
Mar-18
Mar-18
Jun-18
Jun-18
Jul-18
Jul-18
Jul-18
Jul-18
Jul-18
Oct-18
Oct-18
Oct-18
Aug-18
Aug-18
May-18
May-18
May-18
May-18
Weighted average tariff

Source: Media Articles. Sigma Insights, Edelweiss research
Note: Data include solar and wind energy bids with tendered capacity >50 MW
RE capacity likely to C) RE contribution in energy mix to inch up to 13% by FY22

increase at a 15% Based on our base case demand-supply estimate, we believe power demand would
CAGR through FY22 increase at a CAGR of 6.2% over FY18–22E. We expect RE – with 28% of the overall
and will contribute installed capacity base (20% currently) – to contribute 13% to the energy mix by FY22E
13% to generation
(versus 8% currently). As much as 35% of incremental generation is estimated to come from
mix
renewable sources. Given RE’s lower PLFs of 18–20%, about 4GW of renewable is equivalent
to 1GW of thermal capacity at 80% PLF.
Increasing freight rate and coal prices (CIL price up 4%, e-auction up 28%, imported coal
price up 77% over FY16–18) coupled with declining module prices (down 43% over FY16–18)
are propelling renewable cost competitiveness against conventional sources. Setting up of
dedicated green energy corridors for renewable evacuation and favourable policy support in

Power
terms of: a) dedicated solar parks (land provided by government); b) accelerated

depreciation that yields additional tax benefit; c) waiver of interstate transmission charges;
d) RPO obligations; and e) last but not least, the ‘must-run’ status accorded to renewable
will provide the push for this shift. Other key points:
 We expect RE capacity to increase at a 15% CAGR to 121GW by FY22.
 Solar module prices have come off to less than 0.3 USD/MW (down 43% over FY16–18
and 80% over FY11–18) owing to technological progress and large capacity build-up.
 Wind capacity addition should pick up after the temporary setback in FY18 (1.7GW
versus 5.5GW in FY17) as the industry adjusts to reduced counterparty risk with the
Solar Energy Corporation of India (SECI) as the auctioning authority.
 Wind-Solar Hybrid has seen muted response so far.
Chart 31: We expect RE capacity to increase at 15% CAGR to 121GW by FY22 (28% of total installed capacity)
500
FY22E
420 Renewable
28%
340
(GW)
Thermal
260 coal
Nuclear 51%
180 3%
Hydro
100 12% Thermal
FY18 FY19E FY20E FY21E FY22E
gas
Thermal coal Thermal gas Hydro Nuclear Renewable 6%
Chart 32: Power demand likely to touch 1,660 BUs by FY22E with RE catering to ~13% of demand
2,000 15.0
1,600 12.0
1,200 9.0
(BU)
(%)
800 6.0
400 3.0
0 0.0
FY18 FY19E FY20E FY21E FY22E FY18 FY19E FY20E FY21E FY22E
Total conventional Renewable Renewable contribution in energy mix

Chart 33: Power generation mix to shift towards RE as incremental thermal capacity takes a backseat
FY22E
FY18
Renewable
Renewable
Nuclear 13%
8%
3% Nuclear
2%
Hydro
Hydro
10%
10%
Thermal Thermal
gas gas
4% 3%
Thermal
Thermal coal
coal 72%
75%
D) The big change – Coal PLFs to settle lower than historical levels
Coal PLFs to settle at lower than historical levels
After a declining trend for ten years, PLFs of coal-based plants improved 80bps to 60.7% in
FY18. Based on our demand-supply model, we estimate coal-based PLFs would improve to
65% in our base case (6.2% CAGR power demand growth and 15% CAGR RE capacity
addition) by FY22E.
While coal PLF will improve, we do not expect it to scale its historical peak of 78 % (FY10)
Integration of large-
with demand growth of 6–7%. The industry is likely to adjust to lower coal PLFs as RE
scale renewables
integration into the energy mix will require thermal to recede. With RE tariffs dropping
into grid would
require scaling substantially to levels comparable to conventional power, higher variable charge thermal
down thermal plants are likely to be priced out in scheduling.
units, implying
lower coal PLFs as Chart 34: Coal PLFs to improve as capacity addition tapers off
the new normal 90.0
82.0
74.0
(%)
66.0
58.0
50.0
FY19E
FY20E
FY21E
FY22E
FY10
FY11
FY12
FY13
FY14
FY15
FY17
FY18
FY16
Implied coal based plants PLF's


Power
Demand growth the dark horse, could improve PLFs by 400bp

Sensitivity to demand suggests coal PLFs could improve by 400bp for every 1% increase in
power demand CAGR by FY22E. Factoring in RE capacity addition CAGR of 15% (121GW by
FY22E), coal-based PLFs could rise 400/800bp by FY22E in a 6%/7% growth scenario from
current levels (60.7%: FY18).
Chart 35: Coal PLF rises 400bps with 1% incremental demand CAGR over FY18-22E
700
620
(million tonnes)
540
460
380
300
FY18 5% 6% 7% 8% 9%
Power demand CAGR over FY18-FY22E
Table 3: FY22E coal-based PLFs to settle within 65–69%

5% 61% 62% 62% 62%
6% 62% 64% 65% 65%
Demand 7% 63% 66% 67% 69%
Growth 8% 64% 67% 70% 72%
9% 65% 69% 72% 76%
10% 65% 71% 75% 80%
Table 4: Higher renewable capacity by FY22 could pull down coal PLFs
15% 62% 64% 65% 65%
17% 62% 64% 64% 64%
Renewable
20% 62% 63% 63% 63%
Capacity
22% 62% 63% 63% 62%
Growth
25% 61% 62% 62% 60%
27% 61% 62% 61% 59%

Table 5: FY22E implied coal PLF: Sensitivity to energy and renewable capacity growth
Renewable Capacity CAGR FY18-22E
15% 17% 20% 22% 25% 27%
5% 62% 61% 60% 59% 57% 56%
Power demand 6% 65% 64% 63% 62% 60% 59%
CAGR 7% 69% 68% 66% 65% 64% 63%
FY18-22E 8% 72% 71% 70% 69% 67% 66%
9% 76% 75% 74% 73% 71% 70%
10% 80% 79% 77% 76% 75% 74%
One must be mindful that demand growth has been inconsistent over the years. Over the
past decade, power demand was muted (5.1% CAGR) while capacity addition exceeded
demand growth by a margin of 4ppt, which led to a power surplus. The GoI is pushing
‘24x7 Power for All’, but we believe effective reform implementation for improving
discoms’ health is critical to achieving the aforesaid objective.
Chart 36: Historically, demand growth sluggish and profile inconsistent

1,500 20.0 1,300 10.0
1,200 16.0 1,140 8.0
900 12.0 980 6.0

(BU)
(%)
(BU)
(%)
600 8.0 820 4.0
300 4.0 660 2.0
0 0.0
500 0.0
FY09
FY11
FY08
FY10
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY08
FY10
FY12
FY14
FY16
FY18
FY09
FY11
FY13
FY15
FY17
Energy requirement Energy availability Deficit
Energy requirement Energy demand growth

Power
Domestic coal availability a potential dampener

1) Scenario-analysis of coal at different demand levels
2) Reasons for higher international coal prices and why importing coal is imperative
3) Impact of higher coal prices on the thermal power sector

1) Our base-case analysis suggests coal consumption by the power sector could
touch 739MTPA by FY22E (versus 608MTPA in FY18).
2) Furthermore, every 1% incremental power demand CAGR through FY22E would

require additional 40MTPA of coal supply.
3) For CIL, the required off-take could touch 581/611MTPA by FY22E in a 6.2%/7%
demand scenario (454MT in FY18). A spike in coal imports is thus imperative.
A) Fuel conundrum: A challenge in meeting demand

CIL finding it difficult to keep pace with rising demand
Lack of coal availability hampered production in FY18 with coal stocks reaching critical
levels at several plants including NTPC’s. Factoring in 6.2% demand growth and 15% RE
capacity addition in our base case, we expect coal requirement to touch 739MTPA by FY22.
Including other sources (imports, captive mine, SCCL production), the required dispatch
from CIL could touch 581MT by FY22, implying the need for incremental dispatch of
~126MTPA by FY22E (454MT in FY18), which works out a 6.3% CAGR versus its 5.1%
production CAGR over FY13–18
Chart 37: Coal requirement may touch 739MTPA by FY22E Chart 38: FY22E CIL coal dispatch requirement 581MTPA
750 10.0 600 12.0
690 8.0 540 9.6

(mn tonnes)
(mn tonnes)
630 6.0 480 7.2

(%)
570 4.0 420 4.8 (%)
510 2.0 360 2.4
450 0.0 300 0.0

FY18 FY19E FY20E FY21E FY22E FY18 FY19E FY20E FY21E FY22E
Coal requirement (MT) Y-o-Y growth CIL required production Y-o-Y growth

1% incremental power demand CAGR over FY18–22E (6.2% base case) implies
40MT of additional coal requirement by FY22E
Our sensitivity analysis of coal requirement suggests that CIL’s coal dispatch for the power
sector could rise by ~40MT by FY22 for every 1% incremental power demand CAGR. CIL’s
required coal dispatch could climb to 572–611MT by FY22 in a 6–7% coal demand CAGR
scenario. This could lead to particularly challenging situation for IPPs in a shortage scenario
given potential preference for NTPC, as has been the case over the past year.
Chart 39: CIL’s required FY22E dispatch based on power demand growth
700
620
(million tonnes)
540
460
380
300
FY18 5% 6% 7% 8% 9%
Power demand CAGR over FY18-FY22E

Table 6: Sensitivity of CIL production to power demand and RE growth

Renewable Capacity CAGR FY18-22E
15% 17% 20% 22% 25% 27%
Power demand 5% 534 525 510 500 483 471
CAGR 6% 572 563 548 538 521 509
FY18-22E 7% 611 602 587 577 560 548
8% 651 642 627 617 600 588
9% 692 683 668 658 641 629
10% 735 725 711 700 683 671
Source: CIL, Edelweiss research
B) Importing coal imperative

Domestic fuel woes likely to persist; surge in coal imports on the cards
The MoP’s advice to central and state generation companies (gencos) to look into imports
for meeting coal shortfall is a grave pointer on the domestic coal situation. We have been
highlighting (No respite from fuel paucity) that the coal supply deficit is likely to persist in
the near term and, thus, coal imports are imperative given CIL’s inventory is at a multi-year
low (19MT at end-September 2018).
Secondly, coal evacuation has been a challenge for the Indian Railways with network
congestion in major freight corridors, contrary to the popular perception of lower rake
availability. According to the Ministry of Railways data, out of the 265 high-density

Power
networks, 185 sections are operating at capacity utilisation of more than 100%. This
particularly creates bottlenecks for non-pithead thermal IPPs vis-a-vis centre- or state-
owned power plants, which might be preferred for coal evacuation.
Chart 40: Plants with critical coal stock levels alarmingly high Chart 41: Thermal plants grappling with low coal inventory
30.0
40.0
24.0
32.0
(million tonnee))
18.0
24.0
(days)
12.0
16.0
6.0
8.0
0.0
03-Feb-18
03-Aug-17
03-Aug-18
03-Oct-17
03-Oct-18
03-Apr-17
03-Apr-18
03-Jun-17
03-Jun-18
03-Dec-17
0.0
Sep-17
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Plants with critical stock (<7 days)
Plants with super critical stock (<4 days) Thermal plants closing coal stock
Source: Bloomberg, CEA, Edelweiss research
Chart 42: CIL’s Q2FY19 closing inventory at multi-year low… Chart 43: …amid elevated demand spells trouble
75 35.0 120 12.0
60 20.0 108 9.0

(million tonne)
45 5.0 96 6.0
(BU)
(%)
(%)
30 (10.0) 84 3.0
15 (25.0) 72 0.0
0 (40.0) 60 (3.0)
Sep-17
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Jan-18
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
CIL closing coal inventory YoY growth Energy requirement YoY growth
Source: CIL, CEA, Edelweiss research
C) Stiff e-auction premium/international coal prices hurt IPPs/discoms

Since long-term PPAs are a prerequisite for securing long-term fuel supply agreements
(FSAs), merchant players rely on costlier e-auction for coal off-take, which is likely to
aggravate the pressure on stressed merchant capacity (~19GW stressed capacity lacks
PPAs). International coal prices are persistently high (up 77% over FY16–18) and given that
coal imports seem imperative, already-burdened discoms are likely to bear the brunt of the
high fuel cost as central and state generators would pass through higher fuel cost.

Chart 44: International coal prices spike 77% over FY16–18 Chart 45: E-auction premium has widened in recent quarters
130 3,000
110 2,400
(INR/tonne)
(USD/tonne)
90 1,800
70 1,200
50 600
0
30
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
Newcastle thermal 6000kcal/kg FOB spot price

FSA E-auction
Source: CIL, Bloomberg, Edelweiss research
A look at international trade balance, coal production: Skewed towards China

International thermal coal production has risen at a CAGR of just 1.6% over the last 12 years
and is currently at ~5,350MT production. This is mainly on account of a strong favour for
renewables. China produces and consumes ~45% of the global thermal coal production
every year and, hence, any slight change in the Chinese consumption swings coal prices.
Chart 46: Last 12 years’ global coal production trend – 1.6% CAGR Chart 47: Top seven countries produce/consume 85% coal
6,000
Others USA
1.6% CAGR over the last
South 12% 10%
5,500 12 years Russia
Africa
4% 5%
(mn tonnes)
5,000
Indonesia
7%
4,500
India
4,000 8%
3,500
FY09
FY07
FY08
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Australia
8% China
Coal production 46%
Source: Bloomberg, Industry, Edelweiss research
But, why are international thermal prices on an upswing?

International coal prices topped USD100/tonne for the first time in the last six years in FY17.
In fact, for the first time in years, over the past two quarters, 80–90 percent of global
miners have been making money due to higher coal price. We highlight three key reasons
for higher coal prices:

Power
1) strong consumption in China in spite of the Government efforts to wean electricity

generation off coal;
2) robust use in India, Japan, South Korea (together 15% consumption) on the back of
strong demand and domestic supply issues, among others; and
3) supply in South Africa has been diverted to domestic power-generation facilities.
While thermal coal prices have lately come off from the peak of USD120/tonne to about
USD100/tonne, they are quite high. The current landed price of imported coal is broadly at
the level of coal e-auctioned by CIL.
There is a possibility that the international coal prices to decline as supply in China is
expected to rise due to mine upgrades and expansions in CY18. China’s thermal coal output
is expected to increase 3.3% YoY to 3.1bn tonnes (bt) and 4.0% YoY to 3.2bt in CY19 and
CY20, respectively. Further, coal capacity closure is also expected to dip sharply to 100mt in
CY19 and 50mt in CY20 compared to 150mt in CY18. Please refer to (Coal: Reviving China
supply could singe e-auction premium, sector update).
Correction in domestic thermal coal prices in China is expected to cascade to international

prices with Indonesia accounting for almost 50% of total coal imported by China to be
impacted the most. Currently, Indonesian coal (5,500kcal) is at parity with CIL’s e-auction
price. However, we expect e-auction premium to come off the current level of 98%
following possible price correction in Indonesian coal price.
SHAKTI linking ~10GW of capacity will put additional pressure on CIL

In the first round of bidding, ~27MTPA of coal – linking ~10GW of coal-starved capacity –
was auctioned. This will provide relief to ~7GW of capacity of the 40GW stressed pool that
had PPAs but suffered due to lack of coal linkages. According to the Ministry of Coal, all
plants with PPAs have tied up coal linkages after the first round of auctions under SHAKTI.
That said, despite the auctions having taken place in September 2017, actual coal
evacuation faces time overruns. The consequent increase in off-take commitment could put
further pressure on CIL.
Table 7: SHAKTI round 1 allocates additional 27MT coal to be supplied by CIL

Beneficiary Plants State Capacity Coal Allocation (in Mn tonnes)
Adani power Tiroda Maharashtra 1,980 5.8
Adani power Kawai Rajasthan 1,320 4.1
KSK Mahanadi Akaltara Chattisgarh 2,400 6.8
Bajaj Hindustan Lalaitpur Uttar Pradesh 1,980 5.6
GVK Energy Goindwal Saab Chattisgarh 540 1.7
GMR Energy Kamlanaga Odisha 1,050 1.5
Adhunik Power Adhunik TPP Jharkhand 540 1.0
Others Sail Leela, ACB 272 0.8
Total 10,082 27.3

Powerful(l) consolidation: Attractive valuations
1) Assessment of existing stressed assets
2) Resolution of core issues such as lack of PPAs/FSAs

3) Which companies are likely to benefit?

1) Haircuts on the overall stressed capacity could be 55–65%, implying average
transaction of INR30–35mn/MW against current greenfield capex requirement
of INR75mn/MW.
2) Coal allocation under SHAKTI (27MTPA in round 1) and medium-term PPAs (2.5GW
auctioned in pilot scheme) are likely to revive capacities without FSAs/PPAs.
3) NTPC, JSW Energy, Vedanta, Tata Power and Adani Power (the latter though
leveraged) are, likely to be the key beneficiaries.
A) Consolidation to gather steam in stressed thermal assets

 Thirty four projects aggregating 39GW of coal capacity were identified as stressed projects
 due to various reasons outlined in the 37th report of the MoP’s Standing Committee on
 Energy. The RBI’s 12th February circular effective 1st March 2018 ordered lenders to resolve
 theAnyhow
assets within
the 180 days or faceintheensuing
consolidation NCLT, which triggered
quarters sector consolidation.
provides bigger players with
attractive inorganic growth opportunities (NTPC, JSW could be key beneficiaries).
Of this 39GW capacity: a) 9GW has been resolved; b) 6GW has been referred/admitted to
The best plants
(with PPAs/FSAs) the NCLT; and c) the balance 24GW is in the process of resolution. The Supreme Court’s stay
too will suffer a on the RBI’s circular provided lenders breathing room to resolve the assets with some deals
minimal 50% being in advances stages of negotiation.
haircut in our view
Though banks could realise better valuations via out-of-NCLT settlements, bringing on board
the entire consortium of lenders has been a big challenge in such transactions. Besides,
considering that NCLT process is in public domain, banks might prefer to resolve assets
through the NCLT route to avoid scrutiny. Recently, two deals have been announced with
2.5GW of capacity changing hands outside the NCLT. This kick-starts a consolidation wave, in
our view, which would gain traction over the ensuing two–three quarters.
In this backdrop, NTPC, JSW Energy, Tata Power and Adani Power are likely to be the key
beneficiaries in our view. The recently announced deals indicate valuations of
INR30–35mn/MW, which is at steep discount to greenfield capex, implying attractive
inorganic opportunities for bigger players.
To resolve issues such as the lack of PPAs and FSAs, the government launched a pilot
scheme for medium-term PPAs (2.5GW) for stranded capacity in April 2018 and the SHAKTI
coal allocation scheme (27MTPA allocated in round 1). The government is mulling another
round of medium-term PPAs and the SHAKTI scheme to alleviate the pressure on stressed
assets. Besides, the stressed assets could be good candidates for PPA tie-ups, particularly
factoring in a lower capacity charge after debt reduction as lenders absorb haircuts.

Power
Lack of coal linkages and PPAs biggest roadblocks

Approximately 14GW of capacity is lifeless, i.e. without coal linkages and PPAs. Historically
large capacity additions amid tepid demand provided the already-stretched dicoms little
incentive to enter long-term PPAs and thus bear fixed-cost liability. State electricity boards
(SEBs) have been tapping merchant markets to fulfil sporadic spurts in demand. Besides,
with 45GW of under-construction capacity by the centre and states (which will have to be
absorbed by discoms) leaves little room for fresh long-term PPAs.
Since the Supreme Court’s cancellation of coal blocks in 2014, IPPs have failed to secure
fresh linkages and have been relying on costlier e-auction and imported coal. Consequently,
about 19GW of capacity is stranded for lack of long-term PPAs and about 21GW for want of
fuel linkages (ex-SHAKTI allocation).
Fig. 6: Lack of FSAs, PPAs biggest challenges

14 W
No FSA.
No PPA
13GW 40GW 5GW

FSA , Stressed FSA, no
PPA capacity PPA
7GW
No FSA,
PPA
Note: This does not include coal allocation under SHAKTI

Fig. 7: MoP identified 39GW stressed coal capacity with INR1.77tn outstanding debt
INR1.77tn debt

Fig. 8: Lenders must finalise resolution mechanism for 24GW capacity; otherwise, it would be referred to NCLT
Overall
39GW (34 projects)
Resolved Admitted/referred to NCLT Balance

9GW (8 projects) 6GW (7 projects) 24GW (19 projects)
Table 8: 24GW coal capacity is under resolution

Admitted/ To be
Resolved
Referred in NCLT resolved
Count of Projects 8 7 19
Capacity(GW) 8.8 6.1 23.9
PPA Tie Up (GW) 6.9 2.0 11.4
FSA Tie Up(ex SHAKTI Linkage) (GW) 5.7 1.6 10.2
Chart 48: >80% of INR1.77tn outstanding debt of stressed coal capacity to be resolved
INR 1.77tn debt outstanding
Resolved
20%
Admitted/
Referred in NCLT
14%
To be resolved
66%

Power
Fig. 9: Resolution under NCLT process will happen in due course and can be time-consuming
Appointment Formation of 75% of creditors

Admitted to Moratorium
of a resolution committee of to approve the
NCLT (180/270 days)
professional creditors resolution plan
NO YES
Goes into Implementation of

liquidation resolution plan
Note: This is an indicative process

Source: Media articles, Edelweiss research
B) Medium-term PPAs/SHAKTI linking could benefit stressed capacity

Prior to the RBI’s February 12 circular this year, lenders had been resorting to different
restructuring schemes for reviving stressed assets. The stressed assets have largely suffered
from: a) lack of long-term PPAs; b) lack of FSAs; c) stretched working capital cycles with
delayed discom payments; and d) delays in project execution with ballooning interest costs.
In our note (Zero-sum game), we argue a management reshuffle would be of little help
at stressed capacity/plants unless fundamental issues plaguing the assets/sector are
resolved. The government has been mulling medium-term PPAs/coal allocation schemes to
relieve the stressed capacity. Thus, 10MTPA coal was allocated under round 1 of SHAKTI,
which provided coal linkages to plants with PPAs.
On the PPA front, a pilot scheme was launched in April 2018 for contracting medium-term
PPAs totaling 2.5GW. The government is also contemplating further rounds of medium-term
PPAs/SHAKTI for the stressed assets. Reduced debt implying lower capacity charge could
make such assets prime candidates for fresh PPAs in our view.
Chart 49: Core issues need to be tackled as 19GW capacity lacks PPAs
12.0
9.6
7.2
(GW)
4.8
2.4
0.0
Completed Partially completed Under construction
No FSA,No PPA FSA,No PPA No FSA, PPA FSA, PPA
Note: This does not include coal allocation under SHAKTI

Chart 50: Mounting debt has rendered projects unsustainable
7.5x
6.0x
4.5x
(D/E)
3.0x
1.5x
0.0x
Lanco Anpara
Lanco Babandh
Jindal Derang
KSK Mahanadi
RKM Uchpinda
Deveri TPP
Vidarbha
Malibrahmani
Amarkantak
Bhavanpadu
Singhitarai TPP
Mutiara TPP
SKS Binjkote
Lanco
Lanco
TPP
TPP
Source: CEA, MoP, Edelweiss research
C) Bottoming valuations offer attractive buyout opportunities

Recently, two power projects totalling 2.5GW capacity have changed hands outside the
NCLT, namely: a) 75% stake in Prayagraj Power Generation Company Limited – 1,980MW
(>90% PPAs and FSA tie-ups) to be acquired by Resurgent Power for a consideration of
about INR60bn, implying a nearly 50% haircut for lenders; and b) SKS Power Generation
Chhattisgarh Limited – 600MW (PPA tie-up: 5%; FSA tie-up: 50%) to be acquired for a
consideration of about INR22bn, suggesting a nearly 55% haircut for lenders. Tata Power
holds a 26% stake in Resurgent Power.
The two deals with valuations of INR30–35mn/MW have been cut at a steep discount to the
cost of setting up a new coal plant of about INR70mn/MW. In such a scenario, bigger
players are likely to scout for assets given their attractive valuations, particularly the
operational ones with PPAs and FSAs. We expect haircuts of 55–65% on the overall stressed
capacity, implying an average rate of ~INR30mn/MW.
The consolidation phase is a windfall in our view for bigger players with strong balance
sheets. Therefore, NTPC, JSW Energy, Vedanta, Tata Power and Adani Power (though the
latter is highly geared) are likely to be the key beneficiaries. That said, fresh funding for
asset buyout may be a hurdle for bidders. Lenders and the MoP have been contemplating
various schemes such as ‘Samadhan’ (SBI) and ‘Parivartan’ (REC) to avoid hefty haircuts and
to salvage the assets that are unlikely to find any buyers.
Under-construction capacity of 8GW could be shelved

About 8GW of stressed under-construction capacity is unlikely to see the light of day as cost
and time overruns along with huge accrued interest during construction (IDC) have made
such projects unviable. Lenders/bidders will be highly skeptical about bringing in fresh
equity in the under-construction projects (where no unit has been commissioned out of the
proposed capacity) without assurances of PPAs and coal linkages, which are quite unlikely
given current conditions in our view.

Power
The major reasons are: a) delays in land acquisition and regulatory clearances; b) law and
order problems; and c) financial constraints as funding dried up amid mounting IDC and
slow progress.
Chart 51: Under-construction projects likely to evoke little investor interest

100% 100%
Deveri TPP
80% 80% Malibrahmani TPP
60% 60% Lanco Babandh
Lanco Vidarbha
40% 40%
KVK Nilachal TPP
20% 20%
Essar Tori TPP
0% 0% Singhitarai TPP
KVK Nilachal TPP
Deveri TPP
Malibrahmani TPP
Lanco Vidarbha
Bhavanpadu TPP
Singhitarai TPP
Essar Tori TPP
Lanco Babandh
Bhavanpadu TPP
0.0 20.0 40.0 60.0 80.0
Time overun of earliest unit (months as of Mar-

Cost overrun % PPA capacity 18)
Source: CEA, MoP, Edelweiss research
Chart 52: Under-construction projects lack PPA/FSA

12.0
9.6
7.2
(GW)
4.8
2.4
0.0
Completed Partially completed Under construction
No FSA, No PPA FSA, No PPA No FSA, PPA FSA, PPA
Source: CEA, MoP, Edelweiss Research
Notes: 1) 'Partially completed’ implies at least one unit has been commissioned and 'Under-
construction’ means no unit has been commissioned for the project.
2) Note: This does not include coal allocation under SHAKTI.

Distribution reforms: Critical to rekindle sector
1) Signs of improvement in the wake of UDAY
2) Why the ACS-ARR gap will widen again

3) Steps needed to dispel discoms’ woes

1) Under UDAY, discoms’ performance is improving, but the recovery will be slow
and gradual.
2) We believe it would be difficult to narrow the ACS-ARR gap further in the face
of stricter environmental norms and higher fuel costs.
3) It is an apt time to implement big and bold reforms like separation of carriage
and content, formation of national discom, subsidy disbursal through DBT etc.
A) Things are looking up, but recovery likely to be gradual

It would be unfair to assume that lower consumption led to lower demand growth. There
are multiple inefficiencies breeding in the distribution system, which limit discoms’ ability to
supply uninterrupted power. Poor discom operations have repercussions for the entire
power value chain and, therefore, improving discoms’ health (both operationally and
financially) is critical to reviving the beleaguered power sector. The UDAY scheme was
launched with a specific objective of turning around the ailing discoms.
One-time debt restructuring and operational efficiency to drive recovery

With UDAY being implemented, there is a dawn of hope, but the pace of reform is far from
ideal. That said, we are witnessing positive developments on all parameters under the
scheme and the government’s recent steps corroborate its commitment to turn the discoms
around.
This also provides discoms necessary leeway for supplying affordable electricity to the
underserved households and curb the practice of load-shedding, thereby boosting latent
demand in the system.
 Discom losses have curtailed by more than 60% to INR148bn for 9MFY18 (down from
INR515bn in FY16) largely driven by lower interest cost and the declining ACS-ARR gap.
 While the targeted zero ACS-ARR gap by FY19 under UDAY does not seem feasible, it
has considerably narrowed (to INR0.28/Kwh in 9MFY18 from INR0.59/Kwh in FY16).
 AT&C losses, pre-subsidy, for 9MFY18 declined 80bps YoY to 21.4%.

Power
Chart 53: Lower interest outgo and operational efficiency driving down losses
0.8 0
0.6
(120)
(INR bn)
0.5
(INR/kwh)
(240)
0.3
(360)
0.2
(480)
0.0
FY16 FY17 9MFY18 (600)
ACS-ARR gap Book loses
Source: UDAY Portal
While reduced debt provided some leeway, many states have not been able to stick to their
UDAY targets. The performance varies across discoms with many running elevated AT&C
losses. It would be some time before they are able to meet the 15% AT&C loss target set for
FY19. It is worthwhile mentioning that some states are running a negative ACS-ARR gap,
implying operating profitability. All in all, the sector has made headway from the pre-UDAY
era (which is starker for some states), but much still needs to be done.
Chart 54: State discoms’ AT&C losses are still far from FY19 target of 15%; only few states below target
75.0
60.0
(At&C loss %)
45.0
30.0
15.0
0.0 HP
Chattisgarh
UP
J&K
Rajasthan
TN
MP
Gujarat
Assam
Pradesh
Telangana
Punjab
Maharashtra
Kerela
Jharkhand
Karnataka
All India
Bihar
Andhra
Haryana
Uttrakhand
* As on 22-Nov-2018 Source: UDAY Portal
Distribution infrastructure to hog limelight

The government has been pushing discoms to stick to UDAY targets, arguing that consumers
should not have to pay for their inefficiencies.
Some of the measures being considered in ‘Electricity Amendment Act’ could aid in this
turnaround via: a) directly subsidy disbursal to consumers under the DBT scheme, which will

reduce the financial strain on discoms as delayed subsidy stretches their working capital,
necessitating additional funding as well as interest burden; b) cap on AT&C losses at 15% for
tariff calculation – this could incentivise discoms and states to curtail AT&C losses as any
loss beyond the cap will have to be borne from state budget; and c) a cap on cross-subsidy
at 20%, which would help retain the higher-tariff industrial consumers.
Fig. 10: Steps to tackle systemic inefficiencies

•Coal linkage rationalisation allows for swapping coal linkage to plants near coal mine/efficient plants.
•Coal price rationalisation based on GCV via third-party sampling, making producers accountable for quality of coal supplies.
Reducing power •Gradullay phasing out of older inefficient plants and adoption of super cricital technology.
cost •Proposal to bundle RE with high cost thermal generation projects to drive down variable charge.
•UDAY envisages 100% Feder sepration and DT installation for better monitoting. This should reduce pilferage, abate
power theft, and improve billing efficiency.
Improving
operational • The GoI mulling a 15% cap on AT&C loss for tariff calculation for consumers to incentivise disoms and state to curtail it.
efficiency
•All Uday states have undertaken tariff revision in different capacities; however, the GoI is mulling capping the cross-subsidy
at 20%. This could force discoms to undertake tariff revisions more aggressively.
Tariff revision
•Direct benefit transfer of subsidy will ease working capital as state goverenments signficantly delay subsidy transfers.
Improving •Debt transfer from discoms have notably reduced disoms' interest burden.
financial Health
Source: MoP, Industry, Edelweiss research
B) Fresh challenges along the way

In the near term, FGD norm implementation could add INR30–40mn/MW to fixed cost,
which would require a markup of INR0.3–0.4/Kwh to be passed on to discoms. Secondly, the
central and state generators’ reliance on costly imported coal (USD>110/tonne) could
further add to variable charge.
Merchant prices too have been also on the rise with growing demand as dicoms have been
looking to source power from exchanges to meet peak demand. There is also a high
possibility that sales migration through open access and captive routes (essentially for
renewable) could be a trend for the bigger purchasers, implying potential loss of cross-
subsidising consumers to discoms.

Power
C) Bold reforms a crying need

This is the third bailout package in the last 15 years for the distribution space. Though there
is no one-fits-all solution for turning around discoms, some fundamental hurdles need to be
removed to facilitate discoms operate better.
The distribution landscape itself is evolving amid increased consumer expectations,

technological advancements (prepaid metres, smart metres, energy audit systems) and
integration of new forms of energy generation systems via renewable and energy storage
technologies in the future. Given near-term pressure on discoms, it is an apt time to
implement big and bold reforms in our view.
Some of the reforms could be:

a) separation of carriage and content;
b) formation of a national discom; and
c) subsidy disbursal through DBT.
Prepaid meters and Energy audit systems are being adopted to improve discom operations
further. Proposed changes in the Electricity Act, if implemented, could go a long way in
improving the financial efficiency of discoms. Experts suggest 2019-24 will be period of big
and bold distribution reforms.
Some discoms are currently running negative ACS-ARR gaps, implying profitable operations.
More discoms turning profitable could very well be an inflection point for the power sector..
Chart 55: Distribution reform is critical to health of power sector

0.8
0.72
0.6 0.59 Likely to go

0.52 up
(INR/kwh)
0.4 0.4
0.28
0.2
0.0
FY14 FY15 FY16 FY17 9mFY18
ACS-ARR gap on subsisdy booked basis
Source: MoP, Industry, Edelweiss research

Valuations bottoming out; good hunting ground
1) How has the power sector fared historically vis-a-vis broader market
2) Status check: Where do we stand today?

3) Picking winners

1) The power sector has had a tough time with most companies underperforming
the broader market over the past decade.
2) Regulated entities (NTPC, PGCIL) have been trading at the lower end of their
respective historical valuation bands. The situation has started looking up though.
3) NTPC is our top pick (beneficiary of consolidation and sustained rise in power
demand), followed by CESC (re-rating candidate and strong FCF profile) and Tata
Power (streamlining operations).

A) Sectoral woes underlie persistent underperformance
Power sector companies have largely underperformed the broader market over the past
decade. We have highlighted various challenges that led to the accumulation of stressed
assets in the system. The recent bids at INR30–35mn/MW for stressed coal-based capacity
imply a steep discount to greenfield capex (upwards of INR70mn/MW). On a ten-year CAGR,
all companies under our coverage, barring CESC, have lagged the broader market (Nifty).
Table 9: All power companies, except CESC, have largely underperformed Nifty over
past decade
1m 3m 6m 1y 3y-CAGR 5y-CAGR 10y-CAGR
NIFTY 0.7 (8.5) (1.5) 5.5 10.9 11.4 9.0
BSEPOWR (2.7) (9.4) (7.4) (14.9) 0.6 3.5 (3.4)
NTPC (9.3) (17.5) (12.2) (17.9) 5.3 1.2 0.2
PWGR (2.4) (4.9) (5.9) (5.9) 14.2 16.4 8.5
TPWR 5.0 5.6 3.7 (7.5) 9.2 1.7 (1.4)
CESC 2.3 (11.1) (10.1) (6.8) 19.2 19.5 12.2
JSW (1.0) (4.1) (9.9) (14.0) (6.0) 9.2 NA
APL 5.7 60.1 169.3 59.1 19.6 8.7 NA
Source: Bloomberg, Edelweiss research

Power
B) Regulated entities trading at lower end of valuation spectrum;

CERC 2019–24 norms crucial
Operating environment in India’s power sector is quite inflexible with regulators dictating
tariff, operational norms, grid frequency norms, licensing, development of power market,
etc. Hence, the upcoming CERC norms become quite critical, which are regulated for a
period of five years (started in 2004) and define the broad direction of the earnings
trajectory for regulated companies. Historically, stocks have shown high sensitivity to
norms-related announcements.
Chart 56: Fully regulated entities (NTCP, PGCIL) trading at -1SD their historical one-year forward EV/EBITDA
12.0 12.0
10.8 10.8
9.6 9.6
( EV/EBITDA)
( EV/EBITDA)
8.4 8.4
7.2
7.2
6.0
6.0
Apr-15
Sep-15
Feb-16
Mar-18
Jun-14
Dec-16
Jul-16
Oct-17
Aug-18
Nov-14
May-17
Jan-14
Apr-17
Sep-17
Feb-18
Jun-16
Mar-15
Dec-13
Dec-18
Jul-18
Aug-15
Oct-14
Nov-16
May-14
Jan-16
NTPC 12m fwd EV/EBITDA 5 Year average PGCIL 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Chart 57: Regulated players have historically reacted sharply to norms announcements
150 100 140 100
140 90 128 90
130 80 116 80
(INR)
(INR)
(INR)
(INR)
120 70 104 70
110 60 92 60
100 50 80 50
09-Feb-09
23-Feb-09
09-Feb-14
23-Feb-14
12-Jan-09
26-Jan-09
12-Jan-14
26-Jan-14
01-Dec-08
15-Dec-08
29-Dec-08
01-Dec-13
15-Dec-13
29-Dec-13
NTPC PGCIL NTPC PGCIL

The next set of CERC norms for 2019–24 is due shortly. While the discussion paper was
released in mid-2018, the implementation of the proposed changes might be challenging in
our view. It is worthwhile noting that this discussion paper explored different avenues of
tariff norms. The actual norms due in February 2019 might be starkly different from the one
proposed in the discussion paper. We touch upon some of the proposed changes to RoE and
incentive structures outlined in the discussion paper and its impact on RoEs/earnings.

Table 10: NTPC – Sensitivity of target price to RoE structure
Project RoE
190 13.5% 14.5% 15.5% 16.5% 17.5% 18.5% 19.5% 20.5% 21.5%
Growth rate (g)
1.0% 137 144 151 159 166 173 181 188 195
2.0% 138 146 154 162 170 178 186 194 202
3.0% 139 148 157 166 175 184 193 202 211
4.0% 141 151 161 171 182 192 202 212 222
5.0% 144 155 167 178 190 201 213 224 236
Table 11: PGCIL – Sensitivity of target price to RoE structure

Project RoE"S
225 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0%
3.0% 179 187 194 202 210 217 225 232
Growth rate
4.0% 182 191 199 208 216 225 233 242

5.0% 186 196 205 215 225 234 244 254
6.0% 191 202 213 225 236 247 259 270
7.0% 197 211 225 238 252 266 279 293
But private sector/non-regulated entities trading above average valuation band

While regulated entities are trading at the lower end of their valuation bands, perhaps due
to their depressed earnings for various reasons, the non-regulated/semi-regulated entities
are still at higher end of their valuations. A favorable outcome of various pending issues in
the appellate tribunal, particularly the successful resolution of Mundra issue, remains a key
earnings trigger for TPCL and APL. CESC, we believe, is a re-rating candidate in the wake of
its demerger, which makes its a pure-play opportunity. For JSW Energy, unrelated
diversification into the evolving EV business would continue to be an overhang in our view.
Moreover, while valuations remain high for companies such as JSW Energy, Adani Power,
Tata Power, etc, the current scenario presents an excellent opportunity for inorganic growth
at fairly reasonable valuations.

Power
Chart 58: Non-regulated/semi-regulated regulated players barring CESC are trading above/close to historical valuation
13.0 10.0
11.0 9.0
( EV/EBITDA)
( EV/EBITDA)
9.0 8.0
7.0 7.0
5.0 6.0
3.0 5.0
Apr-17
Feb-18
Sep-17
Jun-16
Mar-15
Dec-13
Dec-18
Jul-18
Aug-15
Oct-14
May-14
Nov-16
Jan-16
Apr-17
Sep-17
Feb-18
Mar-15
Jun-16
Dec-13
Dec-18
Jul-18
Oct-14
Aug-15
Nov-16
May-14
Jan-16
TPCL 12m fwd EV/EBITDA 5 Year average CESC 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Source:Bloomberg, Edelweiss research
9.0 11.0
7.8 10.0
( EV/EBITDA)
( EV/EBITDA)
6.6 9.0
5.4 8.0
4.2 7.0
3.0 6.0
Dec-13
Dec-18
Oct-14
Aug-15
Apr-17
Nov-16
May-14
Jan-16
Feb-18
Sep-17
Mar-15
Jun-16
Jul-18
Apr-17
Sep-17
Feb-18
Mar-15
Jun-16
Dec-13
Dec-18
Jul-18
Oct-14
Aug-15
Nov-16
May-14
Jan-16
JSW 12m fwd EV/EBITDA 5 Year average APL 12m fwd EV/EBITDA 5 Year average
+1SD -1SD +1SD -1SD
Source:Bloomberg, Edelweiss research
C) NTPC remains our top pick

We value fully regulated companies, viz., NTPC and PGCIL, with fixed returns on capital on a
P/B basis and the remaining pack on DCF methodology (barring fully regulated assets). While
the CERC 2019–24 norms are awaited, we do not expect stock prices to react much. Moreover,
given the recent bond yield movements and potential interest rate hikes, we believe core RoE
is unlikely to change, though incentive structures may be tweaked.
All in all, we stick to our thesis that the demand-supply mismatch would balance out and, in
the process, would not only lift PLFs but also nudge discoms to sign PPAs. Among our
coverage, NTPC is our top pick (beneficiary of rise in power demand and consolidation)
followed by CESC (re-rating candidate and strong FCF profile) and Tata Power (streamlining
operations). We remain cautious on JSW Energy (unrelated diversification) and Adani Power
(ballooning debt), and positive on PGCIL (but prefer NTPC due to its better prospects).

Chart 59: Regulated players trading at attractive valuatiions
20.0 20.0
PWGR PWGR
15.0 15.0
NTPC NTPC
CESC TPWR TPWR
(RoAE, %)
( RoAE, %)
10.0 10.0
JSW JSW
5.0 5.0
0.0 0.0
0.0 0.5 1.0 1.5 2.0 6.0 8.0 10.0 12.0
(P/B, x) (EV/EBITDA, x)
Table 12: Valuation snapshot

Mkt Cap CMP TP (INR) P/E (x) P/B (x) EV/EBITDA (x) RoAE (%)
Company Reco (USD mn) (INR) Revised Earlier FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
NTPC Buy 16,267 140 190 190 9.0 8.0 1.0 0.9 8.3 7.5 11.6 12.3
CESC Buy 1,305 698 840 818 8.4 7.6 0.9 0.8 6.3 5.7 11.4 11.5
Tata Power Co Buy 3,030 79 101 87 10.3 9.5 1.1 1.0 9.7 9.3 10.7 10.6
Power Grid Buy 13,546 184 225 225 8.5 7.8 1.4 1.3 6.9 6.4 17.7 17.3
JSW Energy Hold 1,562 67 72 72 12.2 10.4 0.9 0.9 7.3 7.3 7.8 8.7
Adani Power Reduce 2,836 52 38 25 NM NM 4.6 4.9 9.4 9.2 (13.8) (8.3)

Power
COMPANIES

COMPANY UPDATE
ADANI POWER
Valuations outpacing fundamentals
India Equity Research| Power
COMPANYNAME
Adani Power (APL) has been treading on thin ice with sustained losses EDELWEISS 4D RATINGS
eroding its equity value. However: a) Supreme Court’s recent judgement Absolute Rating REDUCE
raises hope of successful Mundra resolution—a potent booster; Rating Relative to Sector Underperform
b) cash realisation from compensatory tariffs (CT; INR125bn under Risk Rating Relative to Sector High
litigation) could help deleverage the highly stretched balance sheet (9x Sector Relative to Market Underweight
D/E); and c) coal ramp up under SHAKTI for Tiroda & Kawai plants is
supporting higher PLFs (we estimate 80% plus for both). On the basis of
MARKET DATA (R: ADAN.BO, B: ADANI IN)
our probability scenario analysis (refer table 3) for various events, we
CMP : INR 52
revise our TP to INR38 (earlier INR25). However, the stock has zoomed
Target Price : INR 38
125% in two months and we believe fundamentals do not support the 52-week range (INR) : 58 / 15
current valuation. Hence, we downgrade to ‘REDUCE’. Share in issue (mn) : 3,856.9
M cap (INR bn/USD mn) : 201 / 2,836
Mundra resolution could be a big leg up Avg. Daily Vol.BSE/NSE(‘000) : 26,573.1
The Supreme Court’s judgment raises hope for Mundra’s resolution, also considering
that APL has PPAs with just two states (Gujarat – 2.0GW and Haryana – 1.4GW), we SHARE HOLDING PATTERN (%)
believe Mundra resolution is highly probable. HPC’s recommendations, if Current Q1FY19 Q4FY18
implemented, could lead to a tariff hike of INR0.70-0.80/kwh (in current coal Promoters * 75.0 75.0 73.1
environment)factoring INR0.2/kwh reduction in capacity charge on account of haircut MF's, FI's & BK’s 9.8 8.5 9.2
by lenders and INR0.05/kwh from profit sharing from coal mining. FII's 8.7 9.0 11.3
Others 6.5 7.5 6.5
Compensatory tariffs cash flow could help pare debt * Promoters pledged shares : 24.0
(% of share in issue)
APL has ~INR125bn under litigation as compensation to be received from discoms,
primarily in lieu of non-availability of domestic coal. The actual amount realised is
PRICE PERFORMANCE (%)
subject to approval from regulators/discoms. APL has so far received INR21.5bn from
EW Power
MSEDCL and RVUNL which will be used to reduce its internal debt. Stock Nifty
Index
1 month 114.5 2.0 3.0

Exploring inorganic growth opportunities 3 months 57.2 (7.4) (1.7)
Despite a stretched balance sheet (D/E >9x), APL has featured in bidding rounds for a 12 months 45.6 0.7 (16.6)
few stressed assets. How the company funds these acquisitions remains to be seen.
Outlook and valuations: Expensive; downgrade to ‘REDUCE’

We have assigned a probability to different events viz., Mundra resolution and CT from
Kawai, Tiroda & Lohara plants/mines. APL could benefit immensely from Mundra’s
resolution and CT realisation, though the CMP adequately factors all possible triggers.
Hence, we downgrade to ‘REDUCE’ from ‘HOLD’ with SOTP-based TP of INR38. We
retain ‘SU’ rating.
Swarnim Maheshwari
Financials +91 22 4040 7418
Year to March FY18 FY19E FY20E FY21E swarnim.maheshwari@edelweissfin.com
Revenues (INR mn) 206,110 231,962 227,329 241,909
Varun Mittal
EBITDA (INR mn) 56,912 76,061 71,567 74,816 +91 22 6623 3392
Adjusted Profit (INR mn) (21,194) (8,314) (6,506) (3,499) varun.mittal@edelweissfin.com
EV/EBITDA (x) 12.9 9.6 9.4 9.2

P/B (x) 22.7 4.0 4.6 4.9 December 6, 2018
Edelweiss Research is also available on www.edelresearch.com,
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Power
Mundra the dark horse

The Mundra plant has been a major drag on APL’s balance sheet with cumulative losses of
INR97.4bn till FY18. This could have virtually pushed the company’s equity into negative
territory if not for the recent INR50bn infusion in the form of unsecured perpetual securities
payable at the borrower’s option.
International coal prices touched multi-year high (>USD120/tonne) in FY18, prompting APL
to shutdown the plant. However, it has resumed operations and this is only going to add to
APL’s woes if a successful resolution is not worked out soon. But, the Supreme Court’s latest
judgement raises hope, paving way for PPA renegotiation and the matter now lies in CERC’s
court. The Mundra plant has PPAs with two states—Gujarat (2.0GW) and Haryana
(1.4GW)—which should make it relatively easier for APL. The Gujarat Government has
recently given the nod to raise the tariffs and final decision will be taken by CERC.
Some key HPC recommendations and impact on APL:

 Fuel costs to be made fully pass through on landed cost basis with projects not bearing
any loss on account of fuel prices. However, HPC proposes a ceiling on imported coal
cost up to USD110/MT HBA FOB, beyond which the entire fuel risk will be borne by
the generator. Ceiling price to be reviewed every five years. This could arrest Mundra-
APL’s under-recovery at ~INR1/kwh in Q2FY19.
 Reduction of capacity charge of INR0.2/kwh by reducing project debt by lenders. The
amount will be treated as a discount and is to be reduced from energy charge for
purpose of merit order dispatch and billing. Mundra APL- Proposed debt reduction –
INR 38bn.
 The proposed plan to be applied prospectively: Cut-off date for implementing the
restructuring plan is set at October 15, 2018, and proposed recommendations will be
applied prospectively. Past losses incurred by Mundra-APL up to cut-off date will not
be compensated.
 Extension of PPA tenure by 10 years: Procurers have the option to extend the PPA on
the same terms for further 10 years (without discount to the capacity charges). Capital
costs, if necessary, on renovation and modernisation applicable as per regulatory
norms will be a pass through. If We wait clarity Mndra
 Tie up of free capacity: Additional untied capacity to be offered to procurers at the
capacity charge equal to levelised capacity charge in PPA without any discount.
Mundra-APL’s open capacity of ~550MW could be tied up at the option of discoms.
 Sharing of profit from Indonesian mines: Developers to pass on 100% profit sharing
from coal mining business in Indonesia attributable to coal supplied to their respective
Indian plants. APL may have to share around INR0.05/kwh from coal mining business
profit, which will be adjusted in capacity charge.
CERC is currently considering the matter, though the verdict will be binding unless
challenged in appellate tribunal/court of law. Any favourable resolution will provide much
required relief for the financially stretched APL and remains a key trigger.
We do not build a case of a positive bottom line for the Mundra plant yet and await details
of renegotiated PPAs if resolved.

Adani Power
Optionality from various compensatory tariffs

APL has almost INR13bn under litigation for compensation, primarily in lieu of non-
availability of domestic coal. The Supreme Court, in its April 2017 judgment, clearly stated
that change in Indonesia’s coal policy does not constitute ‘Change in law/Force Majure’
condition as per the existing PPA. However, if the plants were supposed to run on domestic
coal, the situation could be construed under the ‘Change in law’ event.
Maharashtra regulator’s (MERC) recent order granting compensation in lieu of non-

availability of coal for Tiroda plant and subsequent in-principal acceptance by Maharashtra
discom (MSEDCL) could set a precedent for further judgments. If APL is able to receive
compensation due to non-availability of coal, the cash realisation could help deleverage the
balance sheet.
Table 1 : APL has claims of about ~INR125bn under litigation

Entity Matter Lump sump Current Status Amount to be
amount under received/ under
litigation (INR bn) litigation(INR bn)
APML - Tiroda Compensation in lieu of Non- 28 APML has raised invoices with 23
availiblity of coal linkage/coal MSEDCL-(Maharashtra discom)
under FSA which has in princial accepted
the amount. INR5bn has been
received.
Lahora coal block Compensation for Change in 46 Matter under litigation. Amount 46
Law events for alternate coal is yet to be received.The
consumed in lieu of coal from company has recognised
Lahora coal block for 800MW INR12bn
capacity.
APRL - Kawai Compensation in lieu of non- 51 Matter pending with APTEL. In 34.3
availibility/shortfall in the interim SC has asked
domestic coal DISCOM to pay 50% of claim
provisionally as against the
Claim amount of INR51bn of
which INR16.7bn is received.
Total (INR bn) 125 103.3
Source: Company, Edelweiss research

Power
Coal off take under SHAKTI supporting Tiroda, Kawai

APL’s Tiroda and Kawai plants were allocated 5.8MT and 4.1MT coal, respectively, in round
1 of coal allocation under the SHAKTI scheme. While there were delays in ramp up under
SHAKTI initially, off take seems to have picked up off late, helping the plants register higher
PLFs in recent months. We are building in 80% plus PLFs for both the plants FY20 onwards.
Table 2 : Losses in Tiroda and Kawai have been a drag

Plant FY14 FY15 FY16 FY17
Tiroda
Revenue 29,148 61,274 78,674 64,790
EBITDA 7,837 21,640 27,896 23,939
PAT (6,458) (2,314) 1,324 (2,191)
Kawai
Revenue 16,965 30,406 41,843 38,855
EBITDA 2,561 5,350 14,666 11,508
PAT (2,851) (5,381) 2,556 145
Chart 1 : PLFs of Tirodaand Kawai have imroved in recent months with pick up in coal off take under SHAKTI
100.0 100.0
80.0 80.0
60.0 60.0
(%)
(%)
40.0 40.0
20.0 20.0
0.0
0.0 Nov-17
May-17
May-18
Jan-17
Sep-17
Jan-18
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Nov-17
May-17
May-18
Jan-17
Sep-17
Jan-18
Sep-18
Mar-17
Mar-18
Jul-17
Jul-18
Tiroda (3300MW) - PLF Kawai (1320MW) - PLF

Stretched financials can’t keep APL out of action

A stretched balance sheet has not kept APL out of bidding for stressed assets to be resolved
under RBI’s revised framework. The company has participated in bids for a few stressed
assets like GMR Chhattisgarh (1,370MW), KSK Mahanadi (2.4GW) and Essar Mahan (1.2GW).
While the assets are under resolution, what remains to be explored is how APL plans to fund
these acquisitions given its stretched balance sheet position.

Adani Power
Chart 2: Sustained losses have eroded APL’s equity while debt sustains, consequently gearing has spiraled upwards
600 75.0
480 60.0 62
360 45.0
(Number)
(INR bn)
240 30.0
120 18
15.0
10 8 7 9
6 7
0 2 4
0.0
FY15
FY11
FY12
FY13
FY14
FY16
FY17
FY18
H1FY19
H1FY19
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Total Borrowings Shareholders' funds Gross Debt/Equity
Note: In H1FY19, Adani Power has converted 50 bn Group loans into Perpetual Security (considered as equity), hence the D/E got revised to ~9x

Power
Valuations
We have factored INR11bn revenue recognized by APL in Tiroda case in our financials. On
the basis of our probability scenario analysis (refer table below) for various events, we
revise our TP to INR38 (earlier INR25). We have factored 80% plus PLFs for Tiroda and Kawai
plants supported by coal off take ramp up under the SHAKTI scheme. However, the stock
has zoomed 125% in two months and we believe fundamentals do not support the current
valuation. Hence, we downgrade to ‘REDUCE’.
Table 3 : Mundra resolution and CT realisation adds INR14 to our SOTP

Entity Amount under Amount Probability scenario - Impact of TP Rationale
litigation (INR bn) received
(INR bn) 25% 50% 75% 100%
APML - Tiroda 28 5 2 4 5 7 Inprincipal approval in place from
MSEDCL, though amount can vary
Lahora coal block 46 3 6 9 12 Contention not fit for change in law.
Also the amount claim could be
higher. Hence, ZERO proability
assigned
APRL - Kawai 51 16 3 7 10 13 Provisional order- SC has asked
DISCOM to pay INR25bn in interim
Mundra 1 3 4 5 Very high chance of CERC allowing
the tariff hike post amending PPA's
with Gujarat & Haryana
Per share Value 125 21 9 19 28 37
Impact on TP (INR) 14
Table 4 : SOTP
NPV @ Ke 13%
Unit MW Stake INR / share
(INR mn)
Mundra I & II 1,320 100% (405) (0)
Mundra III 1,320 100% (17,866) (5)
Mundra IV 1,980 100% 12,131 3
Tirora 1,980 100% 24,072 6
Tirora II 1,320 100% 25,067 8
Kawai 1,320 100% 27,852 7
Udupi 1,200 100% 15,553 4
Option value from Mundra
14
resolution/CT realization
Total 10,440 86,403 38

Adani Power
Company Description
APL commercialised its first unit of 330 MW at Mundra, Gujarat, in 2009 and scaled up plans
to build India’s largest and one of the world’s top 5 single location thermal power plants
with a capacity of 10,480 MW. The company has also made inroads into power generation
in Maharashtra, Rajasthan and Madhya Pradesh with an ambitious vision of being a 20,000
MW company by 2020. It commissioned the first supercritical 660 MW unit in the country
and also the world’s first supercritical technology project to have received ‘clean
development mechanism (CDM) project’ certification from United Nations Framework
Convention on Climate Change (UNFCCC).
Investment Theme
APL has operational capacity of ~10.4GW (at Mundra (Gujarat), Tiroda (Maharashtra), Kawai
(Rajasthan) and Udupi (Karnataka). The company has a good blend of projects in terms of
diverse locations, imported and domestic coal, long-term PPAs and merchant sales. APL’s
entire capacity (~10.4 GW) is coal based with a blend of imported (AEL) and domestic (CIL)
coal procured through linkages. Though linkages are in place (except 2.6GW-Tiroda
ext/Kawai where coal has been allocated under SHAKTI) coal availability could be a
challenge. Resolution of Mundra plant could be a turning point for APL. APL has filed for
compensation (under litigation) with various discoms primarily in lieu of non-availability of
coal. Realizations from filed compensation could positively impact APL.
Key Risks
Higher Imported Coal Prices: Rise in coal process remains a key risk for Mundra plant
operations and an increase in international coal process will widen the losses for Mundra
power plant.
High Leverage: APL has a highly stretched balance sheet (D/E:60x) and needs to bring down
debt to a more sustainable level.

Power
Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Macro Net revenue 206,110 231,962 227,329 241,909
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Cost of Operations 128,576 135,535 134,461 144,948
Inflation (Avg) 3.6 4.5 4.5 5.0 Other operating expenses 17,085 16,712 17,507 18,223
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Employee costs 3,537 3,655 3,795 3,922
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 149,198 155,901 155,762 167,093
Sector EBITDA 56,912 76,061 71,567 74,816
Merchant prices(INR/kWh) 4.0 5.0 5.0 5.0 Depreciation 26,987 26,269 26,618 26,558
NewCastle FoB(USD/t) 59 59 59 59 EBIT 29,925 49,792 44,949 48,258
Company Less: Interest Expense 55,702 59,818 53,252 53,825
Closing capacity (MW) 10,480.0 10,480.0 10,480.0 10,480.0 Add: Other income 4,823.89 1,711.89 1,797.48 2,067.1
Average PLF (%) 56.0 70.0 70.0 78.0 Profit Before Tax (20,953) (8,314) (6,506) (3,499)
Avg.Realisation(INR/kwh) 4.2 3.7 4.1 4.0 Less: Provision for Tax (52) - - -
Avg. Energy cost(INR/kwh) 2.7 2.2 2.4 2.4 Associate profit share (292) - - -
Reported Profit (21,194) (8,314) (6,506) (3,499)
Adjusted Profit (21,194) (8,314) (6,506) (3,499)
Shares o /s (mn) 3,857 3,857 3,857 3,857
Adjusted Basic EPS (5.5) (2.2) (1.7) (0.9)
Diluted shares o/s (mn) 3,857 3,857 3,857 3,857
Adjusted Diluted EPS (5.5) (2.2) (1.7) (0.9)
Adjusted Cash EPS 1.5 4.7 5.2 6.0
Common size metrics

Year to March FY18 FY19E FY20E FY21E
Operating expenses 72.4 67.2 68.5 69.1
Depreciation 13.1 11.3 11.7 11.0
Interest Expense 27.0 25.8 23.4 22.3
EBITDA margins 27.6 32.8 31.5 30.9
Net Profit margins (10.3) (3.6) (2.9) (1.4)
Growth ratios (%)

Revenues (9.5) 12.5 (2.0) 6.4
EBITDA (4.7) 33.6 (5.9) 4.5
PBT (66.5) (60.3) (21.8) (46.2)
Adjusted Profit 1.0 (60.8) (21.8) (46.2)
EPS 1.0 (60.8) (21.8) (46.2)

Adani Power
Balance sheet (INR mn) Cash flow metrics
As on 31st March FY18 FY19E FY20E FY21E Year to March FY18 FY19E FY20E FY21E
Share capital 38,569 38,569 38,569 38,569 Operating cash flow 50,997 16,563 113,641 30,508
Reserves & Surplus (29,724) 11,962 5,456 1,957 Financing cash flow (46,001) (20,212) (113,742) (36,400)
Shareholders' funds 8,845 50,531 44,025 40,526 Investing cash flow (5,190) 212 297 567
Long term borrowings 346,420 296,363 176,482 86,871 Net cash Flow (194) (3,437) 196 (5,325)
Short term borrowings 198,380 238,042 297,434 404,468 Capex (4,325) (1,500) (1,500) (1,500)
Total Borrowings 544,799 534,406 473,915 491,340
Long Term Liabilities 57,461 57,461 57,461 57,461 Profitability and efficiency ratios
Def. Tax Liability (net) 2,128 2,128 2,128 2,128 Year to March FY18 FY19E FY20E FY21E
Sources of funds 613,234 644,526 577,530 591,455 ROAE (%) (109.1) (28.0) (13.8) (8.3)
Gross Block 606,313 607,813 609,313 610,813 ROACE (%) 6.2 9.0 8.5 9.6
Net Block 519,404 494,635 469,518 444,460 Inventory Days 37 37 37 37
Capital work in progress 1,199 1,199 1,199 1,199 Debtors Days 122 140 156 156
Intangible Assets 1,967 1,967 1,967 1,967 Payable Days 213 215 215 215
Total Fixed Assets 522,570 497,801 472,683 447,625 Cash Conversion Cycle (54) (38) (22) (22)
Non current investments - - - - Current Ratio 2.1 2.6 2.3 2.4
Cash and Equivalents 8,566 5,129 5,325 - Debt/EBITDA (x) 9.6 7.0 6.6 6.6
Inventories 8,692 18,786 8,474 20,913 Debt/Equity (x) 61.6 10.6 10.8 12.1
Sundry Debtors 60,698 117,245 77,074 129,708 Adjusted Debt/Equity 61.6 10.6 10.8 12.1
Loans & Advances 69,380 69,380 69,380 69,380 Interest Coverage Ratio 0.5 0.8 0.8 0.9
Other Current Assets 25,327 25,327 25,327 25,327
Current Assets (ex cash) 164,097 230,738 180,255 245,327 Operating ratios
Trade payable 76,264 83,407 74,998 95,763 Year to March FY18 FY19E FY20E FY21E
Other Current Liab 5,735 5,735 5,735 5,735 Total Asset Turnover 0.3 0.4 0.4 0.4
Total Current Liab 81,999 89,142 80,733 101,498 Fixed Asset Turnover 0.4 0.5 0.5 0.5
Net Curr Assets-ex cash 82,098 141,596 99,522 143,830 Equity Turnover 10.6 7.8 4.8 5.7
Uses of funds 613,234 644,526 577,530 591,455
BVPS (INR) 2.3 13.1 11.4 10.5 Valuation parameters
Free cash flow (INR mn) Adj. Diluted EPS (INR) (5.5) (2.2) (1.7) (0.9)
Year to March FY18 FY19E FY20E FY21E Y-o-Y growth (%) 1.0 (60.8) (21.8) (46.2)
Reported Profit (21,194) (8,314) (6,506) (3,499) Adjusted Cash EPS (INR) 1.5 4.7 5.2 6.0
Add: Depreciation 26,987 26,269 26,618 26,558 P/B (x) 22.7 4.0 4.6 4.9
Interest (Net of Tax) 55,565 59,818 53,252 53,825 EV / Sales (x) 3.6 3.1 2.9 2.9
Deferred tax (120) - - - EV / EBITDA (x) 12.9 9.6 9.4 9.2
Others (7,121) (1,712) (1,797) (2,067)
Less: Changes in WC (3,121) (59,498) 42,074 (44,308)
Operating cash flow 50,997 16,563 113,641 30,508
Less: Capex 4,325 1,500 1,500 1,500
Free Cash Flow 46,673 15,063 112,141 29,008

Power
Additional Data
Directors Data
Mr. Gautam S. Adani Chairman, Promoter Non Executive Mr. Rajesh S. Adani Managing Director, Promoter Executive
Mr. Raminder Singh Gujral Non Executive (Independent) Mr. Vneet S Jain Executive Director
Mr. Mukesh Shah Non Executive (Independent) Ms Gauri Trivedi Non Executive (Independent)
Auditors - M/s. S R B C & Co LLP

*as per last annual report
Holding – Top10
Perc. Holding Perc. Holding
Adani gautam s 36.86 Adani tradeline 9.78
Universal trading co 7.55 Afro asia ind ltd 6.88
Opal investment pvt 5.53 Worldwide emerge mkt 5
Emerging market inv 4.99 Pan asia trade & inv 3.92
Elara india opportun 3.1 Emerging india focus 2.34
*in last one year
Bulk Deals
Data Acquired / Seller B/S Qty Traded Price
No Data Available
*in last one year
Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
10 May 2018 Pan Asia Trade & Investment Pvt Ltd Buy 11500000.00
08 May 2018 Pan Asia Trade & Investment Pvt Ltd Buy 4500000.00
23 Apr 2018 Pan Asia Trade & Investment Pvt Ltd Buy 4500000.00
*in last one year

India Midcaps
COMPANY UPDATE
CESC
Safest bet; spin-off to continue to drive re-rating
We believe CESC will reap multiple benefits from the demerger of its EDELWEISS RATINGS
power business as it offers shareholders a more specific investment/play Absolute Rating BUY
and some value/multiple enhancement. Going forward we expect the Investment Characteristics Value
company to have strong FCF as: a) losses at Chandrapur have ebbed;
b) the practice of funding Spencer’s & FMCG’s FCF from regulated
operations will end; and c) it is not pursuing any capex-heavy projects & MARKET DATA (R: CESC.BO, B: CESC IN)
CMP : INR 698
is focusing on low-intensity franchisee distribution business. In such a
scenario, we believe CESC is one of the safest bets in the sector with
52-week range (INR) : 923 / 621
potential upside of 20% and is a re-rating candidate post-demerger. We
Share in issue (mn) : 132.6
revise our TP to INR840 (earlier INR818) factoring in 180MW renewable
M cap (INR bn/USD mn) : 93 / 1,305
capacity. Maintain ‘BUY’.
Avg. Daily Vol. BSE/NSE (‘000) : 761.3
Regulated business remains sturdy; distribution franchisee arm key

SHARE HOLDING PATTERN (%)
CESC continues to generate a superior RoE of ~20% due to its efficiently-run Kolkata
Current Q1FY19 Q4FY18
generation and distribution business with regulated equity of INR38bn. Losses in the
Promoters * 49.9 49.9 49.9
Rajasthan distribution franchisee business in FY18 were much higher at INR1.2bn
MF's, FI's & BKs 25.5 25.5 25.1
versus the ~INR0.5bn estimate. This was primarily on account of higher-than-expected
FII's 11.9 11.9 13.4
T&D losses in Bharatpur and Kota at ~33%. However, losses are expected to reduce
Others 12.6 12.6 11.6
with improving efficiencies. As discom reforms gain impetus, CESC should benefit. * Promoters pledged shares : 5.7
Demerger offers specific investment play

CESC has demerged its non-power business, which offers a specific investment
BSE Midcap Stock over
opportunity. That said, the company is awaiting approval from the West Bengal Index
Stock
Index
Electricity Regulatory Commission (WBERC) for spinning off the distribution and
1 month 5.8 6.0 0.2
generation businesses. The power business offers a more stable and predictable FCF
3 months (8.6) (6.3) 2.3
profile than the capex-heavy retail business, which was partially funded from the
12 months (11.3) (12.6) (1.2)
former’s cash flow. This spin-off makes CESC a potential re-rating candidate. Its vast
experience in the distribution business should help it scale up operations in the
recently acquired distribution circles and subsequent turn around the Rajasthan circle.
Outlook and valuations: Re-rating candidate; maintain ‘BUY’

We believe restructuring business segments (separating power and non-power assets)
will reposition CESC, enabling it to sharpen focus on each segment. We expect the
standalone business to generate FCF of INR50bn plus over FY18–21E. We maintain
‘BUY’ with revised SOTP-based target price of INR840.
Financials (Consolidated)
Year to March FY18 FY19E FY20E FY21E Swarnim Maheshwari
Revenues (INR mn) 1,02,750 1,07,246 1,11,447 1,16,785 +91 22 4040 7418
swarnim.maheshwari@edelweissfin.com
EBITDA (INR mn) 29,310 30,611 31,322 32,540
Reported Profit (INR mn) 9,750 10,195 11,075 12,260 Varun Mittal
+91 22 6623 3392
EV/EBITDA (x) 7.1 6.5 6.3 5.7 varun.mittal@edelweissfin.com
P/B (x) 1.1 1.0 0.9 0.8
ROAE (%) 8.1 11.5 11.4 11.5 December 6, 2018

Power
Efficient operations shore up RoE of regulated Kolkata business

The company’s Kolkata regulated business has a stable earnings profile along with healthy
FCF. Implied RoE for the Kolkata generation and distribution business has sustained above
19% over the past five years owing to efficient operations. At the same time, the Kolkata
distribution business clocks among the lowest AT&C losses in the country (9.65% currently)
among distribution entities.
Given CESC has demerged the non-power business into a separate entities, FCF of the
regulated business could be used to scale up/turn around the distribution franchise business
in Rajasthan.
Chart 1: Implied RoE for Kolkata business continues at sustain above 19%
25.0
21.8
22.0 21.2
19.8 20.0 19.7
19.0
(%)
16.0
13.0
10.0
Implied ROE
PPA tie-up curtails Dhariwal losses

Subsidiaries on improving trajectory: 1) Dhariwal losses have reduced substantially to
INR2bn in FY18 following the 187MW PPA with NPCL in March 2017. We believe losses
would further reduce to ~INR0.5bn in FY19 as PLF improves to 60% with the recent 185MW
short-term PPA with MSPGCL for a period of eight months (Case-IV bidding) effective April
2018. 2) PLF at Haldia shot up 900bps to 86% with a 7% improvement in PAT in FY18.
Overall, PLFs for Haldia remain healthy given elevated power demand (96% in Q2FY19).

CESC
Chart 2: Dhariwal losses curtailed as open capacity tied up

0.0
(0.57)
(1.5)
(1.99)
(INR bn)
(3.0)
(4.5)
(4.58)
(4.84)
(6.0) (5.57)
Dhariwal Reported PAT
Demerger offers a more specific investment play

CESC implemented the revised demerger plan—it thus demerged RP-SG Retail (Spencers
Retail) and RP-SG Business Process Services (IT, Mall and FMCG) from the power business
(including generation and distribution). Shares of the two separated entities are expected to
be listed over the next few weeks. The company is awaiting PPA approval from the WBERC
for separation of the generation and distribution businesses. The power business offers a
specific investment play with a more stable FCF profile as cash flow of the regulated
business was earlier used to fund operations of Spencer’s Retail. We report CESC’s
consolidated financials of the power business.
Table 1: SOTP valuation: Power business

Value (INR Multiple Target value Value/
Segment mn) times Method Stake (%) (INR mn) share (INR)
Regulated equity - Distribution 30,000 1.9 (RoE-g)/(CoE-g) 100.0 56,250 422
Regulated equity - Generation 10,642 1.2 (RoE-g)/(CoE-g) 100.0 12,713 95
Dhariwal 4,361 1.0 NPV 100.0 4,361 33
Haldia 10,500 1.5 RoE/CoE 100.0 16,154 121
Noida Distribution 2,600 1.9 (RoE-g)/(CoE-g) 49.6 2,416 18
Renewable (180MW operational) 3,000 1.0 At book value 100.0 3,000 23
Net Cash & Liquid Investments (FY18 end) 17,000 1.0 At book value 100.0 17,000 128
Total 840

Power
Company Description
CESC is an RP-Sanjiv Goenka Group company. It started operations in 1899; since then, the
company has been offering power to consumers in its Kolkata license area, which has
expanded from 14.6 square kilometres to 567 square kilometres over the years. The number
of consumers has grown from 6,000 to 2.5mn over time. CESC has total installed capacity of
2,425MW from six generating units at Budge Budge (750MW), Southern (135MW), Titagarh
(240MW),Haldia (600MW), Chandrapur (600MW) and 180MW operational renewable
capacity.
Investment Theme
CESC has de-merged its non-power assets which offers a more specific investment play and
this can lead to a re-rating of the companies and the group overall.
The regulated distribution and generation business is fairly large with ~INR38bn equity
(~45% of total net worth), implying little risk.
The company’s renewed focus on the distribution business (low capex) can significantly
bolster profitability in coming years in our view.
Strong financials with debt/equity of 1.5x provide leeway to expand operations without
much strain.
Key Risks
Regulated returns
Our earnings estimates assume incentives on account of PLF and other normative
parameters; if the company fails to earn such incentives, then the RoE would decrease,
which in turn would impact valuations.
Delay in projects/PPAs
Slowdown in regulated business capex and untied capacity at generating stations could
impact earnings.
Unrelated diversification
The company in the past has made red-herring investments (outside its core business of
power GTD) with no synergies, but they dilute management bandwidth and hence pose a
key risk.

CESC
Financial Statements - Consolidated

Macro Income from operations 102,750 107,246 111,447 116,785
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Direct costs 49,070 56,801 59,758 63,241
Inflation (Avg) 3.6 4.5 4.5 5.0 Employee costs 9,700 8,858 9,124 9,397
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Other Expenses 14,670 10,976 11,244 11,606
Sector EBITDA 29,310 30,611 31,322 32,540
Melawan FoB(USD/t) 52 52 52 52 Less: Interest Expense 13,030 11,864 11,723 11,583
Company Add: Other income 2,520.00 1,873.56 2,357.25 2,716.35
Closing Reg. Eqty(INRmn) 38,542 41,392 44,242 47,092 Profit Before Tax 12,810 13,123 14,266 15,790
RoE on Reg. Eqty (%) 20 17 17 18 Less: Provision for Tax 3,560 2,929 3,190 3,530
PLF (%) 64.3 65.7 66.9 68.3 Add: Exceptional items 1,520 - - -
Net sale energy(mn kwh) 10,818 11,251 11,701 12,169 Associate profit share 500 - - -
Tariff (INR/kwh) 6.9 7.0 7.1 7.2 Reported Profit 9,750 10,195 11,075 12,260
Fuel cost (INR/kwh) 1.9 1.9 1.9 1.9 Exceptional Items (1,520) - - -
Adjusted Profit 8,230 10,195 11,075 12,260
Shares o /s (mn) 133 133 133 133
Adjusted Basic EPS 61.9 76.7 83.3 92.2
Diluted shares o/s (mn) 133 133 133 133
Adjusted Diluted EPS 61.9 76.7 83.3 92.2
Dividend per share (DPS) 12.0 14.3 15.9 17.5
Dividend Payout Ratio(%) 19.2 21.8 22.3 22.2
Common size metrics

Depreciation 7.3 7.0 6.9 6.7
EBITDA margins 28.5 28.5 28.1 27.9
Net Profit margins 8.0 9.5 9.9 10.5
Growth ratios (%)

Revenues 22.9 4.4 3.9 4.8
EBITDA 7.0 4.4 2.3 3.9
PBT 18.3 2.4 8.7 10.7
Adjusted Profit 35.1 23.9 8.6 10.7
EPS 35.1 23.9 8.6 10.7

Power

Reserves & Surplus 82,870 90,841 99,450 108,989 Financing cash flow (14,489) (13,431) (13,478) (13,533)
Shareholders' funds 84,200 92,171 100,780 110,319 Investing cash flow (9,814) (9,500) (9,500) (9,500)
Minority Interest 690 690 690 690 Net cash Flow 180 10,257 2,897 12,061
Long term borrowings 110,480 110,037 109,594 109,153 Capex (8,944) (9,500) (9,500) (9,500)
Short term borrowings 22,000 23,100 24,255 25,468 Dividend paid (1,867) (2,224) (2,467) (2,721)
Deferred revenue 15,070 15,070 15,070 15,070 ROAE (%) 8.1 11.5 11.4 11.5
Sources of funds 295,290 303,918 313,239 323,549 ROACE (%) 9.6 10.6 10.6 10.7
Gross Block 330,171 340,571 350,071 359,571 Inventory Days 53 56 56 56
Net Block 236,280 239,183 240,993 242,611 Debtors Days 55 42 42 42
Capital work in progress 2,170 1,270 1,270 1,270 Payable Days 55 55 55 55
Intangible Assets 1,690 1,690 1,690 1,690 Cash Conversion Cycle 53 43 43 43
Total Fixed Assets 240,140 242,143 243,953 245,571 Current Ratio 2.4 2.4 2.7 2.8
Non current investments 7,240 7,240 7,240 7,240 Gross Debt/EBITDA 4.5 4.3 4.3 4.1
Cash and Equivalents 17,000 27,257 30,154 42,215 Gross Debt/Equity 1.6 1.4 1.3 1.2
Inventories 5,830 11,599 6,737 12,668 Adjusted Debt/Equity 1.6 1.4 1.3 1.2
Sundry Debtors 15,380 9,301 16,347 10,530 Interest Coverage Ratio 1.7 1.9 2.0 2.1
Loans & Advances 460 460 460 460
Other Current Assets 43,810 43,810 43,810 43,810 Operating ratios
Current Assets (ex cash) 65,480 65,171 67,354 67,468 Year to March FY18 FY19E FY20E FY21E
Trade payable 6,910 10,233 7,802 11,285 Total Asset Turnover 0.3 0.4 0.4 0.4
Other Current Liab 27,660 27,660 27,660 27,660 Fixed Asset Turnover 0.4 0.4 0.5 0.5
Total Current Liab 34,570 37,893 35,462 38,945 Equity Turnover 1.0 1.2 1.1 1.1
Net Curr Assets-ex cash 30,910 27,277 31,892 28,523
Uses of funds 295,290 303,918 313,239 323,549 Valuation parameters
BVPS (INR) 633.1 693.0 757.7 829.5 Year to March FY18 FY19E FY20E FY21E
Adj. Diluted EPS (INR) 61.9 76.7 83.3 92.2
Free cash flow (INR mn) Y-o-Y growth (%) 35.1 23.9 8.6 10.7
Year to March FY18 FY19E FY20E FY21E Adjusted Cash EPS (INR) 130.5 133.0 141.1 151.5
Reported Profit 9,750 10,195 11,075 12,260 Diluted P/E (x) 11.3 9.1 8.4 7.6
Add: Depreciation 7,510 7,497 7,690 7,883 P/B (x) 1.1 1.0 0.9 0.8
Interest (Net of Tax) 8,921 9,217 9,102 8,994 EV / Sales (x) 2.0 1.9 1.8 1.6
Deferred tax 1,610 - - - EV / EBITDA (x) 7.1 6.5 6.3 5.7
Others (4,831) 2,648 2,622 2,589
Less: Changes in WC 8,120 3,633 (4,614) 3,368
Less: Capex 8,944 9,500 9,500 9,500
Free Cash Flow 15,377 23,689 16,374 25,595

CESC
Additional Data
Directors Data
Mr S Goenka Chairman, Promoter Non Executive Mr P K Khaitan Independent
Mr Rabi Chowdhury Managing Director (Generation) Rekha Sethi Independent
Mr Debasish Banerjee Managing Director (Distribution) Mr. C. K. Dhanuka Independent
Mr K Jairaj Independent Mr P Chaudhri Independent
Auditors - S.R. BAtliboi & Co. LLP

*as per last available data
Holding – Top10
Rainbow investments 44.36 Hdfc asset managemen 9
Bnk capital markets 1.89 Stel holdings ltd 1.88
Franklin resources i 1.81 Life insurance corp 1.67
Sun life financial i 1.65 Icici prudential ass 1.63
Dsp investment manag 1.4 Goodluck dealcom pvt 1.27
Bulk Deals
No Data Available
Insider Trades
No Data Available

Power
THIS PAGE IS LEFT BLANK INTENTIONALLY

COMPANY UPDATE
JSW ENERGY
Strongest balance sheet; cautious on unrelated diversification
COMPANYNAME
JSW Energy (JSW), with a net debt to equity of <1x (versus peers’ 2.5x), EDELWEISS 4D RATINGS
has the strongest balance sheet in India’s power generation sector. This is Absolute Rating HOLD
particularly relevant now given attractive inorganic growth opportunities Rating Relative to Sector Performer
in the conventional generation market for distressed assets. That said, we Risk Rating Relative to Sector Medium
expect the ongoing business operations aggregating 4.4GW (80% tied up) Sector Relative to Market Underweight
to continue to generate average FCF of INR10bn plus with merchant rates
moving up to INR4.0–4.1/unit. However, the announcement of unrelated
MARKET DATA (R: JSWE.BO, B: JSW IN)
diversification into globally evolving EV business with a capital
CMP : INR 67
commitment of ~INR65bn is likely to smother profitable growth
prospects; hence, we maintain a cautious view. Any meaningful 52-week range (INR) : 98 / 56
distressed power asset acquisition is a key monitorable though. Maintain Share in issue (mn) : 1,640.9
‘HOLD’ given limited upside potential. M cap (INR bn/USD mn) : 111 / 1,562
Avg. Daily Vol.BSE/NSE(‘000) : 3,192.4
Maintaining balance between open and contracted capacity
With 80% capacity tied up under long-term contracts, JSW offers earnings visibility. SHARE HOLDING PATTERN (%)
However, the company is now deliberating a balance between open and merchant Current Q1FY19 Q4FY18
capacity to benefit from stable cash flow while leveraging firming merchant prices (up Promoters * 75.0 75.0 75.0
35% YTD), which are expected to remain elevated in the near term. However, elevated MF's, FI's & BK’s 9.4 9.4 8.1
international coal price (USD100/tonne) could impact profitability. FII's 6.2 6.2 6.0
Others 9.5 9.5 10.9
* Promoters pledged shares : NIL
Potential beneficiary of consolidation (% of share in issue)
We expect consolidation to gather steam over the ensuing two–three quarters and
JSW with a strong balance sheet could be a key beneficiary of distressed assets. PRICE PERFORMANCE (%)
EW Power
Stock Nifty
Index
Unrelated EV diversification a potent risk
1 month 13.2 2.0 3.0
JSW’s entry in the auto business with INR65bn investment (debt/equity of 60:40) poses
3 months 3.7 (7.4) (1.7)
a potent risk as making a profit a venture that does not have a proven business model
12 months (16.8) 0.7 (16.6)
is uncertain and synergies, if any, are difficult to fathom. The entry does give JSW an
entry into a nascent industry on an equal footing with auto peers, but EV is a long-
gestation and low RoE business in the initial few years, thereby dragging returns.
Outlook and valuations: Wait and watch; maintain ‘HOLD’

We like JSW’s strong balance sheet, which can usher in growth once sector demand
revives. However, plans to diversify into unrelated business raises a red flag. Hence, we
maintain ‘HOLD/SP’ with SOTP-based TP of INR72.
Financials Swarnim Maheshwari
Year to March FY18 FY19E FY20E FY21E +91 22 4040 7418
Revenues (INR mn) 80,490 89,375 97,281 100,300
EBITDA (INR mn) 27,625 31,064 33,389 34,148 Varun Mittal
Adjusted Profit (INR mn) 4,959 7,211 9,011 10,615 +91 22 6623 3392
varun.mittal@edelweissfin.com
Diluted P/E (x) 22.2 15.2 12.2 10.4
P/BV (x) 1.0 1.0 0.9 0.9
ROAE (%) 4.7 6.5 7.8 8.7 December 6, 2018
Power
Strong balance sheet to support inorganic growth opportunities

JSW with a net D/E of <1x (versus peers’ 2.5x) has the strongest balance sheet in the Indian
entire power generation sector. Inorganic growth opportunity is currently ripe in the
conventional generation market for distressed assets. JSW has been in foray for acquisition
of some of these projects, and any successful acquisition could propel its capacity base.
Initial bidding rounds suggest large haircuts on these assets and, as such, acquisition is likely
to be value-accretive.
Chart 1 : With debt/equity at 1x, JSW has strongest balance sheet among peers
200 1.9
160 1.7
120 1.5
(INR bn)
(x)
80 1.4
40 1.2
0 1.0
FY19E
FY20E
FY21E
FY17
FY11
FY12
FY13
FY14
FY15
FY16
FY18
FY19E
FY20E
FY21E
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Gross Debt Equity Gross Debt/Equity
Long-term PPA proportion inches to 80%

JSW inched closer to its plan of tying up open capacity after securing 230MW worth of long-
term PPAs for its Vijaynagar plant with the JSW Group. Currently, 80% of capacity is tied up
under long-term PPAs and management highlighted there is further visibility for adding 5–
7% over the next 12 months. Given the favourable environment for merchant capacity, JSW
is deliberating the ideal portfolio’s mix between long-term PPAs and merchant capacity.
Merchant prices have been firming up (up 35% YTD) and we expect the merchant prices to
remain elevated in near term.
Chart 2 : Merchant rates have been firming up… Chart 3: …but volatile short-term prices impacts merchant players
5.0 7.5
4.13
3.82 6.0
4.0 3.54 3.49
3.23
(INR/kwh)
2.76 4.5
(INR/kwh)
3.0 2.54
2.0 3.0
1.0 1.5
0.0 0.0
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Dec-17
Aug-17
Aug-18
Oct-17
Oct-18
Apr-17
Apr-18
Feb-17
Feb-18
Jun-17
Jun-18
Average Merchant Prices Average merchant price


JSW Energy
Though higher short-term rates are comforting, JSW’s financial performance is impacted by
higher coal prices (currently at USD100/tonne, which impacts realisations.
Chart 4 : Elevated international coal prices(USD>100/tonne) impacting importers

130
110
(USD/tonne)
90
70
50
30
Apr-14
Apr-15
Apr-16
Apr-18
Apr-17
Jul-14
Jul-15
Jul-16
Jul-18
Jul-17
Oct-14
Oct-15
Oct-16
Oct-18
Oct-17
Jan-15
Jan-16
Jan-17
Jan-18
Newcastle Thermal 6000kcal/kg FOB Spot Price(USD/tonne)
JSW betting big on EV

The Indian government’s ambitious plans for a mass-scale shift to EVs for all new vehicles –
personal and commercial – by 2030 has caught the attention of various players in the auto
and non-auto industry. The transformative push towards EV holds immense potential, but
not without numerous challenges. OEMs are likely to start planning capacities about two-
three years before a breakthrough in battery technology. Penetration thereafter is likely to
rise at a rapid pace once capacity is in place. We believe 2025 will be a year of rapid strides
in EV penetration with 11% of new cars going electric. Two wheelers, given their
affordability and ubiquity, should witness even faster penetration and will be a function of
the pace of capacity addition.
Given the scale of ambitions underlying the shift, our auto analyst envisages India will be at
the forefront of the global shift towards electric mobility, and global majors are already
sitting up and taking notice.
Fig. 1: EV sales to surge post 2022 as they achieve price parity with ICE

Power
Breakthroughs in battery technologies and development of charging infrastructure will
notably abate consumer apprehension on vehicle range and availability of the latter.
Keeping that in mind, a number of automobile majors are already working on a significant
pipeline of electric variants. With ‘range-anxiety’ diminishing, improved economics and a
greater choice of vehicles, consumers will increasingly look at EV as their primary choice.
Dipping battery costs powering EV viability

Despite the plunge in costs, the battery pack still constitutes ~60% of the cost of an EV.
We expect battery costs to fall by about 50% (implying a greater decline on per kwh basis)
by 2025 driven by sustained improvement in battery in terms of density, size, technology,
chemistry, etc. We also assume 3% inflation for an internal combustion engine (ICE) vehicle
primarily due to stricter environmental compliance.
Cars: The current breakeven for ICE cars is six years assuming annual mileage of 20,000km.
For every 5,000km change in mileage, the breakeven changes by two years. An electric
variant will be cheaper than an ICE if the battery cost plummets 50% from current levels.
Fig. 2: Breakthroughs in battery technology will drive EV competitiveness
Bus: Breakeven plunges from around 11 to three years assuming annual mileage of
67,500km. A 75% fall in battery cost will make it cheaper than ICE.
We expect breakthroughs in battery technology by 2022–23 to spur rapid adoption of EVs

across the board. OEMs are expected to start planning their capacity about a year before
the expected breakthroughs, and penetration would accordingly rise once the capacity is in
place.

JSW Energy
Returns to be back-ended and a lot is desired to become profitable…

JSW plans to bulk up capex to INR65bn over the next three–four years in the EV business.
JSWE indicated it has earmarked capex of about INR10bn for FY19 for land acquisition,
infrastructure and other backend work for its EV business that might spill over to FY20 as
the strategy for rolling out EVs is being finalised.
While we remain positive on EV technology, we continue to maintain the cautious stance on

the company’s unrelated diversification. JSW is yet to release concrete plans with the EV
rollout strategy likely to be adopted.
We highlight following risks:

1) Existing OEMs are struggling as EV battery cost makes up 2–2.5x the cost of a
conventional car battery, not to mention non-existent charging infrastructure in the
country.
2) Diversification from B2B to B2C comes with its own set of risks: JSW Group has
successfully diversified into power, cement and ports from the steel business. But so
far, the group has primarily catered to B2B segments. The proposed venture is however
in the B2C segment. Stepping into auto manufacturing requires: 1) a strong brand,
which could take years to build; and 2) a solid distribution network and franchisee.
While we do not doubt JSW’s ability to successfully to step into a consumer segment,
synergies from this unrelated diversification are difficult to ascertain at this point in
time. Without any competitive advantage, the company might take longer than
expected to gain a foothold in the EV business.
3) Low RoE’s in initial few years would impact returns profile: Car manufacturing is a
long-gestation business marked by low profits or even losses in the initial few years.
This may hit JSWE’s returns profile and would increase the risk profile too.
Table 1: SOTP valuation

Value
Unit Capacity / Length (MW) Method INR/ share
(INR mn)
Generation
JSWEL SBU1 260 NPV @ Ke 13.8% 4,207 2.6
JSWEL SBU2 600 NPV @ Ke 13.8% 19,773 12.1
RWPL-I 1,080 NPV @ Ke 13.8% 19,502 11.9
Ratnagiri 1,200 NPV @ Ke 13.8% 8,097 4.9
Hydro assets 1,391 NPV @ Ke 13.8% 20,729 12.6
Generation- total 4,531 72,307 44
JPTL 169 Km NPV @ Ke 13.8% 1,221 0.7
Power Trading 10x FY18 PAT 1,646 1.0
O&M Services 10x FY18 PAT 11,256 6.9
BLMCL JV with RSMML FY18 BV(Debt+Equity) 3,969 2.4
Cash + Investments FY18BV 27,260 16.6
Total 117,659 72

Power
Company Description
JSW Energy was incorporated in 1994 as the energy vertical of the JSW Group. The company
has been in the power generation business since 2000 and later ventured into the trading
business as well. It has 3,140 MW of operational generating thermal capacity and has
ventured into hydro power by acquiring 1,391MW of capacity from Jai Prakash Power in
FY16. The company plans to increase its installed capacity to 10,000 MW. The company has
recently announced its foray into Electric vehicle manufacturing business and related infra
like battery. It envisages a total CAPEX of INR65bn for EV business.
Investment Theme
The company’s plan to sell ~20% on merchant basis to take advantage of higher realisations
which it believes will be high over near term. However, higher potential for realisations is
accompanied by the risk of volatility in merchant prices, which raises uncertainty in the
company’s earnings. PPA tie-ups (80% capacity) imply stable cash flows.
With a D/E of ~1x , the company can flex its financial muscle and can look for profitable
inorganic growth in near future
While still early, JSE Energy’s bet on diversification into electric vehicles is not very positive
and we highlight following risks: 1) unproven business model? 2) Existing OEMs are
struggling as EV battery costs are still 2.5-3.0x the cost of a conventional car battery and
charging infrastructure is entirely missing in the country; and 3) Synergies in this unrelated
diversification are difficult to understand.
Key Risks
Merchant prices moderating
Our hypothesis is that merchant prices will stay elevated in the south at INR 4.0+/kWh in the
short-medium term. Merchant prices at moderating downwards due to declining SEB’s
demand or buying capacity is a risk to our call that merchant players will start showing
healthy merchant realizations.
International/spot coal costs jump

Volatility in international coal prices impacts JSW Energy’s earnings and international coal
prices have been trending higher at >USD100/tonne. Rise in international coal prices is a risk.
Unrelated diversification
Uunrelated businesses raise risks of uncertainty around profitability of the new venture. EV
capex will impact the FCF profile for the company.

JSW Energy
Macro Net revenue 80,490 89,375 97,281 100,300
GDP(Y-o-Y %) 6.7 7.3 7.6 7.7 Cost of Operations 44,135 48,799 54,084 56,081
Inflation (Avg) 3.6 4.5 4.5 5.0 Other operating expenses 6,579 7,225 7,447 7,646
Repo rate (exit rate) 6.0 6.8 6.8 7.3 Employee costs 2,151 2,287 2,361 2,425
Sector EBITDA 27,625 31,064 33,389 34,148
Year end capacity (MW) 4,531 4,531 4,531 4,531 Profit Before Tax 3,876 10,482 13,285 15,417
Net Gen./Sold (mn kwh) 21,816 23,815 26,086 26,675 Less: Provision for Tax 2,532 3,250 4,251 4,779
Avg.Realisation(INR/kwh) 3.6 3.7 3.7 3.7 Less: Minority Interest 69 62 62 62
Add: Exceptional items (4,179) - - -
Associate profit share (495) 40 40 40
Reported Profit 780 7,211 9,011 10,615
Exceptional Items (4,179) - - -
Adjusted Profit 4,959 7,211 9,011 10,615
Shares o /s (mn) 1,640 1,640 1,640 1,640
Dividend per share (DPS) - 2.0 2.0 2.0
Dividend Payout Ratio(%) - 54.6 43.7 37.1
Common size metrics

Depreciation 12.0 11.6 10.7 10.3
EBITDA margins 34.3 34.8 34.3 34.0
Growth ratios (%)

Revenues (2.6) 11.0 8.8 3.1
EBITDA (16.9) 12.4 7.5 2.3
PBT (56.3) 170.4 26.7 16.0
Adjusted Profit (21.2) 45.4 25.0 17.8
EPS (21.2) 45.4 25.0 17.8

Power

Minority Interest (39) 23 85 147 Net cash Flow (2,486) 4,373 1,226 2,576
Sources of funds 242,720 253,951 269,232 286,117 ROAE (%) 4.7 6.5 7.8 8.7
Gross Block 199,912 221,912 246,912 271,912 ROACE (%) 9.1 10.5 11.0 10.7
Net Block 172,970 184,593 199,190 213,813 Inventory Days 47 43 39 39
Total Fixed Assets 191,709 201,597 216,194 230,817 Cash Conversion Cycle (61) (97) (101) (101)
Non current investments 20,782 20,782 20,782 20,782 Current Ratio 2.2 2.2 2.1 2.2
Cash and Equivalents 6,479 10,852 12,078 14,653 Gross Debt/EBITDA 4.6 4.3 4.3 4.5
Inventories 5,355 6,236 5,191 6,661 Gross Debt/Equity 1.1 1.2 1.2 1.2
Uses of funds 242,720 253,951 269,232 286,117
Free cash flow (INR mn) Adj. Diluted EPS (INR) 3.0 4.4 5.5 6.5
Year to March FY18 FY19E FY20E FY21E Y-o-Y growth (%) (21.2) 45.4 25.0 17.8
Reported Profit 780 7,211 9,011 10,615 Adjusted Cash EPS (INR) 8.9 10.7 11.8 12.8
Add: Depreciation 9,661 10,377 10,403 10,377 Diluted P/E (x) 22.2 15.2 12.2 10.4
Interest (Net of Tax) 5,048 10,330 10,105 9,454 P/B (x) 1.0 1.0 0.9 0.9
Others 12,053 (103) (382) (1,077) EV / Sales (x) 2.9 2.6 2.5 2.5
Less: Changes in WC 11,796 3,031 542 314 EV / EBITDA (x) 8.3 7.5 7.3 7.3
Less: Capex 3,586 22,000 25,000 25,000
Free Cash Flow 35,752 8,845 4,680 4,683

JSW Energy
Additional Data
Directors Data
Mr. Sajjan Jindal Chairman & Managing Director, Executive Mr. Nirmal Kumar Jain Non Executive
Mr. Chandan Bhattacharya Independent Mr. Prashant Jain Jt. Managing Director and CEO
Mr. J.K. Agarwal Director-Finance Shailaja Chandra Independent
Ms. Sheila Sangwan Independent Mr. Rakesh Nath Independent
Mr. S. S. Rao Independent Director
Auditors - Deloitte Haskins & Sells LLP

Holding – Top10
Jsw investments pvt 20.26 Indusglobe multivent 15.65
Glebe trading privat 8.86 Jindal stainless ltd 8.86
Virtuous tradecorp p 5.22 Danta enterprises pv 5.22
Life insurance corp 4.9 Jsw ltd 3.76
Reliance capital tru 1.65 Shete tanvi 1.52
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
06 Jun 2018 Jsw Steel Limited Sell 6111000.00
06 Jun 2018 Jsw Steel Coated Products Limited Buy 4655000.00
06 Jun 2018 Amba River Coke Limited Buy 1456000.00
*in last one year

Power

COMPANY UPDATE
NTPC
Pricking the pessimist’s balloon
COMPANYNAME
Why buy now? We cite three key reasons: 1) our reverse DCF analysis EDELWEISS 4D RATINGS
indicates the CMP is factoring 450bps RoE dilution, which we believe is Absolute Rating BUY
not justified; 2) we do not expect any major changes in CERC 2019-24 Rating Relative to Sector Outperformer
norms which could impact NTPC’s profitability given the state of affairs of Risk Rating Relative to Sector Low
generation companies; and 3) NTPC is best placed to ride the Sector Relative to Market Underweight
consolidation phase in generation. Yes, the fuel risk is for real and likely
to persist for another one-two quarters. Our risk-reward scenario analysis
MARKET DATA (R: NTPC.BO, B: NTPC IN)
indicates potential 35-50% upside (even assuming sedate sector outlook)
CMP : INR 140
with downside risk of 5-10%, indicating that the odds are in our favour. Target Price : INR 190
Maintain ‘BUY’ with target price of INR190. NTPC is the top pick in our 52-week range (INR) : 182 / 138
power coverage universe. Share in issue (mn) : 8,245.5
M cap (INR bn/USD mn) : 1,153 / 16,267
Market factoring negligible growth till FY25 Avg. Daily Vol.BSE/NSE(‘000) : 6,403.5
Our reverse DCF calculation indicates that the market is factoring either 450bps
dilution or 4% growth till FY25. We argue that with 19GW assets under construction, SHARE HOLDING PATTERN (%)
consolidation opportunities and other key potential earnings boosters, perhaps the Current Q1FY19 Q4FY18
market is being too harsh on NTPC. Promoters * 61.7 61.7 62.3
MF's, FI's & BK’s 23.6 23.6 22.8
Coal shortage related under-recoveries to continue in near term FII's 11.3 11.3 11.5
NTPC has posted INR20bn fixed cost under-recoveries cumulatively over the past two Others 3.4 3.4 3.4
years. Of these, INR8bn were due to coal shortage, resulting in lower-than-mandated (% of share in issue)
PAF availability. This could have been avoided had it been permitted to import coal. It
has recently invited two tenders for 2.5MT each for import. We factor in INR20bn PRICE PERFORMANCE (%)
under-recoveries over FY19-21. Ramp up of its captive coal mines could be a booster. EW Power
Stock Nifty
Index
Outlook and valuations: Triggers aplenty; maintain ‘BUY’ 1 month (5.8) 2.0 3.0
3 months (1.9) (7.4) (1.7)
At CMP of INR140, the stock is available at 1.05x FY20E P/BV, at a five-year low. We are
12 months (15.6) 0.7 (16.6)
confident of NTPC’s commercialisation trajectory over FY19-21, which will boost the
regulated equity. Triggers are far higher: 1) favourable outcome of GCV issue (will
boost PAT by 7-8%); 2) successful implementation of National Merit Order dispatch
(will lower variable charges & lead to gains); 3) bundling of renewable power with
thermal at its high cost producing stations will support profitability; and 4) inorganic
growth. We introduce FY21 estimates. We maintain ‘BUY/SO’ with TP of INR190.
Financials
+91 22 4040 7418
Revenues (INR mn) 834,527 898,996 1,020,886 1,144,954 swarnim.maheshwari@edelweissfin.com
EBITDA (INR mn) 216,673 253,290 295,732 332,801
Varun Mittal
Adjusted Profit (INR mn) 103,432 108,679 128,626 144,949 +91 22 6623 3392
Diluted P/E (x) 11.2 10.6 9.0 8.0 varun.mittal@edelweissfin.com
P/B(x) 1.1 1.1 1.0 0.9
ROAE (%) 10.4 10.4 11.6 12.3
December 6, 2018
Power
Our take on investors’ top four concerns

1) Earnings have not moved an inch despite 10GW commercialisation over
the past five years (FY14-18)
Our take: Everything remaining the same, essentially no big change in CERC norms, the
change in commercialisation to CWIP ratio (from 1.7x to 2.2x over FY19-21) is the most
important matrix that will drive NTPC’s earnings. We expect 11.5GW commercialisation
over FY19-21 versus 10GW over FY14-18. Moreover, the fixed cost under-recoveries on
account of coal (INR10bn impact on profit in past two years) are expected to be curbed
as the company starts importing coal until the domestic supply ramps up. Ramping up
production from captive coal mines could also improve fuel supply. We estimate 13%
EPS CAGR over the next two years versus negative 4% over the past five years.
Chart 1: Past five years’ EPS has been in negative territory Chart 2: Bridging the gap between actual and regulated equity
164 27.5 1,250
146 25.0 1,000 60

250
1,019
128 22.5 750 200
509
(INR bn)
(INR bn)
(%)
111 20.0 500
93 17.5 250
75 15.0 0
Regualted Equity in Inventory Equity in Total
FY19E
FY20E
FY21E
FY16
FY18
FY14
FY15
FY17
Equity CWIP & W. Non Equity

Capital operating
PAT Implied ROE's assets
Chart 3: 4-5GW to be commercialised each year till FY21… Chart 4: …releasing equity blocked in CWIP
60 2,500 60.0
48 2,000 50.0
36 1,500 40.0
(INR bn)
(GW)
(%)
24 1,000 30.0
12 500 20.0
0 0 10.0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19E
FY20E
FY21E
FY19E
FY20E
FY21E
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Standalone Commercial Capacity Net Block CWIP CWIP as a % of (Net Block+CWIP)

NTPC
2) NTPC’s latest and upcoming plants have a high variable cost, which would get lower
schedules and impact earnings
Our take: More than 4GW of NTPC’s existing 45GW capacity faces the problem of
higher variable cost of INR3.5/unit plus and is uncompetitive as it comes in the fourth
quadrant of scheduling. The concern that the upcoming plants will have a high variable
cost is not really true. We found that of the upcoming 18GW plus capacities over the
next two-three years, 60% will source coal from captive coal blocks. But, while the
mining ramp up is still not evident (3mt in FY18 versus 8mt targeted in FY19), NTPC has
tied up for bridge linkage with CIL. Our analysis indicates that the upcoming capacities
are on an average 150-200km from coal mines and hence the variable cost is likely to
be lower. Moreover, NTPC is developing solar capacities, which will be bundled with
these high cost producing plants to cut overall cost.
Chart 5: Higher variable charge plants to get lower scheduling (low PLF in FY18)
100.0 5.0
80.0 4.0
60.0 3.0
40.0 2.0
(INR/kwh)
(%)
20.0 1.0
0.0 0.0
SINGRAULI STPS
VINDHYACHAL STPS
KUDGI STPP
DADRI (NCTPP)
SOLAPUR
KORBA STPS
BADARPUR TPS
FARAKKA STPS
SIPAT STPS
SIMHADRI
RAMAGUNDEM STPS
UNCHAHAR TPS
RIHAND STPS
LARA TPP
KAHALGAON TPS
BONGAIGAON TPP
TALCHER STPS
TALCHER (OLD) TPS
BARH II
MAUDA TPS
TANDA TPS
FY18 PLF Indicative Variable Charge

Source: Industry, MoP, Edelweiss research
Chart 6: Breakdown of NTPC’s plant capacity Chart 7: Even though non-pit head mix increases, VC will not rise
Non Pit
head
plants
Pit Head
41% Non Pit
Plants
head 48%
Pit Head plants
Plants 52%
59%
Source: Company, Industry, Edelweiss research

Power
3) Government’s stake sale concerns along with CERC2019-24 norms overhang
Our take: With the government lagging on disinvestment targets, it has often offloaded
its stakes in various entities when markets/stocks do not perform, creating further
pressure on NTPC. The government has already divested ~22% of its stake in NTPC over
the past five years, with another 3-4% sale on the anvil. We agree this is an overhang
on NTPC.
Also, media reports have hinted at the NTPC-SJVN takeover paving way for
consolidation in the generation space. This remains a dark horse and valuations remain
paramount if such a deal does indeed goes through. Management too has echoed these
views, highlighting that valuation will be top criteria for any possible takeover.
Chart 8: Government’s NTPC stake sale have often been at a lower price thus creating
pressure
120 175
168
102 163
84 151
(INR bn)
(INR)
146
66 137 139
48 127
120
30 115
Dec-18
Aug-17
Feb-13
Feb 2016
Stake Procceds(LHS) OFS price (RHS)

Source: Company, Bloomberg, Edelweiss research
Note: December 218 stake sale is through CPSE basket
4) CERC 2019-24 regulatory norms an overhang, but not concerning

The CERC has suggested some bold ideas in its discussion paper for the next cycle and could
set precedence for any future norms.
Among other considerations moving from the prevalent two part tariff to a three part tariff
system where regulated RoE is depended on actual quantum of power generated. This could
be a negative for NTPC if plants are not able to run at more than normative PLF for whatever
reason (low schedule, coal issues, etc). This is as opposed to the current system where core
ROE is contingent on availability (PAF) and not actual generation.
However, one needs to be cognizant of the fact that the idea for the discussion paper was to
lay out all the possible options and one needs to await the draft paper to get more clarity on
CERC’s stance. We believe NTPC has not much to lose in the upcoming CERC
2019-24 regulatory norms given the challenging state of affairs of power
generation in India.

NTPC
Table 1: Sentivity of NTPC target price to RoE structure

Project RoE
190 13.5% 14.5% 15.5% 16.5% 17.5% 18.5% 19.5% 20.5% 21.5%
Growth rate (g)
1.0% 137 144 151 159 166 173 181 188 195
2.0% 138 146 154 162 170 178 186 194 202
3.0% 139 148 157 166 175 184 193 202 211
4.0% 141 151 161 171 182 192 202 212 222
5.0% 144 155 167 178 190 201 213 224 236
Table 2: CERC regulatory norms discussion paper key points
2014–19 norms 2019–24 discussion paper Potential impact
RoE
Coa l power pl a nts - Regul a ted RoE 15.50% 3 pa rt ta ri ff - a ) fi xed cha rge (i nteres t, Depends on PLF. If PLF i s <
depreci a ti on, pa rt of O&M) + RoE res tri cted ta rget PAF i mpa cts RoE
to ri s k-free ra te; b) va ri a bl e cha rge (res t of nega ti vel y, whi l e If PLF>
RoE, a nd O&M); c) energy cha rges for a ctua l ta rget PAF i mpa ct i s neutra l
fuel cos ts ba s ed on pl a nt l oa d fa ctor (PLF).
The recovery of fi xed cha rges i s l i nked to
ta rget pl a nt a va i l a bi l i ty (PAF), wherea s
va ri a bl e cha rges a re l i nked to the
di fference between a va i l a bi l i ty a nd
di s pa tch.
Normative availibility
Coa l power pl a nts -PAF 85.00% 1) Poi nts to di fferenti a l a va i l a bi l i ty norms Di fferenti a l a va i l a bi l i ty
for exi s ti ng a nd new pl a nts a s wi th better ba s ed on l ower peri odi ci ty
technol ogy new pl a nts coul d ha ve hi gher coul d ha ve nega ti ve i mpa ct
a va i l a bi l i ty; 2)s hi fti ng of fi xed cos t recovery
from a nnua l cumul a ti ve a va i l a bi l i ty ba s i s
to a l ower peri odi ci ty, s uch a s monthl y or
qua rterl y or ha l f yea rl y; 3) i ncorpora te fuel
s horta ge i s s ues
Incentive linked to availability

Therma l genera ti ng s ta ti ons Fl a t ra te of INR 0.5/Kwh Poi nts to 1) di fferenti a l i ncenti ve for new Nega ti ve i mpa ct on i ncenti ve
beyond norma ti ve a nd ol d s ta ti ons . 2) di fferenti a l i ncenti ve l i nked returns
PLF(85%) for off-pea k a nd pea k-peri od hours for
therma l pl a nts
Gross Station heat rate
200/210/250 MW s ets 2450 kca l /kwh Poi nts to revi ew of exi s ti ng norms a nd Coul d be pos i ti ve for ol der
a dopti on of di fferenti a l norm ba s ed on pl a nts a nd nega ti ve for new
vi nta ge. pl a nts .
500 MW s ets (s ub-cri ti ca l ) 2375 kca l /kwh
New s ta ti ons a chi evi ng COD 1.045 x Des i gn hea t ra te
Ga i ns from fuel effi ci ency a nd SHR 40% benefi t to be Ga i ns /Sa vi ngs to be s ha red wi th
s ha red wi th benefi ci a ri es
benefi ci a ri es
Secondary Fuel oil consumption
Pi t Hea d s ta ti ons 0.5 ml /kwh No ma jor ca l l outs Neutra l
Non-Pi t Hea d s ta ti ons 0.5 ml /kwh
Normative auxiliary consumptions
200 MW s eri es 8.50% Poi nts for revi ewi ng exi s ti ng s tructure a s Nega ti ve i mpa ct on i ncenti ve
new a ge effi ci ent pl a nts ha ve l ower tha n l i nked returns
norma ti ve a uxi l i a ry cons umpti on
300/330/350/500 MW a nd a bove
Stea m dri ver boi l er feed pumps 5.25%
El ectri ca l l y dri ven boi l er feed 7.75%
pumps
Source: CERC, Edelweiss research

Power
The sunny side: Targeting 5GW of solar addition and its implication
The giant has big plans to go green and aims to develop 10GW of solar capacity by FY22 and
eventually move to 30% non-fossil fuel basket by FY2032 (32GW-RE). Currently, NTPC has
900MW RE commissioned capacity and 5GW is under development both as a developer (NIT
issued: 2GW-solar, 1.2GW-wind) and EPC (NIT issued: 586MW, pipeline: 2,385MW). Further,
the company has been entrusted the development of 15GW solar PV capacity under the
National Solar Mission in three tranches (2,750MW of 3,000MW capacity under tranche I
has already been commissioned).
NTPC’s 5GW solar drive entails several benefits: 1) solar being a must run status will always
get scheduling; and 2) importantly, it will help bundling of solar power with high cost
thermal power at certain plants. For example, solar power can be clubbed with PPAs of
Solapur, Mauda and Kudgi power plants which have a variable cost of ~INR4/unit and are in
the fourth quartile of merit order dispatch. In such a scenario, bundling of renewable power
will help bring the overall procurement cost for a discom to ~INR3.0-3.25/unit, making the
high cost power plants getting better scheduling.
Chart 9: Renewable bundling to improve scheduling for high variable charge capacity
4.0
3.2
(INR/kwh)
2.4
1.6
0.8
0.0
2 8 11 19 20 24 27 32 35 39 40
Standalone Cummulative Capacity (GW)
Increasing Variable charge by capacity
Source: Industry, MoP, Edelweiss research
National Merit Order dispatch works almost like fixed price pooling
The idea behind the National Merit Order is to lower India’s overall generation cost. In the
current system, some costlier plants having variable charge could get schedule ahead of
lower energy charge plants as generators cannot sell their power to discoms with which
they do not have a PPA. Consequently, in the prevalent system, Merit Order Dispatch is
done at each discom level, forcing them to choose from their contracted basket or resort to
open access.
The National Merit Order offers flexibility to generators to fully utilise lower cost plants and
permits sale of idle capacity (after meeting contractual obligations) to discoms with which
they may not have PPA tie ups. In such a scenario, pit head plants, which typically have
lower variable cost, will be heavily utilised. If implemented successfully, this will be positive
for NTPC as the savings are likely to be shared amongst generating companies and
purchasing disocms.

NTPC
Inorganic growth opportunities not priced in

RBI’s February 12, 2018, circular has kick started a consolidation wave in the power
generation space. While NTPC has remained muted in initial bidding of projects, the key
thing to note is that of the 40GW coal stressed capacity, 18-20GW is likely to be referred to
NCLT, where NTPC could be a key beneficiary given its strong balance sheet position, strong
PPA pipeline in place and best placed to take advantage of the coal rationalisation policy.
Moreover, the haircuts for such NCLT assets could be North of 70%, providing fire sale
opportunities for players with capability to lap up these assets—NTPC best placed to
leverage. Also, there are strong incentives to acquire existing projects (INR10-25mn/MW)
given that it costs upwards of INR70mn/MW for greenfield expansion along with land
acquisition issues. The market is not pricing in any inorganic growth opportunities which are
aplenty and NTPC is best placed for acquisition through NCLT.
Fig. 1: Consolidation in thermal space through NCLT route could provide inorganic growth opportunities
Overall
39GW (34 projects)
Resolved Admitted/referred to NCLT Balance

9GW (8 projects) 6GW (7 projects) 24GW (19 projects)
Captive coal production to aid fuel security

While it’s still early days, NTPC’s entry in coal mining opens doors for vertical integration and
the behemoth is planning to capitalise big on this opportunity. It has been facing under-
recovery (INR12bn for FY16-18) on account of coal shortage for its more distant plants amidst
domestic coal unavailability issues and logistic challenges. Coal availability issues are likely to
prevail over the next couple of years with the MoP advising gencos to resort to imports for
meeting any shortfall.
NTPC is planning to import 5MTin FY19; two tenders has been called for 2.5MT each. Ramp up
of coal mining operations could aid fuel security and lower the variable charge for its
upcoming plants, enabling better scheduling. FY19 coal production target at 8MT along with 8-
10MT of coal imports will help the company meet FY19/20E(189/208MT) its coal requirement,
paring fixed cost under-recovery on account of fuel shortage.
Production has commenced from two coal blocks and three additional blocks are targeted in
FY20. Apart from this, five other mines with GR of ~3.42BT and mining capacity of ~55MMTPA
are under various phases of development.

Power
Table 3: Developing captive mines to address coal availability issues (FY19 target at 8MT)
Mining Capacity
Coal block GR (MMT) Mining/MDO
(MMTPA)
Target to produce 6.3 MMT in
Pakri Barwadih 1574 18
FY19
Target to produce 1.5 MMT in
Dulanga 196 7
FY19
Talaipalli 1267 18
Target to produce coal by
Chatti Bariatu 548 7
Nov’19
Kerandari 285 6
However, near term coal availability clouds profitability

It has been almost a year now since NTPC has started facing coal issues. As a result, lower
coal PAF has resulted in under recoveries of fixed cost of INR8.3bn in H1FY19 (INR14bn in
FY18). Out of this coal related under recoveries is ~ INR2bn in plants such as Mauda, Solapur
etc. Unchahar due to accident in Dec 18 also takes a toll incurring a monthly loss of
INR0.5bn.
We believe management’s guidance of INR6bn under recovery looks very optimistic and we
are expecting INR10bn+ under recoveries
Chart 10: Plants contributing to FY19E under recoveries

5.0
4.1
4.0
3.0
(INR bn)
2.5
2.0
1 1
1.0 0.75 0.75
0.0
Unchachar - Mauda I & II Solapur Badarpur Simhadri Others
IV
Fixed cost under recoveries

NTPC
Chart 11: Developing coal mines a booster but near term coal imports to rise
20
16
12
(MMT)
8
FY19E
FY20E
FY07
FY09
FY10
FY11
FY13
FY14
FY15
FY17
FY18
FY08
FY12
FY16
Coal imported by NTPC
Source: CEA, Company, Edelweiss research
Strategies to bring down fuel cost under recovery: NTPC is taking steps to reduce fixed cost
under recovery.
 Striving to increase coal availability through engagement with Indian Railways (INR
20bn advanced towards Indian Railways). Railways plan to expand wagon capacity by
1000 wagons every month. This should help improve coal availability situation.
 Proposal to CERC to reduce the normative PAF for non-pit head plants to 70% as they
face the major brunt of coal availability and this is outside the control of the company.
 Ramp up of production from captive mines (FY19E-7-8MT, FY20E-10MT).

Power
Outlook & valuations: Favourable risk-reward;

maintain ‘BUY’
The NTPC stock has been under pressure—down 20% in past two months—on account of:
1) Poor operational performance recently owing to lower PLFs and PAF resulting in under-
recoveries.
2) Government’s stake sale of 2.9% via CPSE III along with likely OFS of 3.3% stake.
3) CERC 2019-24 draft norms around the corner.
What reverse DCF indicates

Using the reverse DCF valuation methodology, at Mcap of INR1170bn, the market is
factoring:
1) Average annual commercialisation of 3.5GW over FY19‐25, thus implying long‐term

revenue growth of ~11%, with terminal growth of 2% and RoE of 14%, which is a
dilution of 450bps from the current level.
2) Average annual commercialisation of 1GW over FY19‐25, thus implying long‐term
revenue growth of ~4%, with terminal growth of 2% and RoE of 19%.
What could take the stock further down or lead to underperformance

1) Few quarters of low profitability. Sustained coal issues leading to under recovery of
fixed charges.
2) Government selling 3.3% stake along with the green shoe option of another 3% sale to
meet its disinvestment target.
3) Government’s stake sale in SJVN to NTPC at obnoxious valuation (ONGC- HPC
demerger).
The stock to re-rate on:

1) Favourable outcome of the GCV issue (improve PAT by 7-8%).
2) No change in its base RoE and inventive framework in upcoming 2019-24 CERC norms.
3) Successful implementation of the National Merit Order dispatch (will improve incentive
income substantially).
4) Bundling of renewable power with thermal at its high cost producing stations will
support profitability.
5) Inorganic growth.
Our risk-reward scenario analysis indicates potential 15-40% upside (even assuming sedate
sector outlook) with downside risk of 5-10%, indicating that the odds are in our favour. We
maintain ‘BUY/SO’ with target price of INR190. NTPC is the top pick in our power coverage
universe.

NTPC
Table 4: Scenario analysis for NTPC TP

Worst Base Best
Commercialization till FY20E (GW) 6.0 7.7 9.7
Regulated book-FY20 (INR mn) 623,848 656,621 695,177
ROE on regulated book 18% 20% 21%
Growth rate 2% 2% 2%
Multiple on regulated book (x) 1.45 1.82 2.05
Cost of equity 13.0% 11.9% 11.3%
Equity infused in CWIP (INR mn) 222,882 234,353 247,847
Investments & Cash (INR mn) 140,259 140,259 140,259
Per share price (INR) - regulated book 110 145 173

Per share price (INR) - CWIP (@1x) 27 28 30
Per share price (INR) - cash (@1x) 17 17 17
Total Per share value (INR) 154 190 220
Table 5: SOTP
Value Comments Multiple Comments Value Per share
Regulated equity 656,621 FY20E reg equity 1.82 (RoE-g)/(CoE-g) 1,193,856 145
Equity infused in CWIP 234,353 PV of FY19E CWIP 1.00 At equity value 234,353 28
Investments & Cash 140,259 FY18 book 1.00 At book value 140,259 17
Total 1,568,468 190

Power
Company Description
NTPC, set up in 1975, is India’s largest power generation company with 53.6GW installed
capacity (including 7GW from JVs). With 21GW of under construction projects, NTPC is
looking to commercialize 4-5GW of capacity each year for the next two years. In near term
NTPC is committed to set up 10GW renewable portfolio by 2022. Over the long term NTPC
plans to expand its generation portfolio to 130GW by 2032 with 30% of the basket from
non-fossil fuel based capacity. Further NTPC has forayed into coal mining operations with
multiple mines under various phases of development.
Investment Theme
 Regulated returns: NTPC currently has ~45GW of operational capacity (standalone)
under the regulated model with pipeline capacity of ~30-35GW plus signed under the
regulated model. This enables it to pass on increase in costs, limiting the impact on
profitability.
• High efficiency gains: While the current regulation permits post tax RoE of 15.5% (along
with PAF based incentive), on regulated equity the company has been able to earn RoE
of ~19-20% on the regulated book due to highly efficient plants and economies of scale.
• Inorganic growth opportunities: Ensuing consolidation in thermal space at attractive
valuations provides growth opportunities for NTPC given its scale and PPA pipeline in
PPA.
• Fuel security: The company has secured fuel supplies through FSAs with CIL in the past;
incrementally, the coal blocks being developed should improve NTPC’s fuel security.
Key Risks
 CERC norms overhang : Any RoE dilutive norms in forthcoming tariff regulations are a
key risk to earnings impacting valuations.
• Delay in execution of capex: Any delay in execution of pipeline projects could result in
downside from the estimated earnings/valuations.
• SEB delays: While NTPC makes due efforts to maintain adequate LCs for sale of power
to SEBs, failure to secure timely payments is a risk to the working capital cycle and
hence earnings.
• Fuel supplies: Fuel non-availability could impact PLF’s/PAF’s resulting into higher than
estimated fixed cost under-recoveries impacting RoE’s.

Macro Income from operations 834,527 898,996 1,020,886 1,144,954
Sector EBITDA 216,673 253,290 295,732 332,801
NewCastle FoB(USD/t) 59 59 59 59 Depreciation 70,989 77,983 90,193 102,646
Melawan FoB(USD/t) 48 48 48 48 EBIT 145,685 175,307 205,539 230,155
Less: Interest Expense 39,843 47,592 52,724 54,606
Commercial cap. add.(MW) 3,916 3,720 4,000 4,000 Profit Before Tax 128,925 142,998 169,245 190,723
Ending comm. cap.(MW) 44,500 48,220 52,220 56,220 Less: Provision for Tax 25,493 34,320 40,619 45,773
Closing Reg. Eqty(INRmn) 509,201 579,509 656,621 735,275 Add: Exceptional items 5,530 - - -
Avg. Coal plant PLF(%) 78 78 80 81 Reported Profit 103,432 108,679 128,626 144,949
Total units prod. (MUs) 265,798 292,130 331,738 366,556 Adjusted Profit 103,432 108,679 128,626 144,949
Total units sold (MUs) 247,905 270,220 306,858 339,064 Shares o /s (mn) 8,245 8,245 8,245 8,245
Imp./Exp. Reg. RoE (%) 19.3 18.1 19.0 19.4 Adjusted Basic EPS 12.5 13.2 15.6 17.6
Avg.Realisation(INR/kwh) 3.2 3.3 3.3 3.4 Diluted shares o/s (mn) 8,245 8,245 8,245 8,245
Coal cons./req. (MT) 169 181 202 224 Adjusted Diluted EPS 12.5 13.2 15.6 17.6
Landed coal cost (INR/t) 2,675.7 2,694.4 2,720.0 2,774.4 Adjusted Cash EPS 21.2 22.6 26.5 30.0
Avg. Interest rate (%) 3.4 3.8 4.0 4.0 Dividend per share (DPS) 5.1 5.3 6.2 7.0
Depreciation rate (%) 5.0 4.8 4.8 4.8 Dividend Payout Ratio(%) 49.0 48.0 48.0 48.0
Tax rate (%) 21.0 24.0 24.0 24.0
Dividend payout (%) 49.0 40.0 40.0 40.0 Common size metrics
EBITDA margins 26.0 28.2 29.0 29.1
Growth ratios (%)

Revenues 6.6 7.7 13.6 12.2
EBITDA 1.8 16.9 16.8 12.5
PBT 4.1 10.9 18.4 12.7
EPS 10.2 5.1 18.4 12.7

Power
Reserves & Surplus 935,323 991,836 1,058,722 1,134,095 Financing cash flow 10,432 (21,193) (48,799) (77,131)
Shareholders' funds 1,017,778 1,074,291 1,141,176 1,216,550 Investing cash flow (203,882) (220,527) (206,182) (198,715)
Long term borrowings 1,108,856 1,187,421 1,253,086 1,300,136 Net cash Flow (962) (44,606) 26,988 (6,916)
Total Borrowings 1,173,859 1,252,424 1,318,089 1,365,139 Dividend paid (50,660) (52,166) (61,741) (69,576)
Long Term Liabilities 4,809 4,809 4,809 4,809
Def. Tax Liability (net) 24,086 24,086 24,086 24,086 Profitability and efficiency ratios
Deferred revenue 20,859 20,859 20,859 20,859 Year to March FY18 FY19E FY20E FY21E
Sources of funds 2,241,391 2,376,469 2,509,019 2,631,443 ROAE (%) 10.4 10.4 11.6 12.3
Gross Block 1,407,394 1,641,754 1,898,794 2,160,974 ROACE (%) 7.7 8.4 9.2 9.7
Net Block 1,207,206 1,363,583 1,530,430 1,689,965 Inventory Days 46 46 46 45
Total Fixed Assets 1,988,354 2,148,075 2,281,240 2,394,486 Cash Conversion Cycle 42 44 44 43
Cash and Equivalents 39,784 (4,822) 22,165 15,249 Gross Debt/EBITDA 5.4 4.9 4.5 4.1
Uses of funds 2,241,391 2,376,469 2,509,019 2,631,443
Year to March FY18 FY19E FY20E FY21E Y-o-Y growth (%) 10.2 5.1 18.4 12.7
Reported Profit 103,432 108,679 128,626 144,949 Adjusted Cash EPS (INR) 21.2 22.6 26.5 30.0
Add: Depreciation 70,989 77,983 90,193 102,646 Diluted P/E(x) 11.2 10.6 9.0 8.0
Others (10,542) 11,422 12,654 13,105 EV / Sales (x) 2.7 2.7 2.4 2.2
Less: Changes in WC (3,355) (37,140) 10,427 (33,271) EV / EBITDA (x) 10.6 9.5 8.3 7.5
Less: Capex 180,065 237,704 223,358 215,892
Free Cash Flow 12,423 (40,590) 58,611 53,039

NTPC
Additional Data
Directors Data
Shri Gurdeep Singh Chairman and Managing Director Shri K. Biswal Director (Finance)
Shri S.K. Roy Director (Projects) Shri P.K. Mohapatra Director (Technical)
Shri S. Roy Director (Human Resources) Shri Prakash Tiwari Director (Operations)
MS. Archana Agarwal Government Nominee Director Dr. Gauri Trivedi Independent Director
Shri S Chander Independent Director Shri M. P. Singh Independent Director
Shri P. K. Deb Independent Director
Auditors - M/s T R Chadha & Co LLP; M/s PSD & Associates; M/s Sagar & Associates; M/s Kalani & Co., M/s P A & Associates; M/s S.K. Kapoor
& Co., ; M/s B M Chatrath & Co LLP
Holding – Top10
Republic of india 61.77 Life insurance corp 13.01
Icici prudential ass 4.35 Hdfc asset managemen 3.04
Blackrock inc 1.59 T rowe price group i 1.23
Vanguard group inc/t 0.85 Sbi funds management 0.83
Reliance capital tru 0.66 Icici prudential lif 0.63
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
10 Jul 2018 President Of India (Acting Through Ministry Of Power) Sell 41567567.00
*in last one year

Power

COMPANY UPDATE
POWER GRID CORP OF INDIA

Capex takes a temporary pause
COMPANYNAME
Power Grid Corporation of India (PGCIL) offers a defensive play with a EDELWEISS 4D RATINGS
healthy in-hand order book and directly benefits from RE addition & Absolute Rating BUY
power demand growth, which would necessitate enhancing inter-region Rating Relative to Sector Performer
(I-R) transmission capacity. However, significant transmission capability Risk Rating Relative to Sector Low
enhancement over the past five years could lead to moderation in Sector Relative to Market Underweight
incremental project awards. That said, capitalisation of in-hand projects
will drive regulated equity growth at an 15% earnings CAGR over FY18–
MARKET DATA (R: PGRD.BO, B: PWGR IN)
21E. Incentive dilution by the regulator in upcoming norms remains an CMP : INR 184
overhang. Maintain ‘BUY’ with TP of INR225. Target Price : INR 225
52-week range (INR) : 217 / 174
Healthy in-hand order book drives earnings visibility Share in issue (mn) : 5,231.6
Execution of in-hand projects (~INR1,000bn) over the next two–three years is M cap (INR bn/USD mn) : 960 / 13,546
estimated to deliver 15% earnings CAGR over FY18–21E. We expect Avg. Daily Vol.BSE/NSE(‘000) : 7,293.3
capitalisation/capex ratio to remain above 1x during this period, thereby driving
regulated book’s growth. PGCIL continues to show its mettle with 36% market share of SHARE HOLDING PATTERN (%)
projects awarded through the TBCB route. Current Q1FY19 Q4FY18
Promoters * 56.3 56.3 56.9
Renewable an exciting opportunity MF's, FI's & BK’s 15.6 15.6 15.8
A shift towards RE bodes well for transmission players given supply concentration FII's 23.1 23.1 21.2
(eight states accounted for 89% of generation in FY18), which necessitates developing Others 5.0 5.0 6.0
transmission corridors in such regions as states look to meet RPO targets. PGCIL is
implementing schemes worth INR43bn under the Green Energy Corridor project.
Incremental capex to moderate from previous cycle EW Power
Stock Nifty
Transmission players benefitted from their focus on capacity enhancement over FY13– Index
18 as I-R transmission capacity nearly tripled to 86GW from 29GW (PGCIL’s share 88%). 1 month (0.7) 2.0 3.0
While PGCIL has a healthy in-hand order book and will continue to enhance I-R 3 months (2.2) (7.4) (1.7)
capacity, the level of project awarding will moderate from the previous cycle. Further, 12 months (11.4) 0.7 (16.6)
higher awarding via competitive bidding will enhance competition, wherein private
participation could drive down IRRs—key criterion for PGCIL.
Outlook and valuations; maintain ‘BUY’

PGCIL is well positioned to ride the upcoming RE wave while executing strong in-hand
project pipeline. Incremental project awarding is likely to moderate compared to past
five years. CERC’s 2019–24 norms remain an overhang and possibility of RoE/incentive
dilution for transmission players is a key risk. We maintain ‘BUY/SP’ with INR225 TP.
Swarnim Maheshwari
Financials +91 22 4040 7418
Year to March FY18 FY19E FY20E FY21E swarnim.maheshwari@edelweissfin.com
Revenues (INR mn) 299,597 349,864 383,462 416,907
Varun Mittal
EBITDA (INR mn) 261,449 307,902 337,303 366,132 +91 22 6623 3392
Adjusted Profit (INR mn) 82,390 100,742 113,655 123,720 varun.mittal@edelweissfin.com
P/B(x) 1.8 1.6 1.4 1.3

ROAE (%) 15.8 17.5 17.7 17.3 December 6, 2018
Power
Healthy order book executable over next two–three years

PGCIL has a strong project pipeline with projects worth INR1,000bn in hand (including
projects under execution) to be completed over the next two–three years. We expect
capitalisation of INR250bn of projects on average over the next two years, translating into
an earnings CAGR of 15% over FY18-21E.
Besides, transmission capacity was significantly enhanced during the 12th Five-Year Plan
(2012–17), particularly with the focus on the Northern and Southern regions with inter-
region transmission capacity jumping from 30GW to 86GW over FY13–18 (PGCIL had an 88%
share of projects). Given significant capacity augmentation, there are concerns that
incremental orders would moderate; however, PGCIL has a healthy order book to be
executed over the next two–three years and large scale renewable integration would
require additional transmission capacity.
Chart 1: We expect INR 250bn capitalisation on average… Chart 2: …driving regulated equity growth
350 1.5 1,000
280 1.2 800
210 0.9 (INR bn) 600

(INR bn)
140 0.6 400
70 0.3 200
0 0.0 0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19e
FY20e
FY21e
FY19E
FY20E
FY21E
Capex Capitalisation Capt/Capex Ratio Regulared equity
Chart 3: Healthy in-hand order book
Projects in hand-INR1000bn
GoI consultancy
works,
INR150bn
TBCB projects,
INR150bn
New projects,
INR20bn
On going
projects,
INR715bn
Note: This includes projects in execution stage

Source: Company, Edelweiss Research

Power Grid Corp of India
Table 1: INR2.5tn of transmission opportunity envisaged over FY17–22

Element FY17-22 envisaged capacity addtion
Line addition(ckm) 107,490
Transformation Capacity(MVA) 333,479
HVDC addition (MW) 14,000
Renewable to provide future growth headroom for transmission capex

We believe RE will lead the way in future capacity addition while conventional capacity
addition would taper. In fact, India is running one of the largest RE capacity expansion plans
in the world powered by a clear government push through various schemes and initiatives
to spur the shift towards cleaner energy sources. Therefore, over the next decade, India is
likely to exploit its huge untapped renewable energy potential.
However, given RE’s erratic/unpredictable production and large-scale measures needed for
grid integration entail a significant build-up of infrastructure for grid improvement. It is
noteworthy that seven states accounted for over 80% of RE generated in India in FY18.
Given RE potential is concentrated in just seven states, discoms must develop inter-state
transmission capability to fulfill their RPO targets.
Chart 4: Huge RE potential, but concentrated in certain states, which necessitate building up transmission infrastructure
1,000 FY18 RE generation breakdown (101 BU)
800 Others TN
17% 16%
600
(GW)
400 Telangana
5% Karnataka
200 MP 13%
6%
0
Maharashtra
Pradesh
Pradesh
Madhya
Gujarat
J&K
Total
Rajasthan
Andhra
Rajasthan
9% Maharashtr
a
AP Gujarat 12%
Solar power potential 10% 12%
Source: CEA, MOP, Edelweiss research
The green energy corridor projects are being implemented to facilitate large-scale grid
integration by developing transmission capability and developing RE management centres.
34 solar parks with over 20GW capacities are currently being developed cross 21 states.
Power Grid is implementing evacuation system for eight solar parks in five states at an
estimated cost of INR43bn.

Power
Fig. 1: Strengthening of intra- and inter-state transmission infrastructure and evacuation system for solar parks under GEC
Source: MoP, Company, Edelweiss research
Need to upgrade transmission corridors in northern, southern regions

There is sustained focus on cost rationalisation via coal swapping, renewable bundling and
proposed national merit order dispatch. The objective is to cut down power cost, which will
ultimately benefit consumers and reduce the burden on discoms.
Given coal resources are concentrated in the eastern belt, plants in northern and southern
regions are at a natural geographical disadvantage. Transmitting power is much cheaper
than evacuating coal over long distances and, considering more competitive RE entering the
picture, far-flung plants relative to resource locations are likely to be priced out in
scheduling. As a result, incremental capacities is likely to come up in the eastern and
western belts, which would necessitate enhancement of northern and southern
transmission capability.
According to a study conducted by the Central Electricity Authority on transmission capacity

requirement for 20 years through FY36, the deficit in the northern/southern region could
touch 33/16GW by FY27, highest in the country. The study also points out that existing and
under-construction transmission infrastructure would suffice till FY22, but highlights that
capacity concentration will require transmission corridors towards northern and southern
regions over the medium to long term.

Chart 5: 91GW on inter-region capacity may be required by FY22

25,000 22,320
19,530 19,920
20,000
15,000 12,790
(MW)
10,000 7,830
6,000
5,000 2,860
0
East - West - North East East - East - East - West -
North North - North West North East South South
FY22E I-R transmission capacity
Chart 6: NR and SR would require inter-region capacity augmentation in the long term
100.0
(Maximum Surplus/Deficit (GW))
67
60.0 41
34
21 22
20.0 10 14 11
2 2 3 4
(20.0) (7)
(18) (16)
(33) (30)
(60.0) (48)
(55)
(100.0) (80)
Noth West East South North-East
FY22 FY27 FY32 FY36
Transmission capex could resume should thermal ordering begin again

Considering power demand in India has risen without concomitant augmentation of power
supply, especially for the peak periods, will be evident in some time from now. Peak
demand has outpaced base load demand and ramps up at 3MW/sec during peaking hours
(6-8pm).
The government’s ‘24x7 Power for All’ initiative probably indicates its focus on providing
reliable power supply. Unlocking latent demand with 100% electrification could possibly add
4%, i.e. about 40bn units to India’s existing demand base. Out of the peak demand of
177GW, 75% is fed by coal while RE is sidelined because India is an evening peak-load
country. Therefore, we believe India’s thermal capacity available to meet peak demand
would continue to be about 200GW (same as of today, but with changed dynamics), which
would hit a peak of about 90% by FY22.

Power
As the debate about the India’s unpreparedness for meeting peak demand beyond FY22–23
gathers steam, the government might start reconsider thermal to plug the gap. That said,
project funding would be another issue as private participation is unlikely.
Chart 7: Peak hour coal capacity utilisation could hit 85-90% by FY22E
250
200
150
(GW) 100
169
130
50
0
H2FY19 FY22E
Coal Hydro Gas Nuclear Non-Conventional
CERC norms continue to be an overhang

The upcoming CERC norms remain an overhang for the regulated entities. The discussion
paper talks about moving from availability-linked incentive to utilisation-based for
transmission entities. Dilution of RoEs/incentive structure by the regulator in the upcoming
norms remains a key risk for PGCIL. Availability
Table 2: Discussion paper talks about moving to a two-part tariff structure

2014-19 Norms 2019-2024 Discussion Paper Potential impact
Transmission System - 15.50% 2 part tariff- 1) fixed charge on normative Depends on actual power flow
Base ROE basis for long term open access rights but in the lines. If power flow is
recovers only partial ROE (risk free rate) and lower for any reasons implies
2) a variable charge to recover the balance losing out on base ROE's
ROE which will be linked to actual amount of available in existing
electricity flowing through the line framework
Incentive linked to availability
AC System 98.00%
Calls for review of existing methodology for
monthly and cumulative availability and Negative impact on incentive
review formula for HVDC bi pole and HVDC linked returns
HVDC bi-pole 95.00% back to back at par with AC system
HVDC back to back 95.00%
Source: CERC, Edelweiss research

Table 3: Sensitivity of PGCIL target price to RoE structure

Project RoE"S
225 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0%
3.0% 179 187 194 202 210 217 225 232
Growth rate
4.0% 182 191 199 208 216 225 233 242

5.0% 186 196 205 215 225 234 244 254
6.0% 191 202 213 225 236 247 259 270
7.0% 197 211 225 238 252 266 279 293
Table 4: SOTP
Value Comments Multiple Comments Value Per share
Regulated equity 712,695 FY20E req equity 1.50 (RoE-g)/(CoE-g) 1,069,043 203
CWIP equity 33,610 FY19E CWIP 1.00 Equity value 33,610 6
Investments 14,220 FY19E Invst 1.00 At book value 14,220 3
Value of telecom business 8,000 Current equity 1.00 BV 8,000 2
Value of consultancy business 3,724 FY20E earnings 15.0 12x P/E 55,860 11
Total 1,180,733 225

Power
Company Description
PGCIL commenced operations in 1992 by consolidating transmission assets of NTPC, NHPC,
NEEPC, NPCIL, Tehri Hydro Development Corporation, and Neyveli Lignite. In 1994, the
assets and communication systems of regional load dispatch centre (RLDC) were also
transferred to the company with an objective to enhance grid management. Due to the
central transmission utility status, PGCIL is mandated to undertake and operate inter-state
transmission systems efficiently, provide for open access, and undertake various functions
of RLDC. Currently PGCIL is developing various transmission assets under the Green Energy
Corridor scheme.
Investment Theme
Growth visibility: With INR1000bn orders in hand, PGCIL has a strong visibility over next
two-three years. This can keep the capitalisation ratio at more than 1.0x comfortably. But,
visibility beyond FY21 is a tad challenging as generation capacity and inter regional
transmission corridors seems topping out. Nevertheless, FY18-20E regulated equity is slated
to grow by 13% CAGR, which is comforting.
Renewable Opportunity: Concentration of renewable energy capacity in select states will

require developing transmission corridors and investment in grid infrastructure.
Development of Green Energy Corridors should help PGCIL gain transmission projects.
Key Risks
Moderation in incremental order book: In last five years (FY13-18) transmission capacity
has increased meaningfully with Inter-Regional (I-R) capacity tripling to 86GW from 29GW.
Going forward there could be moderation in incremental project awarding.
Shift towards TBCB route: Higher project awarding through competitive bidding vs
nomination basis earlier will increase competition. Also private participation could drive
down the IRRs.

Repo rate (exit rate) 6.0 6.8 6.8 7.3 Total operating expenses 38,148 41,963 46,159 50,775
USD/INR (Avg) 64.5 70.0 72.0 72.0 EBITDA 261,449 307,902 337,303 366,132
Company Depreciation 90,913 108,326 115,848 127,833
Capex (INR mn) 257,900 250,000 235,000 235,000 EBIT 170,537 199,576 221,455 238,299
Commissioning (INR mn) 274,000 270,000 246,750 235,000 Less: Interest Expense 75,907 81,037 87,729 92,141
Closing Reg. Eqty(INRmn) 557,670 638,670 712,695 783,195 Add: Other income 10,138.6 9,566.48 10,802.13 12,460.88
RoE on Reg. Eqty (%) 13 15 15 15 Profit Before Tax 104,769 128,106 144,528 158,619
Less: Provision for Tax 22,379 27,364 30,872 34,896
Reported Profit 82,390 100,742 113,656 123,722
Exceptional Items - - 1 2
Adjusted Profit 82,390 100,742 113,655 123,720
Shares o /s (mn) 5,232 5,232 5,232 5,232
Common size metrics

Depreciation 30.3 31.0 30.2 30.7
EBITDA margins 87.3 88.0 88.0 87.8
Growth ratios (%)

Revenues 16.2 16.8 9.6 8.7
EBITDA 15.3 17.8 9.5 8.5
PBT 9.5 22.3 12.8 9.7
EPS 9.6 22.3 12.8 8.9

Power
Reserves & Surplus 491,834 553,954 624,038 700,329 Financing cash flow 83,475 56,379 30,356 16,516
Long term borrowings 1,228,799 1,323,799 1,397,728 1,461,677 Net cash Flow (19,891) 11,257 24,095 24,341
Total Borrowings 1,238,799 1,333,799 1,407,728 1,471,677 Dividend paid (27,466) (33,584) (37,889) (41,245)
Def. Tax Liability (net) 25,695 25,695 25,695 25,695 Profitability and efficiency ratios
Deferred revenue 49,674 49,674 49,674 49,674 Year to March FY18 FY19E FY20E FY21E
Sources of funds 1,870,058 2,027,179 2,171,192 2,311,431 ROAE (%) 15.8 17.5 17.7 17.3
Gross Block 1,754,781 2,024,781 2,271,531 2,506,531 ROACE (%) 10.3 10.9 11.3 11.4
Net Block 1,522,439 1,684,113 1,815,015 1,922,182 Inventory Days 161 170 175 173
Total Fixed Assets 1,895,630 2,033,880 2,153,031 2,260,198 Cash Conversion Cycle 148 174 179 178
Cash and Equivalents 21,704 32,961 57,056 81,398 Gross Debt/EBITDA 4.7 4.3 4.2 4.0
Net Curr Assets-ex cash (63,359) (53,882) (53,117) (44,386) Equity Turnover 0.5 0.6 0.6 0.5
Uses of funds 1,870,058 2,027,179 2,171,192 2,311,431
Year to March FY18 FY19E FY20E FY21E Y-o-Y growth (%) 9.6 22.3 12.8 8.9
Reported Profit 82,390 100,742 113,656 123,722 Adjusted Cash EPS (INR) 33.2 40.0 43.9 48.1
Add: Depreciation 90,913 108,326 115,848 127,833 Diluted P/E (x) 11.7 9.6 8.5 7.8
Deferred tax 190 - - - EV / Sales (x) 7.3 6.5 6.0 5.6
Others (43,462) (63,727) (68,989) (71,870) EV / EBITDA (x) 8.3 7.4 6.9 6.4
Less: Changes in WC (46,821) (9,476) (766) (8,731)
Less: Capex 211,098 246,575 235,000 235,000
Free Cash Flow (68,197) (46,984) (6,261) 7,825

Additional Data
Directors Data
Shri I.S.Jha Chairman & Managing Director Shri K Shreekant Director (Finance)
Shri Ravi P. Singh Director (Personnel) SMt Seema Gupta Director (Operations)
Shri V. K. Dewagan Govt. Nominee Shri Jagdish I. Patel Director (Independent)
Shri Jagdeesh Patel Independent Director Shri Tse Ten Dorji Independent Director
Shri Manoj Kumar Mittal Independent Director Smt A. R. Mahalashmi Independent Director
Shri S. K. Sharma Independent Director M/s Bharati Govt. Nominee
Auditors - S. K. Mittal & Co; R. G. N. Price & Co; M/s. Kothari & Co.; M/s. Parakh & Co
Holding – Top10
Republic of india 57.9 Hdfc asset managemen 3.07
Icici prudential ass 2.63 Life insurance corp 2.32
Comgest sa 1.36 Virtus investment pa 1.18
Fil ltd 1.17 Blackrock inc 1.13
Vanguard group inc/t 1.01 Vontobel holding ag 0.95
*in last one year
Bulk Deals
15 Jan 2018 Okoworld Growing Markets 2.0 Buy 600000 196.00
15 Jan 2018 Hauck & Aufhauser Privatbankiers Kgaa Niederlassung Luxemb Sell 600000 196.00
*in last one year
Insider Trades
No Data Available
*in last one year

Power

COMPANY UPDATE
TATA POWER CO
Mundra resolution around the corner; growth on cards
We highlight three key reasons underpinning our ‘BUY’ conviction on Tata EDELWEISS 4D RATINGS
Power (TPCL): 1) holding company Tata Sons’ renewed focus on Absolute Rating BUY
restructuring (internal team rejig & divestment of non-core assets— Rating Relative to Sector Performer
INR40bn plus already sold) will set the house in order; 2) focus on Risk Rating Relative to Sector Medium
scalable businesses—RE, distribution franchisee, transmission assets—to Sector Relative to Market Underweight
drive future growth; and 3) resolution of Mundra is in sight. On the basis
of our probability scenario analysis on Mundra resolution (refer table4),
MARKET DATA (R: TTPW.BO, B: TPWR IN)
we revise our SOTP-based TP to INR101 (INR87 earlier). Maintain ‘BUY’
CMP : INR 79
and reiterate it as one of our top picks.
52-week range (INR) : 102 / 60
Mundra resolution on cards: Key trigger Share in issue (mn) : 2,704.8
The Supreme Court’s order raises the hope of a successful resolution of the Mundra M cap (INR bn/USD mn) : 215 / 3,030
issue (INR85bn+ losses so far) by allowing amending the PPAs to raise tariffs with Avg. Daily Vol.BSE/NSE(‘000) : 6,572.7
CERC’s approval. Post Gujarat government’s approval for tariff hikes, we await final
judgment by CERC as to the quantum of tariff hike and other states’ nod to PPA SHARE HOLDING PATTERN (%)
amendment. There is an outer chance that 850MW PPA could not be amended. A Current Q1FY19 Q4FY18
successful resolution will lift TPCL’s EBITDA by 7-8%, which is material enough. Promoters * 33.0 33.0 33.0
MF's, FI's & BK’s 24.6 24.6 23.6
Stricken by low regulated growth; can RE compensate? FII's 27.5 27.5 28.1
Growth in regulated businesses has been lackluster over the past three years with an Others 15.0 15.0 15.2
uptick of mere 2% in regulated equity (INR71bn in FY18). And, this is not changing any * Promoters pledged shares : 12.2
time soon as the roll out is slower in Delhi and Mumbai. TPCL aims to enhance the
share of non-fossil fuel based capacity to 40–50% by 2025 led by RE enhancement. The
distribution franchisee business and transmission business are other focus areas.
EW Power
Stock Nifty
Index
Ongoing disinvestment catalyses debt reduction
1 month 19.8 2.0 3.0
TPCL has, so far, garnered over INR40bn plus from the sale of non-core assets and this
3 months 4.1 (7.4) (1.7)
is likely to continue with 48% stake sale in Tata Projects; Tate Ceramics is next in line.
12 months (10.9) 0.7 (16.6)
Monetisation of non-core assets too could aid deleveraging.
Outlook and valuations: Reposing confidence; maintain 'BUY'

We estimate deleveraging to pare debt to equity to less than 2x and spur earnings
growth 5–6% owing to reduced interest outgo. Further, the Prayagraj O&M contract
could add INR1.5bn to the bottom line. We have factored in 50% possible upside in
our TP pending CERC’s final decision. We maintain ‘BUY/SP’.
Financials (Consolidated)
Revenues (INR mn) 293,312 309,261 315,098 321,839 +91 22 4040 7418
EBITDA (INR mn) 63,570 64,171 66,309 68,974
Adjusted Profit (INR mn) 27,509 16,611 20,768 22,563 Varun Mittal
Adjusted Diluted EPS (INR) 10.2 6.1 7.7 8.3 +91 22 6623 3392
varun.mittal@edelweissfin.com
Diluted P/E (x) 7.8 12.9 10.3 9.5
P/B(x) 1.3 1.2 1.1 1.0
ROAE (%) 15.6 9.6 10.7 10.6 December 6, 2018
Power
Mundra resolution could be a key trigger

The Supreme Court’s recent judgment paves way for PPA renegotiation that would resolve
the issue plaguing the Mundra Power Plant. The matter is currently under consideration
with the CERC, the central regulator. A successful resolution plan could boost Tata Power as
Mundra losses have been a drag on overall profitability (cumulative losses of INR81bn
through FY18). In fact, Mundra, if resolved, could be the key trigger.
While trying incessantly for a Mundra resolution, TPCL has been exploring options to contain
losses through coal blending, by increasing the mix towards lower GCV coal (current mix:
MCV – 77%; LCV –13%; and HCV – 10% versus the proposed mix: MCV – 43%; LCV – 37%;
and HCV – 20%). According to management, in a high coal price scenario, the price of lower
GCV coal does not increase proportionately to the price of high GCV coal and 2–3MT of the
former variety can be procured at a discount of 7%. Besides, the company is:
 in discussion with procurers to sell power beyond contractual obligation (80% PLF) at
higher tariff than PPAs to arrest losses. However, this seems to be on the backburner
for now and the CERC verdict is awaited to renegotiate PPAs;
 exploring coal evacuation from Russia to swap Indonesian coal supplies, which comes at
a lower landed cost; this is being evaluated and it’s too early to expect any meaningful
change in coal sourcing; and
 lowering the financing cost by trying to refinance the ECB loan. INR-denominated loan
refinancing has so far led to a 200bps reduction in interest cost.
Moreover, CGPL and Indonesian coal production act as natural hedges against rising coal
prices with CGPL losses (INR14bn) being offset by coal mining gains (INR14bn in FY18).
However, the Domestic market obligation (DMO) regulation in Indonesia is exerting

pressure on the returns profile of the coal mining business. This DMO ordinance is effective
through March 2019; the pressure is thus expected to persist up till H2FY19. There is no
clarity on the DMO regulation beyond 2019 as of now. The impact of the DMO obligation is
likely to be USD5/tonne.
Chart 1: CGPL and coal mining act as natural hedges Chart 2: CGPL mix to shift towards LCV coal
20.0 100%
14.2 10%
20%
12.0 80%
8.0
(Coal Mix)
4.0 60% 43%

(INR bn)
77%
(4.0) 40%
(12.0) (8.6) 20% 37%

(14.1) 13%
(20.0) 0%
FY17 FY18 Current Propesed
CGPL PAT Coal Mining Business PAT LCV MCV HCV


Tata Power Co
Outer chance that 850MW PPA could not be amended

The SC judgment paves the way for PPA renegotiation. High Powered Committee (HPC)
recommendations if implemented would reduce under-recoveries allowing for a tariff tike of
INR0.30–0.40/unit (depending on coal FOB prices) after considering the benefits from the
reduction in capacity charge (INR0.20 hair cut by lenders) and profit-sharing in coal mines
(INR0.25–0.30; a minimum of INR0.15 paisa). HPC recommends debt reduction of INR42bn
for CGPL-Tata power. There is an outer chance that Punjab and Rajasthan might not amend
the PPA’s. We await clarity on the CERC decision.
Table 1: TATA power has PPA’s with five states

Concerned states (PPA tie up - MW)
Company Capacity (MW) Configuration
Gujarat Haryana Maharahtra Punjab Rajasthan
Tata Power - CGPL 4,000 (5x800) 1,805 380 760 475 380
Source: HPC report, Edelweiss research
Table 2: Under-recovery in current coal environment has ranged between INR0.8-0.9/kwh

Company Capacity PPA Procurers Capacity PPA Variable Variable after actual Under-recovery
(MW) (MW) Charge cost cost pass through (INR/kwh)
(INR/kwh) (INR/kwh) (INR/kwh)
Tata Power - CGPL 4,000 3,800 Multiple States 0.90 1.60 2.37 0.77
Note: Variable charge, Under-recovery will vary with international coal price
Source: HPC report, Edelweiss research
Divestment underway; Tata Projects could be a big positive surprise

TPCL’s divestment of stake in three businesses (INR30bn equity consideration) highlights its
endeavour to simplify the business structure and monetise non-core assets to help
deleverage (current debt/equity of 2.3x). These are sales of: a) a 4.7% stake in Tata
Communications to Tata Sons for INR15bn; 2) a 40% stake in Panatone Finvest to Tata Sons
for INR6bn; 3) its defence business Tata Power Strategic Engineering Division( SED) to Tata
Advance Systems (TAS) for INR12bn (EV of INR22.3bn).
However, the biggest unlocking could happen from the sale of the Tata Project stake sale
(48%). Tata Projects is the EPC arm of Tata Group and it is benefitting from the group’s
renewed focus. Our channel checks indicate Tata Projects has an order book of more than
INR300bn and is growing at a healthy pace of 20%. It may be taken public over the next
three–six quarters, and we believe TPCL could generate ~INR25bn from divestment of its
stake (48% stake) in Tata Projects.

Power
Chart 3: TATA Projects: Key financial highlights
75.0 5,000
60.0 4,000
45.0 3,000
(INR mn)
(INR bn)
30.0 2,000
15.0 1,000
0
0.0
FY12 FY13 FY14 FY15 FY16 FY17
FY12 FY13 FY14 FY15 FY16 FY17
Revenue EBITDA PAT
Source: VCCEDGE, Edelweiss research
Tata Ceramic’s divestment would fetch a lower amount (less than INR2.5bn). Additionally,
TPL is yet to receive USD250mn from the sale of Artumin coal mine in Indonesia. The
remaining proceeds are likely to be received over the next three–four quarters. We believe
another INR25–30bn could materialise over the next couple of quarters, which could be
either used for debt repayment or growth opportunities. We reckon the company will use
the proceeds maintaining a balance between the two..
Prayagraj acquisition a booster

Recently, Resurgent Power Ventures (Tata Power owns 26% stake) inked an agreement to
acquire 75.01% stake in Jaiprakash Associates’ 1,980MW Prayagraj Power Generation Co.
from a State Bank of India-led consortium of lenders for a value of ~INR60bn. This deal is
expected to be funded in the ratio of 80:20 debt/equity.
More importantly, the O&M contract will be taken up by TPCL on normative basis, which is
normally benchmarked as per CERC norms of ~INR2mn/MW annually. As per our
understanding, the actual O&M cost works out to ~INR0.7-0.8mn/MW. So there could be
potential savings of INR1mn/MW, which translates into profit (post tax) of ~INR1.4bn. We
have still not factored this in our assumptions.
On TPCL’s equity contribution (26% stake) to fund the transaction, the company plans to
raise debt of INR2.5-3.0bn overseas at cost of debt of ~5%.

Tata Power Co
Focus areas for future growth:

1) Renewable capacity expansion: TPCL is targeting a higher share of non-fossil fuel of
40–50% of generation capacity by 2025, which will be largely driven by RE (current
operational capacity ~2.2GW, 400MW in the pipeline). However, management has
stated it will be cognisant of profitable growth (meeting internal IRRs) and is willing to
let the opportunities not meeting its criteria pass. The company has remained muted in
the recent bidding rounds as solar and wind tariffs have dipped amid high competitive
intensity.
We expect some rationalisation in RE tariffs over the medium term; that said, near term
pressure amid aggressive bidding could delay TPCL’s RE expansion plans.
Chart 4: TPCL is among leading RE players in India Chart 5: EBITDA margin close to 90% (consolidated RE portfolio)
20.0 100.0
2.1GW Renewable Capacity
16.0 96.0
WIND
ASSETS(SA)
376 MW TPREL 624 12.0 92.0
(INR bn)
MW
(%)
8.0 88.0
4.0 84.0
0.0 80.0
FY17 FY18 H1FY19
WALWHAN
1153 MW Revenue EBITDA EBITDA margin
Another point to note here is that RoE on RE projects can be seemingly lower in the initial
four–five years due to higher non-cash charges such as deferred tax and accelerated
depreciation. RoE would, however, improve over the medium term with debt and interest
costs coming down.
Table 3: 400MW capacities won in recent bidding rounds

Auctioning Entity Location Capacity(MW) Tariff (INR/kwh)
Karnataka Renewable Energy Development Pavagada Solar Park,Tumkur district,
250 2.85
Limited (KREDL) Karnataka
Maharashtra State Electricity Distribution Co.
Maharashtra 150 2.72
Ltd (MSEDCL)
2) Distribution franchise business: TPCL has had tremendous success with its Delhi
distribution operations with among the lowest AT&C losses across discoms in the
country. The government is increasingly looking to privatise distribution through PPP
or the franchise model. Given its success in Delhi and Ajmer, TPCL is well placed to
take advantage of this opportunity. The Delhi distribution business runs at an AT&C
loss of 8.3% and Ajmer 16–17%. Discoms’ failure to stick to AT&C targets could make
a solid case for privatisation in select circles.

Power
Chart 6: TPCL runs one of the most efficient distribution operations in the country
47.8
50.0 44.9
40.0 33.8
30.0 26.5
23.7
(%)
18.6 16.7
20.0 15.2 14.2
11.5 10.7 10.4 9.9
8.8 8.6 8.4
10.0
0.0
FY03
FY04
FY05
FY07
FY08
FY09
FY10
FY11
FY12
FY14
FY15
FY16
FY18
FY06
FY13
FY17
AT&C Losses
3) Building capability for future technologies: Moving away from thermal generation,
TPCL is keen on exploring opportunities such as EV charging stations, smart metres
and grid systems, and house automation systems. It is also looking to explore solar
rooftop technology, wherein no major player has a presence in the country.
Fig. 1: Significant potential from new business opportunities

House
automation
and smart
homes
80mn
EV
Smart
charging
meters
1 mm
270mm
stations
New
Oppurtunities
LED street
Solar
lighting
rooftop
9mm
40GW
points
1. Smart metering: The key drivers are the focus on distribution space and UDAY with a
potential of 270mn meters. TPCL is providing smart metering solutions as well.
2. Rooftop solar: The National Solar Policy will drive this; it is a potential 40GW (currently
1.5GW) opportunity. No big player present currently.
3. LED street light system, ESCO: Energy efficiency and UDAY are the key drivers offering a
9mn points opportunity.

Tata Power Co
4. EV charging: Driven by the National Electric Mobility Mission, TPCL in partnership with
Tata Motors has big plans for EV charging across India, which is likely to be a total
opportunity of 20mn 4W EV and 1mn charging stations.
5. Home automation: The Smart City Mission is a key driver with 80mn homes as the
target opportunity.
6. Micro grids: TPCL is trying to develop a service with a packaged solution. The pilot
project was successful in Bihar with 100% collection.
Table 4: Mundra resolution probability scenario

Entity Probability scenario - Impact on TP Rationale
25% 50% 75% 100%
Mundra - 34 9 17 26 34 There is a resonable chance that CERC will allow tariff
resolution hikes. Since TPCL has five PPA's, there is an outer chance
that 850MW PPA with Punjab & Rajasthan could not be
amended
Coal mining (5) (1) (3) (4) (5) As per HPC recommendations TPCL will have to share the
sharing of profits profit from coal mining business attributable to coal
supplied to Mundra plant
Per share Value 7 14 22 29
Impact on TP (INR) 14
Table 5: SOTP valuation

Earnings / BV Valuation Tata Tata Share Per share
Businesses Method RoE CoE Multiple
Equity/Reserves (INR mn) Share (%) (INR mn) (INR)
Regulated utility P/B 40,222 18.0% 13.0% 1.61 64,748 100 64,748 24
Delhi Distribution P/B 13,495 16.0% 13.0% 1.37 18,432 51 9,400 3
Power Links P/B 4,848 16.0% 13.0% 1.37 6,622 51 3,377 1
Renewable/Overseas projects P/B 10,875 16.0% 13.0% 1.37 14,854 100 14,854 5
Welspun Renewable P/B 35,000 6.6% 13.0% 1.10 38,500 100 38,500 14
Jojobera P/B 5,000 19.0% 13.0% 1.70 8,500 100 8,500 3
Mundra UMPP NPV 1.00 (91,264) 100 (91,264) (34)

DVC (Maithon) P/B 14,320 18.0% 13.0% 1.25 17,900 74 13,246 5
Tata Steel IPP P/B 7,881 18.0% 13.0% 1.45 11,428 74 8,457 3
KPC & Bumi NPV at WACC of 7% 362,981 30.0% 108,894 40
Quoted investments
Total At book value 18,409 7
Net Cash BV 20,521 8
Option value from Mundra 14
resolution
Total 233,698 101

Power
Company Description
TPCL is a pioneer in India's power sector with presence in all spheres of the power industry,
encompassing generation, transmission, trading, and distribution. The company has posted
exceptional performance in its transmission and distribution JVs. It was also awarded the
first UMPP at Mundra (Gujarat) due to its lowest levelised tariff bid at INR2.26 per unit.
Investment Theme
We believe, TPCL is poised to play a pivotal role in India’s power sector. The company, in the
past, has proved its expertise in project execution. It has an installed capacity of 10GW plus
at FY18 end. It has 30% stake in two coal mines of Bumi Resources with proven reserves of
~1.9bt. With rising coal prices, we believe, TPCL will earn significant profits from these
assets as seen in FY18 which saw coal mines contributing ~INR10bn to the profit. Further,
management has stated its intentions to simplify its various unrelated businesses and
intention to divest in six different businesses which could prune debt/equity from 2.4x to
~2.0x over the next few quarters. The renewable bet has been playing well with the
business contributing ~INR4bn to FY18 profit. Successful resolution of Mundra plant could
boost TPCL’s profitability.
Key Risks
TPCL has fully commissioned two key projects at Mundra—4,000MW and Maithon—
1,050MW. Dynamics of the Indian electricity market have undergone a sea change due to
higher imported coal prices, weak customer finances, changing fiscal norms at coal
exporting countries and now, a depreciating INR. Hence, balancing between contractual
supplies (volume and price) and maximising earnings has become a key determinant/risk.
Renewable expansion plans could be dampened in near term amid aggressive bidding in RE
space.

Tata Power Co
Sector EBITDA 63,570 64,171 66,309 68,974
Mundra units sale (MUs) 29,328 29,328 29,328 29,328 Profit Before Tax 13,613 12,251 14,833 19,097
Mundra Cap.charge(INRmn) 24,670 24,650 24,673 24,587 Less: Provision for Tax 1,643 6,376 6,480 7,218
Mundra avg tariff(INR) 2.4 2.6 2.6 2.6 Add: Exceptional items 6,927 - - -
Mundra fuelcost(INR/kwh) 1.8 1.8 1.8 1.8 Minority interest - 2,142 2,232 2,326
Mundra PAT/kwh (INR/kwh) (0.6) (0.5) (0.4) (0.4) Associate profit share 15,539 12,879 14,647 13,011
BUMI coal sales (MT) 57.0 59.0 61.0 66.0 Reported Profit 27,509 16,611 20,768 22,563
BUMI avg realz (USD/t) 67.9 65.5 69.4 69.4 Adjusted Profit 27,509 16,611 20,768 22,563
BUMI PAT/t (USD) 13.8 12.6 13.4 11.1 Shares o /s (mn) 2,705 2,705 2,705 2,705
Consol Reg. Eqty (INRmn) 76,696 78,825 80,670 41,512 Adjusted Basic EPS 10.2 6.1 7.7 8.3
Consol Regulated RoE 18 19 19 17.4 Diluted shares o/s (mn) 2,705 2,705 2,705 2,705
Common size metrics

EBITDA margins 21.7 20.7 21.0 21.4
Growth ratios (%)

Revenues 6.3 5.4 1.9 2.1
EBITDA 7.6 0.9 3.3 4.0
PBT 515.2 (10.0) 21.1 28.7
Adjusted Profit 150.9 (39.6) 25.0 8.6
EPS 150.9 (39.6) 25.0 8.6

Power

Minority Interest 20,153 22,295 24,528 26,854 Net cash Flow 1,197 7,619 8,207 10,137
Total Borrowings 419,216 428,630 438,514 442,666 Share issue/(buyback) 848 - - -
Sources of funds 645,205 670,951 700,809 726,561 Profitability and efficiency ratios
Gross Block 585,223 610,392 635,562 660,732 Year to March FY18 FY19E FY20E FY21E
Net Block 432,567 436,569 440,145 443,633 ROAE (%) 15.6 9.6 10.7 10.6
Capital work in progress 16,526 15,000 15,000 15,000 ROACE (%) 7.4 7.7 7.7 7.8
Intangible Assets 32,247 32,247 32,247 32,247 Inventory Days 33 32 32 33
Total Fixed Assets 481,339 483,816 487,391 490,879 Debtors Days 41 40 40 40
Non current investments 119,928 119,928 119,928 119,928 Payable Days 113 117 112 112
Cash and Equivalents 16,219 23,839 32,046 42,183 Cash Conversion Cycle (39) (45) (40) (39)
Inventories 16,231 18,399 16,753 18,975 Current Ratio 1.2 1.3 1.5 1.6
Sundry Debtors 27,889 39,894 29,169 41,372 Gross Debt/EBITDA 6.6 6.7 6.6 6.4
Loans & Advances 26,966 30,590 34,716 39,415 Gross Debt/Equity 2.2 2.1 2.0 1.8
Other Current Assets 147,968 159,524 167,500 180,678 Adjusted Debt/Equity 2.2 2.1 2.0 1.8
Trade payable 56,098 69,801 51,457 71,631 Interest Coverage Ratio 1.1 1.2 1.3 1.4
Other Current Liab 135,237 135,237 135,237 135,237
Total Current Liab 191,336 205,038 186,694 206,868 Operating ratios
Net Curr Assets-ex cash 27,719 43,369 61,444 73,571 Year to March FY18 FY19E FY20E FY21E
Uses of funds 645,205 670,951 700,809 726,561 Total Asset Turnover 0.5 0.5 0.5 0.5
BVPS (INR) 62.0 67.2 73.8 80.9 Fixed Asset Turnover 0.6 0.7 0.7 0.7
Equity Turnover 1.7 1.6 1.5 1.4
Free cash flow (INR mn)
Year to March FY18 FY19E FY20E FY21E Valuation parameters
Reported Profit 27,509 16,611 20,768 22,563 Year to March FY18 FY19E FY20E FY21E
Add: Depreciation 23,981 21,167 21,594 21,681 Adj. Diluted EPS (INR) 10.2 6.1 7.7 8.3
Interest (Net of Tax) 28,080 17,133 19,668 21,027 Y-o-Y growth (%) 150.9 (39.6) 25.0 8.6
Deferred tax (12,263) - - - Adjusted Cash EPS (INR) 14.5 14.0 15.7 16.4
Others 3,971 15,464 12,074 9,090 EV / Sales (x) 2.2 2.1 2.0 2.0
Less: Changes in WC (7,639) (15,651) (18,075) (12,127) EV / EBITDA (x) 10.0 10.0 9.7 9.3
Less: Capex 19,917 23,644 25,170 25,170
Free Cash Flow 43,722 31,082 30,858 37,065
Peer comparison valuation

Market cap EV / EBITDA (X) P/B (X) ROAE (%)
Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E
Tata Power Co 3,030 10.0 9.7 1.2 1.1 9.6 10.7
Adani Power 2,836 10.0
9.6 9.4 4.0 4.6 (28.0) (13.8)
CESC 1,305 9.6
6.5 6.3 1.0 0.9 11.5 11.4
JSW Energy 1,562 6.5
7.5 7.3 1.0 0.9 6.5 7.8
NTPC 16,267 7.5
9.5 8.3 1.1 1.0 10.4 11.6
Power Grid Corp of India 13,546 99.5.5
7.4 6.9 1.6 1.4 17.5 17.7
Median - 7.4
8.5 7.8 1.1 1.0 10.0 11.1
AVERAGE - 8.5
8.4 8.0 1.6 1.7 4.6 7.6
8.4 Source: Edelweiss research

Tata Power Co
Additional Data
Directors Data
Mr. N. Chandrasekaran Chairman, Non-Independent, Non-Executive Mr Praveer Sinha CEO and Managing Director
Ms Anjali Bansal Independent, Non-Executive Mr N H Mirza Independent, Non-Executive
Mr D M Satwalekar Independent, Non-Executive Miss Vibha Padalkar Independent, Non-Executive
Mr S. V. Bhandarkar Independent, Non-Executive Mr. K. M. Chandrasekhar Independent, Non-Executive
Mr A. S. Sethi COO, Executive Director Ms. Saurabh Agarwal Non-Executive
Mr. Banmali Agarwala Non-Executive
Auditors - M/s S R B C & CO. LLP

Holding – Top10
Tata sons ltd 31.05 Life insurance corp 12.08
Matthews internation 7.36 Tata power co ltd/th 5.07
Icici prudential lif 5.03 Commonwealth bank of 4.85
Icici prudential ass 4.61 General insurance co 2.5
New india assurance 2.48 Blackrock inc 1.5
*in last one year
Bulk Deals
No Data Available
*in last one year
Insider Trades
No Data Available
*in last one year

RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Adani Power HOLD SU H CESC BUY None None
India Grid Trust BUY SP M JSW Energy HOLD SP M
NTPC BUY SP L Power Grid Corp of India BUY SO L
PTC India BUY None None Tata Power Co BUY SP M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING

Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return

Tata Power Co
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=HEAD RESEARCH, cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266c27990
f20bf0213f69235fc3f1bcd0fa1c30092792c20,
Head of Research
NARAIN
postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e91543f9
f4d9b8311cf0678cd975097fc645327865,
aditya.narain@edelweissfin.com st=Maharashtra
Date: 2018.12.07 16:47:12 +05'30'
Coverage group(s) of stocks by primary analyst(s): Power

Adani Power, Adani Transmission, CESC, India Grid Trust, JSW Energy, NTPC, PTC India, Power Grid Corp of India, Tata Power Co
Recent Research
Date Company Title Price (INR) Recos
15-Nov-18 CESC Steady quarter; a rerating 682 Buy

candidate;
Result Update
06-Nov-18 Power Grid Capitalisation to be back- 188 Buy
Corporation ended;
of India Result Update
05-Nov-18 JSW Improving core portfolio; 68 Hold
Energy Result Update
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
446
(INR)
297
149
-
Apr-14
Sep-14
Feb-14
Mar-14
Jun-14
Dec-14
Jul-14
Aug-14
Oct-14
Nov-14
May-14
Jan-14

(INR) (INR) (INR)
0
15
30
45
60
75
50
60
70
80
90
170
180
190
200
210
220
100
Dec-17
Dec-17 Dec-17
Power
Jan-18
Jan-18 Jan-18
One year price chart
Feb-18
Feb-18 Feb-18
Mar-18
Mar-18 Mar-18
Apr-18
Apr-18 Apr-18
May-18
May-18 May-18
Jun-18
Jun-18 Jun-18
Jul-18
Adani Power
JSW Energy
Jul-18 Jul-18
122
Aug-18
Aug-18 Aug-18

Sep-18
Sep-18 Sep-18
Oct-18
Oct-18 Oct-18
Nov-18 Nov-18 Nov-18
Dec-18 Dec-18 Dec-18
(INR) (INR) (INR)
50
62
74
86
98
110
130
142
154
166
178
190
600
670
740
810
880
950
Dec-17 Dec-17
Dec-17
Jan-18 Jan-18
Jan-18
Feb-18 Feb-18
Feb-18
Mar-18 Mar-18
Mar-18
Apr-18 Apr-18
Apr-18
May-18 May-18 May-18
Jun-18 Jun-18
CESC
Jun-18
NTPC
Jul-18 Jul-18
Tata Power Co
Jul-18
Aug-18 Aug-18 Aug-18
Sep-18 Sep-18 Sep-18
Edelweiss Securities Limited

Oct-18 Oct-18 Oct-18
Nov-18 Nov-18 Nov-18
Dec-18 Dec-18 Dec-18
Tata Power Co
NOTES:

Power
NOTES:

Tata Power Co
NOTES:

Power
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Power
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December 07, 2018

Powering Past Pessimism

Swarnim Maheshwari Varun Mittal

The Indian power sector has been battered by capacity

Key points to consider:

 Capacity addition in RE (13% share in overall generation by FY22E) is likely to moderate

 Consumer tariffs can jump ~10% on implementation of various norms.

1 Edelweiss Securities Limited

Thermal power continues to be India’s mainstay

B) Market likely to adjust into a more balanced position

Thermal critical but renewable energy would co-exist

That said, recent macroeconomic developments such as currency depreciation and

Coal availability – The burning issue; imports imperative

2 Edelweiss Securities Limited

Consolidation flares up amid adversity and attractive asset valuations

Distribution reforms on the cards

Impact of upcoming CERC 2019–24 norms overstated

Power sector valuations reasonable; picking winners

3 Edelweiss Securities Limited

Executive summary ......................................................................................................... 1

Investment Themes... ..................................................................................................... 5

The story in charts... ........................................................................................................ 6

India catching up to its potential .................................................................................... 8

Power demand-supply: Equilibrium to deficit again? ................................................... 10

Renewables shining through ......................................................................................... 22

Domestic coal availability a potential dampener .......................................................... 32

Powerful(l) consolidation: Attractive valuations........................................................... 36

Distribution reforms: Critical to rekindle sector ........................................................... 43

Valuations bottoming out; good hunting ground ......................................................... 47

Adani Power ........................................................................................................... 53

JSW Energy ............................................................................................................. 71

Power Grid ............................................................................................................. 97

Tata Power ........................................................................................................... 109

4 Edelweiss Securities Limited

Uptick in commercialisation/CWIP ratio from 1.7x to 2.2x to

Ramp-up in captive coal production to fortify fuel security

Growth opportunities from distribution franchise

IRR, not market share, key criterion

Strong FCF profile from core business USD–INR movement

Entry in unrelated businesses could eat into profitability

SHAKTI tie-up to support Tiroda and Kawai utilisation

Compensation for change in law to support debt reduction Ballooning debt

Table 2: Valuation snapshot

5 Edelweiss Securities Limited

The story in charts

8.0 1,300 6.4

6.0 5.4 1,100 5.8

4.0 3.1 900 5.2

Electricity consumption CAGR 2000—17 India's per capita consumption CAGR

Energy demand growth Peak demand growth

6 Edelweiss Securities Limited

13GW 40GW 5GW 9.0

Source: MoP, Bloomberg, Edelweiss research

Picking winners – Edelweiss model portfolio for Power sector

Source: Edelweiss research

7 Edelweiss Securities Limited

India catching up to its potential

India third-largest electricity consumer, but per capita consumption lags

4.0 3.1 2.8

8 Edelweiss Securities Limited

1,300 6.4 5,000

1,100 5.8 4,000

9 Edelweiss Securities Limited