India Power Generation CLSA

India power generation
Sector outlook
Bharat Parekh
bharat.parekh@clsa.com
+91 22 6650 5020
9 January 2019
India
Power
Top picks
CESC CESC IB
Rec BUY
Market cap US$1.23bn
Price Rs653
Target Rs880
Up/downside +35%
NTPC NTPC IS
Rec BUY
Price Rs149
Target Rs180
Up/downside +21%
Other covered stocks
Adani Power ADANI IB

Rec SELL
Market cap US$2.8bn
Price Rs50
Target Rs23
Up/downside -54%
JSW Energy JSW IB

Rec SELL
Market cap US$1.6bn
Price Rs70
Target Rs63
Up/downside -10%
Tata Power TPWR IB

Rec BUY
Market cap US$2.9bn
Price Rs75
Target Rs96
Up/downside +28%
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Contents
Executive summary ........................................................................................................ 3
Power sector turning around ........................................................................................ 4
Demand-supply balance favours IPPs ........................................................................ 13
Regulatory - Headwind to tailwind ............................................................................ 42
Valuations are compelling ........................................................................................... 58
Company profiles
Adani Power........................................ 73 NTPC ................................................. 125
CESC .................................................... 85 SJVN .................................................. 149
JSW Energy ......................................... 97 Tata Power ........................................ 155
NHPC ................................................. 111 Torrent Power .................................. 169
NLC India ........................................... 119
August 2018’s Throne
games report looked ahead
to this year’s Indian
Appendices
general election, which
1: UDAY - Power reform 3.0 ..................................................................................... 177
will affect power demand
2: Power surrendered by discoms ............................................................................. 180
3: Competitive wind power ........................................................................................ 181
4: UP discoms - Existing structure ............................................................................ 182
5: Stressed and stalled power capacity .................................................................... 184
6: NTPC’s plan to desulphurise ................................................................................. 185
All prices quoted herein are as at close of business on 7 January 2019, unless otherwise stated
Power and politics mix in India
2 bharat.parekh@clsa.com 9 January 2019

Executive summary India power generation
Powering up
We are BUYers of NTPC Prime Minister Narendra Modi’s desire to light up every household has produced
and CESC power reforms that are helping to restore sector viability and lift investor
confidence. Effectively pump-priming the US$135bn ecosystem, regulated
utilities and select power producers should be the first beneficiaries. Higher
utilisation and power-purchase agreements on upcoming projects will provide
scope to improve their ROEs. Our top picks are NTPC and CESC.
Power reforms are Government reforms are already helping fix the debt-ridden distribution
delivering companies (discoms), having lowered their losses by 70% over FY15-18, and we
expect these firms to break even by FY21. In a three-step process, Delhi has
launched a 75% debt-reduction plan to take out legacy costs, cut operating costs
and improved revenue via metering and IT infrastructure. This will help boost
power demand and increase visibility on under-construction projects.
Demand acceleration versus We estimate India’s power requirements will double over the next decade, given
supply slowdown Modi’s 24x7 power-for-all initiative and a pick-up in industrial demand as well as
pre-election needs. At the same time, new guaranteed capacity addition is likely
to decline by 45% over FY20-25CL, compared to FY15-20CL, on an 80% drop in
new-equipment awards over FY10-18. Rising demand should reverse the decade-
long fall (FY07-17) in thermal plant output, and improved utilisation of the same
will be the strongest theme, making IPPs the key plays on the sector turnaround.
Regulation headwind to The IPP sector’s core strength has been its solid regulatory regime. Led by Shiri
tailwind P.K. Pujari, its new and progressive chairman, the Central Electricity Regulatory
Commission’s recent draft regulations for FY19-24 not only promise continuity of
an attractive regulated regime for conventional power (even better than
renewables), but also a host of sector-friendly measures. This should address any
market concerns. Our analysis suggests 6-8% EPS upside for NTPC and Power
Grid on continued 15.5% ROE. Meanwhile, Delhi has proposed sweeping changes
to improve the operations of discoms, which control US$80bn of sector revenue.
Buy growth utilities at value The key beneficiaries will be the incumbents, such as NTPC, and solvent private
multiples IPPs with robust balance sheets, such as CESC. We expect NTPC to grow its
regulated equity by more than 50% over FY18-21, resulting in ROE expansion
of some 240bps, which should be a rerating catalyst. The stock is trading near
its 10-year-low valuation, factoring in the recent risks of a tough regulatory
landscape, a challenging environment and project delays. All are set to change.
We also like CESC, one of the more profitable non-state-owned discoms, whose
IPP business drives EPS growth. Further, we rate Tata Power a BUY but are
SELLers of Adani Power and JSW Energy. We also provide insights into high-
yield (low-growth) regulated utilities - such as SJVN, NHPC and NLC - and
vendors CIL, PTC and IEX.
India IPPs: Covered valuation comps

Company Stock Rec Price Target Upside PE (x) PB (x)
code (Rs) (Rs) (%) FY18 FY19CL FY20CL FY18 FY19CL FY20CL
Adani Power ADANI IB SELL 50 23 (54) na na na 21.8 na na
CESC CESC IB BUY 653 880 35 10.0 6.0 5.5 0.7 0.6 0.5
JSW Energy JSW IB SELL 70 63 (10) 13.3 11.6 10.7 1.1 1.0 1.0
NTPC NTPC IS BUY 149 180 21 11.7 10.6 9.6 1.2 1.1 1.1
Tata Power TPWR IB BUY 75 96 28 14.1 12.2 10.7 1.5 1.3 1.2
Average 12.3 10.1 9.1 1.1 1.0 0.9
Note: Average numbers calculated ex-Adani Power. Source: CLSA,
9 January 2019 bharat.parekh@clsa.com 3

Section 1: Power sector turning around India power generation
Power sector turning around

India’s power reforms 3.0 (Ujjwal Discom Assurance Yojana, or UDAY) has proved
India’s power sector is
to be a solid turnaround recipe to fix the industry’s weakest link, distribution
turning around . . .
companies (discoms). The key difference compared to previous efforts is the
design and implementation of the reforms. Led by cost cutting, discom losses are
consequently already down by two thirds over FY15-18. Cleaning the discom
filter between IPPs and consumers should reignite depressed power demand and
pump prime the entire ecosystem, which comprises US$135bn of revenue and
US$150bn of debt exposure.
UDAY - Solid sector turnaround recipe

. . . and on a solid footing India’s power-sector reforms are helping fix the industry’s weakest link: loss-
making, debt-ridden discoms. We expect the UDAY scheme to drive a sector
turnaround, and these companies to breakeven by FY21. This will help boost
power demand and drive capex recovery, as their ability to buy and supply power
improves, leading to less blackouts. However, we believe a demand revival will
expose the current government’s narrative of India being a surplus power country
and, in the future, recent under-investment in generation will emerge as the new
weak link in the sector. Under UDAY, discoms need to modernise their networks
and lower their distribution losses - fixing this infrastructure deficit will be the
strongest theme in Indian power.
Figure 1
These four pillars will lead UDAY: Cornerstone of power reforms

to a sector turnaround
Domestic coal
 Substitute imported coal with domestic coal
 Swap coal linkages to cut freight cost
 Additional linkages/coal mine to cut coal cost
Cut T&D loss

Discom balance-sheet cleanup
Sector  Spend US$75bn on T&D capex, of
which US$50bn on transmission
 Transfer 75% of discom liabilities to
state budget over two years turnaround capex
 Cut AT&C loss to 10-15%
Discom debt refinancing

 Reprice discom debt at 10bps over base rate
 Reprice discom debt assumed by state at
75bps over gov’t securities
Source: CLSA
Hard stop to discom losses

State of UP bore over 50% Historically, there hasn't been a clear trend in discom losses, as they depended on
of discom losses, Rajasthan state governments’ unilateral decisions to either bear subsidies (Fig 2) or hide
17%, Haryana only 1% losses off-budget in discoms’ profit and loss statements, eg, Rajasthan bore 17%
of discom losses in FY16, while Haryana absorbed only 1% (Fig 3).
Figure 2
Subsidies across states of India power: Relative positioning of subsidies across states
UP, Madhya Pradesh and Rank FY13 FY14 FY15 FY16
Tamil Nadu have gone up 1 AP + Telangana AP + Telangana Uttar Pradesh Uttar Pradesh
2 Punjab Uttar Pradesh Tamil Nadu Tamil Nadu
UP now (FY16) accounts for 3 Haryana Haryana AP + Telangana AP + Telangana
c.15.5% of all-India subsidy 4 Uttar Pradesh Tamil Nadu Haryana Haryana
vs c.12.7% in FY13 5 Tamil Nadu Punjab Punjab Madhya Pradesh
6 Bihar Bihar Madhya Pradesh Karnataka
7 Rajasthan Madhya Pradesh Bihar Punjab
Source: CLSA, PFC

Figure 3
Based on losses before India power: Losses across state discoms (FY16)
subsidies were received . . .
0
. . . Uttar Pradesh was the (20)

highest lossmaking state
(40)
(60)
(80)
(100)
(120)
(140)
Losses after subsidy Subsidy received
(160) (Rsbn)
Uttar Tamil Nadu Rajasthan Madhya Telangana Punjab Haryana Andhra
Pradesh Pradesh Pradesh
Source: CLSA, PFC
A key feature of UDAY is that it puts a hard stop to discoms’ loss absorption;
after that, losses will have to be transferred to individual states’ budgets. This
singular move under UDAY has made a material difference in states’ support for
discom reforms and their sustainable operations, as now it is difficult to hide
losses off budget (partially from FY18, but increasingly from FY21).
Figure 4
Pattern of taking over UDAY: Discom debt to be taken over by states

discom losses Year FY16 FY17 FY18 FY19 FY20 FY21
Previous year's Discom loss 0% of 0% of 5% of 10% of 25% of 50% of
to be assumed by states FY15 loss FY16 loss FY17 loss FY18 loss FY19 loss FY20 loss
Source: CLSA, PIB
Implementation of reform 3.0 - Different this time

These reforms should result The current (third) phase of India’s power reforms, triggered by UDAY, should
in sustainable and structural result in a sustainable and structural change in discoms, versus the spike seen
change during the first two phases. Now the focus is on business-model sustainability
and there is a hard stop to loss absorption, compared to the previous debt swaps,
all reform 3.0’s pillars (Figure 1) are focused on cost cutting/loss reduction in
order to improve the discom sustainability of business. These strategies should
improve revenue by better billing and collection, lower power-purchase volume
and cost, and lower operations and maintenance (O&M) expenses, compared to
the previous reform phases’ focus on deleveraging discoms via lower, just-below-
Ebitda, interest costs. Another difference with 3.0 is feedback loop and constant
pressure to perform vs just prescription for better-behaviour in the past with no
feedback loop, as discussed below.
Figure 5
UDAY: Key differences vs previous reforms

Parameters UDAY Earlier reforms
Debt swap      
Hard stop to discom loss absorption   
Cost cutting    
Focus on metering, billing, collection    
Feedback loop, constant pressure    
Source: CLSA

Multipronged strategy to wipe out discom losses

India’s power-reform scheme, UDAY (see Appendix 1), should a drive sector
turnaround, wiping out US$9.5bn of discom losses. It aims to help them
breakeven by FY19 (but now it looks like this will be achievable in FY21) through
single-mindedly focusing on cost cutting. Key drivers will be debt
transfers/repricing to cut US$5bn of losses, a reduction in transmission and
distribution (T&D) losses to save US$1.8bn, and coal-related savings of another
US$1.6bn. Overall, even if discoms achieve 30% of the planned US$30bn cost
savings (Fig 6), they should achieve breakeven by FY21.
Figure 6
If UDAY is 30% successful, UDAY: Path to discom breakeven

discom losses could be Area (Rsbn) Details Plan Breakeven Assumptions
wiped out savings savings (%)
Interest rate reduction 3% on 25% discom debt 35 26 75
Interest rate reduction 4% on 75% discom debt 135 101 75
Debt takeover by states 8% on 75% discom debt 270 203 75
AT&C loss reduction Reduce to 15-10% 575 115 20
Supply of domestic coal and coal swapping 360 108 30
Demand side management (DSM) LED, appliances, etc 585 59 10
PAT 76 23 30
Transmission losses 1% of intra state 16 5 30
Total 2,052 639
Source: Ministry of Power, CLSA
UDAY aims for sustainable We expect UDAY to improve power generation (Figure 7) driven by increased
improvement in discom demand, which hitherto was suppressed by discoms’ weak financials. We are
operations, vs past blips seeing the first signs of a pickup in the power sector, with the first high single-
digit growth since 2HFY16 (Figure 7). We observe that large power consuming
states, such as Maharashtra, UP and Rajasthan, which were growing slowly (by 0-
5% - accelerated their power-demand growth post-UDAY to 5-12%. We expect
the trend to continue, contrary to previous reforms that caused temporary blips.
This is as because the new reform is a time-bound programme with constant
monitoring and a hard-stop for linking discom losses to state budgets in a gradual
manner. Hence, we believe that sustainable demand recovery would improve
utilisation and eventually drive capex recovery.
Figure 7
Initial signs of demand India power: Generation growth

recovery led by UDAY are 16 (YoY %) Conventional + Renewable - 3mma YoY
visible since 1QFY16
14
12
10
0
Apr 08
Apr 09
Apr 10
Apr 11
Apr 12
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Source: CEA

Figure 8
State-wise consumption, growth and per capita consumption (FY18)

16 FY18 Consumption growth (YoY %)
14
12 Telangana
UP
10
8
Chattisgarh Maharashtra
6 Orissa
AP Gujarat
Punjab
Bihar MP
4
Rajasthan
Delhi Haryana
WB
2
TN
0
Karnataka
(2)
Per Capita Consumption (Units)

(4)
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Source: CLSA, Census, CEA
Figure 9
State-wise consumption, growth and per capita consumption (FY16)

30 FY16 Consumption growth (YoY %)
25 Bihar
Chattisgarh
20
15
MP
10
Gujarat
5 Maharashtra
Karnataka
UP Punjab
0 Rajasthan TN
Delhi Haryana
Orissa AP
WB
(5) Telangana
Per Capita Consumption (Units)

(10)
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Source: CLSA, PFC, Government

Profligacy to prudence: Discom losses down to a third

Gov’t has contained discom Led by the multipronged strategy to fix the power sector’s weakest link, the
losses reduced them to one central government has been able to not only contain discom losses but also
third within three years reduce them to a third within three years (Figure 10). Key drivers of the loss-
reduction strategy are:
1. Debt swap: US$32bn of liabilities assumed by state governments (Figure 12)
2. Cost cutting: power-purchase cost (per kWh) saw a 2.5% Cagr over FY15-18
vs 5.5% over FY12-15. (Figure 13)
3. Improve infra: feeder metering (100% done), distribution transformer metering
(61-64% done) and feeder segregation (100% done) (Figure 11)
4. AT&C losses down by 620bps to 18.8% in FY18.
5. Marginal tariff hike: a 4.5% Cagr for ARR.
Figure 10
UDAY has clearly turned UDAY: Discoms’ losses reduced

out to be a success in 0
addressing the weakest link
in the power sector . . . (100)
. . . discom losses are down (200)

70% over FY15-18
(300)
(400)
(500) 32%
Cagr
(600)
(700)
(Rsbn) TN MP Rajasthan UP Haryana Others

(800)
FY13 FY14 FY15 FY16 FY17 FY18
Note: FY17 & FY18 data are unaudited. Source: CLSA, Ministry of Power
Figure 11
100% of both urban and Metering statistics of 27 UDAY states

rural feeder-metering target (%) Achieved Pending
has been achieved 100
10
36
80 39
60
100 100
90
40
64 61
20
0
Feeder Metering Feeder Metering DT Metering DT Metering Feeder
(Urban) (Rural) (Urban) (Rural) segregation
Source: CLSA, UDAY website
 Debt swap: 14 states issued UDAY bonds to take over US$32bn of discom
liabilities, as of September 2015. Top-three states, namely Rajasthan, UP and
Haryana, account for 65% of the total bonds issued.

Figure 12
UDAY: State-wise liabilities and issuance of bonds by states/discoms

State Discom Approved Bond Bond Total Total Total Total Total % issued
(Rsbn) liabilities by DoE for issued by issued by bonds bonds bonds bonds bonds
as on raising bonds state in discom in issued in issued in issued in issued in issued till
30-09-2015 in FY16 FY16 FY16 FY16 FY17 FY18 FY19 date
Rajasthan 805 389 374 124 497 224 - - 721 90
Uttar Pradesh 539 243 243 - 243 255 0 - 498 92
Chhattisgarh 17 9 9 - 9 - - - 9 50
Jharkhand 67 61 61 - 61 - - - 61 91
Punjab 208 104 99 - 99 58 - - 156 75
Bihar 31 16 16 - 16 16 - - 31 100
Jammu & Kashmir 35 21 21 - 21 14 - - 35 100
Haryana 346 173 173 - 173 87 - - 260 75
Andhra Pradesh 110 - - - - 83 - - 83 75
Maharashtra 66 - - - - 50 - - 50 75
Tamil Nadu - - - - - 140 88 - 228 na
Telangana - - - - - 69 20 - 89 na
Himachal Pradesh - - - - - 29 - - 29 na
Madhya Pradesh 45 - - - - - 74 - 74 162
Total 2,272 1,017 995 124 1,119 1,022 182 - 2,324 na
Source: CLSA, Ministry of Power
 AT&C loss reduction
Figure 13
UDAY promises to be a UDAY: Trends in power-purchase costs, AT&C Losses, interest costs and ACS-ARR gap
holistic solution to the Parameters (Rs/kWh) FY14 FY15 FY16 FY17 FY18 Jun 18 Sep 18
discom loss problem . . . ARR 4.42 4.60 4.88 5.03 5.23
Power purchase cost 3.77 3.89 4.18 4.16 4.20
. . . hence power-purchase AT&C losses (%) 23.0 25.0 21.0 20.0 18.8 18.7 22.8
costs, AT&C losses and
Interest cost 0.43 0.42 0.46 0.34 0.34
interest cost have started
ACS-ARR Gap 0.76 0.60 0.60 0.46 0.21 0.21 0.27
decreasing
Source: CLSA, Ministry of Power, UDAY website
Figure 14
Government plans to save UDAY: Potential savings from AT&C loss reduction
US$8.6bn in AT&C losses State AT&C losses AT&C % loss Potential saving if AT&C loss
(FY13-14) (%) target by FY18-19 reduces to target (US$m)
Haryana 34 15 804
Uttar Pradesh 25 15 781
Rajasthan 27 15 679
Madhya Pradesh 28 15 670
Tamil Nadu 22 15 596
Odisha 39 15 572
Total 8,582
Our analysis of a discom loss reduction of US$6.7bn over FY15-18 under UDAY
points to:
 Savings in interest costs by US$3.2bn led by debt swapping; US$32bn of
discom liabilities have already been assumed by the state governments.
 Increase in revenue by US$1.5bn, led by an improvement in ARR, from
Rs4.6/kWh in FY15 to Rs5.23/kWh in FY18.
 Balance amount of US$1.9bn, led by cost savings, such as a reduction in
power-purchase costs.

Figure 15
Losses under UDAY down India power: Discom losses under UDAY
by US$6.7bn to US$2.5bn 700 (Rsbn)
600
500
400
300
200
100
0
FY15 losses Savings on interest Cost savings Increase in revenue FY18 losses
Source: CLSA, UDAY portal
Key issues to watch

Sanctity of IPP contracts
Last-mile tariff hikes are not easily done in India, especially ahead of general
elections (due in 2Q19). In such a situation, a state government may inflict losses
on its discoms by instructing them to pay higher tariffs to IPPs without
compensation. One such example is the recent decision by Gujarat to allow
discoms to rewrite an existing long-term PPA (contract) to pay Gujarat-based IPPs
higher tariffs to absorb past aggressive bids. India’s Supreme Court (SC) has
advised the central regulator (CERC) to look into this issue and also advised
consumer groups to contest it. The proposed tariff hike, based on the
recommendation of a state-appointed high-powered committee (HPC), assumes a
US$1.4bn hit to banks and inflicts an annual US$325m net hit to discoms, or
US$6.5bn over the balance of those PPAs’ 20 years. If the SC/CERC allows the
reopening of past PPAs, it could hurt discoms’ profitability.
How IPPs are helping discoms cut costs

Power purchase costs (PPC) account for c.77% of discoms’  This case study presents that post UDAY’s launch,
overall costs, and hence are the biggest area of cost cutting government IPPs - under guidance from ministries and
by discoms, apart from reducing AT&C losses. We present pressure from discoms to cut costs - have taken serious
here two case studies of IPPs accounting for over a fifth measures to reduce discoms’ costs by ensuring synergy
India's power generation - how they helped discoms cut costs between the power and coal sectors.
(a key focus of UDAY) by passing on cost cuts, as per
regulations. Steps by these two IPPs resulted into savings of NLC: Reduces discom costs by lowering cost of mining (June
Rs81bn (14% of FY15 discom losses). NTPC (BUY) supplies 2018)
22% of India’s power.  In another case study, we highlight how NLC contributed
in reducing the discom losses by focusing on efficiency
NTPC: Saves US$1bn on coal rationalisation, import control improvement.
(July 2016)
 NLC has been able to reduce the price of its power, by
 The Ministry of Coal in July 2016 applauded the efforts
35-58 paise per unit, using technical expertise, efficient
of NTPC to save fuel costs, which would ultimately
mining operations and prudent cost management.
benefit the discoms.
 This was in addition to the 45-75 paise reduction due to
 NTPC achieved savings of approximately 30 paise/kWh, the introduction of GST in July 2017. This is due to NLC
due to rationalisation of coal linkage and replacing an
being a power generator using coal from its own mines in
expensive imported coal with tapering domestic coal
the same state, compensatory cess is not be applicable
linkage.
under GST.
 This translated into a net benefit of c.Rs5.5bn/month, or  These two cuts saved about Rs15.2bn/US$215m for the
Rs66bn pa/US$1bn to discoms (12% of FY15 discom
discoms every year.
losses).
 Due to various efficiency measures, including a reduction  While the first benefit was made available to the discoms
of South India (mainly TN), the GST benefits were also
in grade slippage of coal, specific coal consumption (coal
passed on to Rajasthan discoms as well.
consumed per unit) in 1QFY17 also came down by 2.9%
on a YoY basis, reducing discoms’ PPC.

Working-capital limits
Discom dues outstanding to UDAY requires working capital via banks, to be 25% of aggregate revenue and
IPPs have increased, as of places severe constraints on discoms’ fiscal space. This could create short-term
1HFY19 volatility in terms of discoms’ ability to source power or pay for it.
High debtors
Due to UDAY placing tight control/discipline over banks’ funding of discom
losses, compared to previous reform phases, we find that discom fees outstanding
to IPPs have increased, as of 1HFY19 (Figure 16). While part of this is seasonal
and led by volume growth, it is also due to a delay in state subsidy payments to
discoms, which typically were paid in 4QFY18. However, under UDAY, as bank
finance beyond approved loss-funding is discouraged, there may be mid-year
spikes, which will eventually put pressure on states and discoms to improve cash
flow discipline.
Figure 16
Outstanding dues across India power: Outstanding dues of all-India discoms¹

discoms historically have 350 (Rsbn)
been Rs300-350bn
As on Sep-18, they were up 300

by 13% YoY
250
200
150
100
Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18
¹ Praapti portal - data only for 19 major IPPs and not all-India. Source: CLSA
Elections
Key risk to UDAY is gov’t The government tends to give up on discipline ahead of elections. This is a key
easing up on financial risk to UDAY as it is based on financial control. Any announcement of “free-
discipline power”, releasing more power to low-Arpu customers, subsidies and a lack of law-
and-order enforcement are key risks ahead of elections.
Three-stage beneficiaries of this cycle

We present three-stage Key beneficiary of the power sector recovery theme would be spread across
beneficiaries of this cycle three stages of this cycle, in our view.
1. Stage 1: improved utilisation at existing regulated IPPs, such as NTPC, and

improved viability of their new capacity add, which were being delayed on
resistance from states till recently (Appendix 2). This is as their fixed cost is
already born by discoms and, hence, incremental cost is most economical.
2. Stage 2: merchant power IPPs, such as JSWE, CESC Genco.
3. Stage 3: new power equipment vendors, such as BHEL & L&T-Mitsubishi.

Rajasthan’s turnaround and “free-power” - Method in madness

A case of classic discom turnaround, but . . .
Rajasthan state discoms are a classic case of how to Rs156bn/US$2.2bn, accounting for 23% of all-India discom
turnaround a highly leveraged, loss-making utility. When the losses. Under UDAY, they were able to reduce losses by 83%
BJP government came to power in FY14, Rajasthan discoms to Rs25.9bn in four years under the BJP, as discussed in our
were India's No.2 loss-makers, with losses of visit summary below
India power: Rajasthan discom losses

0
(20)
(40)
(60)
(80)
(100)
36% Cagr
(120)
(140)
(160) (Rsbn)
Source: CLSA, Rajasthan discom
Our visit to Rajasthan discoms revealed the following . . . politicians will remain politicians
strategies to cut down losses and improve power supply in Ahead of Rajasthan state elections in December 2018, the
the state. incumbent BJP government announced free power for 1.2m
farmers from November, worth Rs12bn/US$170m. Would
1) State assumed US$10.2bn of discom debt, which cut this signal the end of reforms and a return to the old ways of
interest burden by 40% to Rs46.1bn by FY18, working? We don’t think so, if we dig deeper and see the
design of free power.
2) Discoms cut/controlled its costs (avg cost of supply fell to
Rs6.36/kWh by FY18, down by 6% vs FY14) Our analysis of Rajasthan’s free-power scheme points to
three mitigation factors, which are different compared to the
3) Cut its Transmission & Distribution losses by 260bps to past:
24.86% by FY18, vs 27.45% in FY14
1) Payment of free power only via a direct benefit transfer
4) Improved bill-collection efficiency to 101% in FY18, vs (DBT) into the account of the farmer, reducing the risk of
96.9% in FY14 debt at discoms awaiting the state to disburse subsidies,
5) Improved avg revenue realised 51% to Rs5.99/kWh in 2) Cap of Rs10k/HH for subsidy, instilling usage discipline
FY18, vs Rs3.97/kWh. and cap to hit the state exchequer,
3) Monthly cap of Rs833/HH, meaning no gaming is allowed

in the scheme.

Section 2: Demand-supply balance favours IPPs India power generation
Demand-supply balance favours IPPs

Power demand up by 7% We expect India’s power demand to double in the next decade from the UDAY
FY19YTD vs 5% in reforms and 24x7 - Power for All initiative driving electrification, elections and
FY18YTD and 10% industrial recovery. Just when demand is picking up, supply has become
in Oct-18
constrained, due to a lack of new orders, banks’ NPAs and environmental
challenges, such as coal supply. We forecast a reversal of thermal plant load
factors’ 10-year declining cycle. This improvement in supply balance will drive
IPPs’ utilisation and ROEs, as well as improve the visibility of their future projects.
We expect both renewables and thermal volumes to grow until FY30.
Power demand drivers are Demand - Multiple drivers falling into place
falling in place . . .
Figure 17
. . . India’s UDAY reforms India power: Demand drivers

have cleaned-up discoms,
which were affecting power
demand
UDAY
reforms
Power for
Make-in-
All -
India
Electrification
Power
demand
drivers
Industrial
recovery 24x7
post-GST power
slowdown
Elections -
4 states &
1 central by
end-2019
Source: CLSA
Reforms have cleaned up the filter (discom) that was stifling India’s power
demand. As a result of UDAY, improving GDP growth and industrial recovery,
(post GST’s low base) has allowed three key catalysts to fall into place: “Power for
All” led electrification, the government’s 24x7 power agenda, and elections.
Power for All-led electrification

Other reforms will drive the The current government has identified power as one the prime minister’s key
power demand strongly missions. As a part of this mission, it intends to electrify every household (HH)
by March 2019. This means 30m HH since October 2017, when this programme
was launched under the banner of ‘Saubhagya’, at a cost of Rs165bn/US$2.3bn.
Since then the pace of electrification has grown 5x, vs the 2011-17 period, and
discoms have electrified 21.5m HH (Figure 18) as of December 2018. On
completion of electrifying 30m HH and assuming 20% are converted from an
unmetered to metered connection, this drive could potentially add c.200bps to
Indian power demand.

Figure 18
Pace of electrification has All India: Household electrification progress

grown 5x under Saubhagya 225 (m)
Cagr
scheme, vs 2011-17
10.5%
200
Cagr
1.7%
175
150
125
Census 2011 Electrification Electrificatied Addition under Meters yet Post
in 7 yrs HH as on Saubhagya to be added Saubhagya
Oct 17 (till 5 Dec 18) (Mar 19)
Source: CLSA, Census 2011, Saubhagya website
Figure 19
Select large states, such as Saubhagya scheme: Top-10 state-wide electrification

UP, Bihar, MP, Rajasthan (m)
35 Base meters
and Maharashtra, are the Addition under Saubhagya (till 05-Dec-18)
focus of gov’t drive Meters yet to be added
30
25
20
15
10
5
UP MH W. Bihar Raj MP Andh. P Guj TN Kar
Bengal
Source: CLSA, Saubhagya website
India’s 24x7 power plan to push-up demand by 30%

 India’s power blackouts are well known (Figure 21). To fix the problem, the
government plans to supply power 24x7 by 2019 (Figure 23) and reiterated
this during December 2017’s meeting of power ministers (Figure 20).
Figure 20
After the discom debt Power ministers meet: 24x7 power supply for all
problem and instituting
operational excellence, the
government is working on
Reform 3.0
Source: CLSA, Media reports - PTI

Figure 21
Even today, India has Power cuts to the agricultural sector during October 2018
widespread power State/Region Average hours of supply
blackouts October 2018 April 2018 to October 2018
Northern
Discoms claims power cuts Chandigarh Data not received Data not received
of 6-8 hours, especially Delhi Data not received Data not received
Haryana 9:40hrs/day 07:09-09:50hrs/day
during peak hours
Himachal Pradesh No cut imposed on agriculture HPSEBL has only 2% agriculture
consumers and uninterrupted power is consumers and uninterrupted power is
being supplied to agriculture sector being supplied to agriculture sector.
Jammu & Kashmir Data not received Data not received
Punjab 05:07hrs/day 03:49-08:44hrs/day
Rajasthan 06:30hrs/day 06:30hrs/day
Uttar Pradesh 18:25hrs/day 18:14-18:58hrs/day
Uttarakhand 23:50hrs/day 21:28-23:57hrs/day
Western Region
Chhattisgarh 18hours/day 18 hrs/day
Gujarat 8.05 hrs/day 8.05 hrs/day
Madhya Pradesh Three-phase supply (irrigation) Three-phase supply (irrigation)
- 9:47hrs/day, three-phase (mixed) - 09:33-09:47hrs /day, three-phase
supply - 23:11hrs/day (mixed) supply - 23:00-23:20hrs/day
Maharashtra Three-phase supply (irrigation) - Three-phase supply (irrigation) -
9hrs/day, three-phase mixed) supply - 9hrs/day, three-phase (mixed) supply -
24hrs /day 24hrs/day
Goa No restriction No restriction
Southern Region
Andhra Pradesh 7hrs/day 7hrs/day
Telangana 24hours/day 24hours/day
Karnataka 6hrs/day 6hrs/day
Kerala No restrictions No restrictions
Tamil Nadu 9hrs/day 9hrs/day
(6hrs during day time and 3hrs at night) (6hrs during day and 3hrs at night)
Puducherry No restrictions No restrictions
Eastern Region
Bihar About 18hrs/day About 18hrs/day
Jharkhand About 20hrs/day About 20hrs/day
Odisha 24hrs/day 24hrs/day
West Bengal About 23hrs/day About 23hrs/day
Source: CLSA, CEA
 Twelve states elections during FY18-20 and a general election in 2019 should
accelerate the adoption of the 24x7 plan.
 Delhi estimates suggest a 30% rise in consumer demand by FY19, should its
24x7 Power for All plan get implemented.
Figure 22
States forecast 9-12% 24x7 Power for All: Expected growth in the power demand
growth in demand to 14 (YoY %) At consumer level At state periphery
achieve 24x7 Power For All
12
12 11
11
9 10
10 9
0
FY17E FY18E FY19E
Source: CLSA, 24X7 Power for all report

Execution starts after delays: UP, Gujarat and TN show the way; more to follow
States that have started  A few states - UP, Gujarat & TN - that account for a third of India’s demand
implementing 24x7 plan are have started implementing the 24x7 plan; we find them beating the plan’s
beating demand estimate power-demand estimate.
 Gujarat beat the demand in FY18, due to the state elections (Figure 24).
 UP’s power demand grew by 12% during Apr-Mar 2018, vs the government’s
power stats showing just a 6% deficit, following the new Chief Minister’s (CM)
resolve to provide 24x7 power by December 2018.
 Also, UP’s power PPA requirement is understated in the 24x7 docs by 20%.
Figure 23
A detailed state-by-state India 24x7 Power for All: The government’s plan to meet power demand
plan to deliver 24x7 Power Sales volume at state FY16E FY17E FY18E FY19E FY16-19
for All by 2019. . . periphery (BU) Cagr (%)
Maharashtra 145.1 156.9 169.5 183.1 8
. . . which promised a 30%
rise in power demand Uttar Pradesh 106.4 108.9 117.7 122.9 5
Gujarat 93.4 100.0 107.0 114.5 7
Telangana 60.3 74.1 92.5 106.0 21
Like many good plans, even
Tamil Nadu 85.9 91.2 97.5 104.2 7
24x7 was not implemented
by many states Andhra Pradesh 77.9 84.3 91.3 99.1 8
Rajasthan 68.8 75.1 82.2 89.7 9
Karnataka 67.1 73.4 80.3 87.6 9
With many state elections
approaching, power demand Madhya Pradesh 62.3 68.2 74.1 80.8 9
may surprise in 2019 Haryana 51.9 56.4 61.4 66.8 9
Punjab 52.4 56.6 61.2 66.5 8
Bihar 27.4 38.1 49.2 61.8 31
West Bengal 32.1 34.2 34.1 34.9 3
Delhi 29.9 31.2 32.5 34.0 4
Odisha 27.3 29.2 31.4 33.2 7
Chhattisgarh 24.3 26.1 28.2 30.3 8
Kerala 23.8 25.9 27.7 29.6 8
Jharkhand 13.1 16.0 19.0 22.5 20
Uttarakhand 13.8 15.1 16.4 18.1 9
Jammu & Kashmir 13.7 14.1 14.7 15.6 4
Assam 8.8 10.3 12.1 14.0 17
Himachal Pradesh 9.1 9.4 9.7 10.1 4
Goa 3.9 4.5 5.3 5.5 12
Puducherry 3.0 3.2 3.4 3.6 5
Meghalaya 1.6 1.7 1.9 2.0 8
Tripura 1.1 1.2 1.4 1.6 12
Manipur 0.9 0.9 1.1 1.3 14
Arunachal Pradesh 0.8 1.0 1.1 1.3 17
Nagaland 0.7 0.9 1.0 1.2 16
Sikkim 0.5 0.6 0.6 0.7 9
Mizoram 0.5 0.6 0.6 0.7 10
Total 1,108 1,209 1,326 1,443 9
Source: CLSA, 24X7 Power for all reports

Figure 24
Gujarat, Uttar Pradesh, India: Base and peak demand planned in the 24X7 programme
Tamil Nadu, and West State Base load Peak load
Bengal beat the base
FY17E FY18E FY17E FY18E
demand estimates
Andhra Pradesh 84,270 91,298 11,181 12,264
These states form a third of Arunachal Pradesh 952 1,126 227 268
India’s base power demand Assam 10,345 12,085 1,790 2,091
Bihar 38,100 49,215 5,925 7,654
As elections near, more
states will implement the Chattisgarh 26,140 28,163 5,058 5,449
24x7 programme, boosting Delhi 31,203 32,503 6,537 6,807
IPPs’ demand Goa 4,521 5,300 770 903
Gujarat 99,952 106,973 15,419 16,502
Haryana 56,350 61,380 10,214 11,126
Himachal Pradesh 9,384 9,703 1,520 1,566
Jammu & Kashmir 14,131 14,666 2,715 2,808
Jharkhand 16,012 18,988 2,669 3,175
Karnataka 73,423 80,274 12,147 13,476
Kerala 25,889 27,709 4,214 4,510
Madhya Pradesh 68,193 74,098 10,964 11,748
Maharashtra 156,883 169,478 23,079 24,690
Manipur 893 1,050 242 292
Meghalaya 1,725 1,891 379 412
Mizoram 581 641 118 123
Nagaland 891 1,048 198 235
Odisha 29,232 31,354 4,635 4,971
Puducherry 3,203 3,376 580 611
Punjab 56,620 61,215 11,743 12,514
Rajasthan 75,138 82,151 13,402 14,653
Sikkim 585 645 125 137
Tamil Nadu 91,179 97,492 15,439 16,510
Telangana 74,081 92,475 13,645 15,995
Tripura 1,239 1,420 303 347
Uttar Pradesh 108,853 117,722 17,355 17,934
Uttarakhand 15,070 16,438 2,374 2,589
West Bengal 34,217 34,118 10,258 10,687
All India 1,209,256 1,325,995 205,225 223,047
Source: CLSA, CEA, 24x7 Power for All report
Elections
India’s latent demand potential is evident from the sudden rise in power demand
ahead of elections, when discoms deliver more power, under pressure from
politicians. Our analysis of the last two general elections, held in 2009 and 2014,
indicate a 300-500bps rise in power demand in the three to six 3-6 months prior
to the poll.
After experiencing 24-month-high demand growth in October 2018, partly led by

elections in four states, India is set for another six state elections and a general
election in 2019. This should boost demand in 2HFY19 that, due to key state
elections in 4Q19, continues to the end of the year.

Figure 25
Power demand picks up Indian power generation growth trending up

strongly during election 16 (YoY %) Conventional + Renewable - 3mma YoY
periods Election
14
period
12 Election
period
10
0
Apr 08
Apr 09
Apr 10
Apr 11
Apr 12
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Source: CEA
Figure 26
India is set for another six India election timeline

state elections and a State Election timeline
general election in 2019 Odisha Apr-May-19
Sikkim Apr-May-19
Andhra Pradesh Apr-May-19
Arunachal Pradesh Apr-May-19
General Apr-May-19
Haryana Nov-19
Maharashtra Nov-19
Source: CLSA, Election Commission of India
LED disruption is behind us

Gov’t EESL drive led to not India’s focus on a low carbon economy resulted in UJALA, its LED programme.
over 70% fall in its price to This disruption, engineered by then power minister, Piyush Goyal, via the
make it economically viable government’s Energy Efficiency Services (EESL), led to the penetration of 422m
LED bulbs in 2017 (Figure 27), as well as an over 70% fall in prices to make it
economically viable. India's shift to energy-efficient LEDs shaved off 8,240MW,
or 5% of peak power demand, resulting in an annual reduction of 33Mt CO2.
Further, it led to annual savings of 41BU of energy. We note that with a base of
1.04bn LEDs, EESL claims that its seeding task is complete. Hence, we believe
that much of the demand destruction caused by LEDs is behind us, allowing for
real power demand to be visible.
Figure 27 Figure 28
All India CFL and LED quantity sold All India LED street light quantity sold
500 (m) 3.5 (m)
CFL Qty LED Qty
450
3.0
400
350 2.5
300 2.0
250
200 1.5
150 1.0
100
0.5
50
0 0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: CLSA, ELCOMA Source: CLSA, ELCOMA

Supply is constrained
Figure 29
India’s power sector is India power: Capacity constraints
facing capacity constraints
Initial signs of improving New

emission
utilisation are already norms
visible Domestic
Broken pvt
coal / gas
IPP B/s
shortage
Reforms coupled with
capacity constraints should
lead to improving utilisation
Govt/CEA
Exit of IPP discourage
to Captive thermal
addition
Capacity
constraints
Lack of
Retire 25
bank
yr+ old
funding for
plants
pvt. IPP
Green loby Infra

against bottlenecks -
Hydro/ Delay
Nuclear Lack of projects
new
awards
Source: CLSA
India’s new conventional power-capacity addition has peaked

Led by an overbuild of new thermal-power generation capacity during FY12-16
(Figure 30) led by over ordering of thermal-power plant equipment during the bull
market of FY07-10 (Figure 31), a slowdown in demand post-GFC (FY10, FY11-13)
and ill-conceived build-outs, especially by private IPPs, India’s new thermal-power
equipment order dropped by 80% over FY10-18 (Figure 31). This should lead to
weak new thermal capacity additions over FY20-24CL.
Figure 30
We expect capacity India power: Capacity additions
addition to have peaked in 35 (GW) (%) 14
Conventional Renewables Energy deficit (RHS)
FY16
30 12
Solar will be the significant
driver in terms of MWs 25 10
going forward 20 8
15 6
10 4
5 2
0 0
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
FY15
Source: CLSA, CEA

Figure 31
Just as demand is picking India power: New thermal equipment orders (GW)
up, new firm power capacity 25 (GW)
addition is likely to decline
20
-80%
15
10
0
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
YTD
Source: CLSA, Company
Banks pulling the plug on private IPP funding

Stuck with many ill-conceived power-generation assets (without full fuel
supply/power-purchase agreements) and aggressive lending during the power bull
market of FY07-11, banks are starring at 50GW of stranded/stressed assets
worth US$36bn (Figure 32). These may need a further US$8bn (Appendix 5 -
Bucket of under construction/stalled) to complete and be emission compliant,
which itself is a tall order, in our view. This has led to bank funding for new
capacity addition drying up, due to sector-exposure caps and the viability of
private capex, especially given IPPs’ broken balance sheets.
Figure 32
There’s a bigger problem India IPPs (private): Total stress across categories (cost) (Mar-18)
brewing in-under
construction capacity. . . Thermal stressed assets
US$44bn
. . . IPPs have sunk US$11bn
but they need another Under Operational Old coal
US$8bn - who will fund Old gas based
construction (FY15-18) based IPPs
this? IPPs
US$11bn US$13bn US$12bn
Emission
Balance capex
capex
US$6bn
US$2bn
Source: CLSA, CEA
Domestic coal dominates energy mix . . .

Given its demographics, India’s power demand is very price sensitive. Among
the firm-power sources, Indian coal is the cheapest fuel at US$13-15/t (even
adjusted for its low-calorific value), compared to imported coal (US$43/t for
Indo 4,200kcal ecocoal), gas/LNG or nuclear, especially for pit-head plants (see
Figure 49 for power cost economics). Hence, despite the country’s unparalleled
focus on renewables (RE) resulting in 56GW (Jan-10 to Oct-18) of new RE
capacity set-up, the share of coal-based generation has increased in the current
decade (Figures 33-34). Coal’s share in the energy mix is even higher, at 76%
(FY18), compared to its capacity share, given its viability and higher utilisation
factor, versus other fuels.

Figure 33 Figure 34
Installed capacity fuel-wise (Jan-10) Installed capacity fuel-wise (Oct-18)

Total Generation capacity of India was 156GW Total Generation capacity of India stands at 346GW
RES
9.8% RES
20.8%
Hydro
23.5% Coal Hydro Coal
52.4% 13.1% 56.6%
Nuclear Gas Nuclear

2.6% 10.9% 2.0%
Diesel Diesel Gas
0.8% 0.2% 7.2%
Source: CEA, CLSA Source: CEA, CLSA
. . . And it is faced with multiple headwinds . . .

In 2014 the government planned to ramp up CIL’s production to 1bt by 2021.
However, due to a ministry-level leadership change and various infra and
operational constraints - land acquisition, rehabilitation and resettlement of
project-affected people (PAPs), and logistics constraints to move coal from mine
to rail-head and rail-to-power plant - it has already missed the FY18 target by
15% and is likely to miss the FY21 target by a mile. It has already revised its
original plan to achieve 1bt by FY21 by five years (now FY26). This could
constrain CIL’s ability to supply coal to non-FSA customers at eauction and create
an effective cap on thermal utilisation (PLFs).
Figure 35
Gov’t plan in 2014 to ramp- Coal India: Production targets

up CIL’s production to 1bt 1,100 (MT) Projected coal production Actual coal production Revised target
by 2021
1,000
It had already missed its 900
target by 15% in FY18 . . .
800
. . . and has already revised 700
its original plan to achieve
1bt by five years (ie, FY26) 600
500
400
FY14A FY15T FY16T FY17T FY18T FY19T FY20T FY21T FY22T FY23T FY24T FY25T FY26T
Figure 36
Eauction volume has seen a Coal India: Despatch (eauction vs others)

26% Cagr over FY16-18 700 (MMT) Others Eauction
Its share in the overall

despatch has increased 600
from 12.5% in FY16 to
18.3% in FY18
500
Our metals team expects
growth to moderate and its
400
share to remain at 17-17.5%
300
FY16 FY17 FY18 FY19CL FY20CL FY21CL
Source: CLSA, Coal India

. . . leading to wide-spread coal shortages, which cap PLFs

Led by domestic coal’s price competitiveness and a recovery in thermal power
demand, which keeps increasing both its demand and supply constraints, coal
shortages have resurfaced. CIL isn't able to meet its FSA obligation to critical
sectors, such as power. Consequently, there are many plants with very low coal
stocks (<4-7 days, see Figure 37), versus the regulatory mandate of 15-30 days.
Figure 37
After calm from Oct-16 to India power: No. of plants with stock of <7 and <4 days
Oct-17, coal shortages have (No. of plants) < 4 days stocks < 7 days stocks
again started to rise 40
35
30
25
20
15
10
0
Apr 08
Dec 08
Apr 09
Dec 09
Apr 10
Dec 10
Apr 11
Dec 11
Apr 12
Dec 12
Apr 13
Dec 13
Apr 14
Dec 14
Apr 15
Dec 15
Apr 16
Dec 16
Apr 17
Dec 17
Apr 18
Dec 18
Aug 08
Aug 09
Aug 10
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Aug 18
Source: CLSA, CEA
Captive coal mine is the only viable option but . . .

India’s captive coal mine production by private IPPs also missed its lofty target,
led by a failed coal-mine auction. Among the government companies that were
allocated mines, only NTPC seems to have taken some serious action to start
operations and plans 56mtpa capacity from its five mines , which contain 3.9bt of
reserves (Figure 38). NTPC’s first mine, Pakri Barwadih, should contribute
c.6mtpa (3% of its own consumption) in FY19. With this, NTPC accounts for 18%
of India’s captive coal mine production in FY19 (second year of its mining
business) and its target to double production to 12.5mtpa by FY21 should help it
contribute 28% to India’s captive mine production by power companies (Figure
39). NTPC further targets a 4x scale-up in its production over FY21-26 to reach
50mtpa production by FY26.
Figure 38
NTPC’s first mine, Pakri NTPC: Coal mines

Barwadih, should contribute Coal mines Mining capacity (MTPA) Resource (BT)
c.6mtpa (3% of its own Pakri Barwadih 18 1.6
consumption) in FY19 Dulanga 7 0.2
Talaipalli 18 1.3
Chatti Bariatu 7 0.5
Kerandari 6 0.3
Total 56 3.9

Figure 39
NTPC’s first mine, Pakri India: Captive mine production

Barwadih, should contribute Particulars (MMT) FY18 FY19E FY20E FY21E
c.6mtpa in FY19 India total 675.4 728.5 774.4 822.9
- Coal India 567.0 609.5 646.1 684.9
NTPC should account for
- SCCL 62.0 66.7 70.7 74.9
18% of India’s captive coal
mine production in FY19 - Captive power 31.2 36.3 40.9 45.4
- NTPC 2.7 6.4 9.5 12.5
It aims to double production - Other captive power 28.5 29.9 31.4 32.9
to 12.5mtpa by FY21 - Others 15.2 16.0 16.8 17.6
NTPC (% of captive power) 9 18 23 28
Source: CLSA, Ministry of Coal, Company
Closures of old thermal power plants

Based on its commitment, as per COP21 and INDCs, India proposes to shut down
37GW of sub-critical (more polluting than super critical) thermal power plants
operating for longer than 25 years. This could take-out 22.7GW of plants by
FY22, as per Delhi’s plan. However, as these plants are a great source of ultra-
low-cost power to discoms (due to their zero fixed costs), there is resistance to
these closures. Consequently, we model only 12GW of closures by FY22CL in our
power demand-supply estimate.
Figure 40
NTPC has already stated it India power: Notification for implementation of emission control norms
shall replace 11GW of
thermal power capacity
New emission norms challenge some old plants as well

Apart from addressing the global pollution challenge (CO2) by adopting
renewables, India has announced stringent Sox & Nox regulation norms for
thermal power plants (Figure 41) in order to control local pollution. These are to
be met in a time-bound manner. After missing the first (unrealistic) time line of
2017, the CEA has set FY23, with a revised timeline to retrofit 123GW (across
113 plants) of India’s thermal fleet with Sox & Nox control measures.
Figure 41
India has imposed emission India power: Emission control norms

norms to reduce SOx by 50- Thermal power plant Plants installed Plants installed Plants installed
83% and NOx by 67-83% before 31 Dec-03 from 1 Jan-04 to 31 Dec-16 from 1 Jan-17
Sulphur dioxide 600mg/Nm³ 600mg/Nm³ 100mg/Nm³
(units smaller than (units smaller than
500MW capacity units) 500MW capacity units)
200mg/Nm³ 200mg/Nm³ (units having
(units having capacity of capacity of 500MW and more)
500MW and more)
Nitrogen oxide 600mg/Nm³ 300mg/Nm³ 100mg/Nm³
Mercury 0.03mg/Nm³ 0.03mg/Nm³ 0.03mg/Nm³
(units of capacity
500MW and above)
Particulate matter 100mg/Nm³ 50mg/Nm³ 30mg/Nm³

NTPC plans to install FGD- Some thermal power plants operating for over 25 years that do not have space to
for SOx mitigation install emission-control equipment could be forced to close down post FY23. We
equipment at 63GW of its assume the closure rate to rise to 3GW pa from FY23 onwards in our power
current and future
model, further supporting the business case for emission-compliant plants. NTPC
capacities
plans to install flue-gas desulphurisation (FGD) equipment for SOx mitigation at
63GW of its current and future capacities (Appendix 6).
Figure 42
CEA has planned to India’s SOx-control capex timeline

implement FGD technology (GW) FY18 FY19 FY20 FY21 FY22 FY23 TOTAL
for 123GW Central - - 0.5 6.7 11.5 7.4 26.1
-NTPC - - 0.5 3.7 8.3 7.4 19.9
State - 5.3 7.3 19.4 4.6 5.1 41.7
Private - 0.8 13.3 22.5 15.4 3.1 55.1
Total - 6.1 21.1 48.6 31.5 15.6 122.9
Source: CLSA, CEA
Thermal power should grow till FY30, despite shift towards RE

Markets have been worried on the future of thermal power following India’s
INDCs (the treaty under the Paris Agreement). They include 40% of power
capacity from non-fossil fuels by 2030, vs 20% in FY18. It plans to reach 175GW
of RE capacity by FY22, bifurcated as 100GW solar, 60GW wind and 15GW
others (Figure 45). We believe power demand growth, demographics and peak-
power timings make enough space for thermal to not only survive but grow
volumes (Figure 51), as per our power model. This is after assuming tripling of
new capacity addition to 175GW over FY22-30 (versus capacity added between
FY17-22). It is also pertinent to note that India is not the bigger problem, with
CO2 emissions at around half the EU’s and a fifth of China’s (Figures 43-44), but it
still wants to be part of the solution. At the same time, its masses need cheaper
base-load power and resource-rich states need to support millions of coal jobs.
Hence, India should do a tight balancing job of supporting clean-coal technology,
while adding RE at frantic pace.
Figure 43
India’s INDC includes 40% Paris Agreement targets

of power capacity from
non-fossil fuels by 2030, vs
20% in FY18
Source: CLSA, Ministry on Environment

India is not the problem . . .

Figure 44
Global emission: By country (2012)
Source: CLSA, Ministry on Environment
. . . but it wants to be part of the solution; hence, its 175GW RE plan

Figure 45
India plans to reach 175GW India: 175GW renewable capacity target
of renewables capacity by (GW)
180 Solar Wind Biomass Small Hydro 175 GW
FY22 . . .
160
. . . bifurcated as 100GW
solar, 60GW wind and 140
15GW others
120
100
80
60
40
20
0
FY16E FY17T FY18T FY19T FY20T FY21T FY22T Total
Source: CLSA, MNRE, CEA
Execution of 175GW plan started well but fell behind schedule . . .

India’s resolute focus on changing its energy mix towards renewables has been
championed by none other than Prime Minister Narendra Modi. The success of its
175GW plan can be gauged with a 10x scale-up of solar capacity totalling 10GW
in FY18 - the world's third-largest - vs 1.1GW in FY15 (Fig 47). Similarly, while
wind-capacity additions more than doubled over FY15-18, to reach 5GW-plus, it
did collapse in FY18, due to a business-model change to tariff-based competitive
bid, rather than feed-in tariffs. We expect that with a new, more competitive
business model championed by Solar Energy Corporation of India, even the wind
market should bounce back to 4GW (Figure 45) by FY20. Overall, India reached
RE capacity of 72GW by 1HFY19 (40% of its FY22 target).

Figure 46
While solar new capacity Capacity addition: Solar

add was at its peak (GW)
10
in FY18 . . .
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
Source: CLSA, CEA, MNRE
Figure 47
. . . wind capacity addition Capacity addition: Wind

collapsed in FY18 (GW)
6
We expect the wind market

to bounce back 5
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
Source: CLSA, CEA, MNRE
While government agencies claim no new thermal-plant orders needed . . .

We fear CEA’s claim of While we believe that given its cost-competitiveness among firm-power sources,
India being in power surplus CEA (a government think tank) says India has a power surplus (8.8% in FY18 and
could go the way it claimed 4.5% in FY19 Figures 69-70) and does not need to build any thermal plants for
there was a coal surplus
the next five years, while only adding 46GW of thermal plants over FY22-27. This
reminds us of when it claimed there was a coal surplus and now the country is
facing serious domestic coal shortages.
. . . We believe otherwise as coal is most competitive “firm” power

We fear the country may India’s peak power demand is during 7-9pm (Figure 46), when solar cannot help,
face peak-power deficits and it takes five years to build a thermal plant. We fear the country may face
after FY20, when thermal peak-power deficits after FY20, when thermal PLFs approach 70% (Figure 68) and
PLFs approach 70%
it may be too late by the time the government wakes up.

Figure 48
Solar power is unsuitable India’s power-demand peak is between 19:00-21:00hrs

versus the India’s grid
peak . . .
. . . arriving when demand is

low and exiting when
demand begins to pickup
Source: CLSA, POSOCO
We see little choice other than coal-based thermal for peaking-power as:
 Indian coal-based pit-head power plants with environmentally friendly super-
critical technology and emission-control equipment (de-Nox & Sox) are the
most cost competitive ‘firm’ source of power (Figure 49). This is after
accounting for green cess of Rs400/t (US$5.7/t - one of the highest globally).
A key reason for Indian coal’s cost-competitiveness is open-cast, low strip
(0.8-1.5x) mines given to CIL on a nomination basis (no bid premiums to be
paid) in India .
Figure 49
Coal-based pit-head plants India power: Comparison of prices across fuel

with environment friendly 8 (Rs/kWh)
technology the most cost-
competitive power source 7
1
2.0 2.4 2.8 2.8 3.0 3.8 4.5 4.6 5.6 8.0
0
CIL Linkage
CIL Linkage
spot thermal
Battery storage
Solar
Hydro
/mmbtu
/mmbtu
Wind
US$4.2
coal mine
(with subsidy)
Gas at
Gas at
(Pit-head
US$8
(800kms
Captive
haulage)
Imported
+ MGR)
Solar +
coal
Source: CLSA

 Technology advancements (super-critical/advanced super-critical) to low-

carbon thermal plants and emission-control equipment to reduce Sox (50-83%)
and Nox (67-83%) to replace 37GW of 25-year-old plants should create space
for new thermal plants with reduced global and local pollution.
Figure 50
NTPC has already taken NTPC: Thermal efficiency leading to reduction in CO 2

steps to reduce the
pollution . . .
. . . installing plants with

higher efficiency, leading to
lower pollution
Every 1% rise in efficiency

leads to a 2.5% reduction
in CO 2
 Large hydro projects take seven to eight years to build - if they are built at all.
The government, environmentalists and the courts are at loggerheads to build
next large hydro plants, eg, NHPC’s 2GW Lower Subansiri hydro station has
been under construction for over 14 years and stalled for the last eight.
Gas/LNG is too volatile to  Gas/LNG prices are too volatile to be considered long-term as firm price
be considered as firm- contracts aren’t available for 15-25 years,
source long term
 Nuclear power plants takes eight to 10 years to build, fuel is scarce and faces
resistance from locals, eg, EDF’s Jaitapur nuclear power plant is facing severe
resistance from the locals for its 6x1650 MW EPR.
 Storage systems are “too exotic” a choice for India currently, eg, a 20MW,
8000kwh/day power plant in the Andaman and Nicobar Islands costs
Rs8/kWh with a Rs50m/MW government grant, or Rs12/kWh without. The
studies have said that storage systems won’t help curtailment.
India targeted 175GW/ However, we remain concerned about conventional power IPPs on continued
350GW RE capacities by cross-subsidisation of RE by thermal (be it be a zero-cost transmission subsidy or
FY22/FY30 to meet COP21 green cess on coal) power, and cycling risk inflicted on thermal by RE integration
commitments into the grid. We believe India will need base-load thermal power to meet the
aspirations of the masses, who are cost conscious. This is even after factoring in
175GW of RE capacity by FY22 and 350GW by FY30, to meet COP21
commitments.
Hence, we see thermal power not only sustaining but rather growing till FY30,
both in terms of capacity and also energy (Figure 51). We do not see risk to the
existing capacity and even the growth of thermal IPPs, such as NTPC, NLC and
state gencos.

Figure 51
We anticipate declining India power: Thermal volume and share in generation

share of thermal in overall 1,800 (BU) (%) 85
generation volume Thermal volume (BU) % share in generation (RHS)
83
1,500 81
79
1,200 77
75
900 73
71
600 69
67
300 65
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
FY25CL
FY26CL
FY27CL
FY28CL
FY29CL
FY30CL
Source: CLSA, CEA
Figure 52
We anticipate increasing India power: Renewable volume and share in generation

share of renewable in the 500 (BU) (%) 20
overall generation volume Renewable volume (BU) % share in generation (RHS)
18
400 16
14
300 12
10
200 8
6
100 4
2
0 0
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
FY25CL
FY26CL
FY27CL
FY28CL
FY29CL
FY30CL
Source: CLSA, CEA
Renewables is not a firm power and is highly variable

RE isn’t useful all year Given that RE is location specific, placed in select states of India and is “in-firm”
round due to uneven power, the grid, which aims to deliver quality power 24x7, finds it hard to absorb
solar/wind levels it. In Tamil Nadu, wind power has exceeded 20% of the grid, which led to a back
down of turbines. This problem is further compounded by huge variability
(Figures 53-56) in generation for both solar vs bell-curve expectations during
sunny hours, which requires an intelligent grid with static synchronous
compensator (Statcom). RE isn't useful round-the-year as over 50% of wind
generation happens in four months - May to August - and solar generation is
impacted severely during monsoon (three/four months). Apart from being
seasonal, wind is highly variable during the day. In TN, wind doesn't help to meet
peak demand very much during 7-9pm (Figure 55), while in Rajasthan and Gujarat,
it helps only to some extent. These problems could be exposed more when India
actually starts to deliver power 24x7, as per Delhi’s mission.

Figure 53 Figure 54
Gujarat Solar Park: Variability in solar generation due to cloud Gujarat Solar Park: Variability in solar generation on cloud/rain
Source: Government documents Source: Government documents
Figure 55 Figure 56
TN Wind - Variability in generation (1.5-1.8GW/day) Rajasthan - Variability in generation (700-800MW/day)
Source: Government documents Source: Government documents
Demand - Supply balance favour IPP

We see material improvement in India's power-demand supply scenario over the
next decade, and that should be the biggest positive catalyst for IPP. This is as we
model a doubling of India’s power demand over the next decade (Figure 57), led
by power reforms 3.0 (UDAY) and other catalysts (Figure 17) on one side and
falling capacity add (Figure 61) and supply constraints (Figure 29) on the other.
This shall not only end a decade of falling thermal utilisation (FY07-17) but also
signal a structural turn for the next. Consequently, we forecast improving PLFs,
falling capital intensity of business (higher capitalisation versus capex), lower
resistance from discoms to honour PPAs, pricing power and eventual ROE
expansion - a rerating catalyst.

Figure 57
We expect India’s power India power: Demand growth

demand growth to double 2,500 (BU)
over FY18-28CL . . .
2,000
1,500
1,000
500
FY08 FY13 FY18 FY23CL FY28CL
Source: CLSA, CEA
Figure 58
. . . and pace of capacity India power: Conventional capacity addition

addition to slow down lead 350 (GW)
by supply constraints . . .
. . . improving thermal PLFs 300

going ahead
250
200
150
100
FY08 FY13 FY18 FY23CL FY28CL
Source: CLSA, CEA
Demand growth from 2% to 6%

Led by India’s power reforms, UDAY, the launch of the 24x7 - Power for All
power delivery programme and industrial recovery, power demand is beginning to
pick-up (Figures 59-60).
Figure 59
Power demand grew by 10% India power: Base load demand growth
YoY in October 2018 . . . 15 (%) Base load demand YoY
3m moving average
. . . led by extended summer,
pre-election demand and
10
strong demand from newly
electrified states
5
(5)
Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 Oct 18
Source: CLSA, CEA

Figure 60
India’s per capita India power: Per capita consumption

consumption saw a 5% Cagr 2,000 (BU) (kWh) 1,600
Energy availability Per Capita (RHS)
over FY08-18 . . .
1,400
1,600
. . . given reforms and 1,200
demand improvement, we 1,000
expect a 6% Cagr over 1,200
FY18-23 800
800 600
400
400
200
0 0
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
Source: CLSA, CEA
New capacity addition from 10% to 3% . . .

While power demand has begun to pick up, the new conventional-power capacity
add, which provides ‘firm power’, has peaked and has begun to fall (Figure 61).
Figure 61
Net capacity addition has India: Net capacity additions for conventional sources
fallen significantly in the 25 (GW) 23.3
past two years
20
15
10.4
10
5.4
5
0
FY16 FY17 FY18
Source: CLSA, CEA
Figure 62
FY17 was a perfect India: CEA target versus actual capacity additions
achievement . . . 14 (GW) Target Acheivement
12
. . . however, for FY18, India
missed CEA’s capacity 10
addition target by 25
8
6
India kept a target of
7.3GW for FY19 - actual 4
achievement till Nov-18 is
1.4GW 2
0.1
0
FY17 FY18 FY19¹
¹ FY19 - Achievement till Nov-18. Source: CLSA, CEA

. . . and new power-capacity orders from 6% to 2%

Led by CEA’s view that no new thermal plant orders need to be placed during
FY17-22, which broke the momentum of investment in thermal and near-term
stranded capacity (Figure 63), new thermal-power equipment orders have dried
up. Consequently, our channel checks suggest weak new- power equipment-
ordering trends in the last five years in general, and the last two years in
particular, where awards have slowed to just 2% of capacity, versus 6% in FY16.
Figure 63
Demand growth is India power: Capacity awarded vs base load growth

improving but capacity Year Capacity awarded % of installed Growth
additions are falling (MW) capacity Base load (MU) (%) Peak load (MW)
FY14 5,080 3.4 1.0 465
FY15 7,010 4.2 6.6 12,248
FY16 11,580 6.1 4.3 5,200
FY17 4,870 2.3 2.5 5,877
FY18 5,040 2.3 6.0 4,071
FY19YTD¹ 0 0.0 6.7 13,224
¹ FY19YTD Oct-18. Source: CLSA, L&T, BHEL, Doosan, Toshiba
Figure 64
Capacity addition growth India power: Capacity awarded vs base load growth
has come down . . . 7 (%) Capacity awarded (% of Installed capacity) Base load growth
. . . base load growth has 6

improved
5
0
FY14 FY15 FY16 FY17 FY18 FY19YTD
Source: CLSA, CEA, Companies
Figure 65
Peak load has grown by India power: Capacity awarded vs peak load growth
9GW in FY19YTD against 14 (GW) Capacity awarded Peak load growth
which no new capacity has
been awarded . . . 12
. . . on a net basis 10
conventional capacity
addition was down 50% for 8
FY18
6
We remain confident of our
theory of improving 4
utilisation
2
0
FY14 FY15 FY16 FY17 FY18 FY19YTD

Power demand - Supply-balance has structurally turned

After a decade of falling thermal utilisation over FY10-17, which weakened the
investment case in the power ecosystem, we call for a structural turn in India’s
PLFs (Figure 68) till FY30. We may not see the low (59.6%) thermal PLF seen in
FY17 till FY30, as per our power model. The first sign of the turn is visible YTD,
when even on a 7%YTD growth in power demand, the country has seen a 215bps
improvement in thermal PLFs (Figure 68). We fear that if the new thermal power
order cycle isn’t started in FY20, the country could face peak-power deficits from
FY21 onwards.
Figure 66
Gov’t companies have India power: Sector-wise generation growth

emerged as clear Category Monthly (Oct 18) YTD (FY19)
beneficiaries of this strong bn kWh Growth PLF-Oct Change bn kWh Growth PLF-YTD Change
demand growth (% YoY) (%) (bps) (% YoY) (%) (bps)
Thermal 97 10.7 65 642 627 5.0 61 215
YTD PLF for central and -Central 32 5.1 74 483 211 4.2 71 156
state gov’ts has improved, -State 30 16.1 61 861 195 8.4 57 481
whereas private is flat -Pvt 36 11.5 63 564 219 2.1 56 0
Nuclear 3 (2.9) 60 (178) 22 9.2 63 532
Hydro 13 12.9 96 3.8
Imports 0 (41.4) 4 (5.5)
Conventional 113 10.2 749 4.9
Renewable¹ 8 20.1 81 27.6
Total 121 10.8 830 6.8
¹ Renewable generation data is estimated for Oct-18. Source: CLSA, CEA
Figure 67
Contrast was clearly visible India power: PLF across sectors

across the sectors . . . 85 (%) Central State Pvt Overall thermal
. . . both central and state 80

PLF rose in FY18 whereas
75
private PLF was down . . .
70
. . . FY19YTD overall
thermal PLF was up 215bps 65
60
55
50
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19YTD¹
¹ FY19YTD - Oct-18. Source: CLSA, CEA
Figure 68
PLFs bottomed in FY17 as Indian thermal power plants’ PLF

new capacity outpaced 80 (%)
demand growth
75
FY18 saw first revival of
PLF in past several years . . . 70
. . . hereon in it is expected 65
to rise structurally
60
55
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
FY23CL
FY24CL
Source: CEA, CLSA

Power prices moving up despite claim of surplus power

During FY18, government extension CEA claimed India would have surplus power
of 8.8% and 6.8% during the peak. Despite this, the country faced shortages and
average merchant power prices rose by 35%YoY for FY18. Again, CEA claims a
surplus of 4.6% on energy and 2.5% at the peak for FY19, with merchant prices
already up 30%YTD. This indicates that India’s power statistics under-report
demand and doesn’t take into account infra shortages, which restricts generation.
Figure 69
India’s power statistics India’s planner claims: India will enjoy a power surplus in FY18 for first-time post-independence
‘under-report’ demand
Figure 70
To plan future capacity India power: Anticipated power supply position for FY19
based on constrained
demand is fraught with the
risk . . .
. . . the country faces

blackouts if Modi’s various
missions succeed in taking
growth into a new orbit
Source: CLSA, LGBR report
Delay in capacity adds

Figure 71
Deep portal has become an Deep portal: Tariffs for short-term PPAs
effective mechanism for 6 (Rs) DEEP portal IEX tariffs
procurement of short-term
power for discoms 5
Avg prices during Oct-17- 4

Apr-18 up to Rs4.14 vs
Rs2.95 in July-16 to Dec-16 3
2
Sep 16
Dec 16
Apr 17
Sep 17
Dec 17
Apr 18
Sep 18
Dec 18
Aug 16
Aug 17
Aug 18
Jul 16
Oct 16
Jul 17
Nov 16
Oct 17
Jul 18
Nov 17
Oct 18
Nov 18
Feb 17
Mar 17
Feb 18
Mar 18
May 16
Jun 16
Jan 17
May 17
Jun 17
Jan 18
May 18
Jun 18
Jul-Dec 16: Jan-Jun 17: Jul-Dec 17: Jan-Jun 18: Jul-Dec 18

Rs2.90/kWh Rs3.38/kWh Rs3.84/kWh Rs4.59/kWh Rs4.38/kWh
(Avg) (Avg) (Avg) (Avg) (Avg)
Source: CLSA, Deep portal

Beneficiaries may vary in this cycle: NTPC - An early beneficiary

Key beneficiaries of last The improving demand-supply outlook should benefit the whole ecosystem of the
power cycle were merchant power sector (Figures 77-80) at different stages of this cycle. While the key
power plants; this time it beneficiaries of the last power cycle were merchant power plants, this time it
could be different could be different. We see government IPPs (54% of capacity - Figure 73) to be
the first beneficiaries of this demand uptick, as discoms are already paying for
their fixed costs. Among the listed companies, we see NTPC (BUY) as an early
cycle beneficiary for five key reasons:
 Improved visibility of its existing capacity being absorbed vs 5.9GW (13% of
its contracted capacity) being surrendered by its clients (Appendix 2).
 Visibility of commissioning its 14GW (parent)/21GW (group) of under-
construction capacity costing US$14.1bn (parent)/US$21.6bn (group) with less
resistance from states to pay for the fixed cost (ROE) vs current requests for
delay in plant commercialisation. This will ensure visibility of 50%+ growth in
NTPC’s regulated equity.
NTPC hasn’t ordered any  Start of a new capacity addition cycle, which has been stalled for eight years.
new plants at parent level NTPC hasn’t ordered any new plant at the parent level since FY16, improving
since FY16, improving its its long-term growth prospects.
long-term growth prospects
 Improved utilisation of its 40.3GW coal-based thermal capacity. Beyond 85%
utilisation makes it eligible for PLF@50 paise/kWh (4% of its FY18 power
PAT). We have not baked in any rise in PLF incentive till its commercialisation
phase is complete by FY22CL.
 Higher thermal incentives led by improved demand, which drives thermal PLFs
and reduce its cycling losses.
Figure 72 Figure 73
Installed capacity sector-wise (Jan 2010) Installed capacity sector-wise (Oct 2018)
Total Generation capacity of India was 156 GW Lot of incremental cap. addition has happened from Pvt. sector
Private
18% Central
Central
24%
32%
Private
46%
State State
50% 30%
Source: CEA, CLSA Source: CEA, CLSA
The whole US$135bn ecosystem should benefit

We see the turnaround in India’s power demand and resultant demand-supply
balance for IPPs to kick-start the whole new capex cycle from FY20 onwards. The
first beneficiary of this capex cycle would be main-plant equipment majors (Figure
77), financiers and, one to two years later, transmission builders (PWGR, Adani
Transmission and Sterlite Grid) and, consequently, T&D equipment vendors.
Figure 74
We see a turnaround in the India power: Ecosystem size (P&L)

power sector should help Ecosystem (P&L) Amount (Rsbn) Amount (US$bn)
the entire ecosystem worth Discoms 5,661 80
US$135bn Fuel 970 14
Railways 229 3
Eqp supplier 2,641 37
Total 9,501 135
Source: CLSA, CEA, CERC, Companies

Figure 75
Financial system has an India power: Ecosystem size (balance sheet)

exposure of c.US$150bn to Ecosystem (balance sheet) Amount (Rsbn) Amount (US$bn)
the power sector PFC 2,800 40
REC 2,400 34
Banks 5,200 74
Total 10,400 148
Source: CLSA, CEA, CERC, Companies
Figure 76
Power sector has been a Banking sector credit to power sector

crucial exposure for the 7,000 (Rsbn)
banking sector . . . UDAY Impact
6,000
. . . impact of UDAY was
clearly visible during the 5,000
period of Jan-Mar 2016
4,000
3,000
2,000
1,000
0
Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18
Source: CLSA, RBI
Figure 77
India power: Transmission capacity split across the country
Transmission
391K ckm
Central State Pvt.

150K ckm 214K ckm 27K ckm
38% 55% 7%
Adani
Power Grid Sterlite Tata Power
Transmission
150K ckm 5,157 ckm 3,516 ckm
8,600 ckm
38% 1% 1%
2%
Figure 78
India power: Discom structure across the country
DISCOMs
1210 BU
Maharashtra UP Gujarat Tamil Nadu Rajasthan Others Pvt.

132 BU 116 BU 98 BU 106 BU 69 BU 621 BU 69 BU
11% 10% 8% 9% 6% 51% 6%
Adani
Torrent R - Infra CESC Tata Power
Transmission
17.6 BU 19.9 BU 15.2 BU 14.4 BU
9.0 BU
1.5% 1.6% 1.3% 1.2%
0.7%
Source: CLSA, CEA, Companies, State ERCs

Figure 79
38
India power: Generation capacity split across the country
All India
(340 GW)
Central Joint State Pvt.

74GW 22% 19GW 5% 96GW 28% 152GW 45%
Adani JSW Tata Torrent

NTPC NHPC NPCIL NLC SJVN DVC Mah. Kar. Guj. CESC
Power Energy Power Power
54GW 7GW 6.8GW 4.8GW 1.9GW 7.8GW 13.9GW 8.9GW 7.7GW 2.5GW
10.6GW 4.5GW 10.8GW 3.7GW
16% 2% 2% 2% 1% 2% 4% 3% 2% 1%
3% 1% 3% 1%
Section 2: Demand-supply balance favours IPPs

bharat.parekh@clsa.com
Figure 80
India power: Ecosystem
Ecosystem
Banks Indian Equipment supplier

Traders Exchanges
Fuel NBFC Rs5.2tn Railways 244
11.65BU 47.7BU
of 77tn of 1,161 mtpa
Generation T&D
CIL 454 of SCCL 54 of PFC REC PTC NTPC Vidyut Manikaran Power IEX PXIL BHEL, L&T, ABB, GE T&D,
PLNG GAIL
580 mtpa 65mtpa Rs2.8tn Rs2.4tn 37.6% 10.3% 9.6% 97% 3% Doosan, Toshiba, Cummins, KEC,
GE Power, Kalpataru,
Thermax, Siemens,
Triveni Turbine Scheider

(6.4GW awarded) Electric
Source: CLSA, CEA, Companies, CMIE

9 January 2019

Discoms haven’t signed enough long-term PPAs

We think discoms are The CEA says India has a power surplus and does not need to order any thermal plants
under-reporting demand for the next five years. We remember when it claimed India enjoyed a coal surplus. We
and planners/consultants think discoms are under-reporting demand and planners/consultants are ignoring it,
are ignoring it
while suggesting the curtailment of new thermal capacity/generation. For UP, the most
populous second-largest power-consuming state, the 24x7 report estimates just a 15%
rise in demand by FY19. A recent Uttar Pradesh Electricity Regulatory Commission
(UPERC) order estimates the state’s demand at 144.9BU in FY20, 6% higher vs the
24x7 report. We were surprised to see the government overstating the long-term tie-
up availability of power, leading to a lack of need to sign new PPAs. The recent
regulator order forecasts only 95% (FY19) and 88% (FY20) of demand, backed-by long-
term PPAs vs more than 100% being claimed by the 24x7 report (see below).
Discoms are under- Uttar Pradesh: Planned power consumption

reporting demand and 155 (BU) Tariff order Consultant's report of 24X7
planners/consultants are 150 144.9
ignoring this . . . 145
140 137.0
Power demand planned by 135

the government (FY20) in 130
122.9
24x7 plan is 6% lower vs 125
118.2
regulator-approved demand 120
115
110
105
100
FY19 FY20
Source: CLSA, UP ERC, “24X7 Power for all” report
We were surprised to see Uttar Pradesh: Long-term tie up of power availability

the government over- 120 (%) Tariff order Consultant's report of 24x7
stating the long-term tie-up 115
115
availability of power
110 107
Recent regulator order 105

forecasts only 95% (FY19) 100
and 88% (FY20) of demand 95
95
backed-by long-term PPAs
88
vs more than 100% being 90
claimed by the 24x7 report 85
80
FY19 FY20
Source: CLSA, UP ERC, “24X7 Power for all” report
UPERC approved 12% of Uttar Pradesh: Approved merchant purchases in the tariff order
requirement to be procured 20 (BU) Approved merchant purchase (%) 14
12
from merchant market . . . 18 Purchase as a % of total consumption (RHS)
12
16
. . . whereas 24x7 plan 14 10
claims to have entered into 12 8
PPAs over and above 10
requirement 8
5 6
6 4
4 1 2
2
0 0
FY18 FY19 FY20
Source: CLSA, UP ERC

Anecdotal evidence of under-reported demand

UP, India’s most populous state, is getting its acts together
We present on-the-ground anecdotes to answer the key for 9% of demand, began to contribute 24% of incremental
questions facing India’s energy security and investors in the demand. This raises questions about India’s reporting
utility/banking sectors. Our analysis of the demand patterns demand methodology, and leads to the conclusion it has a
of UP points to robust demand growth (16-20% in 1Q18), power surplus. With the rise in the popularity of UP’s CM,
following the change in state government, versus the we would not be surprised if other state CMs also follow
government’s own power-demand estimate of just 1% in this strategy and power-demand suddenly rises, catching
FY17 and 6% deficit. Suddenly, UP, a state that accounted planners sleeping.
UP: Key parameters

Uttar Pradesh All states
Population 204m 1.3bn
GSDP as a percentage of all states’ GSDP 7.9 100
GSDP growth rate (%) 9.9 8.6
Per capita GSDP (US$) 876 1,546
Physical infrastructure
Installed power capacity (MW) 19,293 304,506
Wireless subscribers (No.) 152,222,711 1,033,157,014
Internet subscribers (No.) 37,040,000 334,340,000
National highway length (km) 8,483 100,087
Airports (No.) 6 125
Source: CLSA
UP’s new CM announces Power for All UP and Delhi’s joint statement after signing the 24x7 Power for All programme
Source: CLSA, Ministry of Power Source: CLSA, ‘Power for All’ website

UP peak power demand and deficit

18 (GW) Peak load demand Deficit (%) (%) 35
31
16
30
14
23 24 23 25
22
12
10 20
15
8 15
6
10
4 6
5
2
11.1 12.0 13.9 13.1 15.7 17.0 16.3
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: CLSA, CEA
UP reported 20% growth in power demand, led by new CM’s resolve

19,000 (MW) UP FY16 UP FY17
18,000
17,000
16,000
15,000
14,000
13,000
UP CM UP signs agreement
12,000 announces with centre for 24x7
24x7 power power by 2018
11,000
10,000
1 Apr 8 Apr 15 Apr 22 Apr 29 Apr 6 May 13 May 20 May 27 May
Source: CLSA, CEA
UP’s base power demand (FY18) India’s base load power demand (FY18)
125 (BU) 1,240 (BU)
120 1,220 1,211

120
1,200
115
1,180
1,160
110
1,142
107
1,140
105
1,120
100 1,100
FY17 FY18 FY17 FY18
Source: CLSA, NLDC Source: CLSA, NLDC

Section 3: Regulatory - Headwind to tailwind India power generation
Regulatory - Headwind to tailwind

India’s regulators provide India has one of the best-regulated regimes, with all legitimate costs passed
returns on the basis of cost through via tariffs without any interference. However, under the previous
plus ROE of 15.5% after tax regulator, there were issues leading to the under-recovery of ROE. All this is set
to change, with a new regulatory team creating a tailwind - as opposed to a
headwind. The government is doing its bit to improve the legislative and policy
environment. Innovative moves, such as incentives and the flexibility to blend
renewable energy, should also help select IPPs.
India has one of the best regulated regimes, but . . .

India’s power sector boasts a robust regulatory regime, with returns of 15.5%
(post tax) provided on the basis of cost plus ROE. Regulations encourage superior
performance by providing incentives for operating above normative efficiency.
Current regulations are applicable over FY14-19, and a draft for FY19-24 has
been issued, indicating the regime’s intended general direction.
But there has been challenging environment under the previous regulator . . .
The regulator at the helm does have an impact on administration and
Regulator at the helm has
an impact on administration implementation, which impacts regulated utilities’ ability to earn the regulated
and implementation return. Coal-handling loss pass-through within IPP plants has been one such
instance. Here the regulatory provisions in FY14-19 and CERC’s subsequent
delays correcting it hurt IPP ROEs, as well as investor confidence in regulators
that were unaware of on-the-ground realities. The situation also exposed lethargy
in the system and select regulatory members’ autocratic behaviour. Despite the
government advising CERC (Figure 82) to allow an 85-120kcal/kWh handling loss
between coal “as received” and coal “as fired” back in February 2018, the issue
remains unresolved. NTPC has already experienced ROE under-recovery to the
tune of 240-280bps, or 2.4-2.8% of its 15.5% regulatory ROE for eight quarters,
and will suffer for another two quarters of 2HFY19 before it gets corrected by
the new regulator in FY19-24.
Figure 81
NTPC did not receive 13% NTPC: Coal under-recovery (FY18)

of its regulated return in
FY18 FY18 Regulated return - Rs73.6bn
Post tax coal

Regulated return under-recovery
87% 13%

Figure 82
Despite gov’t advice in Feb- CEA’s advice to CERC

18, the issue remains
unresolved
Source: CLSA, MoP
New regulation and progressive team provide tailwind

Draft regulation was a The FY19-24 draft regulations from India’s power regulator, CERC, were a
balancing act, maintaining positive surprise and a big departure from its earlier approach paper, thanks to
15.5% ROE while tightening
its new chairman, Shri P.K. Pujari. The draft was a great balancing act of
norms
maintaining a 15.5% ROE (vs renewable at 14% and EPS of 6-8% for NTPC &
PWGR), while tightening norms with innovative provisions. Apart from ROE, the
key positives are the extra allowance for security expenses, allowing coal-loss
costs to IPPs, a higher special allowance for 25-year-old stations, lower
effective PAF and a host of IPP-friendly measures (Figure 88). Potential risks
come from retrospective capping of full regulated equity only until useful life,
lower working capital days and interest, quarterly PAF achievement and tighter
operating norms from FY20. We model for a 14% ROE from FY20, due to the
CEA’s myopic conventional power view, so even if discoms push for lower
ROEs, we see no EPS downside.

India boasts robust and rewarding regulated regime

 India’s power sector boasts of a robust regulatory  Tariffs are derived from two components - capacity
regime with returns being provided on the basis of cost charges and energy charges (see below). At the start of
plus ROE of 15.5% (post tax). Regulations encourage the contract, the regulatory authority determines the
superior performance by providing incentives for tariff on a provisional basis, which after the regulatory
operating above normative efficiency. Current period of five years is trued up to reconcile with the
regulations are applicable over the period of FY14-19. actual expenses incurred.
CERC has already come out with its draft regulations for
FY20-24.
India power regulations: Composition of tariff
Capacity Energy
Tariff Charges (AFC) Charges (ECR)
Source: CLSA, CERC Regulations
 Capacity charge: Components recovered through this  What is normative equity?

are - 15.5% ROE on normative equity, income tax,
interest on loan capital, depreciation, working-capital Actual equity deployed to fund the project subject to
interest and operation and maintenance expenses. the ceiling limit of 30% of the capital cost. As there in no
incentive of deploying equity above 30% - project
 Recoverability of AFC depends upon the Plant funding in India is mostly in the ratio of 70:30 -
availability factor (PAF). New CERC regulations specify debt/equity.
83% as the minimum threshold for the full recovery of
AFC. AFC to be recovered is calculated every month on  What is PAF?
a cumulative (YTD) basis.
 Percentage of capacity declared (to the grid) to be
 Formula: available for the generation of power is referred as Plant
availability factor, eg, if there is sufficient stock of coal
Capacity charges to be recovered = AFC x PAF/NAPAF and other fuel, it means the plant is available. PAF
subject to the ceiling of AFC determines the recovery of AFC.
AFC - Annual fixed cost for the year Energy charge: Coal and other fuel costs are recovered
on actual basis through the energy charge rate (ECR).
PAF - Actual plant availability factor
 Formula:
NAPAF - Normative plant availability factor - 85%, ‘83%’
as per new draft regulations  ECR = landed price of primary fuel x (Heat rate - Heat by
secondary fuel) + secondary fuel cost per unit
New draft regulations propose the recovery to be
shifted on quarterly basis vs annual currently  Gross calorific value of fuel

India power regulations: Regulated ROE vs 10-yr bond yield
18 (%) (%) 12
10Y bond yield ROE Spread (RHS)
11
16
10
14
9
12 8
10 7
6
8
5
6
4
4 3
Dec 98
Dec 99
Dec 00
Dec 01
Dec 02
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Source: CLSA, CERC Regulations, Bloomberg
Important terminology simplified:  Gross calorific value (GCV): Energy produced by any
 PLF-based incentive - Payable at flat rate of 50 paise fuel by combustion of its one unit. It is a characteristic
per kWh of energy generated exceeding normative specific to a fuel. Unit of Measurement - kcal/kg.
annual plant load factor (NAPLF). Except for a few
notified plants, thermal station NAPLF is 85%. Draft  Gross station heat rate: Heat energy required by a
proposes to consider calculation on qtrly basis vs annual power station to produce one unit (1 kWh) of power. It
currently and a 65-paise-per-kWh incentive during peak. is a characteristic specific to a power generating station.
Unit of measurement - kcal/unit.
 Compensation allowance - To meet expenses on new
assets of capital nature that aren’t admissible for Compensation allowance
capitalisation; removed under proposed FY20-24 draft. Years of operation of the asset (Rsm/MW/year)
0-10 Nil
 Interest on working capital - As per new draft - at bank
11-15 0.02
rate (SBI’s 1Y MCLR+350bps) on normative level of WC,
eg, primary fuel cost - 30-day inventory, maintenance 16-20 0.05
spares - 20% of O&M expenses, receivables -45 days of 21-25 0.10
capacity charges + energy charges, O&M expenses - 1M.
Source: CLSA

Progressive regulations preserve integrity

We were positively surprised at CERC’s draft regulations under the new
chairman. It encourages investment in the face of the government’s myopic view
that India does not need to order any thermal plants till FY27 (Figure 95). This
may be due to a recent collapse in new capacity additions (Figure 83) and a 30%
rise in merchant prices (Figure 84). The regulations are for five years, compared to
renewable (three years), and improve long-term visibility until FY24.
Figure 83
A lack of funding India power capacity additions

enthusiasm . . . 25 (GW) 23.3
. . . coupled with the

implementation of the 24x7 20
power programme . . .
. . . we see a pick-up in 15
thermal PLFs and improved
pricing for IPPs 10.4
10
5.4
5
0
FY16 FY17 FY18
Source: CLSA, CEA
Figure 84
Strong demand reflected at India power: Day-ahead power prices at IEX

IEX, as grid couldn’t handle (Rs/kWh)
6
a month of robust demand
Avg clearing price at IEX for

5
Oct-18 was Rs5.9/unit (up
46% YoY)
It cooled off slightly in 4

November 2018
2
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Nov 18
May 12
May 13
May 14
May 15
May 16
May 17
May 18
Source: CLSA, IEX
What are the positives for regulated utilities?

Stable returns are likely to Apart from maintaining ROE at 15.5% (meaning 10 years of stable returns are
continue for another five likely to continue for another five years), the key positives are the allowance for
years security costs above O&M expenses, allowing coal-loss costs to IPPs of 85 kcal/t
vs nil, a higher special allowance (SA) for 25-year-old stations (pre 2014) and a
lower effective PAF by taking-out normal maintenance (c.30 days) from the PAF
calculation. The draft also proposes to address difficulties in the sector: land
acquisitions as an uncontrollable parameter and the pass-through of emissions
capex (Figure 99).

Key risks and innovative moves

CERC’s key tightening measures include innovative provisions, such as capping
full regulated equity only till useful life of the asset (Figure 86), a peak power
focus (20% of AFC recovery)/incentives (65 paise/kWh vs 50 previously) and
quarterly PAF-based recovery of fixed costs to reduce gaming, versus annual.
Also, efficiency tightening included lower working capital (WC) days and interest
pass-through, lowered O&M and a transmission TAF for HVDC lines (Figure 89).
Positive impact for both NTPC and PWGR

Draft proposal could Given our conservative stance ahead of the regulatory review, we see both NTPC
add 6-8% to NTPC’s & & PWGR being positively impacted by the draft regulations, which are of course
PWGR’s FY20CL EPS subject to review - the 15.5% ROE itself could add 6%-8% to NTPC’s & PWGR’s
FY20CL EPS. Similarly, emission capex (Figure 98) and the coal-loss pass-through
are positives for NTPC (Figure 89). The rest - security costs & SA benefits -
should be neutralised by a lower WC recovery and lower regulated equity on
>25-year-old plants (c.12% of NTPC’s FY20CL regulated equity; Figure 91).
Figure 85
CERC surprised the market CERC draft regulations: Proposal for ROE
with its proposal to
maintain ROE
Source: CLSA, CERC
Figure 86
Proposal to cap full CERC draft regulations: Proposal for ROE at end- of useful-life assets
regulated equity only till
useful life should instil long-
term blended ROE risk
Source: CLSA, CERC

Figure 87
Security costs excluded CERC draft regulations: Security expenses, a new provision
from O&M is the single-
biggest positive for
regulated utilities
Source: CLSA, CERC
Figure 88
CERC recognised need for CERC draft regulations: Proposal for PAF
preventive maintenance and
difficulty meeting PAF
Source: CLSA, CERC
Figure 89
CERC draft regulations: Impact on regulated utilities

Provisions Change EPS Impact vs FY20CL
NTPC PWGR
Generic provisions
ROE Maintained @ 15.5%  
Security expenses Over & above O&M expenses like water charges  
Land acquisition Controllable to uncontrollable parameter Good move Good move
Depreciation - asset value recovery 90- 95%
- Short-term  
- Long-term  
WC (Stock & days) - Non-pit head coal stock 20 days vs 30 days  
- Receivables 45 days vs 60 days
WC(rate %) Down 145bps as base changed from base  
(Frozen at Apr-14) rate to MCLR
Regulated equity post-useful plant life  
Specific provisions
Thermal
Special provision for thermal Post-25 year returns  na
PAF
- effective PAF PAF calculation ex-scheduled annual maintenance  na
- Quarterly calculation  na
Coal-loss cost pass-through 85kcal/kWh allowance for storage loss 
Special allowance Hiked for pre-FY14 plants, small cut for post-FY14 
Heat rate 4.5- 5%
PLF incentive Peak @ 65 paise/kWh vs 50 paise/kWh 
Fuel cost - SHR 200 210/250-2410kcal/kWh vs 2450kcal/kWh 
Transmission
O&M Higher TAF of 97.5% for HVDC vs 96% earlier 
TAF Quarterly calculation 
Sharing of benefits with beneficiaries Increase in proportion from 40% to 50%  
Source: CLSA, CEA

Figure 90
Draft regulation was a great India power: Comparison of regulatory regime

balancing act of maintaining Type of regulation Current regulations Proposed regulations Renewables
a 15.5% ROE (vs RE at 14% (draft)
and EPS of 6-8% for NTPC Control period FY15 to FY19 FY20 to FY24 FY18 to FY20
& PWGR) while tightening Period 5 years 5 years 3 years
norms with innovative Return on equity:
provisions . . . - Methodology Fixed return on equity Fixed return on equity Fixed return on equity
portion of capital cost portion of capital cost portion of capital cost
- ROE 15.5% for thermal/ 15.5% for thermal/ 14% for all
transmission assets transmission assets
Other key positives are the 16.5% for Hydro stations 16.5% for Hydro stations
extra allowance for security Interest on working capital:
expenses, allowing coal-loss - Methodology SBI Base rate (As on 1 SBI 1-yr MCLR + 350bps
Apr-14) + 350bps premium
costs to IPPs, a higher premium
special allowance for 25-
- Base rate#/MCLR* 10.00% 8.55%
year-old stations, lower
- Premium 3.50% 3.50%
effective PAF and a host of
Interest % 13.5% 12.05%
IPP-friendly measures . . .
Working Capital Pit-head/non pit-head Pit-head/non pit-head
(15D/30D) + coal cost (15D/20D) + coal cost
(30D)+ fuel cost (2M) + (30D)+ fuel cost (2M) +
maintenance @20 % of maintenance @20 % of
. . . retrospective capping of O&M + receivables (2M) O&M + receivables (45D)
full regulated equity only till O&M expenses escalation 6.35% 3.20%
useful life, lower working rate
capital days and interest, Debt:Equity Prior to 1992 - 50:50 Prior to 1992 - 50:50
quarterly PAF achievement Thereafter 70:30 Thereafter 70:30
and tighter operating norms Depreciation:
from FY20 are potential Block 1 SLM basis using SLM basis using
risks Appendix-II rates Appendix-I rates
Loan Term (years) Depreciation term Depreciation term
Interest on project loans Weighted average on the Weighted average on the
basis of the actual loan basis of the actual loan
portfolio after adjusting portfolio after adjusting
for interest capitalised for interest capitalised
Sharing of benefits:
Proportion of benefits to 40% 50%
be shared by generation/
transmission companies
with beneficiaries
Source: CLSA, CERC, *rates taken are current rates - this will be replaced with rates as on 1 Apr-19 - as the new
regulations will be applicable from 1 Apr-19 onwards, #Base rate as on 1 Apr-14 (frozen as per regulations)
Figure 91
We estimate c.10-13.5GW NTPC: Plants with more than 25 years of life

of NTPC’s capacity to be Plants old for >25 yrs FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
25-years old . . . Capacity (MW)
Year FY93 FY94 FY95 FY96 FY97 FY98
Singrauli 2,000 2,000 2,000 2,000 2,000 2,000
Rihand 1,000 1,000 1,000 1,000 1,000 1,000
Unchahar - I 420 420 420 420 420 420
Korba 2,100 2,100 2,100 2,100 2,100 2,100
Vindhyachal 1,260 1,260 1,260 1,260 1,260 1,260
Ramgundam 2,100 2,100 2,100 2,100 2,100 2,100
Farrakka 1,100 1,600 1,600 1,600 1,600 1,600
Kahalgaon 210 420 630 840 840 840
Dadri Thermal - - 840 840 840 840
Talcher STPS - - - 1,000 1,000 1,000
Talcher TPS - - - 460 460 460
Total 10,190 10,900 11,950 13,620 13,620 13,620

Keeping it simple
CERC’s draft aims to keep tariffs simple and, hence, does away with its earlier
paper, which had asked for opinion on adding one more segment to tariffs to
factor in utilisation. For thermal power, it sought opinions on a three-part tariff
(Figure 92, compared to two parts to add a variable charge, which would be
recovered on utilisation versus current availability. Similarly for transmission
assets, it seeks to distinguish tariffs for access & usage (utilisation).
Figure 92
For thermal-power assets, CERC approach paper: New generation tariff regulations
CERC sought opinions on a
three-part tariff New Power Generation Tariff
Fixed charges Variable charges Energy charges
 Depreciation
 Fuel cost
 Interest on loan
 Incremental return > Rf  Transport cost
 Guaranteed return
 Balance O&M  Taxes
(ROE = Rf)
 Duties on fuel
 Part O&M
Note: ROE - return on equity, Rf- Risk free rate, O&M - Operations & Maintenance. Source: CLSA
Figure 93
Current availability-based CERC approach paper: existing generation tariff regulations
tariffs (PAF) earn core ROE
and only incentives are Existing Power Generation Tariff
linked to utilisation (PLF).
Fixed charges Energy charges
 Depreciation
 Fuel cost
 Interest on loan
 Transport cost
 Guaranteed return
 Taxes
(ROE = 15.5%)
 Duties on fuel
 O&M
Note: ROE - return on equity, O&M - Operations & Maintenance. Source: CLSA
Figure 94
For transmission power CERC approach paper: New transmission tariff regulations
assets, CERC sought
opinion on a two-part tariff New Power Transmission Tariff
Regulated utilities have

enjoyed power ROEs with a Fixed component Variable component
(Access charges) (Usage driven)
c.7.2% spread over 10-yr
bonds over past 20 years
 AFC of fixed transmission system for
access & immediate evacuation  CTS or system strengthening scheme
 AFC of evacuation transmission system OR
OR  Sum of incremental retrun (ROE)
 Part AFC of entire transmission system above Rf
 Debt service obligation  O&M expenses
 Interest on loan  Interest on working capital
 Guaranteed return (ROE = Rf)
Note: ROE - return on equity, CTS - Common Transmission system, AFC - Annual fixed charges,
O&M - Operations & Maintenance, Rf- Risk free rate. Source: CLSA

Figure 95
We model for a 600bp CERC approach paper: CERC’s view on tightening ROE
spread to accommodate
potential changes in CEA’s
stance
CERC asked if past

incentives need to continue
Source: CLSA, CERC
Figure 96
Regulated utilities have India power: Spread of the power ROE over 10-year yield curve and power ROE
enjoyed power ROEs with a (%) ROE Spread Avg spread
18
c.7.2% spread over 10-yr
bonds over past 20 years 16
We model for a 600bp 14

spread to accommodate
potential changes in CEA’s 12
stance 10
2
Dec 98
Dec 99
Dec 00
Dec 01
Dec 02
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Source: CLSA, CERC
Figure 97
CEA ignored the recent up- CERC approach paper: Comments on power ROE
move in 10-yr bonds and
used a dated bond yield of
early-2018 to justify point
Source: CLSA, CERC

Figure 98
Another positive for NTPC CERC approach paper: View on the allocation of coal GCV risk
is the recognition of a
three-way allocation of
grade slippage risk
Source: CLSA, CERC
Figure 99
While factoring in the CERC approach paper: O&M costs

impact on O&M costs of
emission control equipment
is positive . . .
. . . a likely cut in O&M for

hydro and gas assets is
negative for NHPC/NTPC
Source: CLSA, CERC
Figure 100
India’s lending rates have SBI base rate and MCLR

bottomed out and started (%)
10
rising, supporting higher MCLR
ROE
6
Dec 01
Dec 02
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Source: CLSA, Bloomberg

Delhi is doing its bit to improve legislative and policy environment

We see the NDA government has proposed two sweeping reforms, which should
not only instil better behaviour among the discoms, but also improve power
demand for IPPs by mandating the signing of long-term PPA (LT PPA) and
regulatory audits for the same.
Tariff policy changes: A prescription for better behaviour

Delhi has proposed In the proposed draft amendments to the national tariff policy, 2016, the central
breakthrough changes in government has incorporated some transformational provisions. The focus is to
the tariff policy make 24x7 uninterrupted power supply to all consumers; improve efficiency in
the operation of distribution business; address certain constraints faced in
implementing change-in-law provisions, issues in open access, compliance and
related aspects; tariff design-related issues, including simplification of tariff
categories and the rationalisation of retail tariffs. Highlights of certain key
proposed amendments follow:
1. Consumers should not be asked to pay the price of discom inefficiency;
therefore AT&C Losses in excess of 15% shall not be passed on to consumers
but shall be borne by the discom.
Introduction of DBT, 2. Adequate and uninterrupted power supply for 24 hours maybe ensured to all
restricting AT&C losses to categories of consumers by March 2019, or earlier. In the case of power cuts
15% and simplification of other than in force-majeure conditions or technical faults an appropriate
tariff structure
penalty, as determined by the SERC, shall be levied on the discom and credited
to the account of the respective consumers.
3. Standards of performance for distribution licensees to include continuity and
reliability of supply, quality of supply, timeframe for disposing application for
connection/disconnection/enhancement or reduction of connected load and
complaints of disruption in supply
4. Subsidy to any category of consumers would be required to be given through
direct benefit transfer (DBT), ie, directly in the bank account of such
consumers, to reduce the leakage.
5. An appropriate commission would ensure that cross-subsidies are reduced and
the tariff for all consumer categories are brought within ±20% of the average
cost of supply effective from 1 April 2019, or earlier.
6. Simplification of tariff categories and rationalisation of retail tariff as below.
Simplification of tariff structure

Unified, simplified tariff Delhi has proposed the unification and simplification of tariff structures across
structure has been all discoms, by doing away with different tariffs for usage by different
proposed categories of customers.
The principle to be adopted shall be on the basis of different slabs in sanctioned

load and units consumed. A maximum of five load categories are to be created,
such as 0-2 KW, >2-5 KW, >5-1 0 KW, >1 0-25KW, and >25KW. For each load
bracket, the consumption slab shall be considered such as 0-200, 201-400, 401-
800, 801-1200 and >1200 units with progressive rates.
This will mean that consumers in the lower brackets will be subsidised by
consumers in the higher bracket. For example, consumers in load bracket 0-2 and
>2-5 KW may be subsidised by consumers having higher load brackets (>5-1 0,
>1 0-25 and >25 KW).

Figure 101
A simple progressive Draft tariff policy - tariff structure

structure has been Simplified tariff Load
proposed structure 0-2 KW 2-5 KW 5-10 KW 10-25 KW > 25 KW
0-200 XXX
No. 201-400 XXX
of 401-800 XXX
units 801-1200
> 1200 XXX XXX
The Electricity Act - Amendments: Breakthrough changes, but . . .

Obligation for 24x7 power, Delhi remains on the reform path, as demonstrated by its plan to amend the
subsidy via DBT and a path Electricity Act (EA) with transformational proposals. It has given states 45 days to
to zero cross-subsidies respond to the changes and hopes to take this important piece of legislation to
parliament in the winter session (Dec-18). Most important are the obligation for
24x7 power, subsidies via DBT and a pathway to zero cross-subsidies. Given
limited time the Govt. has before election (just one session), it remains to be seen
if it can see the amendment to the EA through parliament but the proposals do
give us the peek into the power reforms ahead. Also in a democratic set up, there
may be changes to more sweeping reforms in the parliament, such as to phase out
cross-subsidies in three years.
 24 x 7 to become obligation: The Ministry of Power (MoP) has proposed an

important amendment of making ‘24x7 power supply’ as an obligation for the
discoms.
 Sign PPAs of power required to provide power 24x7, which would have
regulatory oversight: Discoms will be required to tie up the necessary capacity
through long/medium-term PPAs, such that it meets the annual average
demand of the area. The proposal also mentions that this arrangement will
undergo a review once in every two years.
 No electricity without a meter: The proposal mentions that after a defined

time period (two years from the appointed date) - no electricity shall be
supplied without a proper/smart/prepaid meter. We believe this strong step of
bringing the matter in the act itself will provide a huge fill up to the metering
of electricity in India.
Figure 102
Reality of power 24x7 will Electricity act amendments: 24 x 7 to become obligation

force discoms to address
decade-long problem of
power cuts

 Separate recovery of connection charges: Further, the amendment explicitly

proposes to recover the connection charges vs the current practice of levying
a regulation based fixed charge. This will enable the recovery of fixed cost
through fixed charge and variable cost through energy charge.
The draft paper requires  Special focus on renewables - Renewable Generation Obligation (RGO): Clear
Delhi to prepare a national focus on renewables is visible as the paper requires the Central govt. to
renewable energy policy prepare a ‘National Renewable Energy Policy’. Also, any generating company
establishing any new unit or expanding any existing capacity will be required
to fulfil the RGO. Non-compliance of RGO will attract penalty in the range of
Rs1-5/unit. We already have ‘Renewable Purchase Obligation’ (RPO) for
DISCOMs - this is the first time an obligation has been introduced on the
generating side.
 Support to EV: In order to promote the ‘EVs’ and not to keep it restricted only
to discoms, the amendment has stated that ‘Charing of batteries’ for EVs
should not be considered as ‘distribution, trading or supply’. We believe this
step will address the licence restrictions and promote set-up of EV charging
infrastructure.
 Subsidy transfer through DBT route: In order to eliminate the middle-men and
make DBT an integrated success - the amendment states that any subsidy -
whether the one determined under the tariff order or any special subsidy of
central/state governments will pass through the DBT route.
Restricts cross-  Eliminate cross-subsidisation: The proposal restricts cross-subsidisation of
subsidisation of tariff up to tariff up to 20% and mentions about complete phase-wise elimination over a
20% three-year period.
 Open access over & above 1 MW: The paper has proposed to grant open
access for consumers having connected load of 1MW and above.
 Development of forwards & futures market: Taking forward the success of
IEX, the amendment entrusts responsibility on Delhi to appoint a commission
to develop the forwards & futures market in the electricity arena.
 Change in law/duties/taxes matters to get judicial expedition: The paper has
also taken judicial expedition into consideration. It states that matters
pertaining to pass-through of tariff on account of ‘Change in law/duties/taxes’
to be decided in a period of 30 days and all other matters in a span of 90 days.
We believe this will address the slow moving judicial system of India.
 Ancillary market, Smart grid gets a mention: The proposal states that central
govt. while formulating any policy or framing any regulation should take into
consideration the development of smart grid, ancillary support and
decentralised distributed generation.
Futuristic moves to help select IPPs

Merit order operation and Central regulator's move to improve the market structure, vision to promote
allowing blending of renewables and cost-competitiveness of discoms power purchase also could help
renewables with thermal boost select IPP profitability. We highlight two such initiatives:
will help cut cost and save
carbon-footprint
Merit Order Operation / Constrained generation to unlock cheap power of IPPs
Under UDAY, cost cutting at discoms remains the No.1 theme. To support this,
grid operator, POSOCO has proposed ‘Security Constrained Economic Despatch’
(SCED). This supports Delhi’s ‘Merit Order Operation’ (MOO) scheme, called to
bring-about flexibility in generation and scheduling of thermal power to reduce
cost of power to discoms.

Figure 103
POSOCO proposed Security Power reforms: Proposed power market development

Constrained Economic
Despatch, which supports
Delhi’s Merit Order
Operation
MOO proposes to bring-

about flexibility in
generation & scheduling of
thermal power to reduce
cost of power to discoms
In the current power scheduling system, depending on the requirement of the

states, generation remains unrequisitioned in certain ISGS. This leads to a
situation where, some beneficiaries are drawing costlier power from ISGS even
while some fragmented power of cheaper stations may remain undespatched.
The objective of Merit Order Operation (MOO) is to minimise the total generation
cost, while honouring the technical constraints of the power plants and the grid.
Figure 104
Our BoE suggests cost NTPC: Plant-wise tariff (FY16)

savings from MOO reform (Paise/kWh)
380
to add Rs6bn to NTPC PAT
340 Avg=307
300
260
220
180
140
100
Talcher
Korba I & II
Ramagundem III
Unchahar II
Rihand I
Vindhyachal III
Sipat I
Talcher Kaniha I
Vindhyachal IV
Simhadri I
Kahalgaon II
Rihand III
Korba III
Vindhyachal II
Unchahar I
Farakka I & II
Kahalgaon I
Vindhyachal V
Ramagundem I & II
Rihand II
Sipat II
Vindhyachal I
Talcher Kaniha II
Singrauli

One generator-discom pair As per the MOO, one pair of generator/discom will be scheduled at the national
will be scheduled at the level vs the current practice of tied up capacities at the plant level. Plants will be
national level utilised based on their energy charge rate (ECR), ensuring that those with lower
ECRs to be utilised first - reducing the overall cost of power generation.
Net savings shall be to be shared 50:50 between the discom and the generator.
Our basis of estimate (BoE) suggests cost savings from MOO reforms to save
Rs11bn on a net basis to discoms and add Rs6bn to NTPC PAT. Implementation
of MOO could begin from 1QFY20.
Renewable blending with thermal to cut costs & save carbon footprints
Savings from replacing CERC has allowed blending of RE as part of thermal PPA, where cost of
costly thermal power with renewables is lower than the thermal energy charge. This is mainly suitable for
renewables shall be shared high-cost (imported coal-based) thermal plants, who could replace costly power
50:50 between beneficiaries
with cheaper renewables esp. during the sun-hours. Savings derived by replacing
and generator
costly thermal power with renewables shall be shared 50:50 between
beneficiaries and generator. NTPC has contracted 2GW of solar and 1.2GW of
wind power to replace its costly generation, improve availability, cut-down its
carbon foot-print and still earn incentives from cost-savings.

Section 4: Valuations are compelling India power generation
Valuations are compelling

India’s regulated IPPs are With a resolute focus on capitalisation versus capex, we see improved cashflow
attractive compared to and higher dividends at Indian IPPs. Falling ROEs - due to the level of IPP capital
domestic, regional comps stuck in under-construction projects and regulatory headwinds - mean valuations
are near 10-year lows, making the space compelling. India’s regulated IPPs, such
as NTPC, are attractive, compared to domestic and regional comps. A reduction in
the stock overhang from government divestitures, central public-sector enterprise
ETFs and a likely rebound in EPS growth - coupled with NTPC’s above-average
dividends - should support stocks after derating. BUY NTPC and CESC.
Seeds of next bull market sawn - Capitalisation>capex

Good days ahead for power Our core arguments presented in the previous three sections support our belief that
sector as demand-supply is the seeds of the next bull market have been sown in the form of successful power
getting tightened reforms (UDAY) and improving demand - supply environment and regulatory tailwind.
India’s power demand reported double-digit growth of c.10% in October 2018
(Figure 59) after a gap of 30 months, and merchant prices rose by 30%YoY (Figure
84), indicating that the system doesn't have reserve margin. Good days for the power
sector are ahead, as while demand is improving (up by 7% FY19YTD up to October,
compared to 5% for FY18YTD), capacity additions are falling. Net capacity addition
for conventional power sources was down by 50% for FY18 (Figure 65). IPPs have
corrected capital allocation to improve free cashflow, and reduced new thermal-
plant-equipment orders (Figure 30). Their capex is now decisively below
capitalisation, leading to improved ROE/FCF on lower capital without ROE in capital
work in progress. The same is also reflected in improving PLF (Figure 68) and rising
merchant prices (Figure 84). We remain BUYers of NTPC and CESC.
Figure 105
We are confident NTPC’s NTPC: Capex versus capitalisation

capitalisation-to-capex ratio 500 (Rsbn)
Capex Capitalisation
will improve from FY19
400
300
200
100
0
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
We expect NTPC to enjoy c.53% regulated equity growth over FY18-21,

compared to c.40% over FY15-18, to drive a 13% EPS Cagr and 240bps
improvement in ROE. On the under-recovery of ROE, management is taking
proactive steps to curtail it by improving coal supplies and plant operations. NTPC
should have a much better 2HFY19 with lower under-recovery of Rs6bn for
FY19, compared to Rs14.4bn in FY18 and Rs8.2bn in 1HFY19. This means a
swing of Rs10bn would drive 2HFY19 PAT by 18%. The IPP’s accident-hit
500MW Unchahar plant resumed operation in mid December. Steps on the coal
front include lifting new 5mtpa of short-term coal from CIL by March 2019, and
paying advances to railways for wagon prioritisation. We model 11.3 GW of
capacity to be commissioned over FY19-21. Of these, NTPC has already spent

80% of the cost in 70% of the projects, improving project-start visibility. NTPC is
getting closer to robust regulated equity growth, which will expand ROE by
240bps over FY18-21CL (a rerating catalyst). The stock is value trading below c.-
2sd on PE (Figure 116) & at a 1.0x FY20CL BV (Figure 115), a near 10-year low,
with a 4.5% dividend yield (FY20CL) at 40% payout.
Post-restructuring, CESC We see CESC offering investors a dual opportunity: a key power-reform play as
has now emerged as a pure- India opens up the distribution sector, and through a turnaround in its IPP
play on India’s power business (12% of FY18 consolidated PAT). While its Kolkata discom keeps
reforms generating cash, CESC saw losses of Rs1.2bn in FY18 at the three newly acquired
Rajasthan discom circles it won as part of the state’s power reforms. It plans to
turn these around, cutting AT&C losses by transposing its best practices from the
Kolkata license area. In IPP, while its Haldia-regulated IPP is cash-generative,
Chandrapur is losing money. However, with rising PLFs, even the losses at
Chandrapur have halved in 1HFY19 to Rs500m, versus a loss of Rs2bn in FY18.
Post restructuring, we highlight CESC has now emerged as a pure-play on India’s
power reforms. We value the generation and discom business of CESC at
US$470m and US$1.1bn.
Figure 106
India power generators (FY18)

FY18 Capacity (MW) Generation (MU)
NTPC (group) 53,651 265,798
CESC 2,499 13,238
Sector valuations are compelling

New draft has maintained Given a stable and attractive regulatory regime (ROE maintained at 15.5% in the
ROE at 15.5% for FY20-24 new draft for FY20-24, vs the fear of taking it down by 50-150bps) that implies a
vs the fear of taking it down 800bp spread over 10-year bonds, high growth (7-15% EPS Cagr over FY18-
by 50-150bps 20CL) and an ‘AAA’ annuity-driven business model, we find the sector valuation
inexpensive. Both NTPC and CESC are trading at 7-10x FY20CL EPS, versus
similar regulated/annuity-driven businesses, such as PWGR (10x), Petronet LNG
(12x), GAIL (12.5x), GSPL (16x) and Bharti Infratel (25x).
Figure 107
India Utilities: Valuation comps

Stock code Rec Price Mkt EPS PE (x) EV/Ebitda (x) PB (x) Net gearing (%) ROE (%) Div yield (%)
(Rs) cap Cagr (%)
FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL
(US$m) (18-21)
Power
Adani Power¹ ADANI IB SELL 50 2,751 na na na 12.0 10.1 na na na na na na na na
Adani Transmission ADANIT IN SELL 200 3,138 23.7 33.2 28.3 12.5 11.4 4.6 4.0 239 184 15 15 0.3 0.5
CESC² CESC IB BUY 653 1,233 6.7 6.0 5.5 4.4 3.9 0.6 0.5 40 30 9 11 1.8 2.0
JSW Energy JSW IB SELL 70 1,640 11.2 11.6 10.7 5.0 5.5 1.0 1.0 106 89 9 9 4.3 4.7
NTPC NTPC IS BUY 149 17,373 13.9 10.6 9.6 6.4 6.0 1.1 1.1 123 117 11 11 3.3 4.2
Power Grid PWGR IB O-PF 198 14,814 9.8 10.9 10.7 7.0 6.8 1.7 1.6 229 217 17 15 2.8 2.8
Tata Power TPWR IB BUY 75 2,875 13.8 12.2 10.7 5.7 5.0 1.3 1.2 232 192 12 12 1.8 1.9
Power average 14.1 12.6 7.6 7.0 1.7 1.6 161 138 12 12 2.4 2.7
Non power
Bharti Infratel BHIN IS O-PF 294 7,726 (5.9) 24.5 28.8 14.9 16.9 3.3 3.3 (42) (42) 13 11 4.6 3.5
GAIL GAIL IB BUY 357 11,484 11.7 13.3 12.9 8.6 6.2 1.8 1.7 4 7 14 14 2.5 2.5
Petronet LNG PLNG IB SELL 217 4,646 11.5 14.0 12.3 9.1 7.8 2.8 2.3 (36) (42) 22 21 2.3 2.3
Gujarat Petronet GUJS IB BUY 175 1,419 4.8 11.8 16.1 6.5 4.5 1.7 1.6 37 26 15 10 1.7 1.1
Gujarat Gas GUJGA IN BUY 657 1,293 25.1 25.3 19.0 12.0 11.0 4.3 3.6 82 55 18 21 0.7 1.0
Indraprastha Gas IGL IS BUY 274 2,725 13.4 25.2 22.2 15.4 13.7 4.5 3.8 (40) (45) 20 19 1.1 1.1
Mahanagar Gas MAHGL IN BUY 906 1,275 10.7 16.7 15.5 10.9 9.2 3.8 3.4 (13) (24) 24 23 3.0 3.3
Non-power average 18.7 18.1 11.1 9.9 3.2 2.8 (1.1) (9.3) 18 17 2.3 2.1
¹ Adani Power ratios taken as ‘na’ to account for negative equity in FY19/20CL. ² CESC adjusted for subsidiary numbers. Source: CLSA

CGD companies remain Among India’s large companies, NTPC has the best growth profile and it is the
excessively valued to cheapest, trading at 9.6x FY20CL EPS and 1.1x FY20CL BV, vs a 14% EPS Cagr
perceived high growth over FY18-21CL and dividend yield of over 4%. We believe that the NTPC's risk-
reward is favourable, compared to Petronet LNG, as NTPC has the best
combination of high growth and inexpensive valuations among its
regulated/annuity peers. However, Petronet LNG stock is trading at its long-term
average PE, while NTPC is trading below/at -2sd PE. City gas distribution (CGD)
companies remain excessively valued (50-100% PE premium, versus regulated
peers) due to perceived high-growth, but neither IGL (13%) nor MGL (11%) is
demonstrating EPS Cagrs, albeit they do earn excessive ROE (19-24%).
We expect Bharti Infratel’s EPS to report degrowth over FY18-21. The stock is
trading expensively at 26x FY20CL EPS and 3.0x FY20CL BV for 11% ROE/3.5%
dividend yield at 90% payout.
Figure 108
India IPPs: Valuation comps

IPPs Stock code Rec Price Mkt cap EPS PE (x) EV/Ebitda (x) PB (x) Net gearing (%) ROE (%) Div yield (%)
(Rs) (US$m) Cagr (%)
(18-21) FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL
CESC² CESC IB BUY 653 1,233 6.7 6.0 5.5 4.4 3.9 0.6 0.5 40 30 9 11 1.8 2.0
NHPC NHPC IB N-R 26 3,824 10.9 9.9 8.8 8.6 7.7 0.9 0.8 50 49 9 10 6.0 6.6
NLC³ NLC IB N-R 68 1,499 na - - - - - - - - - - na na
NTPC NTPC IS BUY 149 17,373 13.9 10.6 9.6 6.4 6.0 1.1 1.1 123 117 11 11 3.3 4.2
SJVN SJVN IN N-R 26 1,434 0.9 8.1 8.1 4.7 4.7 0.9 0.8 - - 12 12 8.6 7.5
Torrent Power TPW IB N-R 264 1,823 24.3 10.7 9.7 5.5 5.1 1.4 1.2 118 114 14 13 na na
Average 11.7 9.9 9.0 6.5 6.0 1.0 0.9 110.1 95.4 10.8 11.2 4.3 4.5
¹ Adani Power -ratios taken as ‘na’ to account for negative equity in FY19/20CL. ² CESC - adjusted for subsidiary nos. ³ NLC - no analyst coverage as per
Bloomberg. Source: CLSA, Bloomberg
Figure 109
Bharti Infra should have a India utilities: PB vs ROE (%) framework (FY18-21CL)
lower ROE than NTPC in ROE (%) MGL (5, 24)
25
FY21CL . . .
MGL
23 PLNG
. . . despite NTPC trading IGL (6, 21)
21 GGL
below 1.0x FY21CL BV vs PLNG
Bharti’s c.3.0x 19 IGL
17
PWGR BHIN
PWGR
GGL (5, 16)
15
NTPC GAIL GSPL
ATL
13
TPWR TPWR BHIN
11 CESC GSPL GAIL
JSWE NTPC ATL (6, 11)
9
7 JSWE
CESC
PB (x)
5
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Source: CLSA

Figure 110
Among IPPs, NTPC is the India IPPs: PB vs ROE (%) framework (FY18-21CL)
only stock moving in the 15 ROE (%)
top-left quadrant NLC
14 TORRENT
NTPC TORRENT
13
TPWR
12 TPWR
SJVN SJVN
11
CESC
NHPC
10 NTPC
JSWE
9
8 NHPC
JSWE
CESC PB (x)
7
0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7
Source: CLSA
NTPC (BUY): Robust defensive growth, decade-low valuations

NTPC has a compelling Key catalysts for NTPC stock ahead are: 53% regulated-equity growth over FY18-
combination: robust growth 21CL (one of fastest globally), versus c.40% over FY15-18, to drive capitalisation
and decade-low valuations to higher than capex; decade-low valuations at 1.0x FY20CL BV (Figure 115);
below -2sd on a PE basis (Figure 116); macro tailwinds with improving power
demand led by UDAY-reforms and falling capacity add; improving utilisation.
Robust growth ahead, valuations at decade low

NTPC commercialised During FY18, NTPC capitalisation (on which it earns ROE) rose 135%YoY (to
800MW of capacity till Rs287bn/US$4bn - a seven-year high) reducing its gap vs capex by 45%YoY. FY19
1HFY19; we estimate could be the first year in the last six when capitalisation exceeded capex (-24%YoY),
3.3GW more in FY19 in our view. We model this trend of capitalisation exceeding capex to sustain for at
least five years (based on equipment orders placed by NTPC - Figure 30), before the
next capex cycle starts. However, despite NTPC commercialising only 800MW
(Kudgi-3) of capacity till 1HFY19, we estimate 3.3GW of commercialisation in FY19.
Lara (24% of FY19 CoD) has already been commissioned but needs to
commercialise. The BoP of Solapur/Bongaigaon (27% of CoD) is fully operational,
with the start of units 1/1&2, hence units 2/3 starting should not have much
problem once BTG is ready. We pencil in commercialisation of 11.3GW costing
US$18bn over FY18-21, as 81% of the spending on 70% of these projects have
been done by August 2018. Hence, we estimate NTPC to have c.53% regulated-
equity growth over FY18-21CL, versus c.40% over FY15-18, driving a 13% EPS
Cagr. This should expand its ROE by 240bps over FY18-21CL (a rerating catalyst).
The stock is value trading below c.-2sd on PE (Figure 116) and at 1.0x FY20CL BV
(Figure 115) with a 4.5% dividend yield (FY20CL) at 40% payout.
Figure 111
Considering all the NTPC: Multipillar approach

valuation methodologies,
NTPC’s price is justified Rs177 - DCF Value
(Terminal growth 1.5%,
WACC 9.1%, Beta 0.83)
Rs180
TP
Rs226 - 12.6x Rs193 - 1.3x

Dec-20 EPS Dec-20 BV
Source: CLSA

DCF-based valuation
As the focus of the company shifts from capex to capitalisation, we believe the
FCFF will emerge and remain healthy. Our one-year forward DCF-based valuation
is Rs180, which implies 1.3x FY20CL PB and 11.4x FY20CL PE. We have set the
long-term growth rate at 1.5% (terminal growth rate), which is below the long-
term growth rate for the Indian power sector.
Figure 112
NTPC: FCFF until FY28CL

FY ends on 31 Mar (Rsbn) FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL FY25CL FY26CL FY27CL FY28CL
Adj Ebitda 284 324 374 419 460 482 501 522 527 533
Cash tax payable on Ebit (35) (38) (38) (40) (43) (46) (49) (51) (53) (55)
Changes in working capital (3) 10 11 (21) (19) 13 (27) (30) (6) (10)
Changes in non-CA & CL operational (22) (15) 2 (6) (5) (16) 1 (16) (13) (13)
Capital expenditure (238) (198) (223) (228) (151) (179) (166) (144) (150) (152)
FCFF (15) 83 126 123 241 255 261 281 306 303
Discounted FCFF (5) 80 112 100 180 173 162 160 159 144
Source: CLSA
Figure 113
Our target price for NTPC is NTPC: DCF valuation

based on DCF-based Cost of debt (%) 8.1
valuation methodology Rf (%) 7.75
Beta (x) 0.8
ERP (%) 5.5
CoE (%) 12.5
Terminal growth (%) 1.5
Weight of debt (%) 52.1
Weight of equity (%) 47.9
Tax rate (%) 25.0
WACC (%) 9.1
PV of FCFF (Rsm) 548,703
PV of terminal value (Rsm) 2,219,663
Total firm value (Rsm) 2,768,366
Net debt (Rsm) 1,305,442
Total equity value (Rsm) 1,462,924
Shares O/S (m) 8,245
Equity value (Rs/sh) 180
Source: CLSA
Theoretical PB approach
We arrive at a fair value of NTPC has a stable ROE profile, which makes it ideal to use the theoretical PB
Rs193 at 1.3x PB, via approach (Gordon growth model). Its long-term ROE should be similar to the
Gordon growth model returns allowed by the regulator, which is 15.5% (without incentives). We factor
in the uncertainty around coal availability/plant shutdown and take the long-term
average ROE of 14% for the DCF-based valuation methodology. We use 12.5%
cost of equity (COE) for NTPC, with a beta of 0.83. The 7.8% long-term growth
rate in nominal terms is based on ROE (14%) multiplied by the retention ratio
(56%).
 Growth = ROE x (1 - payout ratio)
 PB = (ROE - growth)/(COE - growth)
Through this method we arrive at a fair value of Rs193 at a 1.3x PB.

Figure 114
Our theoretical PB value for Valuation derived from theoretical PB approach

NTPC is Rs193/share Particulars % age
Long-term average ROE (%) 14.0
Payout ratio (%) 44.1
Growth rate (%) 7.8
Risk-free rate (%) 7.75
Market risk premium (%) 5.75
Beta 0.83
Cost of equity (%) 12.5
PB (x) 1.3
Book value at valuation date (Rs) 147
Fair value (Rs) 193
Source: CLSA
Stock looks cheap on historical PE and PB basis

On historical PB and PE NTPC’s long-term average PB and PE come out at 1.3x and 13x. The implied
stock looks cheap stock value, based on these multiples, is Rs197/share on PB and Rs226/share on
PE. Looking at these, we highlight the stock is already trading at a discount to its
historical valuations, on stock over-hang from Government divestment, apart
from concerns around under-recovery of ROE, due to coal-shortages, plant-
outages and delays in new project starts. Our target price of Rs180 gives us the
cushion of a 9% and 26% stock derating on a PB and PE basis.
Figure 115
With earnings likely to see a NTPC: Long-term PB

13% Cagr over FY18- 2.0 (x)
21CL . . .
1.9
1.8
1.7
1.6
1.5 +1sd 1.53x
1.4
avg 1.34x
1.3
1.2
-1sd 1.15x
1.1
1.0
Apr 11
Apr 12
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Source: CLSA
Figure 116
. . . NTPC is trading below NTPC: Average PE

c.-2 standard deviation 13.5 (x)
+2sd
12.5
+1sd
11.5
Avg
10.5
-1sd
9.5
-2sd
PE
8.5
Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

CESC - A pure-play on India’s power reforms

CESC offers best of both We see CESC offering the best of both worlds, ie, a key power reform play as
worlds - a key power reform India opens up the distribution sector and revives power demand for its IPP
play and a revival in the capacities. While it received NCLT approval for a demerger in March 2018 itself,
power demand for its IPP the state regulator (WBERC) has not yet approved its new genco PPA, on account
capacity of which it altered its plan to a three-part demerger versus four parts previously.
The discom and genco are combined under the currently listed stock. CESC saw
losses of Rs1.2bn in FY18 at the three Rajasthan discom circles it won as part of
the state’s power reforms. It plans to turn these around, cutting AT&C losses by
transposing its best practices from the Kolkata license area. Even the losses at
Chandrapur have halved in 1HFY19 to Rs500m, versus a loss of Rs2bn in FY18.
Post-restructuring, we highlight CESC has now emerged as a pure-play on India’s
power reforms.
We rate CESC a BUY with a target price of Rs880. We value CESC using SOTP-
based methodology. Our post demerger value, considers the discom and
generation businesses at US$1.1bn and US$470m. We assign a PB multiple of
1.7x for the regulated business, due to its superior (18-20% RoE), and PB
multiples of 0.9x and 1.8x for the Chandrapur and Haldia projects. Losses at its
recently acquired franchise and coal linkage for the 600MW Chandrapur plant are
the key risks.
Regulated IPPs are attractive, vs other annuity-driven businesses

Gail (BUY; TP Rs420)
Considering EPS Cagr and Gail stock trades at 13x FY20CL PE, for a 12% EPS Cagr over FY19-21CL, vs NTPC
PE comparison, NTPC is at 10x, for a 13% EPS Cagr. Its dividend yield for FY20CL stands at 2.5% below
trading relatively cheap vs NTPC’s 4.2%. Our BUY rating is largely predicated on our bullish crude price thesis,
Gail which assumes a c.40% rally in crude prices in 2019. Every US$10/bbl would
impact our fair value by Rs25, or c.7%, of the current stock price.
Gail’s transmission business’ tariff is determined by a formula allowing 12% post-

tax project IRR. However, this assumes full-capacity utilisation. In reality, Gail’s
capacity utilisation is sub-40%, which limits ROE to a much lower level. The
transmission business comprised c.42% of Gail’s core Ebitda in FY18.
Gail trades well below its average PE and pending tariff hikes for key pipelines,
which may be announced within three months, could be a catalyst for the stock.
Gas being brought under GST and the government’s push for cleaner fuels are
other positives for the stock.
Figure 117
Gail trades well below its GAIL: One-yr forward PE

average PE (x)
28
26
24
22
20 +1sd 19.79x
18
16 avg 15.75x
14
12 -1sd 11.72x
10
8
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: CLSA

Petronet LNG (SELL; TP Rs225)

Petronet LNG’s offers Petronet LNG stock trades at FY20CL PE of 12.5x for EPS Cagr of 11.5% over
dividend yield of 2.3% for FY19-21CL vs NTPC at 10x for EPS Cagr of 13%. Its dividend yield is below
FY20CL vs NTPC at 4.2% NTPC at 2.3% for FY20CL.
The start of the Mundra and Jaigarh terminals in early 2019 will add over 35% to
India’s regas capacity, when total LNG demand in India may hardly see an
increase as Reliance’s petcoke gasifier starts.
Our 20mtpa FY23 volume for Petronet implies c.10% utilisation for the rest of
the industry and could put pressure on its regas tariffs. Take-or-pay contracts are
c.50% of its regas volumes.
We also see limited chance of any volume-led earnings surprises driving a further
rerating, as we model near full utilisation of the Dahej terminals.
Petronet should see a 13% earnings Cagr over FY18-21CL and is trading above
historical long term average valuations: SELL.
Figure 118
Petronet LNG is trading Petronet LNG: One-year forward PE

near its long-term PE (x)
19
multiple
17
15 +1sd 14.73x
13
avg 12.25x
11
-1sd 9.77x
9
5
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: CLSA
Bharti Infratel (O-PF; TP Rs315)

Despite lower EPS growth, Bharti Infratel’s annuity-driven telecom-tower business trades at 26x FY20CL
Bharti trades at 26x FY20CL earnings, compared with NTPC’s 10x, despite lower EPS growth in FY18-21CL (-
earnings 6%, compared to NTPC’s 14%). Our telecom analyst Deepti Chaturvedi attributes
this to the following reasons:
The company has historically traded at an average valuation of 27x PE because of

higher earnings predictability, low incremental capex requirement and high FCF
growth and yields. The stock’s PE ratio appears high because the company is
likely to see earnings compression over FY19-20 due to tenancy declines, led by
ongoing consolidation among telecom operators.
Bharti Infratel is trading below its long-term average PE multiples. NTPC is

trading at -2sd long-term average PE. Also, Bharti trades at 3.5% yield, vs NTPC
at 4.2% (FY20CL).

Figure 119
Bharti Infratel is trading Bharti Infratel: One-year forward PE

near its long-term average (x)
40
PE of 25x
35
30 +1sd 30.45x
avg 25.67x
25
-1sd 20.88x
20
15
2013 2014 2015 2016 2017 2018
Source: CLSA
Indian regulated utilities offer unique assets vs regional comps

Key strength of Indian In relation to global peers, except Chinese IPPs, NTPC offers higher growth (EPS
regulated utilities vs Cagr of 14% over FY18-21CL) at a reasonable valuation (9.6x FY20 EPS and 1.1x
Chinese is stability and FY20 BV). A key strength of Indian regulated utilities, compared to those in
visibility due to solid China, is stability and visibility imparted by solid regulation. Chinese IPP earnings
regulation fell during CY17 (Figure 120) on a lack of full pass-through of rising coal prices -
China Power (down by 67%), CR Power (down by 40%), Huadian Power (down by
80%) and Huaneng Power (down by 80%). This kind of collapse in earnings won't
happen in India's regulatory regime as costs, including of coal, are passed through
in tariffs, versus dependence on NDRC for tariff hikes in China. With supply-side
reforms (SSR), our analyst Johnny Lau expects improved utilisation, leading to
rebound in earnings over 17-20CL, albeit on a low base. However, SSR also
means Chinese IPPs think twice before adding new coal-fired power plants and
hence, slower long-term growth, especially with uncertainty around market-
driven mechanism.
Figure 120
Decrease in profitability China IPPs: Decrease in profitability since 2H16

would reduce motivation of Roe (%)
25 CPI CRP Datang Huadian Huaneng
China’s IPPs to add new
capacity to some extent
20
Coal-fired IPPs need to
think twice before adding
new projects amid sharp
15
decrease in return
10
0
2014 2015 2016 2017 2018CL 2019CL
Source: Companies, CLSA

Figure 121
IPPs: Regional comps

Stock Stock code Rec Price Mkt 3M- EPS PE (x) EV/Ebitda (x) PB (x) ROAE (%) Div Net
cap ADTO Cagr yield gearing
(US$m) (US$m) (2017- 18CL 19CL 18CL 19CL 18CL 19CL 18CL 19CL (%) (%)
20CL) 18CL 18CL
CHINA
China Power 2380 HK U-PF 1.8 2,242 3.1 30 18.8 8.6 10.6 8.0 0.5 0.5 2.6 6.0 2.7 183
CR Power 836 HK BUY 15.5 9,522 14.2 28 12.2 9.2 6.7 6.0 1.0 0.9 8.0 10.2 5.6 135
Datang Power 991 HK O-PF 1.9 7,274 1.6 26 12.2 7.3 7.8 6.4 0.5 0.5 4.4 7.2 3.8 216
Huadian Power 1071 HK O-PF 3.5 6,197 4.4 94 18.9 8.3 7.6 5.9 0.7 0.7 3.5 8.2 2.0 173
Huaneng Power 902 HK U-PF 5.0 14,356 16.8 71 29.5 11.3 7.9 6.3 0.8 0.8 2.6 7.0 2.3 196
Average - IPPs 18.3 8.9 8.1 6.5 0.7 0.7 4.2 7.7 3.3 181
Longyuan Power 916 HK BUY 5.2 5,378 10.3 18 7.3 6.8 6.6 6.1 0.7 0.7 10.1 10.6 2.7 123
HN Renewables 958 HK BUY 2.1 2,807 10.1 11 5.5 5.1 6.5 6.0 0.7 0.6 12.9 13.3 2.7 164
Huadian Fuxin 816 HK BUY 1.7 1,858 1.1 17 6.6 4.6 8.2 7.2 0.5 0.5 8.1 11.3 3.8 247
Average - wind 6.5 5.5 7.1 6.5 0.6 0.6 10.4 11.7 3.1 178
Average - China 13.9 7.6 7.7 6.5 0.7 0.6 6.5 9.2 3.2 180
HONG KONG
CLP 2 HK SELL 88.9 28,668 17.2 (3) 16.6 18.0 10.8 11.5 2.0 1.9 12.3 10.8 3.3 38
HK Electric 2638 HK SELL 8.0 9,062 4.1 (7) 22.1 28.1 13.8 16.4 1.4 1.5 6.5 5.2 5.0 85
Power Assets 6 HK O-PF 54.9 14,950 18.6 (3) 16.2 16.1 26.9 27.7 1.4 1.4 8.1 8.6 5.3 (4)
Cheung Kong Infra 1038 HK BUY 60.0 20,294 13.9 7 13.7 12.5 16.5 13.7 1.4 1.3 10.4 10.9 4.3 40
HK & China Gas 3 HK SELL 16.4 32,186 25.7 7 29.1 28.0 21.9 21.1 3.7 3.6 13.1 13.0 2.6 33
Average - HK 19.5 20.5 18.0 18.1 2.0 1.9 10.1 9.7 4.1 39
INDIA¹
Adani Power² ADANI IB SELL 50.4 2,751 16.2 (31) na na 12.0 10.1 na na na na na na
CESC³ CESC IB BUY 653.2 1,233 8.5 7 6.0 5.5 4.4 3.9 0.6 0.5 8.7 10.7 1.8 40
JSW Energy JSW IB SELL 70.0 1,640 0.9 20 11.6 10.7 5.0 5.5 1.0 1.0 8.9 9.2 4.3 106
Tata Power TPWR IB BUY 74.7 2,875 8.4 14 12.2 10.7 5.7 5.0 1.3 1.2 11.7 11.8 1.8 184
Average - private 9.9 9.0 5.0 4.8 1.0 0.9 9.8 10.6 2.6
NTPC NTPC IS BUY 148.6 17,373 19.6 14 10.6 9.6 6.4 6.0 1.1 1.1 11.0 11.5 3.3 123
Power Grid PWGR IB O-PF 198.4 14,814 12.3 10 10.9 10.7 7.0 6.8 1.7 1.6 16.6 15.2 2.8 229
Average - gov 10.7 10.1 6.7 6.4 1.4 1.3 13.8 13.3 3.0 176
Average - India 10.3 9.6 5.9 5.6 1.2 1.1 11.8 12.0 2.8 143
KOREA
Kepco Plant S&E 051600 KS O-PF 34,150 1,340 7.9 1 12.1 11.6 7.7 7.5 1.7 1.7 14.0 14.4 4.3 (12)
MALAYSIA
Tenaga TNB MK BUY 13.9 18,485 17.6 1 12.5 12.7 7.2 7.2 1.3 1.3 10.8 10.1 4.3 59
THAILAND
Egco EGCO TB BUY 247.0 4,037 5.6 2 5.5 11.1 10.5 9.8 1.2 1.2 24.6 10.7 3.8 68
Glow Energy GLOW TB O-PF 88.5 4,019 5.2 (5) 16.0 15.8 9.9 9.8 2.6 2.6 16.4 16.7 6.3 51
Ratch RATCH TB U-PF 51.8 2,330 1.8 3 11.4 11.3 8.2 8.9 1.1 1.0 9.8 9.5 4.4 16
Banpu BANPU TB BUY 16.4 2,628 15.7 (6) 11.9 13.5 7.2 7.5 1.0 0.9 8.2 7.0 4.2 88
Average - Thailand 11.2 12.9 8.9 9.0 1.5 1.4 14.8 11.0 4.7 56
¹ 18CL for India means Mar-19 (i.e. FY19). ² Adani Power -ratios taken as ‘na’ to account for negative equity in FY19/20CL.³ CESC - adjusted for subsidiary nos.
Source: CLSA
Stock overhang reduces with ETFs

Government divestment overhang reduced
With the arrival of ETFs, Government divestiture has been a constant stock overhang for PSU utilities in
gov’t divestment overhang general, and NTPC in particular, given its high ownership and fiscal pressure to
has reduced meet high divestment targets. Consequently, Delhi’s holding has reduced more in
NTPC (down 25.7%) vs PWGR (13.1%) from FY12 to December 2018. (Figure
122). However, with 780bps of headroom left and the government left with
US$1.3bn to divest before it reaches its strategic limit (51%), we think the
divestment overhang on NTPC stock has reduced.

Stock overhang reduces further with ETFs

To expand the investor base to passive domestic pension/insurance/retail base,
Delhi has preferred the ETF route to divest PSU holdings. While initial discounts
offered on ETFs do create arbitrage risk, they reduce the risk of single-stock OFS
supply and ensure a gradual release of stock in the market upon redemption.
Considering the impact of the latest ETF - FFO 3 (Rs170bn) - government
shareholding in NTPC, NLC and SJVN should come down by 2.98%, 1.14% and
1.08%, further reducing stock overhang.
Figure 122
Power companies are India utilities: Gov’t shareholding % (Sep-18)

having high gov’t ownership (%)
100
vs gas-based companies Central State Govt Indirect (Central) Indirect (State)
90
80
70
60
50
40
30
20
10
0
SJVN NLC NHPC NTPC Guj Gas PWGR GAIL PLNG IGL GSPL Maha
Gas
Source: CLSA, BSE, Company
Figure 123
Considering the impact of India utilities: Gov’t shareholding % (Dec-18)

the latest ETF - FFO 3 (%)
100
(Rs170bn), gov’t holding in Central State Govt Indirect (Central) Indirect (State)
NTPC, NLC, SJVN to drop 90
by 2.98%, 1.14%, 1.08%
80
70
60
50
40
30
20
10
0
SJVN NLC NHPC NTPC Guj Gas PWGR GAIL PLNG IGL GSPL Maha
Gas

Figure 124
Given high ownership in NTPC/PWGR: Gov’t shareholding movement

NTPC and fiscal pressure to (%)
90 NTPC Power Grid
meet high divestment
targets . . .
80
. . . gov’t holding has
reduced more in NTPC 70
(-25.7%) vs PWGR (-13.1%)
over FY12 to Dec-18
60
50
40
30
Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Dec 18
Regulated IPPs offer above average dividend yields + growth

Indian IPPs had above World over, utilities are invested in for their dividend yields. Indian IPPs (Figure
average div yield of 3.8% 125) had an above average dividend yield of 3.8% (FY18), vs 1.4% for our India
(FY18) vs 1.4% for our India
coverage. Further, large regulated government IPPs, such as NHPC, SJVN, NLC,
coverage
and NTPC, offer higher dividend yields (3-8%) vs smaller private IPPs, such as
CESC, TPWR and Torrent (1-2%), due to Government diktat on payout ratios.
BUY NTPC - A growth utility with 5% yield by FY21

With its resolute focus on capitalisation vs capex, we see NTPC stock emerging as
a key yield play. Though late, many projects of NTPC (US$7.3bn) are reaching the
finishing line by FY20, from where it starts to earn ROE and boost FCF. We
expect NTPC dividends to grow by 45% by FY21, making it a 5% dividend yield
play at a 40% payout. While, NHPC’s/NLC’s investment is stuck in capital work in
progress (CWIP), this makes NTPC the ideal contender to be a play on dividend
yields, along with earnings growth (Figure 125).
Figure 125
NHPC’s/NLC’s investment India IPPs: Dividend & buyback yields

is stuck in CWIP, making (%)
18 Dividend yield Buyback yield
NTPC the ideal contender
to be a play on dividend 16
yields along with earnings
14
growth
12
10
0
SJVN NHPC NLC JSW NTPC PWGR CLSA CESC TPWR TPW Adani
Universe
CLSA Universe - refers to India coverage only. Source: CLSA, BSE, Bloomberg, Company

Notes

Company profiles
Adani Power .................................................................................................................. 73
CESC ............................................................................................................................... 85
JSW Energy .................................................................................................................... 97
NHPC ............................................................................................................................ 111
NLC India ..................................................................................................................... 119
NTPC ............................................................................................................................ 125
SJVN ............................................................................................................................. 149
Tata Power................................................................................................................... 155
Torrent Power ............................................................................................................. 169
All prices quoted herein are as at close of business on 7 January 2019, unless otherwise stated

Notes

Adani Power
Rs50.35 - SELL
Bharat Parekh Balance-sheet challenge remains

bharat.parekh@clsa.com PPP renegotiation key to survival; needs to end M&A strategy
+91 22 6650 5020
Adani Power is India’s largest private independent power producer, but
aggressive M&A bids, FX losses and coal prices have led to expanding losses, and
gearing has risen. Hope comes in the form of recent tariff-order wins and the
Supreme Court’s verdict on referring tariff-hikes back to CERC. The firm’s
balance sheet remains a risk from plans to complete an expensive, lossmaking
acquisition of Avantha’s Korba West plant. We maintain our SELL rating on high
debt levels and aggressive power-purchase agreements.
9 January 2019 India’s largest IPP; pioneer in super-critical tech

With an operational portfolio of 10.6GW of thermal capacity, Adani Power (APL)
India is India’s largest private independent power producer (IPP). It pioneered the use
Power of super-critical technology in India at its Mundra plan, and has capacity in the
states of Rajasthan, Maharashtra and Karnataka. The company’s Udupi power
Reuters ADAN.BO station sells 90% of its generated power to the Karnataka government, making it
Bloomberg ADANI IB
a regulated plant; APL’s unregulated/regulated capacity stands at 88%/12%.
Priced on 7 January 2019
CNX Nifty @ 10,771.8 1HFY19: Losses continue to expand; PPA amendment directed back to CERC
12M hi/lo Rs57.75/15.45 APL’s losses in 1H grew by 130% YoY, to Rs22.4bn. A 6% YoY rise in per-unit fuel
12M price target Rs23.00 costs was not adequately compensated by improvement in realisation (flat).
±% potential -54% Ebitda (per unit) fell by 32% YoY, to Rs0.76. Coverage ratios deteriorated, with
Shares in issue 3,333.9m 2Q net debt/Ebitda at 14x (TTM). The Supreme Court has referred the Gujarat
Free float (est.) 25.0% High Power Commission’s recommendations back to the CERC, as the HPC
Market cap US$2.75bn questions the sanctity of contracts. Thus, the legal battle on whether PPAs should
be amended, even when discoms support state-government policy, will start
3M ADV US$16.2m
again. If APL wins, it will have a net benefit of Rs8.8bn (26% of FY18 PBT).
Foreign s'holding 17.7%
Major shareholders Balance sheet challenging, leverage rises; M&A risk remains
Promoters 75.0% Looking at net debt/equity doesn't help much (at 100x in 2QFY19), as net worth
Opal Investment 5.5%
was wiped out: accumulated losses total 88% of its paid-up share capital and APL
parent Adani Group has stopped injecting equity, choosing instead to lend debt.
APL is still bidding for stressed assets (GMR, KSK), despite its precarious balance
Blended ESG Score (%)* sheet. In our view, the key to sustainability lies in it paring down unsustainable
Overall 42.8 debt, receiving change-in-law compensation, securing SHAKTI coal and ending its
Country average 63.7 M&A strategy. We value Adani Power at an EV of Rs53m/MW and take into
GEM sector average 57.8 account its debt, to arrive at a target price of Rs23.
*Click to visit company page on clsa.com for details
Stock performance (%)

1M 3M 12M
Absolute (4.0) 115.2 8.5 Financials
Relative (4.7) 106.1 6.4 Year to 31 March 17A 18A 19CL 20CL 21CL
Abs (US$) (3.0) 126.4 (1.9) Revenue (Rsm) 229,038 192,910 206,286 245,316 266,791
(Rs) Adani Power (LHS) (%)
70 140 Net profit (Rsm) (19,774) (33,902) (23,689) (14,049) (11,177)
Rel to Nifty 130
60
EPS (Rs) (5.1) (8.8) (6.1) (3.6) (2.9)
120
110 CL/consensus (5) (EPS%) - - 181 214 153
50 100 EPS growth (% YoY) - nm nm nm nm
90
40 EV/Ebitda (x) 11.7 15.2 11.8 9.9 9.3
80
70 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
30
60 FCF yield (%) 21.5 28.2 38.0 35.9 43.0
50
20 PB (x) 6.8 22.0 (20.8) (8.3) (5.6)
40
10 30 ROE (%) (37.6) (180.4) 9,438.7 85.8 38.6
Jan 17 Sep 17 May 18 Jan 19 Net debt/equity (%) 1,804.6 5,877.6 (5,358.5) (2,074.6) (1,314.5)
Source: Bloomberg Source: www.clsa.com

Adani Power - SELL India power generation
Financials at a glance
Year to 31 March 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Profit & Loss (Rsm)

Revenue 229,038 192,910 206,286 6.9 245,316 266,791
Cogs (ex-D&A) (146,236) (125,484) (134,663) (162,789) (182,336)
Gross Profit (ex-D&A) 82,802 67,427 71,623 6.2 82,527 84,455
SG&A and other expenses (21,886) (21,415) (13,662) (15,511) (16,190)
Op Ebitda 60,917 46,012 57,961 26 67,017 68,265
Depreciation/amortisation (26,724) (26,987) (27,349) (27,349) (27,349)
Op Ebit 34,193 19,025 30,612 60.9 39,668 40,915
Net interest inc/(exp) (54,828) (52,978) (54,118) (53,717) (52,093)
Other non-Op items - 0 - - -
Profit before tax (20,635) (33,953) (23,506) (14,049) (11,177)
Taxation 861 52 (183) - -
Profit after tax (19,774) (33,902) (23,689) (14,049) (11,177)
Minority interest 0 0 0 0 0
Net profit (19,774) (33,902) (23,689) (14,049) (11,177)
Adjusted profit (19,774) (33,902) (23,689) (14,049) (11,177)
Cashflow (Rsm) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Operating profit 34,193 19,025 30,612 60.9 39,668 40,915
Depreciation/amortisation 26,724 26,987 27,349 1.3 27,349 27,349
Working capital changes 35,233 (2,331) 9,855 2,124 14,733
Other items (47,733) (2,680) 5,317 - -
Net operating cashflow 48,416 41,002 73,133 78.4 69,140 82,997
Capital expenditure (6,612) 13,722 719 (94.8) 639 546
Free cashflow 41,804 54,724 73,852 35 69,779 83,544
M&A/Others 0 0 0 0 0
Net investing cashflow (6,612) 13,722 719 (94.8) 639 546
Increase in loans (61,467) (52,198) (64,837) (81,705) (74,988)
Dividends 0 0 0 0 0
Net equity raised/other 17,018 0 0 0 0
Net financing cashflow (44,449) (52,198) (64,837) (81,705) (74,988)
Incr/(decr) in net cash (2,645) 2,526 9,015 256.9 (11,926) 8,555
Exch rate movements - (1) - - -
Balance sheet (Rsm) 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Cash & equivalents 6,042 8,566 17,581 105.2 5,656 14,211
Accounts receivable 99,727 60,698 80,593 32.8 67,268 78,919
Other current assets 29,521 70,117 42,917 (38.8) 91,503 54,684
Fixed assets 542,003 534,563 507,214 (5.1) 479,865 452,516
Investments - - - - -
Intangible assets 1,906 1,906 1,906 0 1,906 1,906
Other non-current assets 34,666 19,282 20,745 7.6 19,283 19,283
Total assets 713,864 695,133 670,957 (3.5) 665,481 621,517
Short-term debt 158,338 182,750 179,291 (1.9) 169,831 162,101
Accounts payable 72,542 76,264 73,987 (3) 106,628 94,477
Other current liabs 25,735 21,267 26,093 22.7 30,838 32,552
Long-term debt/CBs 366,506 345,599 339,057 (1.9) 321,168 306,549
Provisions/other LT liabs 61,994 60,411 61,874 2.4 60,411 60,411
Shareholder funds 28,750 8,843 (9,345) (23,394) (34,572)
Minorities/other equity 0 0 0 0 0
Total liabs & equity 713,864 695,133 670,957 (3.5) 665,481 621,517
Ratio analysis 2017A 2018A 2019CL (% YoY) 2020CL 2021CL
Revenue growth (% YoY) - (15.8) 6.9 18.9 8.8
Ebitda margin (%) 26.6 23.9 28.1 27.3 25.6
Ebit margin (%) 14.9 9.9 14.8 16.2 15.3
Net profit growth (%) - nm nm nm nm
Op cashflow growth (% YoY) - (15.3) 78.4 (5.5) 20.0
Capex/sales (%) 2.9 7.1 0.3 0.3 0.2
Net debt/equity (%) 1,804.6 5,877.6 (5,358.5) (2,074.6) (1,314.5)
Net debt/Ebitda (x) 8.5 11.3 8.6 7.2 6.7
ROE (%) (37.6) (180.4) 9,438.7 85.8 38.6
ROIC (%) 6.0 3.2 5.4 7.4 8.2
Source: www.clsa.com

APL is India’s largest private Adani Power: Organisational structure

IPP, with an operational
portfolio of 10.6GW Adani Power
It was a pioneer in the use

of super-critical technology
in India at its Mundra plant Other
Thermal Solar
investments
It has capacity in the states
of Rajasthan, Maharashtra
and Karnataka
Mundra Tiroda Kawai Udupi Bitta Korba West
(4.62GW) (3.3GW) (1.32GW) (1.32GW) (40MW) Advance towards
acquisition - Rs5bn
(4.3% of net assets)
Supreme Court referred HPC recommendations: Compensation to producers

Gujarat HPC Company PPA Gen Net compensation PBT % of
recommendations to CERC (MW) (MU) (Rsm) (FY18) PBT
Adani Power 3,424 23,995 8,855 (33,953) 26
If APL wins PPA Gujarat - PPA 1 1,000 7,008 2,102
renegotiation, it will have a Gujarat - PPA 2 1,000 7,008 5,256
net benefit of Rs8.8bn Haryana 1,424 9,979 1,497
Source: CLSA, CEA, Ministry of Power, POSOCO
Mundra was completely Adani Power: 2QFY19 results review

shut down but resumed full FY ends on 31 Mar (Rsm) 2QFY18 2QFY19 % YoY
operations from August Total generation 14,570 15,212 4.4
2018 . . . Mundra 7,053 7,352 4.2
Tiroda 4,603 5,221 13.4
Kawai 1,695 1,964 15.9
. . . which resulted in
generation up by 4% YoY vs Udupi 1,219 675 (44.6)
being down 74% in 1QFY19 Units sold (m units) 13,750 14,600 6.2
Sales 56,069 59,261 5.7
Rs/kWh 4.08 4.06 (0.5)
Material cost 35,330 39,874 12.9
- Rs/kWh 2.57 2.73 6.3
Purchase of stock in trade 719 2368 229.3
Employee cost 966 895 (7.4)
Other expenditure 4,046 5,374 32.8
Expenses (41,062) (48,512) (18.1)
Ebitda 15,007 10,749 (28.4)
Ebitda (%) 27% 18% (32.2)
Rs/kWh 1.14 0.90 (21.4)
Depreciation (6,782) (6,975) (2.8)
Ebit 8,225 3,775 (54.1)
Ebit (%) 15% 6% (56.6)
Losses expanded, led by Other income 456 4,757 943.2
rising fuel costs and bad Interest (13,888) (14,067) (1.3)
bids
PBT (5,208) (5,536) (6.3)
Taxes 35 (3,150) (9099.7)
PAT before exceptional items (5,173) (8,685) (67.9)
Rs/kWh (0.38) (0.59) (58.1)
Extraordinary income 8,100 12,554 55.0
Reported PAT 2,927 3,869 32.2

Following regulatory orders, Adani Power: Compensatory tariffs (unrecovered)

APL booked past claims as 16,000 (Rsm) (%) 22
compensatory tariffs in GUVNL and Harayana Discom
20
2QFY19 14,000 MSEDCL (Tiroda I and II)
MSEDCL 18
12,000 Rajasthan discom 16
% of total revenue (RHS)
10,000 14
12
8,000
10
6,000
8
4,000 6
4
2,000
2
0
0
(2,000) (2)
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
APL generated meaningful Adani Power: Cashflow, not accounting for unpaid compensatory tariffs
positive cashflow in 6,000 (Rsm) 16,440
2QFY19
5,000
4,000
3,000
2,000
1,000
0
(1,000)
(2,000)
(3,000)
(4,000)
(5,000)
(6,000)
(7,000)
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
Unsustainably high debt, Adani Power: Gross debt split across plants
due to accumulated losses
on bad bids, loss on fuel and Consol
risky FX debt Rs538bn
Holdco
Rs14bn
Mundra Tiroda Kawai Udupi

Rs215bn Rs172bn Rs90bn Rs46bn

If resolution is not found for Adani Power: Gross debt split across sources
Mundra asset, haircuts can’t
be ruled out Consol
Rs538bn
Adani Group has already
invested Rs122bn in
keeping entity afloat
NCD ECB Term loan WC ICD
Rs39bn Rs63bn Rs266bn Rs49bn Rs122bn
Aggressively bid PPAs and Adani Power: Mundra plant generation

rising sea-borne coal prices 3,500 (GWH) (%) 150
forced Mundra shut-down Mundra generation YoY growth (RHS)
Around 70% of capacity 3,000

100
became operational in June
2018
2,500
50
All nine units restored
operations in August 2018 2,000
0
1,500
(50)
1,000
(100)
500
0 (150)
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Generation at Tiroda has Adani Power: Tiroda plant generation

picked up by 12% FY19YTD 2,500 (GWH) (%) 150
vs 8% in FY18YTD Tiroda generation YoY growth (RHS)
304
2,000 100
1,500 50
1,000 0
500 (50)
0 (100)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA

Kawai’s coal shortages and Adani Power: Kawai plant generation

coal linkage problems 1,000 (GWH) (%) 200
Kawai generation YoY growth (RHS)
resolved . . .
900
150
. . . resulting in generation 800
up by 50% post 1QFY19, vs 700 100
down by 37% in 1QFY19 600 50
500
400 0
300 (50)
200
(100)
100
0 (150)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Generation at Udupi was Adani Power: Udupi plant generation

down 9% for FY19YTD vs 1,000 (GWH) (%) 150
Udupi generation YoY growth (RHS)
down 20% for FY18YTD
900
800 100
700
600 50
500
400 0
300
200 (50)
100
0 (100)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Adani Power: Profit and loss

Profit and loss (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Sales 229,038 192,910 206,286 245,316 266,791
We expect revenue to see % YoY (10) (16) 7 19 9
Expenditure (168,122) (146,898) (148,325) (178,299) (198,527)
an 11% Cagr over FY18-21
Fuel costs (146,236) (125,484) (134,663) (162,789) (182,336)
% YoY (2) (14) 7 21 12
O&M cost (21,886) (21,415) (13,662) (15,511) (16,190)
Ebidta 60,917 46,012 57,961 67,017 68,265
% YoY (31) (24) 26 16 2
Ebidta margin (%) 26.6 23.9 28.1 27.3 25.6
Other income 4,190 2,724 719 639 546
Depreciation (26,724) (26,987) (27,349) (27,349) (27,349)
Interest (59,017) (55,702) (54,837) (54,356) (52,639)
- as % of debt 11 11 10 11 11
PBT (20,635) (33,953) (23,506) (14,049) (11,177)
Tax 861 52 (183) 0 0
We hike our FY19-21 loss Eff tax rate (%) 4.2 0.2 (0.8) 0.0 0.0
Rec PAT (19,774) (33,902) (23,689) (14,049) (11,177)
estimates by 20%-50%
% YoY (459) 71 (30) (41) (20)
given Mundra’s unviability Minority interest 0 0 0 0 0
Share from associates 0 (292) 0 0 0
Exceptional Income (41,967) 13,000 5,500 0 0
Reported PAT (61,741) (21,194) (18,189) (14,049) (11,177)

Adani Power: Balance sheet

Balance sheet FY17 FY18 FY19CL FY20CL FY21CL
Equity shares 38,569 38,569 38,569 38,569 38,569
Share premium 74,098 74,098 74,098 74,098 74,098
Reserves & surplus (82,672) (103,822) (122,011) (136,060) (147,237)
APL’s net debt to equity in Net worth 29,996 8,845 (9,343) (23,392) (34,570)
FY18 stood at 60x Total long-term borrowings 366,506 345,599 339,057 321,168 306,549
Other long-term liabilities 59,422 57,822 57,822 57,822 57,822
We expect APL’s net worth Long-term provisions 324 461 461 461 461
to erode in FY19 Minority interest 0 0 0 0 0
Deferred tax liability 2,249 2,128 2,128 2,128 2,128
Total liabilities 458,496 414,855 390,125 358,186 332,390
Gross fixed assets 602,114 607,762 607,762 607,762 607,762
Accumulated depreciation 60,111 87,098 114,447 141,797 169,146
Net fixed assets 542,003 520,664 493,315 465,965 438,616
Other non-current assets 34,646 19,246 19,246 19,246 19,246
Goodwill 1,906 1,906 1,906 1,906 1,906
Long-term loans and advances 0 13,900 13,900 13,900 13,900
Total non-current assets 579,801 555,715 528,366 501,017 473,668
Current assets 129,268 130,851 123,547 158,808 133,639
We expect a moderate Current investments 1,643 0 0 0 0
improvement in APL’s Inventories 17,604 8,592 30,970 16,077 35,088
debtor days Trade receivables 99,727 60,698 80,593 67,268 78,919
Short-term loans and advances 20 37 37 37 37
Other current assets 10,273 61,525 11,947 75,426 19,596
Cash 6,042 8,566 17,581 5,656 14,211
Current liabilities 256,615 280,280 279,371 307,296 289,129
Total short-term borrowings 125,800 145,603 142,848 135,311 129,152
Current maturities of LT debt 32,538 37,146 36,443 34,520 32,949
Trade payables 72,542 76,264 73,987 106,628 94,477
Other current liabilities 25,638 21,267 26,093 30,838 32,552
Short-term provisions 97 0 0 0 0
Net current assets (127,347) (149,429) (155,824) (148,488) (155,490)
Total assets 458,496 414,855 390,125 358,186 332,390
Adani Power: Cashflow statement

Cashflow statement FY17 FY18 FY19CL FY20CL FY21CL
PAT (61,741) (21,194) (18,189) (14,049) (11,177)
Deferred tax - - - - -
Depreciation 26,724 26,987 27,349 27,349 27,349
Interest 59,017 55,702 54,837 54,356 52,639
Other income (4,190) (2,724) (719) (639) (546)
Working capital at APL to Working capital 35,233 (2,331) 9,855 2,124 14,733
improve Others (11,208) (6,163) - - -
Operating cashflow 43,835 50,279 73,133 69,140 82,997
Capex (1,555) (4,402) - - -
Other non-current assets (9,247) 15,400 - - -
Other income 4,190 2,724 719 639 546
Investing cashflow (6,612) 13,722 719 639 546
Despite losses, we expect Equity infusion 17,018 - - - -
APL’s debt repayment to Debt raising/(repayment) (2,450) 3,504 (10,000) (27,349) (22,349)
happen Interest repayment (59,017) (55,702) (54,837) (54,356) (52,639)
Financing cashflow (44,449) (52,198) (64,837) (81,705) (74,988)
Cash at start 8,687 6,042 8,566 17,581 5,656
Changes in cash (7,226) 11,803 9,015 (11,926) 8,555
Cash at end 6,042 8,566 17,581 5,656 14,211

Adani Power: Key ratios & valuation matrix

Key ratios & valuation matrix FY17 FY18 FY19CL FY20CL FY21CL
APL will continue to have CMP 50 50 50 50 50
worse ratios until FY21 Number of shares (m) 3,857 3,857 3,857 3,857 3,857
Market capitalisation (Rsm) 192,847 192,847 192,847 192,847 192,847
Enterprise value (Rsm) 711,649 712,629 693,614 678,190 647,286
Rec EPS (Rs) (5.1) (8.8) (6.1) (3.6) (2.9)
EPS growth (%) (410.49) (71.45) 30.13 40.69 20.44
CEPS (Rs) 1.80 (1.79) 0.95 3.45 4.19
BVPS (Rs) 7.8 2.3 (2.4) (6.1) (9.0)
PE (x) na na na na na
PB (x) 6.4 21.8 na na na
EV/Ebidta (x) 11.7 15.5 12.0 10.1 9.5
EV/MW (x) 67.1 67.2 65.4 64.0 61.1
ROE (%) (66) (175) na na na
ROAE (%) 7 4 6 8 9
Net debt/equity (x) 17.5 59.7 na na na
Valuation details
We value Adani Power at an EV of Rs53m/MW and take into account its debt, to
arrive at a target price of Rs23.
Investment risks
Potential acceptance of compensatory tariffs by state discoms, continued fall in
coal prices, rupee appreciation and a run-up in merchant power prices are key
investment risks to our call. The balance sheet is highly leveraged, which could
worsen, due to additional debt taken for M&A.
Recommendation history of Adani Power Ltd (ADANI IB)

Bharat Parekh BUY O-PF
Other analysts U-PF SELL
Stock price (Rs)
60 No coverage N-R
50
40
30
20
May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18 May 18 Sep 18 Jan 19
Date Rec Target Date Rec Target

07 May 2018 SELL 23.00 10 Aug 2016 SELL 26.00
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Year to 31 March 2017A 2018A 2019CL 2020CL 2021CL
Revenue 229,038 192,910 206,286 245,316 266,791
Cogs (ex-D&A) (146,236) (125,484) (134,663) (162,789) (182,336)
Gross Profit (ex-D&A) 82,802 67,427 71,623 82,527 84,455
Research & development costs - - - - -
Selling & marketing expenses - - - - -
Other SG&A - - - - -
Other Op Expenses ex-D&A (21,886) (21,415) (13,662) (15,511) (16,190)
Op Ebitda 60,917 46,012 57,961 67,017 68,265
Op Ebit 34,193 19,025 30,612 39,668 40,915
Interest income 4,190 2,724 719 639 546
Interest expense (59,017) (55,702) (54,837) (54,356) (52,639)
Associates/investments - - - - -
Forex/other income - - - - -
Asset sales/other cash items - - - - -
Provisions/other non-cash items - - - - -
Asset revaluation/Exceptional items - - - - -
Profit before tax (20,635) (33,953) (23,506) (14,049) (11,177)
Taxation 861 52 (183) - -
Profit after tax (19,774) (33,902) (23,689) (14,049) (11,177)
Preference dividends - - - - -
Profit for period (19,774) (33,902) (23,689) (14,049) (11,177)
Net profit (19,774) (33,902) (23,689) (14,049) (11,177)
Extraordinaries/others 0 0 0 0 0
Profit avail to ordinary shares (19,774) (33,902) (23,689) (14,049) (11,177)
Dividends 0 0 0 0 0
Retained profit (19,774) (33,902) (23,689) (14,049) (11,177)
Adjusted profit (19,774) (33,902) (23,689) (14,049) (11,177)
EPS (Rs) (5.1) (8.8) (6.1) (3.6) (2.9)
Adj EPS [pre excep] (Rs) (5.1) (8.8) (6.1) (3.6) (2.9)
Core EPS (Rs) (5.1) (8.8) (6.1) (3.6) (2.9)
DPS (Rs) 0.0 0.0 0.0 0.0 0.0
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) - (15.8) 6.9 18.9 8.8
Ebitda growth (% YoY) - (24.5) 26.0 15.6 1.9
Ebit growth (% YoY) - (44.4) 60.9 29.6 3.1
Net profit growth (%) - nm nm nm nm
EPS growth (% YoY) nm nm nm nm nm
Adj EPS growth (% YoY) nm nm nm nm nm
DPS growth (% YoY) - - - - -
Core EPS growth (% YoY) nm nm nm nm nm
Margins (%)
Ebitda margin (%) 26.6 23.9 28.1 27.3 25.6
Ebit margin (%) 14.9 9.9 14.8 16.2 15.3
Net profit margin (%) (8.6) (17.6) (11.5) (5.7) (4.2)
Core profit margin (8.6) (17.6) (11.5) (5.7) (4.2)
Op cashflow margin 21.1 21.3 35.5 28.2 31.1
Returns (%)
ROE (%) (37.6) (180.4) 9,438.7 85.8 38.6
ROA (%) 4.6 2.7 4.5 5.9 6.4
ROIC (%) 6.0 3.2 5.4 7.4 8.2
ROCE (%) 6.2 3.5 6.0 8.3 9.3
Other key ratios (%)
Effective tax rate (%) 4.2 0.2 (0.8) 0.0 0.0
Ebitda/net int exp (x) 1.1 0.9 1.1 1.2 1.3
Exceptional or extraord. inc/PBT (%) - - - - -
Dividend payout (%) - - - - -

Balance sheet (Rsm)

Cash & equivalents 6,042 8,566 17,581 5,656 14,211
Accounts receivable 99,727 60,698 80,593 67,268 78,919
Inventories 17,604 8,592 30,970 16,077 35,088
Current assets 135,289 139,381 141,091 164,427 147,813
Fixed assets 542,003 534,563 507,214 479,865 452,516
Investments - - - - -
Goodwill 1,906 1,906 1,906 1,906 1,906
Other intangible assets 0 0 0 0 0
Total assets 713,864 695,133 670,957 665,481 621,517
Short term loans/OD 125,800 145,603 142,848 135,311 129,152
Accounts payable 72,542 76,264 73,987 106,628 94,477
Accrued expenses - - - - -
Taxes payable 0 0 0 0 0
Other current liabs 58,273 58,413 62,536 65,358 65,501
Current liabilities 256,615 280,280 279,371 307,296 289,129
Long-term debt/leases/other 366,506 345,599 339,057 321,168 306,549
Convertible bonds - - - - -
Provisions/other LT liabs 61,994 60,411 61,874 60,411 60,411
Share capital 38,569 38,569 38,569 38,569 38,569
Retained earnings (83,918) (103,824) (122,013) (136,062) (147,239)
Reserves/others 74,098 74,098 74,098 74,098 74,098
Shareholder funds 28,750 8,843 (9,345) (23,394) (34,572)
Total equity 28,750 8,843 (9,345) (23,394) (34,572)
Total liabs & equity 713,864 695,133 670,957 665,481 621,517
Total debt 524,844 528,348 518,348 490,999 468,650
Net debt 518,802 519,782 500,767 485,343 454,439
Adjusted EV 712,999 700,079 681,064 665,641 634,736
BVPS (Rs) 7.5 2.3 (2.4) (6.1) (9.0)
Balance sheet ratios

Key ratios
Current ratio (x) 0.5 0.5 0.5 0.5 0.5
Growth in total assets (% YoY) - (2.6) (3.5) (0.8) (6.6)
Growth in capital employed (% YoY) - (3.5) (7.0) (6.0) (9.1)
Net debt to operating cashflow (x) 10.7 12.7 6.8 7.0 5.5
Gross debt to operating cashflow (x) 10.8 12.9 7.1 7.1 5.6
Gross debt to Ebitda (x) 8.6 11.5 8.9 7.3 6.9
Net debt/Ebitda (x) 8.5 11.3 8.6 7.2 6.7
Gearing
Net debt/equity (%) 1,804.6 5,877.6 (5,358.5) (2,074.6) (1,314.5)
Gross debt/equity (%) 1,825.6 5,974.5 (5,546.6) (2,098.8) (1,355.6)
Interest cover (x) 0.7 0.4 0.6 0.7 0.8
Debt Cover (x) 0.1 0.1 0.1 0.1 0.2
Working capital analysis
Inventory days 43.9 38.1 53.6 52.7 51.2
Debtor days 158.9 151.8 125.0 110.0 100.0
Creditor days 181.1 216.4 203.6 202.5 201.3
Working capital/Sales (%) 13.5 17.3 11.4 8.7 2.5
Capital employed analysis
Sales/Capital employed (%) 41.8 36.5 42.0 53.1 63.5
EV/Capital employed (%) 130.2 132.4 138.6 144.1 151.2
Working capital/Capital employed (%) 5.7 6.3 4.8 4.6 1.6
Fixed capital/Capital employed (%) 99.0 101.1 103.2 103.9 107.8
Other ratios (%)
EV/OCF (x) 14.7 17.1 9.3 9.6 7.6
EV/FCF (x) 17.1 12.8 9.2 9.5 7.6
EV/Sales (x) 3.1 3.6 3.3 2.7 2.4
Capex/depreciation (%) 24.7 50.8 2.6 2.3 2.0

Cashflow (Rsm)
Operating profit 34,193 19,025 30,612 39,668 40,915
Operating adjustments - - - - -
Depreciation/amortisation 26,724 26,987 27,349 27,349 27,349
Working capital changes 35,233 (2,331) 9,855 2,124 14,733
Interest paid / other financial expenses 59,017 55,702 54,837 54,356 52,639
Tax paid - - - - -
Other non-cash operating items (106,750) (58,382) (49,520) (54,356) (52,639)
Net operating cashflow 48,416 41,002 73,133 69,140 82,997
Capital expenditure (6,612) 13,722 719 639 546
Free cashflow 41,804 54,724 73,852 69,779 83,544
Acq/inv/disposals - - - - -
Int, invt & associate div - - - - -
Net investing cashflow (6,612) 13,722 719 639 546
Increase in loans (61,467) (52,198) (64,837) (81,705) (74,988)
Dividends 0 0 0 0 0
Net equity raised/(buybacks) 17,018 - - - -
Net financing cashflow (44,449) (52,198) (64,837) (81,705) (74,988)
Incr/(decr) in net cash (2,645) 2,526 9,015 (11,926) 8,555
Exch rate movements - (1) - - -
Opening cash 8,687 6,042 8,566 17,581 5,656
Closing cash 6,042 8,566 17,581 5,656 14,211
OCF PS (Rs) 12.6 10.6 19.0 17.9 21.5
FCF PS (Rs) 10.8 14.2 19.1 18.1 21.7
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) - (15.3) 78.4 (5.5) 20.0
FCF growth (% YoY) - 30.9 35.0 (5.5) 19.7
Capex growth (%) - (307.5) - - -
Capex/sales (%) 2.9 7.1 0.3 0.3 0.2
Capex/op cashflow (%) 13.7 33.5 1.0 0.9 0.7
Operating cashflow payout ratio (%) 0.0 0.0 0.0 0.0 0.0
Cashflow payout ratio (%) 0.0 0.0 0.0 0.0 0.0
Free cashflow payout ratio (%) 0.0 0.0 0.0 0.0 0.0
DuPont analysis
Ebit margin (%) 14.9 9.9 14.8 16.2 15.3
Asset turnover (x) 0.3 0.3 0.3 0.4 0.4
Interest burden (x) (0.6) (1.8) (0.8) (0.4) (0.3)
Tax burden (x) 1.0 1.0 1.0 1.0 1.0
Return on assets (%) 4.6 2.7 4.5 5.9 6.4
Leverage (x) 24.8 37.5 (2,721.6) (40.8) (22.2)
ROE (%) (68.8) (180.4) 9,438.7 85.8 38.6
EVA® analysis
Ebit adj for tax 32,767 18,996 30,850 39,668 40,915
Average invested capital 609,545 599,291 571,166 537,828 501,319
ROIC (%) 6.0 3.2 5.4 7.4 8.2
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 10.5 11.0 11.1 11.0 11.0
Weighted average cost of capital (%) 12.1 12.4 12.5 12.4 12.4
EVA/IC (%) (6.2) (9.2) (7.1) (5.0) (4.2)
EVA (Rsm) (33,765) (55,256) (40,268) (27,023) (21,248)

Notes

CESC
Rs653.20 - BUY
Bharat Parekh Best of both worlds

bharat.parekh@clsa.com Play on power reforms
+91 22 6650 5020
As India’s No.3 discom, CESC is a power generation and distribution company
that boasts the right blend of regulated and non-regulated businesses. Loss
reductions at its Chandrapur IPP and improved momentum for PPA signups and
Rajasthan discoms are near-term earnings drivers. Longer-term stock catalysts
include scaled-up distribution and improved plant load factor. After a recent
demerger completes, CESC will be a pure play on India’s power reforms. The
stock is value trading at below book (0.6x) on FY19CL and 6.2x PE with visible catalysts.
9 January 2019 Integrated play with optionality, T&D losses remain best in business
With 2.5GW of generation capacity and 13BUs of distributed power, India’s No.3
India discom offers investors a play on electricity generation and distribution, boasting
Power the right blend of regulated (Kolkata genco, Haldia IPP, and Kolkata and Noida
discoms) and unregulated (Chandrapur IPP and Rajasthan discoms) units. A key
Reuters CESC.BO driver would be to reinvest cashflow from regulated businesses into unregulated
Bloomberg CESC IB
ones, to improve long-term ROE. Transmission and distribution losses remain
Priced on 7 January 2019 below 10%, making it one of the most profitable regulated discoms.
CNX Nifty @ 10,771.8
12M hi/lo Rs919.89/636.12 IPP subsidiaries add 22% to parent earnings
12M price target Rs880.00 India’s power reforms are helping unclog depressed power demand, which has
±% potential +35% led to more short-term PPAs. On the back of improving agreement utilisation
Shares in issue 132.6m and visibility, we expect losses at CESC’s Chandrapur IPP (9% of our SOTP) to
Free float (est.) 50.1% halve in FY19, from Rs2bn in FY18 - while it operated at a plant load factor
Market cap US$1.23bn (PLF) of 65% in 1H19, compared to 49% in 1H18. Haldia reported a profit of
Rs1.5bn in 1H19, operating at a PLF of 94% in 1H19, versus 87% in 1H18. On a
3M ADV US$8.5m
net basis, subsidiaries’ generation businesses contributed Rs1bn (22% to
parent earnings in 1H19).
Major shareholders
Promoters 49.9% Emerging pure-play on power reform after start-up losses; BUY
HDFC Trustee Company 9.0%
We see CESC as a key power-reform play as India opens up its distribution sector.
It had start-up losses of Rs1.2bn in FY18 at three Rajasthan discom circles it won
as part of the state’s power reforms. It plans to turn these around, cutting
Blended ESG Score (%)* aggregate technical and commercial losses by transposing its best practices from
Overall 62.5 the Kolkata license area. Even the losses at Chandrapur have halved YoY in 1H19,
Country average 63.7 to Rs500m. We maintain our BUY recommendation using a SOTP-based valuation
GEM sector average 57.8 to derive our target price of Rs880. We assign a PB multiple of 1.7x for the
regulated business, which contributes a value of Rs558/share.
1M 3M 12M
Absolute (6.5) 1.9 (22.5) Financials
Relative (7.2) (2.4) (24.1) Year to 31 March 17A 18A 19CL 20CL 21CL
(Rs) (%)
950 150 Net profit (Rsm) 8,629 8,710 8,938 9,757 10,572
900 EPS (Rs) 64.8 65.4 67.1 73.2 79.4
140
850
CL/consensus (10) (EPS%) - - 92 89 72
800 130
EPS growth (% YoY) 2.1 1.0 2.6 9.2 8.4
750
120 PE (x) 10.1 10.0 9.7 8.9 8.2
700
Dividend yield (%) 1.5 1.8 1.8 2.0 2.1
650 110
600
FCF yield (%) 2.1 6.4 6.2 6.3 6.8
CESC (LHS) 100
550 Rel to Nifty
PB (x) 0.8 0.7 1.0 0.9 0.8
500 90 ROE (%) 7.6 7.4 8.7 10.7 10.7
Jan 17 Sep 17 May 18 Jan 19 Net debt/equity (%) 32.7 35.7 40.1 29.8 20.5

CESC - BUY India power generation
Profit & Loss (Rsm)

Revenue 74,102 79,820 87,682 9.9 94,403 101,442
Cogs (ex-D&A) (55,994) (61,200) (67,575) (73,375) (79,533)
Gross Profit (ex-D&A) 18,109 18,620 20,107 8 21,029 21,909
SG&A and other expenses - 0 - - -
Op Ebitda 18,109 18,620 20,107 8 21,029 21,909
Op Ebit 14,019 14,290 14,864 4 15,612 16,320
Other non-Op items 388 578 578 0 577 578
Profit before tax 11,009 11,110 11,172 0.6 12,196 13,214
Taxation (2,380) (2,400) (2,234) (2,439) (2,643)
Profit after tax 8,629 8,710 8,938 2.6 9,757 10,572
Net profit 8,629 8,710 8,938 2.6 9,757 10,572
Adjusted profit 8,629 8,710 8,938 2.6 9,757 10,572
Operating profit 14,019 14,290 14,864 4 15,612 16,320
Working capital changes (957) 1,501 (102) (629) (787)
Other items (6,660) (7,040) (7,080) (7,391) (7,685)
Net operating cashflow 10,492 13,081 12,925 (1.2) 13,009 13,437
Capital expenditure (8,700) (7,516) (7,516) (7,516) (7,516)
Free cashflow 1,792 5,565 5,409 (2.8) 5,493 5,921
M&A/Others 2,996 (100) 4,214 3,304 3,449
Net investing cashflow (5,704) (7,616) (3,302) (4,212) (4,067)
Increase in loans 6,562 (2,354) 900 900 900
Dividends (1,599) (1,918) (1,918) (2,078) (2,238)
Net equity raised/other (284) (3,352) (160) 0 -
Net financing cashflow 4,679 (7,624) (1,178) (1,178) (1,338)
Incr/(decr) in net cash 9,467 (2,159) 8,445 7,619 8,032
Exch rate movements (8,587) 0 0 0 0
Cash & equivalents 9,250 7,090 15,535 119.1 23,153 31,185
Other current assets 21,060 25,950 28,539 10 31,295 34,309
Fixed assets 143,185 142,565 144,837 1.6 146,937 148,863
Investments 71,980 80,960 42,124 (48) 42,124 42,124
Intangible assets 0 0 0 0 0
Other non-current assets 0 0 - - -
Total assets 255,155 266,975 242,470 (9.2) 255,821 269,711
Short-term debt - - - - -
Accounts payable 25,569 32,180 35,350 9.9 38,059 40,897
Long-term debt/CBs 46,954 49,598 50,498 1.8 51,400 52,300
Shareholder funds 115,409 118,989 87,173 (26.7) 94,851 103,185
Total liabs & equity 255,155 266,975 242,470 (9.2) 255,821 269,711
Revenue growth (% YoY) 12.1 7.7 9.9 7.7 7.5
Ebitda margin (%) 24.4 23.3 22.9 22.3 21.6
Ebit margin (%) 18.9 17.9 17.0 16.5 16.1
Net profit growth (%) 2.1 0.9 2.6 9.2 8.4
Op cashflow growth (% YoY) (73.3) 24.7 (1.2) 0.6 3.3
Capex/sales (%) 11.7 9.4 8.6 8.0 7.4
Net debt/equity (%) 32.7 35.7 40.1 29.8 20.5
Net debt/Ebitda (x) 2.1 2.3 1.7 1.3 1.0
ROE (%) 7.6 7.4 8.7 10.7 10.7
ROIC (%) 7.6 7.8 8.2 8.5 8.7

Offers play on an integrated CESC: Organisational structure

business model spanning
generation and power CESC
distribution
Generation Distribution
Renewable Kolkata Noida 1.8BU Rajasthan

Regulated Unregulated
(174MW) 11.4BU (49.6%) 2BU
Kolkata Haldia Chandrapur Crescent Power

(1.1GW) (0.6GW) (0.6GW) (40MW)
CESC demerger - retail and CESC revised corporate structure (equity capital)
ventures businesses will be
listed separately CESC Power Spencer Retail CESC Ventures
(Rs1,320m) (Rs400m) (Rs260m)
Discom and generation will

split post-WBERC approval Source: CLSA, Company
Rajasthan state took the CESC Rajasthan franchisee circles

lead in opening the
distribution sector by
auctioning four cities
Start-up losses of Rs1.2bn CESC performance at Rajasthan circles

in FY18 at the Rajasthan
discom circles
Plans turn around, cutting

AT&C losses by using best
practices from Kolkata
license area

Owing to the higher CESC: Haldia plant monthly generation and PLF
demand from the Kolkata 500 (MU) (%) 120
Haldia generation PLF (RHS)
licence area . . .
450
100
. . . Haldia operated at a PLF 400
of 96% in 2Q19 vs 88% in 350
2Q18 80
300
250 60
200
40
150
100
20
50
0 0
Dec 15
Apr 16
Dec 16
Apr 17
Dec 17
Apr 18
Aug 16
Aug 17
Aug 18
Oct 15
Oct 16
Oct 17
Oct 18
Feb 16
Feb 17
Feb 18
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Chandrapur’s losses should CESC: Chandrapur plant monthly generation and PLF
halve in FY19CL with a 400 (MU) (%) 90
Chandrapur generation PLF (RHS)
185MW new STPPA (Case
IV) with Maharashtra state 350 80
70
PLFs improved to 67% in 300
FY19YTD, vs 45% FY18YTD 60
250
50
200
40
150
30
100
20
50 10
0 0
Dec 15
Apr 16
Dec 16
Apr 17
Dec 17
Apr 18
Aug 16
Aug 17
Aug 18
Oct 15
Oct 16
Oct 17
Oct 18
Feb 16
Feb 17
Feb 18
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Licence area operated at CESC: Licence area generation and PLF

PLF of c.67% in FY19YTD, 700 (MU) (%) 85
CESC license area generation PLF (RHS)
similar to FY18YTD . . .
600 80
. . . while T&D losses were
below 10% in 1HFY19, vs 75
500
above 10% in 1HFY18 70
400
65
300
60
200
55
100 50
0 45
Dec 15
Apr 16
Dec 16
Apr 17
Dec 17
Apr 18
Aug 16
Aug 17
Aug 18
Oct 15
Oct 16
Oct 17
Oct 18
Feb 16
Feb 17
Feb 18
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA

Fall in generation at CESC: Total generation

Titagarh/Southern offset by 14 (BU)
Budge Budge Southern Titagarh Chandrapur Haldia
rises at Haldia/Chandrapur
12
10
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: CLSA, CEA
Budge Budge plant CESC: Budge Budge generation and PLF

generation up by 11% for 6,100 (MU) (%) 96
Generation PLF (RHS)
FY18
6,000
94
It operated at a higher PLF 5,900
of 92% 92
5,800
90
5,700
5,600 88
5,500
86
5,400
84
5,300
82
5,200
5,100 80
Source: CLSA, CEA
Southern plant CESC: Southern Generating Station generation and PLF

generation declined 26% 1,200 (MU) (%) 100
Generation PLF (RHS)
during FY18 . . .
90
. . . but operated at a PLF of 1,000
80
25% during FY18, versus
35% in FY17 70
800
60
600 50
40
400
30
20
200
10
0 0
Source: CLSA, CEA

CESC (consolidated): Profit and loss

Consol (Rsm) FY17 FY18
Net sales 84,090 103,420
Power business reported a YoY growth (%) 23
strong turnaround as PLF Retail business cost 360 120
improved at Haldia and as a % of retail sales 0 0
Chandrapur YoY growth (%) (67)
Fuel cost 25,270 28,910
as a % of power sales 30 28
YoY growth (%) 14
Power purchase 9,480 20,040
as a % of power sales 11 19
YoY growth (%) 111
Personnel cost 8,730 9,700
as a % of total sales 10 9
YoY growth (%) 11
Others 12,400 14,670
Ebitda grew by 8% YoY on YoY growth (%) 18
strong performance in Expenditure 56,240 73,440
power business and break- Ebitda 27,850 29,980
even of retail business Ebitda margin (%) 33 29
YoY growth (%) 8
Depreciation 7,150 7,510
Ebit 20,700 22,470
Other Income 2300 2520
YoY growth (%) 10
Interest 13720 13030
YoY growth (%) (5)
PBT 9,280 11,960
YoY growth (%) 29
Tax 3,210 3,560
Tax rate (%) 35 30
Turnaround in genco and Rec profit before JV/MI 6,070 8,400
lower effective tax rate led YoY growth (%) 38
to 36% growth at PAT level Share of profit in associate/JV 480 500
Minority interest
Rec profit after JV/MI 6,550 8,900
YoY growth (%) 36
PAT margin (%) 8 9
Profit/loss from discontinued business (1,550) (850)
Rep profit (Cal) 8,100 9,750
Our post-demerger SOTP CESC: SOTP valuation (post demerger)

presents separate valuation Particulars Rsbn Rs/sh Comments
of discom/generation units Discom business 86 644
- Licence area business 74 558 @1.7x 1-yr fwd avg regulated equity
- Rajasthan franchisee circle 6 42 @10% discount to 7x 1-yr fwd earnings
- NPCL 6 44 12x FY18A Rec EPS
Generation business 31 234
- Haldia project 20 152 @ 1.8x PB
- Chandrapur Project 8 58 @ 0.9x PB
- Renewable energy 2 19 @ 1.5x PB
- Crescent Power 1 6 @ 1.1x PB
Total 117 879
Source: CLSA, Bloomberg consensus

CESC (parent): Valuation and key ratios

Year ending FY17 FY18 FY19CL FY20CL FY21CL
CESC (parent) is trading at EPS (Rs) 65 65 67 73 79
6.1x FY19CL EPS Rec EPS growth (%) 2 1 3 9 8
CEPS (Rs) 95 98 106 114 121
PE (x) 6.2 6.1 6.1 5.6 5.1
PB (x) 0.4 0.4 0.6 0.5 0.5
ROE (%) 7.6 7.4 8.7 10.7 10.7
EV/Ebitda (x) 5 5 4 4 3
Div yield (%) 1.5 1.8 1.8 2.0 2.1
CESC trading above avg PE CESC: One-year forward PE ratio

ratio 14 (x)
13
12
11
+1sd 10.55x
10
9
avg 8.28x
8
6 -1sd 6.01x
4
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Jul 13
Oct 13
Jul 14
Oct 14
Jul 15
Oct 15
Jul 16
Oct 16
Jul 17
Oct 17
Jul 18
Oct 18
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Source: CLSA, Company Jan 19
CESC is trading at +1sd CESC: One-year forward PB ratio

above its PB ratio 1.3 (x)
1.2
1.1
1.0
+1sd 0.98x
0.9
0.8
avg 0.74x
0.7
0.6
0.5 -1sd 0.51x
0.4
0.3
Apr 13
Apr 14
Apr 15
Apr 16
Apr 17
Apr 18
Jul 13
Oct 13
Jul 14
Oct 14
Jul 15
Oct 15
Jul 16
Oct 16
Jul 17
Oct 17
Jul 18
Oct 18
Jan 14
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19

Valuation details
We rate the impact of CESC's demerger and carve-out of the discom and
generation businesses separately. We value the company using a SOTP-based
valuation for a target price of Rs880. We assign a PB multiple of 1.7x for the
regulated business, which contributes a value of Rs558/share, and PB multiples of
0.9x and 1.8x for the Chandrapur and Haldia projects, which contribute Rs58/sh
and Rs152/sh.
Investment risks
Risk of losses at its recently acquired coal mine due to aggressive bidding and
potential cancellation of linkage for the 600MW Chandrapur plant (25% of its IPP
capacity) are key risks.
Recommendation history of CESC Ltd (CESC IB)

1,000 Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
800
600
400

15 Nov 2018 BUY 880.00 15 Sep 2016 BUY 600.63*
09 Nov 2017 BUY 930.01* 20 May 2016 BUY 515.38*
12 Feb 2017 BUY 775.01* 10 Feb 2016 BUY 496.00*
04 Nov 2016 BUY 577.38*
Source: CLSA; * Adjusted for corporate action

Detailed financials
Profit & Loss (Rsm)
Year to 31 March 2015A 2016A 2017A 2018A 2019CL 2020CL 2021CL
Revenue 61,888 66,080 74,102 79,820 87,682 94,403 101,442
Cogs (ex-D&A) (46,400) (48,640) (55,994) (61,200) (67,575) (73,375) (79,533)
Gross Profit (ex-D&A) 15,489 17,440 18,109 18,620 20,107 21,029 21,909
Research & development costs - - - - - - -
Selling & marketing expenses - - - - - - -
Other SG&A - - - - - - -
Other Op Expenses ex-D&A - - - - - - -
Op Ebitda 15,489 17,440 18,109 18,620 20,107 21,029 21,909
Depreciation/amortisation (3,431) (3,700) (4,090) (4,330) (5,243) (5,416) (5,589)
Op Ebit 12,058 13,740 14,019 14,290 14,864 15,612 16,320
Interest income 766 1,003 1,083 1,083 777 1,158 1,559
Interest expense (4,079) (4,560) (4,480) (4,840) (5,046) (5,152) (5,242)
Net interest inc/(exp) (3,312) (3,557) (3,398) (3,758) (4,269) (3,994) (3,683)
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items 82 277 388 578 578 577 578
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 8,827 10,460 11,009 11,110 11,172 12,196 13,214
Taxation (1,850) (2,010) (2,380) (2,400) (2,234) (2,439) (2,643)
Profit after tax 6,977 8,450 8,629 8,710 8,938 9,757 10,572
Preference dividends - - - - - - -
Profit for period 6,977 8,450 8,629 8,710 8,938 9,757 10,572
Minority interest 0 0 0 0 0 0 0
Net profit 6,977 8,450 8,629 8,710 8,938 9,757 10,572
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 6,977 8,450 8,629 8,710 8,938 9,757 10,572
Dividends (1,439) (1,598) (1,599) (1,918) (1,918) (2,078) (2,238)
Retained profit 5,539 6,852 7,030 6,792 7,020 7,679 8,334
Adjusted profit 6,977 8,450 8,629 8,710 8,938 9,757 10,572
EPS (Rs) 52.4 63.4 64.8 65.4 67.1 73.2 79.4
Adj EPS [pre excep] (Rs) 52.4 63.4 64.8 65.4 67.1 73.2 79.4
Core EPS (Rs) 52.4 63.4 64.8 65.4 67.1 73.2 79.4
DPS (Rs) 9.0 10.0 10.0 12.0 12.0 13.0 14.0

Growth (%)
Revenue growth (% YoY) 12.3 6.8 12.1 7.7 9.9 7.7 7.5
Ebitda growth (% YoY) 8.1 12.6 3.8 2.8 8.0 4.6 4.2
Ebit growth (% YoY) 10.2 14.0 2.0 1.9 4.0 5.0 4.5
Net profit growth (%) 10.4 21.1 2.1 0.9 2.6 9.2 8.4
EPS growth (% YoY) 4.1 21.1 2.1 1.0 2.6 9.2 8.4
Adj EPS growth (% YoY) 4.1 21.1 2.1 1.0 2.6 9.2 8.4
DPS growth (% YoY) 12.5 11.1 0.0 20.0 0.0 8.3 7.7
Core EPS growth (% YoY) 4.1 21.1 2.1 1.0 2.6 9.2 8.4
Margins (%)
Ebitda margin (%) 25.0 26.4 24.4 23.3 22.9 22.3 21.6
Ebit margin (%) 19.5 20.8 18.9 17.9 17.0 16.5 16.1
Net profit margin (%) 11.3 12.8 11.6 10.9 10.2 10.3 10.4
Core profit margin 11.3 12.8 11.6 10.9 10.2 10.3 10.4
Op cashflow margin (3.6) 59.5 14.2 16.4 14.7 13.8 13.2
Returns (%)
ROE (%) 12.1 9.6 7.6 7.4 8.7 10.7 10.7
ROA (%) 5.7 5.3 4.4 4.3 4.7 5.0 5.0
ROIC (%) 8.9 8.5 7.6 7.8 8.2 8.5 8.7
ROCE (%) 11.5 10.5 9.4 9.1 10.5 12.7 13.2
Effective tax rate (%) 21.0 19.2 21.6 21.6 20.0 20.0 20.0
Ebitda/net int exp (x) 4.7 4.9 5.3 5.0 4.7 5.3 5.9
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividend payout (%) 17.2 15.8 15.4 18.4 17.9 17.7 17.6

Balance sheet (Rsm)

Cash & equivalents 7,377 8,370 9,250 7,090 15,535 23,153 31,185
Accounts receivable 13,817 9,660 9,680 10,410 11,435 12,312 13,230
Inventories 4,055 3,170 3,790 3,840 4,218 4,542 4,880
Other current assets 26,482 15,440 17,270 22,110 24,321 26,753 29,428
Current assets 51,731 36,640 39,990 43,450 55,509 66,760 78,724
Fixed assets 86,440 143,725 143,185 142,565 144,837 146,937 148,863
Investments 42,493 61,150 71,980 80,960 42,124 42,124 42,124
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Other non-current assets - 0 0 0 - - -
Total assets 180,665 241,515 255,155 266,975 242,470 255,821 269,711
Short term loans/OD - - - - - - -
Accounts payable 11,351 24,606 25,569 32,180 35,350 38,059 40,897
Accrued expenses - - - - - - -
Taxes payable 0 0 0 0 0 0 0
Other current liabs 3,558 2,420 2,970 3,480 3,823 4,116 4,423
Current liabilities 14,909 27,026 28,539 35,660 39,173 42,175 45,320
Long-term debt/leases/other 60,940 40,392 46,954 49,598 50,498 51,400 52,300
Convertible bonds - - - - - - -
Provisions/other LT liabs 41,769 61,918 64,252 62,727 65,627 67,394 68,906
Total liabilities 117,617 129,336 139,745 147,986 155,298 160,969 166,526
Share capital 1,332 1,332 1,332 1,332 1,332 1,332 1,332
Retained earnings 61,715 110,847 114,077 117,657 85,841 93,519 101,853
Reserves/others 0 0 0 0 0 0 0
Shareholder funds 63,048 112,179 115,409 118,989 87,173 94,851 103,185
Minorities/other equity 0 0 0 0 0 0 0
Total equity 63,048 112,179 115,409 118,989 87,173 94,851 103,185
Total liabs & equity 180,665 241,515 255,155 266,975 242,470 255,821 269,711
Total debt 60,940 40,392 46,954 49,598 50,498 51,400 52,300
Net debt 53,562 32,022 37,704 42,508 34,964 28,247 21,115
Adjusted EV 95,471 55,931 50,863 47,284 78,576 71,859 64,727
BVPS (Rs) 473.3 842.1 866.3 893.3 654.4 712.1 774.7

Key ratios
Current ratio (x) 3.5 1.4 1.4 1.2 1.4 1.6 1.7
Growth in total assets (% YoY) 17.6 33.7 5.6 4.6 (9.2) 5.5 5.4
Growth in capital employed (% YoY) 25.6 23.7 6.2 5.5 (24.4) 0.8 1.0
Net debt to operating cashflow (x) (23.9) 0.8 3.6 3.2 2.7 2.2 1.6
Gross debt to operating cashflow (x) (27.2) 1.0 4.5 3.8 3.9 4.0 3.9
Gross debt to Ebitda (x) 3.9 2.3 2.6 2.7 2.5 2.4 2.4
Net debt/Ebitda (x) 3.5 1.8 2.1 2.3 1.7 1.3 1.0
Gearing
Net debt/equity (%) 85.0 28.5 32.7 35.7 40.1 29.8 20.5
Gross debt/equity (%) 96.7 36.0 40.7 41.7 57.9 54.2 50.7
Interest cover (x) 3.1 3.2 3.4 3.2 3.1 3.3 3.4
Debt Cover (x) 0.0 1.0 0.2 0.3 0.3 0.3 0.3
Inventory days 29.5 27.1 22.7 22.8 21.8 21.8 21.6
Debtor days 75.7 64.8 47.6 45.9 45.5 45.9 46.0
Creditor days 93.5 134.9 163.5 172.2 182.4 182.6 181.2
Working capital/Sales (%) 47.6 1.9 3.0 0.9 0.9 1.5 2.2
Sales/Capital employed (%) 53.1 45.8 48.4 49.4 71.8 76.7 81.6
EV/Capital employed (%) 81.9 38.8 33.2 29.3 64.3 58.4 52.1
Working capital/Capital employed (%) 25.3 0.9 1.4 0.4 0.7 1.2 1.8
Fixed capital/Capital employed (%) 74.1 99.7 93.5 88.3 118.6 119.4 119.8
Other ratios (%)
EV/OCF (x) (42.6) 1.4 4.8 3.6 6.1 5.5 4.8
EV/FCF (x) (9.2) 1.8 28.4 8.5 14.5 13.1 10.9
EV/Sales (x) 1.5 0.8 0.7 0.6 0.9 0.8 0.6
Capex/depreciation (%) 236.1 208.1 212.7 173.6 143.3 138.8 134.5

Cashflow (Rsm)
Operating profit 12,058 13,740 14,019 14,290 14,864 15,612 16,320
Operating adjustments - - - - - - -
Depreciation/amortisation 3,431 3,700 4,090 4,330 5,243 5,416 5,589
Working capital changes (11,801) 28,200 (957) 1,501 (102) (629) (787)
Interest paid / other financial expenses (4,079) (4,560) (4,480) (4,840) (5,046) (5,152) (5,242)
Tax paid (1,850) (2,010) (2,380) (2,400) (2,234) (2,439) (2,643)
Other non-cash operating items - 242 200 200 200 200 200
Net operating cashflow (2,241) 39,312 10,492 13,081 12,925 13,009 13,437
Capital expenditure (8,100) (7,700) (8,700) (7,516) (7,516) (7,516) (7,516)
Free cashflow (10,341) 31,612 1,792 5,565 5,409 5,493 5,921
Acq/inv/disposals (10,583) (18,657) (40) (40) (40) (40) (40)
Int, invt & associate div 3,200 3,953 3,036 (60) 4,254 3,344 3,489
Net investing cashflow (15,482) (22,404) (5,704) (7,616) (3,302) (4,212) (4,067)
Increase in loans 12,875 (20,548) 6,562 (2,354) 900 900 900
Dividends (1,439) (1,598) (1,599) (1,918) (1,918) (2,078) (2,238)
Net equity raised/(buybacks) 76 - - 0 - - -
Net financing cashflow 15,653 (26,257) 4,679 (7,624) (1,178) (1,178) (1,338)
Incr/(decr) in net cash (2,070) (9,349) 9,467 (2,159) 8,445 7,619 8,032
Exch rate movements 1,634 10,342 (8,587) 0 0 0 0
Opening cash 7,814 7,377 8,370 9,250 7,090 15,535 23,153
Closing cash 7,378 8,370 9,250 7,091 15,535 23,153 31,185
OCF PS (Rs) (16.8) 295.1 78.8 98.2 97.0 97.7 100.9
FCF PS (Rs) (77.6) 237.3 13.5 41.8 40.6 41.2 44.4

Growth (%)
Op cashflow growth (% YoY) (127.5) nm (73.3) 24.7 (1.2) 0.6 3.3
FCF growth (% YoY) (1,526.8) - (94.3) 210.6 (2.8) 1.5 7.8
Capex growth (%) 9.2 (4.9) 13.0 (13.6) 0.0 0.0 0.0
Capex/sales (%) 13.1 11.7 11.7 9.4 8.6 8.0 7.4
Capex/op cashflow (%) (361.4) 19.6 82.9 57.5 58.2 57.8 55.9
Operating cashflow payout ratio (%) - 3.4 12.7 12.2 12.4 13.3 13.9
Cashflow payout ratio (%) - 4.1 15.2 14.7 14.8 16.0 16.7
Free cashflow payout ratio (%) - 5.1 89.2 34.5 35.5 37.8 37.8
DuPont analysis
Ebit margin (%) 19.5 20.8 18.9 17.9 17.0 16.5 16.1
Asset turnover (x) 0.4 0.3 0.3 0.3 0.3 0.4 0.4
Interest burden (x) 0.7 0.8 0.8 0.8 0.8 0.8 0.8
Tax burden (x) 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Return on assets (%) 5.7 5.3 4.4 4.3 4.7 5.0 5.0
Leverage (x) 2.9 2.4 2.2 2.2 2.5 2.7 2.7
ROE (%) 12.1 9.6 7.6 7.4 8.7 10.7 10.7
EVA® analysis
Ebit adj for tax 9,531 11,100 10,988 11,203 11,891 12,490 13,056
Average invested capital 107,105 130,427 145,177 144,325 144,452 147,004 149,725
ROIC (%) 8.9 8.5 7.6 7.8 8.2 8.5 8.7
Cost of equity (%) 14.0 14.0 14.0 14.0 14.0 14.0 14.0
Cost of debt (adj for tax) 7.9 8.1 7.8 7.8 8.0 8.0 8.0
Weighted average cost of capital (%) 11.0 11.0 10.9 10.9 11.0 11.0 11.0
EVA/IC (%) (2.1) (2.5) (3.4) (3.2) (2.8) (2.5) (2.3)
EVA (Rsm) (2,200) (3,298) (4,864) (4,557) (3,999) (3,681) (3,414)

Notes

JSW Energy
Rs70.00 - SELL
Bharat Parekh Not best placed

bharat.parekh@clsa.com Mix shifting to PPA; international coal remains a concern
+91 22 6650 5020
JSWE’s balanced portfolio of 4.5GW of thermal and hydro assets has seen PPA
sign-up momentum improve. However, the stock faces medium-term risk from
Power Grid’s 6GW Raigarh-Pugalur HVDC line, which will flood the southern
grid with cheap power. And we doubt the state of Karnataka will issue any new
long-term PPA for NTPC’s new Kudgi power station, JSWE’s historical merchant
plant cash-cow. International coal prices and rupee weakness hurt its 2QFY19,
with parent JSW Group’s dark spreads compressing by 23% YoY. We rate JSWE
a SELL, based on its empire-building strategy leading to ROE pressure.
9 January 2019
Balanced portfolio shifting to PPA; green ambitions visible
India JSWE has a well balanced portfolio of 4.5GW of operational assets being
diversified as thermal/hydro at 70%/30, and signed 985MW of PPAs between
Power April 2017 and September 2018. The PPA/merchant ratio currently stands at
Reuters JSWE.BO
80%/20%, versus 55%/45% in March 2017 - by the time merchant market revives
Bloomberg JSW IB in FY21, JSWE may not even be a merchant player. Its empire-building strategy is
a key risk, with the company having already written off Rs5.7bn (76% of its
Priced on 7 January 2019
CNX Nifty @ 10,771.8 exposure) from its acquisition advances. To cash in on country's 'green' ambition,
the firm has committed US$1bn of investment towards EV (the next five years’
12M hi/lo Rs95.35/58.90
cashflow) and US$170m to solar generation and equipment manufacturing (now
12M price target Rs63.00 on the back burner).
±% potential -10%
Shares in issue 71.6m Coal and dollar pain; balance-sheet improvement continues
Free float (est.) 25.0% The impact of rising coal prices (up by 24% YoY) and a strong US dollar
Market cap US$1.64bn contracted JSW Group’s dark spreads by 23% YoY over 2QFY19. JSWE’s Ebitda
36% margin was down by c.725bps YoY. The impact was partly nullified by higher
3M ADV US$0.9m
utilisation at its Ratnagiri plant (2Q19 PLF c.68% vs 61%). Balance-sheet
Foreign s'holding 8.8% improvement has been a bright spot, with net debt falling by Rs34bn over the
Major shareholders past six quarters; 2QFY19 net debt/equity was 0.9x, compared to 1.3x in 4Q17.
Promoter & promoter group 75.0%
LIC of India 4.9% Green capex, lack of adequate PPAs, HVDC, remain key risks
JSWE’s US$1bn commitment to its green ambitions could raise investor concerns
about diverted cashflow towards unrelated, long-gestation projects. The stock
faces long-term risk from PWGR's 6GW Raigarh HVDC line, starting in 4QFY20,
Blended ESG Score (%)*
which will flood the southern grid with cheap power, and we doubt the state of
Overall 50.7
Country average 63.7
Karnataka will issue any new medium-term PPAs. We value JSW Energy’s
GEM sector average 57.8 projects using FCFE methodology, with different COEs for different projects (a
*Click to visit company page on clsa.com for details 7.75% risk-free rate and 5.5% risk premium), and investments at BV/discount to
Stock performance (%) market value. We maintain our SELL rating and target price of Rs63.
1M 3M 12M
Absolute 1.9 16.4 (23.6) Financials
Relative 1.2 11.5 (25.1) Year to 31 March 16A 17A 18CL 19CL 20CL
Abs (US$) 3.0 22.5 (30.9) Revenue (Rsm) 98,245 82,634 88,627 90,235 92,992
(Rs) (%)
100 120 Net profit (Rsm) 13,553 6,226 8,652 9,870 10,690
95 115
EPS (Rs) 8.3 3.8 5.3 6.0 6.5
90 110
CL/consensus (17) (EPS%) - - 173 123 112
85 105
80 100 EPS growth (% YoY) (1.4) (54.1) 39.0 14.1 8.3
75 95 PE (x) 8.5 18.4 13.3 11.6 10.7
70 90 Dividend yield (%) 3.3 3.3 3.8 4.3 4.7
65 85
FCF yield (%) (39.5) 12.9 9.4 7.4 (50.6)
60 80
JSW Energy (LHS) PB (x) 1.2 1.1 1.1 1.0 1.0
55 Rel to Nifty 75
50 70 ROE (%) 15.7 6.2 8.2 8.9 9.2

JSW Energy - SELL India power generation
Profit & Loss (Rsm)

Revenue 98,245 82,634 88,627 7.3 90,235 92,992
Cogs (ex-D&A) (43,774) (39,072) (40,788) (43,225) (46,442)
Op Ebitda 40,261 33,244 35,996 8.3 34,828 34,006
Op Ebit 31,719 23,552 25,587 8.6 24,419 23,597
Other non-Op items - - - - -
Taxation (5,113) (2,690) (4,661) (4,362) (3,955)
Profit after tax 13,976 6,185 8,595 39 9,805 10,620
Minority interest (423) 41 57 39 65 70
Net profit 13,553 6,226 8,652 39 9,870 10,690
Adjusted profit 13,553 6,226 8,652 39 9,870 10,690
Working capital changes (8,548) 7,669 (121) (32) (56)
Other items (20,094) (19,538) (19,988) (17,918) (15,726)
Net operating cashflow 11,620 21,375 15,887 (25.7) 16,878 18,225
Free cashflow (45,318) 14,797 10,747 (27.4) 8,552 (58,102)
M&A/Others (10,359) (1,862) 2,363 3,304 2,749
Increase in loans 55,681 (5,129) 2,188 3,423 5,303
Dividends (3,811) (3,811) (4,326) (4,935) (5,345)
Net equity raised/other - 0 0 - -
Net financing cashflow 51,870 (8,941) (2,138) (1,512) (42)
Incr/(decr) in net cash (3,808) 3,995 10,972 174.7 10,344 (55,395)
Exch rate movements 3,866 275 633 129.8 - -
Cash & equivalents 3,574 7,843 19,448 148 29,792 34,646
Other current assets 0 0 - - 0
Fixed assets 226,615 223,468 218,258 (2.3) 216,239 207,330
Investments 9,369 13,599 13,599 0 13,599 13,599
Other non-current assets 0 - - - -
Total assets 284,634 282,118 290,744 3.1 299,668 296,639
Short-term debt - - - - -
Other current liabs 0 0 0 0 0
Provisions/other LT liabs 4,376 5,848 5,848 0 5,848 5,848
Shareholder funds 97,042 103,685 108,014 4.2 112,948 118,292
Total liabs & equity 284,634 282,118 290,744 3.1 299,668 296,639
Revenue growth (% YoY) 4.7 (15.9) 7.3 1.8 3.1
Ebitda margin (%) 41.0 40.2 40.6 38.6 36.6
Ebit margin (%) 32.3 28.5 28.9 27.1 25.4
Net profit growth (%) (1.4) (54.1) 39.0 14.1 8.3
Op cashflow growth (% YoY) 13.7 84.0 (25.7) 6.2 8.0
Capex/sales (%) 58.0 8.0 5.8 9.2 82.1
Net debt/equity (%) 149.5 130.8 116.9 105.6 88.9
Net debt/Ebitda (x) 3.6 4.1 3.5 3.4 3.1
ROE (%) 15.7 6.2 8.2 8.9 9.2
ROIC (%) 11.7 7.0 7.2 7.5 7.8

Well-balanced portfolio of JSW Energy: Organisational structure

4.5GW of operational
assets JSW Energy
Generation Other Advances for

Transmission
(4.53GW) investments acquitisions
Thermal Hydro Jaigad JSW Green Jindal Steel

(3.14GW) (1.39GW) Power and Power
(74%) Rs3.7bn
JSW Steel (1.6% of
Vijaynagar Ratnagiri Baspa net assets)
(0.86GW) (1.2GW) (0.3GW)
JSW Energy
Jaiprakash
(Raigarh)
Barmer Karcham Power
(1.08GW) (1.09GW) Rs1.78bn
JSW Energy (0.8% of
(Kutehr) net assets)
Impact of rising coal prices JSWE (consolidated): 2QFY19 results review

(+24% YoY per unit) and FY ends on 31 Mar (Rsm) 2QFY18 2QFY19 % YoY
higher US$ felt in results Units sold (MU) 5,831 6,349 9
Average realisation (Rs/kwh) 3.51 3.83 9
Impact partly nullified by Total revenues 20,490 24,308 19
higher utilisation at Fuel costs (9,359) (13,289) 42
Ratnagiri plant (2Q19 PLF Purchase of power (186) (235) 26
c.68% vs 61%) Staff costs (539) (616) 14
Others (1,583) (1,453) (8)
Expenses (11,667) (15,594) 34
However, this was
Ebitda 8,824 8,713 (1)
inadequate and 36% Ebitda
Ebitda margin 43.1 35.8 (722bps)
margin came was down by
Other income 1,305 840 (36)
c.725bps YoY
Depreciation (2,449) (2,933) 20
Interest (3,910) (3,083) (21)
PBT 3,770 3,537 (6)
Tax (1,062) (1,003) (6)
Eff tax rate (%) 28% 28% 18bps
Rec PAT 2,708 2,534 (6)
Share of minority & profit from JV/associates 3 317 9215
Rec PAT after MI 2,712 2,851 5
Exceptional, net of tax 260 308 19
Reported PAT 2,972 3,160 6
International coal prices up JSWE (consolidated): 2QFY19 Rs/kWh analysis

by 14% YoY for 2QFY19 Rs/kWh 2QFY18 2QFY19 % YoY
Total revenue 3.51 3.83 9
Realisation growth was Fuel costs (2.64) (3.33) 26
inadequate, resulting in Expenses (incl others) (2.00) (2.46) 23
Ebitda down by 9% YoY Ebitda 1.51 1.37 (9)
Other income 0.22 0.13 (41)
Depreciation (0.42) (0.46) 10
Interest (0.67) (0.49) (28)
PBT 0.65 0.56 (14)
Tax (0.18) (0.16) (13)
Rec. PAT 0.46 0.40 (14)
Share of Asso & MI (profit) 0.00 0.05 8455
Rec. PAT after share of Asso & MI 0.47 0.45 (3)
Exceptional Items 0.07 0.07 (1)
Reported PAT 0.51 0.50 (2)

Disclosure standards have JSWE: Composition of consolidated PAT

worsened at JSWE . . . 5,000 (Rsm)
Thermal Hydro Others
. . . it has not reported 4,000
plant-level PAT since
2QFY18
3,000
2,000
1,000
(1,000)
(2,000)
2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18
Thermal Ebitda down by 5% JSWE: Composition of consolidated Ebitda

YoY for 2QFY19, led by 10 (Rsm)
Thermal Hydro Others
higher international coal
prices
8
6
Hydro Ebitda was flat
0
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
Source: CLSA, Company 2QFY19
Rising coal prices and higher JSWE (parent): Dark spread

US$ contracted JSW 5.5 (Rs/kWh) (P)
Revenue Fuel costs
Group’s dark spreads by
23% YoY 5.0
4.5
4.0
3.5
3.0
2.5
2.0
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19

We expect dark-spread JSWE: Dark spread

compression to continue at 5.0 (Rs/kWh) Revenue Fuel costs
JSWE during FY19
4.5
4.0
3.5
3.0
2.5
2.0
FY15 FY16 FY17 FY18 FY19CL FY20CL
Strategy of managing to sell JSWE (consolidated): Average realisation

power at peak prices did 5.0 (Rs/kWh)
not work in 2QFY19
4.8
Realisation grew by 9%
4.5
YoY, vs fuel cost (per kWh)
up by 26% 4.3
4.0
3.8
3.5
3.3
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
Vijaynagar, Ratnagiri JSWE (parent): 2QFY19 results review

reported increased FY ends on 31 Mar (Rsm) 2QFY18 2QFY19 % YoY
Net generation (MU) 2,121 2,464 16
generation from higher PPA Vijaynagar 760 905 19
tie-up Ratnagiri 1,361 1,559 15
Total revenue 9,388 11,991 28
Merchant now stands at Rs/kWh 4.43 4.9 10
Fuel costs (6,571) (9,482) 44
80:20, vs 55:45 at Mar-17
Rs/kWh (3.1) (3.8) 24
Other costs (789.7) (819.2) 4
By the time merchant Rs/kWh (0.4) (0.3) (11)
market revives in FY21, Total expenditure (7,360) (10,301) 40
JSWE may not be a % of sales 78.4 84.0
Rs/kWh (3.5) (4.2) 20
merchant player Ebitda 2,028 1,690 (17)
Ebitda margin (%) 21.6 14.1 (750bps)
- Rs/kWh 0.96 0.69 (28)
Other income 1,064 869 (18)
Depreciation (934) (916) (2)
- Rs/kWh (0.4) (0.4)
Interest (1,279) (1,089) (15)
- Rs/kWh (0.6) (0.4)
Rec PAT down by 20% YoY, PBT 879 554 (37)
Tax (423) (191) (55)
led by higher international Tax rate (%) 48.1 34.6 (1,358bps)
coal prices Rec. PAT 456 362 (21)
- Rs/kWh 0.21 0.15 (32)
Exceptional items 260 347 34
Reported PAT 716 710 (1)

Rise in fuels cost not JSWE (parent): 2QFY19 Rs/kWh analysis

adequately compensated by Rs/kWh 2QFY18 2QFY19 % YoY
increase in realisation Total revenue 4.43 4.87 10
Fuel costs (3.10) (3.85) 24
Other costs (0.37) (0.33) (11)
Total expenses (3.47) (4.18) 20
Ebitda 0.96 0.69 (28)
Other income 0.50 0.35 (30)
Depreciation (0.44) (0.37) (16)
Interest (0.60) (0.44) (27)
PBT 0.41 0.22 (46)
Tax (0.20) (0.08) (61)
Rec PAT 0.21 0.15 (32)
Exceptional Items 0.12 0.14 15
Reported PAT 0.34 0.29 (15)
Generation at mainstay JSWE: Vijaynagar generation

Vijaynagar plant improved, 700 (MU) (%) 80
Vijaynagar YoY % (RHS)
led by healthy off-take from
LT PPA customers 600 60
40
500
20
400
0
300
(20)
200
(40)
100 (60)
0 (80)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Ratnagiri’s generation was JSWE: Ratnagiri generation

up by 13% YoY . . . (MU) (%)
1,000 Ratnagiri YoY % (RHS) 140
900 120
800 100
80
. . . driven by increase in LT 700
PPA off-take 60
600
40
500
20
400
. 0
300
(20)
200 (40)
100 (60)
0 (80)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA

Barmer (JSWE’s regulated JSWE: Barmer generation

capacity) is already 800 (MU) (%) 50
Barmer YoY % (RHS)
operating at a healthy PLF
of c.85% 700 40
30
600
20
500
10
400
0
300
(10)
200
(20)
100 (30)
0 (40)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Overall rise in thermal JSWE: Total thermal generation

generation of 16% in 2Q19 2,500 (MU) (%) 60
Total thermal YoY % (RHS)
supported by Ratnagiri and 50
Vijaynagar plants
2,000 40
30
20
1,500
10
0
1,000
(10)
(20)
500 (30)
(40)
0 (50)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
Hydro generation up by 4% JSWE: Total generation (including hydro)

YoY for 2QFY19 3,000 (MU) (%) 80
Total thermal Total hydro YoY % (RHS)
2,500 60
40
2,000
20
1,500
0
1,000
(20)
500 (40)
0 (60)
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA

We value JSWE at Rs63/sh, JSWE: SOTP valuation

factoring in provisions for Project Capacity Rationale NPV Rs/ % of SoTP
JP Power/JSPL (MW) (Rsm) share value
Vijaynagar 860 DCF at CoE of 16% 21,568 13 20.7
Ratnagiri 1,200 DCF at CoE of 14.4% 9,818 6 9.4
Raj West 1,080 DCF at CoE of 13.8% 36,607 22 35.2
Karcham 1,091 DCF at CoE of 14.4% 15,482 9 14.9
Baspa 300 DCF at CoE of 12.2% 5,683 3 5.5
Investments 9 14.4
- Loan to JSPL At book value 3,730 2 3.6
- Loan to JP Power At book value (after provisions) 1,780 1 1.7
- Toshiba JSW At book value 1,000 1 1.0
- JSW Steel At 60% discount to CLSA TP 10,086 6 9.7
-Kutehr DCF at CoE of 18.8% (1,655) (1) (1.6)
Total 4,531 104,098 63 100.0
Source: CLSA
Indian utility valuation comps

Bloomberg Rec Price Mkt EPS PE (x) EV/Ebitda (x) PB (x) Net gearing (%) ROE (%) Div yield (%)
code (Rs) cap Cagr (%)
FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL
(US$m) (18-21)
Power
Adani Transmission ADANI IN SELL 200 3,138 23.7 33.2 28.3 12.5 11.4 4.6 4.0 239 184 15 15 0.3 0.5
CESC² CESC IB BUY 653 1,233 6.7 6.0 5.5 4.4 3.9 0.6 0.5 40 30 9 11 1.8 2.0
NTPC NTPC IS BUY 149 17,373 13.9 10.6 9.6 6.4 6.0 1.1 1.1 123 117 11 11 3.3 4.2
Power average 14.1 12.6 7.6 7.0 1.7 1.6 161 138 12 12 2.4 2.7
JSWE: Income statement

FY ends on 31 Mar (Rsm) FY16 FY17 FY18CL FY19CL FY20CL
JSWE’s revenue to see a Revenue 98,245 82,634 88,627 90,235 92,992
Cagr of 2% over FY18-20CL Fuel costs (43,774) (39,072) (40,788) (43,225) (46,442)
O&M costs (6,941) (6,670) (8,121) (8,423) (8,747)
Other costs (7,270) (3,649) (3,722) (3,759) (3,796)
Total costs (57,984) (49,391) (52,631) (55,407) (58,986)
Ebitda 40,261 33,244 35,996 34,828 34,006
Ebitda margin (%) 41.0% 40.2% 40.6% 38.6% 36.6%
We expect contraction in Other income 2,351 2,170 2,996 3,304 2,749
dark spreads . . . Depreciation (8,543) (9,692) (10,409) (10,409) (10,409)
Interest (14,981) (16,848) (15,327) (13,555) (11,771)
. . . that will reduce its
Ebitda margin by 400bps PBT 19,089 8,875 13,256 14,167 14,575
over FY18-20CL Taxes (5,113) (2,690) (4,661) (4,362) (3,955)
Eff tax rate (%) 26.8% 30.3% 35.2% 30.8% 27.1%
Rec PAT 13,976 6,185 8,595 9,805 10,620
Minority interest (423) 41 57 65 70
Rec PAT after MI 13,553 6,226 8,652 9,870 10,690
Exceptional items (net of tax) 1,050 - - - -
Reported PAT 14,603 6,226 8,652 9,870 10,690

JSWE: Balance sheet

JSWE’s net worth to see a FY ends on 31 Mar (Rsm) FY16 FY17 FY18CL FY19CL FY20CL
4.6% Cagr over FY18-20CL Assets
Gross fixed assets 204,963 205,043 206,543 208,043 238,543
Accumulated depreciation 8,443 18,167 28,577 38,986 49,395
Net fixed assets 196,520 186,876 177,967 169,057 189,148
CWIP 30,095 36,592 40,292 47,182 18,182
Investments 9,369 13,599 13,599 13,599 13,599
Net current assets 7,598 9,510 21,236 31,613 36,522
Total assets 243,582 246,577 253,093 261,451 257,451
Liabilities
Shareholders fund 97,041 103,685 108,011 112,946 118,291
Debt 148,622 143,493 145,680 149,104 139,760
Other long-term liabilities (2,082) (601) (601) (601) (601)
JSWE: Cashflow statement

FY ends on 31 Mar (Rsm) FY16 FY17 FY18CL FY19CL FY20CL
Cash from operations 50,532 36,842 31,214 30,434 29,995
PAT 13,976 6,185 8,595 9,805 10,620
Add interest 14,981 16,848 15,327 13,555 11,771
Add depreciation 8,543 9,692 10,409 10,409 10,409
Less Other Income (2,351) (2,170) (2,996) (3,304) (2,749)
We expect working capital Working capital change 11,452 2,358 (121) (32) (56)
to turn favourable for JSWE Cash from investments (51,494) (8,638) (2,204) (5,086) (1,500)
Capex (56,938) (6,578) (5,140) (8,326) (76,326)
Investments (1,907) (4,230) 0 0 0
Other income 2,351 2,170 2,996 3,304 2,749
JSWE should incur capex of Cash from financing 36,888 (25,788) (17,465) (15,067) (26,460)
c.Rs15bn over FY18-20CL Equity 0 0 0 0 0
Direct reserve add 0 0 0 0 0
Debt 55,681 (5,129) 2,188 3,423 (9,344)
Interest costs (14,981) (16,848) (15,327) (13,555) (11,771)
Dividends (3,811) (3,811) (4,326) (4,935) (5,345)
Change of cash 35,926 2,416 11,545 10,280 2,036
Cash start 3,515 3,574 7,843 19,388 29,668
Cash end 3,574 7,843 19,388 29,668 34,453
Single-digit ROE poses JSWE: Key ratios and valuation

downside risks to JSWE’s FY ends on 31 Mar FY16 FY17 FY18CL FY19CL FY20CL
valuation CMP (Rs) 69 69 69 69 69
Number of shares (m) 1,640 1,640 1,640 1,640 1,640
Market capitalisation (Rsm) 112,754 112,754 112,754 112,754 112,754
EPS (Rs) 8.3 3.8 5.3 6.0 6.5
DPS (Rs) 5.9 2.3 2.6 3.0 3.3
BVPS (Rs) 59.2 63.2 65.9 68.9 72.1
PE (x) 8.3 18.1 13.0 11.4 10.5
PB (x) 1.16 1.1 1.0 1.0 1.0
EV/Ebidta (x) 6.4 7.5 6.6 6.7 6.4
EV/MW (x) 56.9 54.8 52.7 51.2 48.1
Dividend yield (%) 8.6 3.4 3.8 4.4 4.7
ROE (%) 14.0 6.0 8.0 8.7 9.0
ROCE (%) 13.9 10.4 11.3 10.6 10.2
Net debt/equity (%) 149.5 130.8 116.9 105.6 88.9

Valuation details
Our target price is based on SOTP; we value all six projects of JSW Energy using
FCFE methodology with different COEs for different projects (a 7.75% risk-free
rate and 5.5% risk premium) and investments at book value/discount to market
value. For investments in JSW Steel, we value it at a discount to our target price.
Investment risks
Rise in merchant-tariff rates and a fall in coal prices and/or freight rates may
positively impact JSW’s profitability.
Recommendation history of JSW Energy Ltd (JSW IB)

100 Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
90
80
70
60

28 Jul 2018 SELL 63.00 07 Jan 2017 SELL 63.00
07 Feb 2018 SELL 69.00 27 Oct 2016 SELL 65.00
02 Nov 2017 SELL 66.00 21 Jan 2016 O-PF 81.00
24 Jan 2017 SELL 57.00
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Year to 31 March 2015A 2016A 2017A 2018CL 2019CL 2020CL
Revenue 93,802 98,245 82,634 88,627 90,235 92,992
Cogs (ex-D&A) (46,811) (43,774) (39,072) (40,788) (43,225) (46,442)
Gross Profit (ex-D&A) 46,991 54,471 43,562 47,839 47,010 46,550
Research & development costs - - - - - -
Selling & marketing expenses - - - - - -
Other SG&A - - - - - -
Other Op Expenses ex-D&A (10,756) (14,210) (10,319) (11,843) (12,182) (12,544)
Op Ebitda 36,234 40,261 33,244 35,996 34,828 34,006
Depreciation/amortisation (7,898) (8,543) (9,692) (10,409) (10,409) (10,409)
Op Ebit 28,337 31,719 23,552 25,587 24,419 23,597
Interest income 2,301 2,351 2,170 2,996 3,304 2,749
Interest expense (11,375) (14,981) (16,848) (15,327) (13,555) (11,771)
Net interest inc/(exp) (9,074) (12,630) (14,678) (12,331) (10,252) (9,022)
Associates/investments - - - - - -
Forex/other income - - - - - -
Asset sales/other cash items - - - - - -
Provisions/other non-cash items - - - - - -
Asset revaluation/Exceptional items - - - - - -
Profit before tax 19,263 19,089 8,875 13,256 14,167 14,575
Taxation (5,243) (5,113) (2,690) (4,661) (4,362) (3,955)
Profit after tax 14,020 13,976 6,185 8,595 9,805 10,620
Preference dividends - - - - - -
Profit for period 14,020 13,976 6,185 8,595 9,805 10,620
Minority interest (276) (423) 41 57 65 70
Net profit 13,745 13,553 6,226 8,652 9,870 10,690
Extraordinaries/others 0 0 0 0 0 0
Profit avail to ordinary shares 13,745 13,553 6,226 8,652 9,870 10,690
Dividends (3,811) (3,811) (3,811) (4,326) (4,935) (5,345)
Retained profit 9,933 9,742 2,414 4,326 4,935 5,345
Adjusted profit 13,745 13,553 6,226 8,652 9,870 10,690
EPS (Rs) 8.4 8.3 3.8 5.3 6.0 6.5
Adj EPS [pre excep] (Rs) 8.4 8.3 3.8 5.3 6.0 6.5
Core EPS (Rs) 8.4 8.3 3.8 5.3 6.0 6.5
DPS (Rs) 2.3 2.3 2.3 2.6 3.0 3.3

Growth (%)
Revenue growth (% YoY) - 4.7 (15.9) 7.3 1.8 3.1
Ebitda growth (% YoY) - 11.1 (17.4) 8.3 (3.2) (2.4)
Ebit growth (% YoY) - 11.9 (25.7) 8.6 (4.6) (3.4)
Net profit growth (%) - (1.4) (54.1) 39.0 14.1 8.3
EPS growth (% YoY) nm (1.4) (54.1) 39.0 14.1 8.3
Adj EPS growth (% YoY) nm (1.4) (54.1) 39.0 14.1 8.3
DPS growth (% YoY) - 0.0 0.0 13.5 14.1 8.3
Core EPS growth (% YoY) nm (1.4) (54.1) 39.0 14.1 8.3
Margins (%)
Ebitda margin (%) 38.6 41.0 40.2 40.6 38.6 36.6
Ebit margin (%) 30.2 32.3 28.5 28.9 27.1 25.4
Net profit margin (%) 14.7 13.8 7.5 9.8 10.9 11.5
Core profit margin 14.7 13.8 7.5 9.8 10.9 11.5
Op cashflow margin 10.9 11.8 25.9 17.9 18.7 19.6
Returns (%)
ROE (%) 19.5 15.7 6.2 8.2 8.9 9.2
ROA (%) 10.6 9.7 5.8 5.8 5.7 5.8
ROIC (%) 13.1 11.7 7.0 7.2 7.5 7.8
ROCE (%) 17.2 15.6 9.8 10.8 10.5 10.4
Effective tax rate (%) 27.2 26.8 30.3 35.2 30.8 27.1
Ebitda/net int exp (x) 4.0 3.2 2.3 2.9 3.4 3.8
Exceptional or extraord. inc/PBT (%) - - - - - -
Dividend payout (%) 27.7 28.1 61.2 50.0 50.0 50.0

Balance sheet (Rsm)

Cash & equivalents 3,515 3,574 7,843 19,448 29,792 34,646
Accounts receivable 38,054 38,619 30,760 32,990 33,589 34,615
Inventories - - - - - -
Other current assets - - - - - -
Current assets 41,569 42,192 38,603 52,438 63,381 69,262
Fixed assets 145,073 226,615 223,468 218,258 216,239 207,330
Investments 7,462 9,369 13,599 13,599 13,599 13,599
Goodwill 97 6,458 6,449 6,449 6,449 6,449
Other intangible assets 0 0 0 0 0 0
Other non-current assets 0 0 - - - -
Total assets 194,200 284,634 282,118 290,744 299,668 296,639
Short term loans/OD - - - - - -
Accounts payable 22,577 34,594 29,093 31,203 31,769 32,739
Accrued expenses - - - - - -
Taxes payable 0 0 0 0 0 0
Other current liabs 0 0 0 0 0 0
Current liabilities 22,577 34,594 29,093 31,203 31,769 32,739
Long-term debt/leases/other 92,941 148,622 143,493 145,680 149,104 139,760
Convertible bonds - - - - - -
Provisions/other LT liabs 3,501 4,376 5,848 5,848 5,848 5,848
Total liabilities 119,020 187,592 178,433 182,730 186,720 178,347
Share capital 16,401 16,268 16,280 16,280 16,280 16,280
Retained earnings 58,780 80,774 87,405 91,734 96,668 102,012
Reserves/others 0 0 0 0 - 0
Shareholder funds 75,180 97,042 103,685 108,014 112,948 118,292
Minorities/other equity 0 0 0 0 0 0
Total equity 75,180 97,042 103,685 108,014 112,948 118,292
Total liabs & equity 194,200 284,634 282,118 290,744 299,668 296,639
Total debt 92,941 148,622 143,493 145,680 149,104 139,760
Net debt 89,427 145,049 135,650 126,232 119,311 105,114
Adjusted EV 183,506 220,389 200,263 187,145 173,335 188,137
BVPS (Rs) 45.8 59.2 63.2 65.9 68.9 72.1

Key ratios
Current ratio (x) 1.8 1.2 1.3 1.7 2.0 2.1
Growth in total assets (% YoY) - 46.6 (0.9) 3.1 3.1 (1.0)
Growth in capital employed (% YoY) - 47.1 (1.1) (2.1) (0.8) (3.8)
Net debt to operating cashflow (x) 8.7 12.5 6.3 7.9 7.1 5.8
Gross debt to operating cashflow (x) 9.1 12.8 6.7 9.2 8.8 7.7
Gross debt to Ebitda (x) 2.6 3.7 4.3 4.0 4.3 4.1
Net debt/Ebitda (x) 2.5 3.6 4.1 3.5 3.4 3.1
Gearing
Net debt/equity (%) 118.9 149.5 130.8 116.9 105.6 88.9
Gross debt/equity (%) 123.6 153.2 138.4 134.9 132.0 118.1
Interest cover (x) 2.7 2.3 1.5 1.9 2.0 2.2
Debt Cover (x) 0.1 0.1 0.1 0.1 0.1 0.1
Inventory days - - - - - -
Debtor days 148.1 142.4 153.2 131.3 134.7 133.9
Creditor days 176.0 238.4 297.5 269.8 265.9 253.5
Working capital/Sales (%) 16.5 4.1 2.0 2.0 2.0 2.0
Sales/Capital employed (%) 57.0 40.6 34.5 37.8 38.9 41.6
EV/Capital employed (%) 111.5 91.0 83.7 79.9 74.6 84.2
Working capital/Capital employed (%) 9.4 1.7 0.7 0.8 0.8 0.8
Fixed capital/Capital employed (%) 88.1 93.6 93.4 93.2 93.1 92.8
Other ratios (%)
EV/OCF (x) 18.0 19.0 9.4 11.8 10.3 10.3
EV/FCF (x) 39.8 (4.9) 13.5 17.4 20.3 (3.2)
EV/Sales (x) 2.0 2.2 2.4 2.1 1.9 2.0
Capex/depreciation (%) 71.1 666.5 67.9 49.4 80.0 733.2

Cashflow (Rsm)
Operating profit 28,337 31,719 23,552 25,587 24,419 23,597
Operating adjustments - - - - - -
Depreciation/amortisation 7,898 8,543 9,692 10,409 10,409 10,409
Working capital changes (9,396) (8,548) 7,669 (121) (32) (56)
Interest paid / other financial expenses (11,375) (14,981) (16,848) (15,327) (13,555) (11,771)
Tax paid (5,243) (5,113) (2,690) (4,661) (4,362) (3,955)
Other non-cash operating items - - - - - -
Net operating cashflow 10,221 11,620 21,375 15,887 16,878 18,225
Capital expenditure (5,614) (56,938) (6,578) (5,140) (8,326) (76,326)
Free cashflow 4,608 (45,318) 14,797 10,747 8,552 (58,102)
Acq/inv/disposals 2,407 (11,842) (4,230) - - -
Int, invt & associate div 2,760 1,483 2,368 2,363 3,304 2,749
Net investing cashflow (446) (67,297) (8,439) (2,777) (5,022) (73,577)
Increase in loans (8,123) 55,681 (5,129) 2,188 3,423 5,303
Dividends (3,811) (3,811) (3,811) (4,326) (4,935) (5,345)
Net equity raised/(buybacks) - - - - - -
Net financing cashflow (11,935) 51,870 (8,941) (2,138) (1,512) (42)
Incr/(decr) in net cash (2,160) (3,808) 3,995 10,972 10,344 (55,395)
Exch rate movements - 3,866 275 633 - -
Opening cash 5,675 3,515 3,574 7,843 19,448 90,041
Closing cash 3,515 3,573 7,843 19,448 29,792 34,646
OCF PS (Rs) 6.2 7.1 13.0 9.7 10.3 11.1
FCF PS (Rs) 2.8 (27.6) 9.0 6.6 5.2 (35.4)

Growth (%)
Op cashflow growth (% YoY) - 13.7 84.0 (25.7) 6.2 8.0
FCF growth (% YoY) - (1,083.6) - (27.4) (20.4) (779.4)
Capex growth (%) - 914.3 (88.4) (21.9) 62.0 816.7
Capex/sales (%) 6.0 58.0 8.0 5.8 9.2 82.1
Capex/op cashflow (%) 54.9 490.0 30.8 32.4 49.3 418.8
Operating cashflow payout ratio (%) 37.3 32.8 17.8 27.2 29.2 29.3
Cashflow payout ratio (%) 37.3 32.8 17.8 27.2 29.2 29.3
Free cashflow payout ratio (%) 82.7 - 25.8 40.3 57.7 -
DuPont analysis
Ebit margin (%) 30.2 32.3 28.5 28.9 27.1 25.4
Asset turnover (x) 0.5 0.4 0.3 0.3 0.3 0.3
Interest burden (x) 0.7 0.6 0.4 0.5 0.6 0.6
Tax burden (x) 0.7 0.7 0.7 0.6 0.7 0.7
Return on assets (%) 10.6 9.7 5.8 5.8 5.7 5.8
Leverage (x) 2.6 2.8 2.8 2.7 2.7 2.6
ROE (%) 18.6 16.2 6.2 8.1 8.9 9.2
EVA® analysis
Ebit adj for tax 20,624 23,223 16,413 16,590 16,900 17,193
Average invested capital 160,646 198,872 234,341 229,039 225,501 220,081
ROIC (%) 13.1 11.7 7.0 7.2 7.5 7.8
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5
Cost of debt (adj for tax) 7.6 7.7 7.3 6.8 7.3 7.7
Weighted average cost of capital (%) 14.5 14.5 14.5 14.5 14.5 14.5
EVA/IC (%) (1.3) (2.8) (7.5) (7.2) (7.0) (6.7)
EVA (Rsm) (2,111) (5,546) (17,483) (16,533) (15,716) (14,643)

Notes

NHPC
Rs25.95 – N-R
Bharat Parekh Hydro major

bharat.parekh@clsa.com Low ROE, struggling with project execution and hostile environment
+91 22 6650 5020
Delhi hasn’t done a good job of enlightening the masses on the need for dams as
a flood mitigation/power tool, so NHPC, the country’s hydropower major, has
suffered misinformed agitation at its largest project. Shareholders have not earnt
ROE on 10% of its net worth for over a decade. The firm also suffered hydrology
surprises and poor project execution at 35% of its UC capacity. ROE is at a 10-
year low of 8.5% as 53% of net worth is stuck in CWIP, earning no ROE. NHPC
stock offers 6% yield, but has delivered no stock return over the last 2.5 years.
9 January 2019 India’s hydro major with ‘compelling’ power

Apart from its 7GW (16% of India hydro) capacity and under construction
India capacity of 3.8GW, NHPC has a lofty pipeline of 8.2GW of projects under
development. It boasts regulated equity of Rs112.5bn versus market capital of
Power
Rs270bn. With India’s 175GW renewable energy (RE) plan, the importance of
Reuters NHPC.BO hydro cannot be stressed enough, given its renewable nature, storage potential
Bloomberg NHPC IB and lack of viable gas-based power.
Priced on 7 January 2019 Large projects stuck in on ground agitation, project execution lagging
India hasn’t done a good job at enlightening its masses on the compelling need to
12M hi/lo Rs33.85/22.10 create water storage for agriculture and drinking, and the importance of
dams/hydro power as a flood mitigation/power tool. Hence, even the courts have
supported locals and banned storage hydro projects. NHPC has been a victim of
such misinformed agitation at its largest project - the 2GW Lower Subansiri (44%
Shares in issue 10,259m of its CWIP), under-construction for 14 years and stalled for the last seven. It is
Free float (est.) 22% likely to start construction again from 4QFY19. It also faced project execution
challenges at its second largest project under construction - Parbati 2 (800MW)
and 3 (520MW) - at 32% of CWIP, due to a delayed management decision to
3M ADV US$1.8m cancel a defunct contract, hydrology surprises and poor planning.
Foreign s'holding 4.6% High tariffs deter buyers, voluntary ROE sacrifices?
NHPC’s recent P&L hit on stalled projects, and consideration of hiking
Major shareholders
Government of India 73.6% debt/equity/offering lower ROE to discoms on its ROE to make its power from
LIC of India 7.47% the Parbati project viable has shocked investors. This shall further depress its
Power Finance Corp 2.54% ROE and defeat the purpose of CERC giving a higher ROE for hydro power.
HDFC Trustee 2.00%
Value or value trap?
Some 42% of NHPC’s balance sheet is stuck with CWIP, which doesn’t earn a
Stock performance (%) return for shareholders and depresses its ROE. This is at a decade low of 8.5%,
1M 3M 12M
despite CERC offering it a superior 16.5% ROE, as 53% of its net worth is stuck in
Absolute (1) 12 (19) CWIP - earning no ROE. NHPC stock is trading at 0.9x PB and offers 6% yield.
Financials
(Rs) (%)
35 110 Year to 31 March 17A 18A 19IBES 20IBES 21IBES
105
33 Revenue (Rsm) 84,165 77,512 90,950 104,836 109,784
100
31 95
Net profit (Rsm) 23,106 25,039 28,738 31,221 35,046
90 EPS (Rs) 2.09 2.44 2.85 3.04 3.43
29
85 EPS growth (% YoY) (14.3) (14.4) (6.3) (11.4) (18.7)
27 80 PE (x) 12.4 10.6 9.1 8.5 7.6
25 75
Dividend yield (%) 6.6 5.4 6.0 6.8 7.5
NHPC (LHS) 70
23
Rel to Nifty 65 ROAE (%) 7.6 8.5 9.1 10.3 10.6
21 60 PB (x) 0.9 0.9 0.9 0.8 0.8
Dec 16 Aug 17 Apr 18 Nov 18 Net gearing (%) 36.54 41.54 47.58 50.27 -
Source: Bloomberg Source: IBES

NHPC - N-R India power generation
NHPC (consolidated): Financial snapshot

(Rsm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Sales 51,437 72,181 64,062 74,159 82,441 89,050 93,431 84,872 87,910 98,842 107,423
Growth - YoY (%) 40 (11) 16 11 8 5 (9) 4 12 9
Ebitda 35,755 50,990 42,730 43,833 52,163 53,728 55,643 49,378 52,228 58,865 61,237
Ebitda margin (%) 70 71 67 59 63 60 60 58 59 60 57
PAT 16,331 30,541 23,733 17,160 24,364 26,018 30,293 25,037 26,724 30,521 34,148
Growth - YoY (%) 87 (22) (28) 42 7 16 (17) 7 14 12
Source: CLSA, Company, Bloomberg
NHPC plans to near triple NHPC: Organisational structure

capacity from its existing
operational portfolio of NHPC Group
7GW . . . (19GW)
. . . however, its largest

project, Lower Subansiri (14 Operational Under construction Awaiting clerance Under pipeline
years), is under construction (7GW) (3.8GW) (7GW) (1.2GW)
and stalled for seven years (37%) (20%) (37%) (6%)
Parent (5.5GW) Parent (2.8GW) Parent (5GW) Parent

 Salal , J&K  Lower Subansiri  Dibang, Ar. (1.2GW)
(690MW) (2000MW) Pradesh  Bursar, J&K
 Chamera, HP  Parbati - II, HP (2880MW) (800MW)
(540MW) (800MW)  Tawang - II,  Dhauliganga
Ar. Pradesh Int.,
(800MW) Uttarakhand
Subs JV (1GW) (210MW)
(1.5GW)  Pakal Dul, J&K
 Indrasagar, MP (1000 MW) Subs (0.07GW)
(1000MW)
 Omkareshwar,
MP (520MW) JV
(1.9GW)
 Chamkharchhu,
Bhutan
(770MW)
 Kiru, J&K
(624MW)
Led by misinformed local NHPC (parent): Operational capacity addition

agitation and hydrology 6,000 (MW)
surprises . . .
. . . NHPC’s capacity has 5,500

grown at a meagre rate of
6% Cagr over FY13-18
5,000
4,500
4,000
3,500
3,000

Consensus expects revenue NHPC (consolidated): Revenue and growth - YoY (%)
growth to pick up at 120 (Rsbn) (%) 50
Revenue Growth - YoY (RHS)
NHPC post the decline +40%
over FY14-18 . . . 40
100
. . . revenue is expected to
30
grow at 8% Cagr over 80
FY18-21E vs 1% Cagr
over FY15-18 20
60
10
40
0
20 (10)
0 (20)
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: CLSA, Capitaline, Bloomberg
Ebitda margins have fallen NHPC (consolidated): Ebitda and margin (%)
from 67% in FY13 to 58% in 70 (Rsbn) (%) 73
Ebitda Margin (RHS)
FY18 . . .
71
60
. . . increase of CWIP, local
agitation issues have 69
50
marred Ebitda margins 67
40 65
30 63
61
20
59
10
57
0 55
Profit is expected to enjoy NHPC (consolidated): PAT and growth - YoY (%)
an 11% Cagr over FY18- 35 (Rsbn) (%) 100
PAT Growth - YoY (RHS)
21CL vs flat growth over +87%
FY15-18
30 80
25 60
20 40
15 20
10 0
5 (20)
0 (40)

36% of NHPC’s B/S is stuck NHPC (consolidated): Capital work in progress (as % of total assets)
in CWIP, earning no ROE 750 (Rsbn) Gross block CWIP (%) 36
for the company . . . Other non-current assets WC
700 CWIP (% of total assets) 34
. . . NHPC’s ROE has been 650
depressed . . . 600 32
. . . it reported ROE of 7-8% 550 30

in FY17 and FY18 500
28
450
400 26
350 24
300
22
250
200 20
Source: CLSA, Capitaline
As capacity addition gathers NHPC (consolidated): Book value per share

pace, NHPC’s BVPS will also 35 (Rs) 10
BVPS Growth - YoY (RHS)
improve . . .
30 8
. . . consensus estimates its
BVPS to be 12% higher in
25
FY21 vs FY18 6
20
4
15
2
10
5 0
0 (2)
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
NHPC’s multiple has NHPC (consolidated): P/BV - One-year forward

corrected materially from 1.8 (x)
1.7x in Sep-09 to 0.8x in
1.7
Nov-18 . . .
1.6
. . . proportion of CWIP in 1.5
the B/S has increased over 1.4
the same period . . . 1.3
1.2 +1sd
. . . its largest project, Lower
1.1
Subansiri, is stuck due to
local agitation 1.0
0.9 Avg
0.8
0.7 -1sd
0.6
0.5
Sep 09 Sep 10 Sep 11 Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18

NHPC‘s stock has not NHPC (consolidated): Total shareholder yield (%)
delivered any return over
the last 2.5 years . . . 22 (%)
Dividend yield Buyback/capital return yield
. . . however, it offers a high 20
dividend yield
18
16
14
12
10
(2)
No new significant capacity NHPC (parent): Regulated equity

has been added post FY14,
on account of which 120 (Rsbn)
regulated equity has grown
only at 3.5% Cagr over
FY14-18
110
100
90
80
70
60

NHPC: Projects in pipeline

Sr. Project Capacity (MW) Cost Status
no. (Rsbn)
Projects awaiting clearance
Parent
1 Kotli Bhel - IA, 195 MW (3 x 65) 26 In the PIB meeting on 23 October 2013, the project was recommended for investment
Uttarakhand subject to clearance from Honourable SC for Uttarakhand Projects. Decision of
Honourable SC is awaited.
2 Teesta - IV, Sikkim 520 MW (4 x 130) 57 All statutory clearances received except forest clearance (Stage - II). Approval of pre-
investment activities conveyed by MoP on 3 May 2016. FRA compliance is underway.
Draft PUB memo for implementation of project submitted on 24 September 2018.
3 Dibang, Arunachal 2,880 MW (12 x 281 Concurrence to project, environment clearance and forest clearance available. PIB
Pradesh 240) memo circulated by MoP on 12 July 2018. Replies to various agencies furnished by
MoP.
4 Tawang - I, 600 MW (3 x 200) 62 All statutory clearances received except forest clearance. FRA compliance is underway
Arunachal Pradesh and basin study report has been submitted and accepted. After receipt of forest
clearance (Stage - I), the process for PIB/CCEA shall be initiated. DIB meeting held for
pre-investment activities on 24 October 2018, where the proposal has been
recommended. MoM is awaited.
5 Tawang - II, 800 MW (5 x 200) 76 All statutory clearances received except forest clearance (Stage - II). FRA compliance is
Arunachal Pradesh underway. Approval of pre-investment activities by MoP accorded on 28 July 2016.
Total 4,995 MW
JV
Chenab Valley
1 Kiru, J & K 624 MW (4 x 156) 46 Appraisal of DPR accorded by CEA on 13 July 2016. Forest clearance accorded by
state forest department of government of J&K on 19 May 2016. Environment
clearance accorded by MoEF & CC on 24 June 2016. Draft PIB note seeking
recommendation for implementation of Kiru project submitted to MoP on 10
September 2017. PIB memo circulated by MoP on 1 February 2018.
2 Kwar, J & K 540 MW (4 x 135) 42 Environmental clearance accorded by MoEF on 10 April 2017. Forest clearance
accorded by state forest department on 8 August 2014. Appraisal of DPR accorded by
CEA on 23 February 2017. Draft PIB note seeking recommendation for implementation
of Kwar project submitted to MoP on 21 December 2017. PIB memo circulated by
MoP on 7 March 2018.
Foreign Assignment
3 Chamkharchhu, 770 MW 62 SHA and AOI shall be signed after finalisation of concession agreement with RGoB &
Bhutan CCEA approval of GoI. Revised draft material for PIB memorandum submitted to MOP
on 23 June 20 17 and PIB memo circulated by MoP on 8 September 2017. Replies to
all observations of various agencies submitted.
Total 1,934 MW
Subsidiary
1 Loktak D/S, 66 MW (2 x 33) 14 JVC formed and board functioning. Environmental clearance accorded in January 2013.
Manipur Forest clearance accorded by MoEF on 22 December 2014. Concurrence by CEA
accorded on 5 May 2017. Draft PIB memo submitted to MoP on 6 September 2018.
6,995 MW
Projects under pipeline
Under FR/DPR preparation
Parent
1 Bursar, J & K 800 MW na DPR submitted to CEA on 6 January 2017 and is under examination at CEA/CWC.
2 Dhauliganga 360 MW na na
Intermediate,
Uttarakhand
3 Gauriganga-III A, 150 MW na DPR submitted to CEA on 30 March 2018.
Uttarakhand
Total 1,310 MW

NHPC’s capacity has NHPC (consolidated): Summary profit and loss statement (Rsm)
grown at a Cagr of 6% over Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
FY13-18 . . . Revenue 74,159 82,441 89,050 93,431 84,872
Ebitda 43,833 52,163 53,728 55,643 49,378
. . . reflecting the same, Depreciation (14,994) (17,153) (14,320) (14,618) (14,791)
even revenue has grown at
Ebit 28,839 35,010 39,408 41,026 34,587
3.5% Cagr over FY14-18
Net interest expense 1,419 1,624 (245) 4,321 1,786
Profit before tax 30,258 36,634 39,163 45,347 36,374
Taxes (8,954) (9,203) (10,003) (10,544) (8,629)
Rec PAT 21,304 27,431 29,160 34,802 27,745
Minority and associates (4,144) (3,067) (3,142) (4,509) (2,708)
Rec PAT (after minority and associates) 17,160 24,364 26,018 30,293 25,037
Exceptional (4,972) 550 - - -
Rep PAT (after minority and associates) 12,188 24,914 26,018 30,293 25,037
NHPC has invested higher NHPC (consolidated): Summary balance sheet (Rsm)
proportion of equity in its Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
assets; also 42% of its B/s is Shareholder's fund 282,460 307,575 316,427 290,148 300,179
stuck in CWIP . . . Minority interest 30,657 33,257 31,681 33,822 29,349
Long-term borrowings 193,090 187,245 181,811 172,456 167,282
. . . due to both these
Other non-current liabilities 34,877 33,481 47,187 49,747 46,448
reasons, NHPC reported
single digit ROE of 8.5% in Total equity and liabilities 541,084 561,557 577,106 546,174 543,258
FY18 Net block 295,868 279,161 226,095 222,226 211,728
CWIP 149,240 163,775 167,416 175,876 190,871
Trade receivables 24,224 29,052 19,045 18,540 13,460
Cash and cash equivalent 61,428 69,410 72,835 34,725 33,191
Short-term borrowings - - - (3,025) (2,800)
CM of long-term borrowings (15,104) (18,600) (17,571) (16,786) (15,939)
Trade payables (2,234) (1,649) (1,304) (1,576) (1,838)
Other current liabilities (55,589) (32,315) (32,020) (34,211) (40,042)
Total assets 541,084 561,557 577,106 546,174 543,258
Led by positive change in NHPC (consolidated): Summary cashflow statement (Rsm)

working capital, NHPC Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
reported healthy operating PBT 22,091 23,833 18,561 30,276 26,897
cashflow . . . Depreciation 4,858 4,365 6,415 6,831 8,612
Interest (net) (4,102) (4,122) (2,296) (621) 964
. . . it incurred capex of
Change in working capital 14,725 (8,629) (3,942) (23,785) 2,363
Rs30-35bn per annum on its
ongoing projects Other non-cash adjustments (5,467) (6,942) (5,601) (4,603) (608)
Capex (9,957) (11,355) (14,638) (34,810) (32,944)
Purchase of investments (1,845) (3,172) (1,183) (4,723) -
Other investing activities 5,406 6,227 4,280 3,718 1,339
Change in debt (3,739) 141 3,903 34,046 17,607
Dividend paid (5,051) (7,615) (4,454) (15,909) (7,747)
Interest Paid (3,001) (2,661) (2,710) (3,210) (4,876)
Other financing activities - - - (14,796) (11,700)
Net changes in cash 13,919 (9,931) (1,665) (27,586) (94)

Notes

NLC India
Rs68.30 – N-R
Bharat Parekh Major capex on the anvil

bharat.parekh@clsa.com Lignite major trying to diversify mix and customers
+91 22 6650 5020
Joint-sector regulated power utility NLC was a value trap as the stock lost 38%
in 2018 on derating, despite being high yield at the beginning of the year. With
delayed thermal capex, it entered lower-ROE renewables and faces lower ROE,
due to a delayed solar project with 30% lower tariffs. The expected start of a
US$1bn 1GW lignite expansion by March is key. A high government
stakeholding (84%) exposes it to stock overhang. The stock trades at FY18
valuations of 6.8x PE and 0.8x PB, with a 7.4% dividend yield at a 43% payout.
9 January 2019 India’s lignite major in a regulated regime

NLC is India’s largest producer of lignite, with about 54% production market
India share. It is strategically located in Tamil Nadu, which has about 79% of India’s
Power total lignite reserves. It has operational capacity of 4.8GW with
lignite/coal/renewables at 68:21:11. Under its Vision 2025 plan, it proposes to
Reuters NLCI.BO organically add 13.3GW of capacity, for a mix of 37:38:24.
Bloomberg NLC IB
Priced on 7 January 2019 In the midst of large capex
CNX Nifty @ 10,771.8 NLC is poised to pump Rs1.3tn by 2025 towards capex. It plans to more than
12M hi/lo Rs113.50/65 double its lignite mining and power generation capacity from 30.6MTPA/3.2GW
to 62.2MTPA/6.8GW, increase coal-based power-generation capacity from
1.0GW to 6.9GW, and renewable from 0.5GW to 4.4GW. Management also
Shares in issue 1,529m envisages inorganic expansion of 3GW, leading to mining capacity of 62.2MTPA
Free float (est.) 17.7% (lignite) and 31MTPA (coal) and power generation capacity to 21.1GW by 2025.
Market cap US$1.5bn
High dependence on one state being fixed, but . . .
3M ADV US$0.9m
NLC has taken steps towards geographical diversification by making inroads in
Foreign s'holding 0.40% Rajasthan, Odisha and Uttar Pradesh. The Ghatampur TPP, UP (3x660MW)
Major shareholders contract was awarded to L&T in August 2016. But Tamil Nadu will continue to
Government of India 83.4% account for 47% of power generation capacity (ex-inorganic expansion) from
LIC of India 3.2%
Reliance Mutual Fund 1.9% 95% currently.
UTI Mutual Fund 1.2%
Stock is value with 7.4% dividend yield
NLC stock offers a dividend yield of 7.4% (FY18) vs NTPC (3.5%) and PWGR
(2.7%). Against a 14% ROE in FY18, the stock is trading at 0.8x FY18 PB vs its 10-
year average of 1.25x. Its projects have seen increasing execution risks, with 25%
of its balance sheet being stuck in CWIP in FY18 vs 11% in FY16. This is also
reflected in its stock price, which is down 36% over the past year.
1M 3M 12M
Absolute (9) (5) (36)
Financials
(Rs) (%)
125
NLC India (LHS)
140 Year to 31 March FY14 FY15 FY16 FY17 FY18
120
115 Rel to Nifty 130 Revenue (Rsm) 59,672 60,877 56,633 77,790 84,472
110 120 Net profit (Rsm) 15,479 12,666 2,567 25,489 17,893
105
100 110 EPS (Rs) 9.23 7.55 1.53 16.68 11.71
95
100 EPS growth (% YoY) (18) (80) 990 (30)
90
85 90 PE (x) 8.68 10.60 52.32 4.80 6.84
80
75 80 Dividend yield (%) 4.8 7.3 4.3 15.3 7.4
70 70 ROAE (%) 11.5 8.8 1.9 20.3 14
65
60 60 PB (x) 0.83 0.77 0.89 0.86 0.79
Dec 16 Aug 17 Apr 18 Dec 18 Net gearing (%) 23 21 28 57 65
Source: Bloomberg Source: IBES

NLC India - N-R India power generation
NLC (parent): Financial snapshot

(Rsm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Sales 42,960 48,669 55,901 59,672 60,877 56,633 77,790 84,472
Growth - YoY (%) 13 15 7 2 (7) 37 9
Ebitda 16,250 17,345 20,091 19,293 19,513 12,831 25,117 30,605
Ebitda margin (%) 38 36 36 32 32 23 32 36
PAT 12,848 13,306 12,984 15,479 12,666 2,567 25,489 17,893
Growth - YoY (%) 4 (2) 19 (18) (80) 893 (30)
NLC has strong expansion NLC: Organisational structure

plans . . .
NLC
. . . on the thermal side it (18.7GW)
awarded the 2GW
Ghatampur TPP to L&T in
August 2016 . . . Operational Under construction Upcoming
(4.8GW) (3.7GW) (10.3GW)
. . . it proposes to (26%) (19%) (55%)
organically add 13.3GW of
capacity; post which the
Parent (3.8GW) Parent (1.7GW) Parent + Subs/JVs
mix shall change to  TPS I (600MW)  NNTPS (net 400MW)  TPS II 2nd Ext. Ph-I
37:38:24 as  TPS I Ext. (420MW)  Bithnok TPS (250MW) (1320MW)
lignite/coal/renewables vs  TPS II (1470MW)  Barsingar TPS Exp  TPS II 2nd Ext. Ph-II
68:21:11 currently . . .  TPS II Ext. (500MW) (250MW) (1320MW)
 BTPS (250MW)  Renewable (1159MW)  Odisha Ph- I & II
 Renewable (100MW) (4800MW)
. . . it intends to acquire  Solar (2671MW)
another 3GW of assets Subs (1.9GW)  Wind (200MW)
Subs (1GW)  Ghatampur TPP (NLC
 Tuticorin TPP - JV owns 51%)
with TANGEDCO
(NLC owns 89%)
Capacity addition at 6% NLC (parent): Operational capacity addition

Cagr (FY13 to FY18) is likely 4,000 (MW)
to accelerate as per
management guidance
3,500
NLC commissioned 430MW
of solar capacity in Tamil
Nadu during FY18
3,000
2,500
2,000
1,500
1,000

Over and above power NLC: Regulated equity of power generation

generation, regulated equity 25 (Rsbn)
of lignite mining business
was 20bn in FY18, as per
management 20
15
10
0
FY15 FY16 FY17 FY18 FY19
Source: CLSA, CERC
Decline in revenue growth NLC (parent): Revenue and growth - YoY (%)
due to unprecedented 90 (Rsbn) (%) 40
power surrender and
passing on benefit to 80 35
discoms in FY18 . . . 30
70
25
60
20
50
15
40
10
30
5
20 0
10 (5)
0 (10)
. . . decline in Ebitda in NLC (parent): Ebitda and margin (%)

FY16 was on account of 35 (Rsbn) (%) 40
Ebitda Margin (RHS)
floods during Nov-Dec
2015 impacting lignite 38
30
production . . . 36
25 34
32
20
30
15
28
10 26
24
5
22
0 20

. . . bottom line also faced NLC (parent): PAT and growth - YoY (%)
the same brunt in FY16 and 30 (Rsbn) (%) 40
FY18 +90%
30
25
20
20
10
15 0
(10)
10
(20)
5
(30)
(80%)
0 (40)
CWIP proportion increasing NLC (parent): Capital work in progress (% of total assets)
on account of major capex 300 (Rsbn) Gross block CWIP (%) 28
plans . . . Other non-current assets WC
CWIP (% of total assets) (RHS) 26
. . . may put short term
24
pressure on ROE 250
22
20
200
18
16
150
14
12
100 10
Flattish BVPS since FY16 NLC (parent): Book value per share
100 (Rs) (%) 10
90
8
80
70 6
60
4
50
2
40
30 0
20
(2)
10
(13%)
0 (4)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

NLC’s 10-year average one- NLC (parent): PB - One-year forward

year forward PB is 1.25x 2.8 (x)
2.4
2.0
+1sd
1.6
1.2 Avg
0.8
-1sd
0.4
Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17
NLC’s stock offers a NLC (parent): Total shareholder yield

dividend yield of 6% (FY18) 35 (%)
vs NTPC (3.5%) and PWGR Dividend yield Buyback/capital return yield
(2.7%)
30
25
20
15
10
0
Plans to beef up power NLC: Projects in pipeline

generation capacity to Upcoming projects State Cap (MW)
18.7GW from 4.8GW by Lignite based
2025 TPS-II 2nd Expn Phase I Tamil Nadu 1,320
TPS-II 2nd Expn Phase II Tamil Nadu 1,320
Total 2,640
Coal based
Odisha Phase I and II Odisha 4,800
Total 4,800
Renewable
Solar Various 2,651
Solar Andaman 20
Wind power Tamil Nadu 200
Total 2,871
Grand total 10,311

Increase in YoY revenue in NLC (parent): Summary profit and loss statement
FY18 offset by power Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
surrender and benefit Revenue 59,672 60,877 56,633 77,790 84,472
passed on to discoms
Ebitda 19,293 19,513 12,831 25,117 30,605
Depreciation (5,173) (4,406) (6,415) (6,831) (8,612)
Ebit 14,120 15,106 6,416 18,286 21,994
Net interest expense 8,432 5,597 3,368 5,055 3,819
Taxes (7,073) (8,037) (7,217) 2,148 (7,919)
Rec PAT 15,479 12,666 2,567 25,489 17,893
Exceptional (460) 3,130 (287) (1,801) 594
Rep PAT 15,019 15,797 2,280 23,688 18,488
Capacity expansion NLC (parent): Summary balance sheet

on anvil . . . Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
Shareholder's fund 139,036 148,693 129,255 121,986 133,346
. . . leading to constant
increase in CWIP
Total equity and liabilities 180,446 190,894 185,440 194,105 222,729
Net block 64,706 64,257 96,542 96,250 105,741
CWIP 37,008 44,061 24,575 51,147 70,752
Short-term borrowings 0 0 (146) (15,461) (14,578)
Trade payables (4,613) (6,314) (9,706) (7,074) (4,952)
Total assets 180,446 190,894 185,440 194,105 222,729
Capex funded largely by NLC (parent): Summary cashflow statement

internal accruals since FY15 Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
(excluding FY17) PBT 22,091 23,833 18,561 30,276 26,897
Depreciation 4,858 4,365 6,415 6,831 8,612
Interest (net) (4,102) (4,122) (2,296) (621) 964
Change in working capital 14,735 (8,622) (3,942) (23,785) 1,415
Other non-cash adjustments (5,478) (6,949) (5,601) (4,603) 340
Capex (9,596) (11,319) (14,592) (34,715) (32,944)
Purchase of investments (1,845) (3,172) (1,183) (4,723) 0
Other investing activities 5,045 6,191 4,234 3,623 1,339
Change in debt (3,739) 141 3,903 34,046 17,607
Dividend paid (5,051) (7,615) (4,454) (15,909) (7,747)
Interest paid (3,001) (2,661) (2,710) (3,210) (4,876)
Other financing activities 0 0 0 (14,796) (11,700)
Net changes in cash 13,919 (9,931) (1,665) (27,586) (94)

NTPC
Rs148.60 - BUY
Bharat Parekh Defensive growth at a bargain

bharat.parekh@clsa.com Deep-value BUY, stock at 10-year-low PB
+91 22 6650 5020
NTPC is one of world's largest power utilities with 50+GW of installed capacity
and 21GW under construction. Its share price has fallen 13% over the past three
months. We see it bottoming on a material turn in ROE under-recovery and
capacity additions. We expect 53% regulated-equity growth over FY18-21,
versus 40% over FY15-18, driving a 13% EPS Cagr. NTPC is closing on robust RE
growth, expanding ROE by 240bps over FY18-21CL, and trading at around 10-
year-low multiples, with rising yields of 4.2% (FY20CL) at a 40% payout.
9 January 2019
What is happening to ROE under-recovery?
Whatever could go wrong, did. NTPC ROE fell to a 10-year low in FY17. We
India turned positive as we see ROE rising by 240bps over FY18-21. Drivers, apart
from new plant starts, are lower coal plant operations-related under-recovery.
Power Management halved the UR to Rs6bn for FY19. Unchahar plant (UR 35bps ROE)
Reuters NTPC.NS starting in mid-December should also help. Strategies to boost coal supplies
Bloomberg NTPC IS include: about 3x captive coal production to 6.4mtpa, approval to import 2.5mt of
Priced on 7 January 2019 coal during 4QFY19, and new 5mtpa of short-term coal from CIL by March 2019.
12M hi/lo Rs178.55/136.20 Capacity additions on track; regulated equity to grow by 53% FY18-21CL
We expect NTPC to add 11.3GW of thermal capacity at the parent over FY18-
12M price target Rs180.00
±% potential +21%
21CL, leading to 53% regulated-equity growth FY18-21CL vs 40% FY15-18CL,
driving a 13% EPS Cagr. It should commercialise 3.3GW of capacity in FY19CL,
Shares in issue 8,245.5m
31.8%
leading to 15% YoY growth in RE by end-FY19CL.
Free float (est.)
Market cap US$17.4bn M&A concerns unwarranted, could be value-enhancing

3M ADV US$19.6m The government may sell its 64% stake in SJVN to NTPC for US$875m, helping
Foreign s'holding 11.7% bridge the budget deficit. Similarly, if NTPC buys NHPC’s stake, it would also be
value enhancing. At the current market price, the SJVN acquisition should add 3%
Major shareholders
Government of India 61.8% to NTPC’s consolidated EPS, and NHPC could add 4%. More importantly, both
ICICI Prudential AMC 4.7% M&A, if concluded, will improve its RE/thermal mix to 23:77 versus 3:97 now.
Regulatory draft positive, stock at 10-year low PB

CERC's draft regulation FY19-24 is a positive signal to investors of continued
Blended ESG Score (%)* regulatory support for capex and creates upside risk to EPS (6%). BUY NTPC as it
Overall 62.2 is getting closer to robust RE growth - a rerating catalyst for a stock trading close
Country average 63.7 to 10-year low multiples. We value NTPC using DCF-based methodology to give
GEM sector average 57.8
*Click to visit company page on clsa.com for details us a BUY rating and target price of Rs180. We assume a 7.75% risk-free rate,
5.5% equity-risk premium and 0.83 beta to calculate a COE of 12.5%.
1M 3M 12M
Absolute 7.8 (8.8) (16.3) Financials
Relative 7.0 (12.6) (17.9) Year to 31 March 17A 18A 19CL 20CL 21CL
Abs (US$) 8.9 (4.0) (24.3) Revenue (Rsm) 783,865 849,035 938,252 1,072,197 1,240,214
(Rs) (%)
190 110 Net profit (Rsm) 93,189 104,917 115,927 128,268 154,950
105
180
EPS (Rs) 11.3 12.7 14.1 15.6 18.8
100
CL/consensus (20) (EPS%) - - 101 100 107
95
170
90 EPS growth (% YoY) (3.2) 12.6 10.5 10.6 20.8
160 85 PE (x) 13.1 11.7 10.6 9.6 7.9
80 Dividend yield (%) 3.2 3.4 3.3 4.2 5.1
150
75
NTPC (LHS)
FCF yield (%) (8.4) (6.4) (6.6) 5.1 5.9
70
140
Rel to Nifty PB (x) 1.3 1.2 1.1 1.1 1.0
65
130 60 ROE (%) 9.9 10.6 11.0 11.5 13.0

NTPC - BUY India power generation
Profit & Loss (Rsm)

Revenue 783,865 849,035 938,252 10.5 1,072,197 1,240,214
Cogs (ex-D&A) (475,722) (483,155) (528,349) (616,346) (726,852)
Gross Profit (ex-D&A) 308,144 365,881 409,903 12 455,851 513,362
Op Ebitda 206,244 226,622 265,665 17.2 305,977 357,389
Op Ebit 147,036 155,633 185,087 18.9 209,101 244,251
Other non-Op items 0 0 - - -
Taxation (28,563) (28,426) (35,445) (38,963) (39,436)
Profit after tax 93,189 104,917 115,927 10.5 128,268 154,950
Net profit 93,189 104,917 115,927 10.5 128,268 154,950
Adjusted profit 93,189 104,917 115,927 10.5 128,268 154,950
Working capital changes 16,175 (42,750) (3,126) 25,524 14,652
Other items (46,584) (3,543) (79,684) (48,413) (52,010)
Net operating cashflow 175,836 180,328 182,855 1.4 283,088 320,030
Free cashflow (102,336) (78,087) (81,354) 62,663 72,000
M&A/Others (5,593) (10,951) (25,815) (17,205) (7,382)
Increase in loans 137,104 147,483 134,793 (8.6) 28,897 37,277
Dividends (46,693) (50,381) (49,062) (62,041) (74,946)
Net equity raised/other 2,216 2,414 - - -
Net financing cashflow 92,627 99,517 85,730 (13.9) (33,144) (37,669)
Incr/(decr) in net cash (15,303) 10,479 (21,438) 12,314 26,949
Exch rate movements - - - - -
Cash & equivalents 29,305 39,784 18,346 (53.9) 30,659 57,608
Other current assets 173,315 251,540 263,095 4.6 264,471 277,383
Fixed assets 1,800,928 1,988,354 2,171,986 9.2 2,295,534 2,430,427
Investments 89,524 100,475 126,290 25.7 143,495 150,877
Intangible assets 0 0 0 0 0
Other non-current assets 186,096 138,572 178,790 29 179,828 181,526
Total assets 2,360,547 2,594,504 2,840,486 9.5 2,999,288 3,196,559
Short-term debt 94,828 128,728 150,130 16.6 138,528 109,027
Long-term debt/CBs 973,393 1,086,976 1,200,367 10.4 1,240,865 1,307,643
Shareholder funds 962,312 1,017,778 1,084,642 6.6 1,150,869 1,230,873
Total liabs & equity 2,360,547 2,594,504 2,840,486 9.5 2,999,288 3,196,559
Revenue growth (% YoY) 7.1 8.3 10.5 14.3 15.7
Ebitda margin (%) 26.3 26.7 28.3 28.5 28.8
Ebit margin (%) 18.8 18.3 19.7 19.5 19.7
Net profit growth (%) (3.2) 12.6 10.5 10.6 20.8
Op cashflow growth (% YoY) 35.4 2.6 1.4 54.8 13.0
Capex/sales (%) 35.5 30.4 28.2 20.6 20.0
Net debt/equity (%) 108.0 115.5 122.8 117.2 110.4
Net debt/Ebitda (x) 5.0 5.2 5.0 4.4 3.8
ROE (%) 9.9 10.6 11.0 11.5 13.0
ROIC (%) 6.0 5.9 6.2 6.6 7.7

NTPC is one of the world's NTPC: Organisational structure

largest power utilities, with
50+GW of installed capacity NTPC
(53.6GW)
and 21GW of plants under-
construction . . .
Parent Subsidiaries Joint ventures
Other investments
. . . on the inorganic front, it (46.1GW) (1GW) (6.5GW)
recently completed
acquiring the stakes of the Kanti Bijli - Bhartiya Rail - Patratu - NTPC NTPC EESL
Bihar govternment in Kanti 220MW 500MW 325MW -SAIL Tamil Nadu (32%)
Bijlee Utpadan and (73%) (74%) (74%) (50%) (50%)
Nabinagar Power CIL NTPC Urja
(50%)
Generating Company Meja Ratnagiri
Urja Gas
(50%) (26%) Trincomalee
Power, Sri Lanka
(50%)
Aravali
Nabinagar
Power
(50%) Bangladesh-India
(50%)
Friendship Power
(50%)
NTPC grew RE at Cagr of NTPC quarterly regulated equity

11.5% during FY15-18 . . . 525 (Rsbn) 520
506 509 509
496
. . . led by Kudgi (Unit 3 - 500
800MW) commercialised by
NTPC during 2QFY19 475
RE grew 5% YoY for
2QFY19 450 440 441
423 425
420
425 414
398
394
400
369 369
375
350
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
We expect a historic high - NTPC capacity additions

11.3GW of thermal capacity 7,000 (MW)
NTPC Parent (ex-solar/wind) NTPC JVs and ssubsidiaries
to start commercial
operations by FY21 6,000
5,000
4,000
3,000
2,000
1,000
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL

What is happening to ROE under-recovery?

Management guided for Whatever could go wrong at NTPC, did, with ROE falling to a 10-year low in
lower under-recoveries of FY17. We turned positive here as we see ROE not only bottoming, but also rising
Rs6bn for FY19 vs Rs14.4bn 240bps over FY18-21CL. Key drivers here, apart from new plant starts, are lower
in FY18
coal-related under-recovery and improved plant operations. Management guided
lower under-recovery (UR) of Rs6bn for FY19 vs Rs14.4bn in FY18. The accident-
hit 500MW Unchahar (UR Rs2.2bn in FY18 - 35bps ROE) resumed operations in
mid-December. Strategies to boost coal supplies include: triple captive coal to
6.4mtpa), approval to import 2.5mt of coal during 4QFY19, lifting new 5mtpa of
short-term coal from CIL by March 2019, and paying advances to railways for
wagon prioritisation.
Unchahar-IV (500MW) NTPC under-recovery

resumed operations in mid- 3 (Rsbn) Coal related Plant shutdown/maintenance related Total under recovery
December and NTPC has
taken proactive measures to 2
avoid coal shortages . . . 1
0
. . . this will lead to a swing
of Rs10bn in 2HFY19, (1)
which itself will drive the (2)
PAT by 18%
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
1HFY18 2HFY18 1HFY19 2HFY19E
Given NTPC’s efforts to NTPC: Cumulative PAF for FY18/19

resolve the coal availability 82 (%)
issue . . . FY18 FY19
. . . we expect NTPC’s PAF 81

to trend upwards vs the
same time last year. 80
79
78
77
76
75
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Source: CLSA, CEA

Captive coal mines are the only viable option, but . . .

Coal-related UR accounted for 58% of NTPC’s total UR in FY18. With CIL
continuing to miss its targets, we see limited scope for it to help NTPC’s new
capacity addition plans. Hence, we believe the key issue to focus on for its energy
security is its captive coal mines.
India’s captive coal-mine production by private IPPs also missed its lofty target
led by a failed coal-mine auction. Of government companies allocated mines, only
NTPC seems to have taken some serious action to execute it and plans 56mtpa
capacity from its five coal mines , containing 3.9bt of reserves.
NTPC’s first mine, Pakri Barwadih, will contribute about 6mtpa (3% of its own
consumption) in FY19. With this, NTPC could account for 18% of India’s captive
coal-mine production by power utilities in FY19 (second year of its mining
business). Its target to double production to 12.5mtpa by FY21 should help it
contribute 28% to India’s captive mine production by power companies. It also
targets 4x scale-up in its captive coal production over FY21-26 to reach 50mtpa
production by FY26.
NTPC’s first mine, Pakri India: Captive mine production

Barwadih, will contribute Particulars (MMT) FY18 FY19E FY20E FY21E
about 6mtpa in FY19 . . .
India total 675.4 728.5 774.4 822.9
. . . NTPC will account for - Coal India 567.0 609.5 646.1 684.9
18% of India’s captive coa-l
mine production in FY19 (its - SCCL 62.0 66.7 70.7 74.9
second year of mining - Captive power 31.2 36.3 40.9 45.4
business) . . .
- NTPC 2.7 6.4 9.5 12.5
. . . it targets to double - Other captive power 28.5 29.9 31.4 32.9
production to 12.5mtpa by
FY21 - Others 15.2 16.0 16.8 17.6
NTPC (% of captive power) 9 18 23 28

Source: CLSA, Ministry of Coal, Company
NTPC’s first mine, Pakri NTPC: Coal mines

Barwadih, will contribute Mining capacity (MTPA) Resource (BT)
about 6mtpa (3% of its own
consumption) in FY19, and Pakri Barwadih 18 1.6
NTPC targets 8x scale-up in Dulanga 7 0.2
production to reach 50mtpa
production by FY26 Talaipalli 18 1.3
Chatti Bariatu 7 0.5
Kerandari 6 0.3
Total 56 3.9

NTPC plant-wise PAF (cumulative)

NTPC (Parent) Capacity Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18
Coal UR had been a problem (MW)
at NTPC . . . Capacity < normative 17 12 17 24 24 32 25 24 24 30
PAF (% of capacity)
. . . however, since Capacity < normative

PAF (% of reg. equity)
17 15 16 27 27 28 26 26 26 33
September 2018, UR has Western region

started to reduce % capacity in red zone 18 14 15 22 22 25 22 22 22 22
Korba 2,100 94.4 93.0 93.4 92.3 90.5 89.1 87.2 85.0 85.3 86.1
Plants experiencing coal Vindhyachal I 1,260 90.6 88.9 90.2 91.4 92.3 88.1 88.1 86.0 87.0 87.7
shortages or availability Vindhyachal II 1,000 80.6 84.1 86.3 87.7 88.7 81.8 83.4 84.8 84.8 86.7
Vindhyachal III 1,000 99.2 99.3 92.2 92.0 93.1 96.8 97.6 98.1 98.4 96.3
problems have been inter-
Sipat II 1,000 97.4 96.6 96.6 96.4 96.8 98.8 97.1 97.4 97.4 96.6
changing on account of Korba III 500 79.8 83.8 85.2 87.2 87.5 93.3 94.2 91.2 90.5 91.7
which the percentage of Sipat I 1,980 88.4 90.7 92.2 91.0 87.5 84.6 86.0 87.4 89.1 89.9
capacity in the red zone Vindhyachal IV 1,000 87.2 81.4 83.6 86.0 87.8 99.5 91.3 92.7 93.2 94.0
increased to 33% in Nov Mauda I 1,000 94.3 95.0 85.7 77.8 74.7 68.9 65.3 68.8 72.6 76.5
2018 vs 26% in Oct 2018 Vindhyachal V 500 97.6 98.0 98.2 98.5 98.6 96.9 97.9 98.4 97.8 98.3
Mauda II 1,320 37.5 45.8 45.8 47.4 46.3 70.9 73.9 73.1 68.6 67.8
Solapur 660 - - 24.4 20.0 24.7 83.4 76.8 73.0 76.3 79.4
Southern region
% capacity in red zone 31 31 31 48 48 15 22 20 20 52
Ramagundam - I & II 2,100 91.4 93.0 92.8 93.1 92.7 88.7 90.4 91.1 88.6 89.5
Ramagundam - III 500 95.8 93.8 93.7 94.7 95.2 96.2 96.9 96.7 97.0 90.6
NTPC Talcher STPS II 460 87.7 84.7 84.1 83.9 85.2 83.4 79.7 77.5 76.1 77.4
NTPC Simhadri STPS II 1,000 94.3 91.7 83.6 80.1 81.2 78.0 72.2 71.6 74.4 77.4
NTPC Simhadri STPS II 1,000 78.3 76.5 75.2 73.3 73.6 99.7 99.8 94.8 88.5 84.7
Kudgi I 2,400 59.2 75.6 73.4 74.8 76.8 102.4 101.9 97.4 88.5 82.9
Farakka underwent boiler Eastern region

maintenance and an
Farakka - I & II 1,600 91.8 89.5 88.4 85.9 86.1 76.7 77.5 80.5 80.8 82.8
overhaul from April to Farakka - III 500 97.2 96.9 95.3 91.0 101.0 89.0 89.8 90.5 90.9 88.4
August on account of which Kahalgaon - I 840 88.9 90.3 91.0 90.9 89.8 89.2 89.6 90.7 90.6 90.5
it saw lower PAFs Kahalgaon - II 1,500 95.5 96.4 91.8 91.3 92.3 82.2 85.6 83.8 83.6 84.7
Talcher - I 1,000 87.8 89.3 89.8 90.9 89.3 88.6 86.8 85.9 85.1 84.3
Barh - II 1,320 89.1 85.6 80.5 79.8 80.6 92.9 92.3 90.0 90.4 90.5
Northern region
Dadri TPS 840 100.5 95.7 90.1 87.7 89.3 91.2 93.1 94.0 91.3 89.9
Dadri-II TPS 980 99.7 97.4 93.3 90.5 91.6 92.7 94.5 96.1 96.6 95.9
Rihand STPS 1,000 98.3 91.7 93.1 93.8 94.4 84.0 86.8 86.6 86.7 86.8
Rihand-II STPS 1,000 80.0 83.7 83.9 86.2 87.9 80.0 84.2 87.0 89.0 89.8
Rihand-III STPS 500 87.1 88.6 90.4 91.8 92.8 96.6 97.5 95.9 89.3 89.6
Singrauli STPS 2,000 89.8 90.0 90.5 90.3 88.6 71.5 73.8 77.1 79.4 82.3
Unchahar-I TPS 420 92.7 94.2 95.2 90.0 84.5 98.7 94.4 91.0 92.2 93.4
Unchahar-II TPS 420 99.6 99.7 99.8 97.5 96.9 88.4 87.8 90.6 90.9 92.6
Unchahar-III TPS 210 98.8 99.1 99.3 98.9 98.9 77.3 79.7 83.7 86.7 88.9
Unchahar-IV TPS 500 - - 43.2 62.3 42.1 - - - - -
North eastern region
% capacity in red zone - 100 100 100 100 100 0 0 0 0 0
Given Bongaigaon is Bongaigaon 500 10.8 16.5 28.9 38.7 44.2 91.8 92.3 88.5 84.3 84.6
GAS BASED Capacity Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
stabilising, PAF has CAPACITIES (MW)
improved substantially Capacity < normative 0 0 0 0 0 26 26 26 20 20
PAF (% of capacity)
Capacity < normative 0 0 0 0 0 13 13 13 38 38
PAF (% of reg. equity)
656
A pick-up in its captive mine Kawas GPS 99.1 99.4 99.6 99.1 98.0 95.7 96.6 97.3 97.2 97.3
Gandhar GPS 657 96.5 94.4 94.8 94.4 92.4 89.8 87.7 83.5 81.2 79.5
production, improving
Anta GPP 419 93.2 93.7 92.7 92.1 93.0 85.0 87.6 89.4 90.0 90.9
supply from CIL, the end of Auraiya GPP 663 92.5 93.0 90.2 88.8 89.9 86.6 88.9 90.4 91.2 91.6
maintenance at Rihand, Dadri GPP 830 90.3 91.2 90.4 90.4 91.5 75.0 79.5 82.4 84.2 86.0
Singrauli and Vindhyachal Hydro based capacities Capacity Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
and good wind generation (MW)
Koldam HEP 800 105.5 105.7 104.8 104.1 103.6 106.9 107.5 107.8 108.1 107.8
should aid improving PAF
Singrauli SHEP 8 - - - - - 66.4 66.4 66.4 66.4 53.2
from 3QFY19 onwards Weighted avg PAF Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18
Coal based 79.1 79.7 79.8 79.5 79.5 79.5 79.2 79.3 79.5 80.0
Gas based 83.0 83.0 83.0 83.0 83.0 82.0 82.5 82.9 82.3 81.7
Note: Each month is on a cumulative basis, plant-wise regulated equity has been estimated for the calculation.
Source: CLSA, Regional Energy Account

NTPC plant-wise coal stock

Capacity Normative Dec 17 Mar 18 Jun 18 Sep 18 Nov 18
(MW) stock
NTPC (parent) - as per 18 9 13 14 8 9
capacity
NTPC’s coal stocks depleted NTPC (parent) - as per 18 7 12 13 7 8
to half the normal level on regulated equity
lower CIL supply, delays in Western region
ramping-up captive coal Average 16 7 10 11 9 9
mines and logistics Korba 2,100 15 6 4 1 0 1
problems
Vindhyachal I 1,260 15 15 25 27 22 24
Vindhyachal II 1,000 15 15 25 27 22 24
Vindhyachal III 1,000 15 15 25 27 22 24
Sipat II 1,000 15 0 0 6 1 0
Korba III 500 15 6 4 1 0 1
Sipat I 1,980 15 0 0 6 1 0
Vindhyachal IV 1,000 15 15 25 27 22 24
Mauda I 1,000 20 0 0 0 0 1
Vindhyachal V 500 15 15 25 27 22 24
Mauda II 1,320 20 0 0 0 0 1
Solapur 660 25 2 3 5 18 4
Southern region
Coal production in India Average 22 7 11 15 2 5
slowed to just 2.5% in Ramagundam - I & II 2,100 15 7 15 18 3 10
August 2018. CIL also Ramagundam - III 500 15 7 15 18 3 10
reported lower growth of
NTPC Talcher STPS II 460 15 13 23 17 11 14
9% YoY for 2Q19 vs 15%
YoY for 1Q19. . . NTPC Simhadri STPS II 1,000 25 0 3 13 0 0
NTPC Simhadri STPS II 1,000 25 0 3 13 0 0
. . . this, coupled with Kudgi I 2,400 30 15 12 10 1 1
logistics problems, has led Eastern region
to the depletion of coal
Average 16 1 8 11 1 1
stocks across the country
Farakka - I & II 1,600 15 0 8 7 0 0
Farakka - III 500 15 0 8 7 0 0
Kahalgaon - I 840 15 0 7 14 3 0
Kahalgaon - II 1,500 15 0 7 14 3 0
Talcher - I 1,000 15 6 6 3 0 4
Barh - II 1,320 20 0 9 18 2 3
Northern region
Average 20 21 27 21 16 18
Northern region is relatively Dadri TPS 840 30 13 6 3 4 9
better placed on coal Dadri-II TPS 980 30 13 6 3 4 9
stocks . . . Rihand STPS 1,000 15 19 23 31 31 30
Rihand-II STPS 1,000 15 19 23 31 31 30
. . . start of pick-up in
captive coal mine Rihand-III STPS 500 15 19 23 31 31 30
production . . . Singrauli STPS 2,000 15 26 31 30 19 19
Unchahar-I TPS 420 25 26 51 14 2 8
. . . and coal imports from Unchahar-II TPS 420 25 26 51 14 2 8
February 2018 will improve Unchahar-III TPS 210 25 26 51 14 2 8
coal stocks across NTPC
Unchahar-IV TPS 500 25 26 51 14 2 8
North Eastern region
Average 20 1 10 10 5 1
Bongaigaon 500 20 1 10 10 5 1
Note: Plant-wise regulated equity has been estimated for the calculation. Source: CLSA, CEA

Capacity additions on track; RE to grow 53% FY18-21CL

We expect NTPC to add 11.3GW of thermal capacity at the parent level over
FY18-21CL. This will lead to about 53% RE growth over FY18-21CL vs about 40%
over FY15-18CL, driving a 13% EPS Cagr. We estimate NTPC to commercialise
3.3GW of capacity in FY19, leading to 15% YoY growth in RE by end-FY19 vs 5%
in 2Q. Lara (24% of FY19 CoD) has already commissioned but needs to
commercialise. The balance of plant of Solapur/Bongaigaon (27% of the
commercial operation date) is fully operational with the start of units 1/1&2,
hence starting units 2/3 should not have much problem once the boiler turbine
generator is ready.
NTPC commercialised NTPC capacity commercialised in FY18

3.9GW of capacity in FY18, 45,000 (MW)
adding about 10% to its 8
FY17 capacity. . . 44,000 50

800
250
250
. . .Kudgi, Mauda and Solapur 43,000 500

are the major plants which 660
were commercialised in 42,000
660
FY18
44,500
41,000 800
40,000
40,522
39,000
38,000
Mauda
Rojmal
Unchahar
FY17
Mandsaur
FY18
Kudgi
Solapur
Bongaigaon
Kudgi
Singrauli
(U-1)
(U-2)
Wind
Solar PV
(U-2)
(U-1)
SHEP
(U-1)
(U-2)
Many of the projects at NTPC are close to reaching the finishing line
We model 11.3GW of capacity to be commissioned in FY19-21. Of this, NTPC
has already spent 80% of the cost in 70% of the projects, improving project-start
visibility.
We expect NTPC to NTPC capacity to commercialise in FY19

commercialise 3.3GW of 49,000 (MW)
thermal and 760MW of
hydro +RES capacity in 48,000 500
FY19 . . . 800
47,000
. . . in FY19YTD it 800
commercialised 800MW 46,000 660

(Kudgi U-3) of capacity 250
48,310
45,000 800
44,000
44,500
43,000
42,000
Darli Palli
FY18
FY19CL
(U-1)
RES
Kudgi
Solapur
Bongaigaon
(U-3)
Lara
(U-2)
(U-1)
(U-3)

NTPC has a strong pipeline NTPC capacity to commercialise in FY20

of projects . . . 53,000 (MW)
600
. . . we expect it to 52,000
800
commercialise 4.3GW of
capacity at the parent level 51,000 660
in FY20CL, which will lead 660
to 15% growth in RE in 50,000
52,630
800
FY20CL over FY19CL
49,000
800
48,000
48,310
47,000
46,000
Tanda
FY19CL
Gadarwara
(U-2)
(U-1)
(U-2)
RES
FY20CL
Lara
(U-1)
NK
DP
(U-1)
Source: CLSA, Company, NK - North Karanpura, DP - Darlipalli
We see a significant pick-up NTPC capex for commercialised projects - Those starting to earn an ROE (Rsbn)
in COD for the capex to be 400 (Rsbn) Anantpur Barh - I
incurred over FY18-21CL 17 Barh - II Bhadla
30
350 46 Bongaigaon Darli Palli
46
300 Farakka - III Gadarwara
48
17 48
Karimnagar - I Khargone STPP
250 47
40 59 40 Koldam Hydro Kudgi - I
200 34 Lara - I Mandsaur

59 53
58
Mauda I North Karanpura
47
150 51 Rihand - III Simhadri - II
15 58
63
100 Sipat - I Solapur
63
40 101 Tanda Tapovan Vishnugad
53
50 22 22
106
Vindhyachal - IV Vindhyachal - V
16
31 37
0
18 22 Unchahar - IV Mauda-II
FY17 FY18 FY19CL FY20CL FY21CL Other solar/wind
We expect NTPC to add NTPC commercialised projects - Those starting to earn an ROE in FY17-21CL
11.2GW of capacity at the 6,000 (MW) Anantpur Barh - I
the parent level over
FY18-21CL Bhadla Bongaigaon
5,000 520
Darli Palli Gadarwara
660
4,000 660
Karimnagar - I Khargone STPP
500
660
660
600
Koldam Hydro Kudgi - I
660
3,000 500
500 Lara - I Mandsaur
660
660
660
800 North Karanpura Other solar / wind
2,000 250 800
800
800
Singrauli Hydro Solapur
660 800
1,000 1600 800
Tanda Tapovan Vishnugad
250 800
260 800 660 Vindhyachal - V Unchahar - IV
250 250 250
0
FY17 FY18 FY19CL FY20CL FY21CL Mauda-II Rojmal wind

NTPC will have about 53% NTPC regulated equity

RE growth over FY18-21CL 1,000 (Rsbn)
Conevntional (RE) 60% rise in RE
vs about 40% over FY15-
900 Renewable Equity over FY18-21CL
18CL driving a 13% EPS
Cagr 800
700
40% rise in RE
600 over FY15-18CL
500
861
400
780
674
300
586
509
440
414
200
369
351
326
272
254
237
100
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
FY22CL
We estimate NTPC to NTPC (parent): thermal capacity additions (CLSA estimates vs NTPC’s targets)
slightly under-perform its 5,000 (MW)
CLSA est. NTPC target
capacity addition targets for
FY19-20
4,000
3,000
4,240
4,240
2,000
3,720
3,580
3,440
3,310
2,120
1,000
-
0
FY19 FY20 FY21 FY22
M&A concerns unwarranted, could be value-enhancing

The government intends to consolidate its holding and make large sector leaders.
To this effect, government officials were quoted in the media saying it may sell a
64% stake in SJVN to NTPC for US$875m, helping it bridge the budget deficit.
Similarly, if NTPC buys an NHPC stake, it would also be value enhancing. There is
also a plan to consolidate PWGR into NTPC, which may not be accretive, as its
stock is more expensive than NTPC. However, the PWGR deal may be a long-
term plan. At CMP, while the SJVN acquisition should add 3% to NTPC
consolidated EPS and NHPC could add 4%. More importantly, both M&A, if
concluded, will improve its RE/thermal mix to 23:77 versus 3:97 now.
Over and above the NTPC: Change in capacity mix

financial benefit, M&A, if Installed capacity (2QFY19) NTPC NHPC SJVN Total
concluded, will improve the RE (MW) 1,728 10,871 1,991 14,590
thermal/RE mix . . . Thermal (MW) 49,663 0 0 49,663
Total (MW) 51,391 10,871 1,991 64,253
. . . this will overcome the Thermal (%) 3 23
limitations for those investors RE (%) 97 77
who consider NTPC as a pure Source: CLSA, Company
thermal exposure

Our BoE calculation NTPC: Acquisition sensitivity*

suggests . . . Particulars (Rsm) NHPC SJVN Total
Price (Rs) 26.0 25.1
. . . with only a marginal No. of shares 10,259 3,930
impact on leverage, stake Mkt cap 266,229 98,638 364,867
acquisition could add 7% to
Central govt. stake 73.7% 63.8% 0.0%
NTPC’s EPS
Cost of stake 196,131 62,921 259,052
Debt raised 100% 100% 100%
Int. rate 8.50% 8.50% 8.50%
Tax rate 21.9% 21.3% 21.6%
Impact analysis (FY20)
Impact on EPS 4.2% 2.8% 7.0%
Impact on leverage 16 bps 5 bps 21 bps
* Data as on 31 December 2018. Source: CLSA, Company
Progressive FY19-24 draft regulation preserves regulatory integrity

India’s power regulator’s draft FY19-24 regulation was a positive surprise, and a
big departure from its earlier approach paper. The draft regulation is a great
balancing act of maintaining a 15.5% ROE (vs renewable at 14% and EPS of +6%-
8% for NTPC and PWGR), while tightening norms with innovative provisions.
Apart from ROE, the key positives are the extra allowance for security expenses,
allowing coal-loss costs to IPPs, a higher special allowance, lower effective PAF
and a host of IPP friendly measures.
CERC draft regulation: Impact on regulated utilities

Provisions Change EPS Impact vs FY20CL
NTPC PWGR
Generic provisions
ROE Maintained @ 15.5%  
Security expenses Over & above O&M expenses like water charges  
Land acquisition Controllable to uncontrollable parameter Good move Good move
Depreciation - asset value recovery 90% to 95%
- Short-term  
- Long-term  
Working capital (Stock & Days) - Non-pit head coal stock 20 days vs 30 days  
- Receivables 45 days vs 60 days
Working capital (rate %) Down 145 bps as base changed from Base  
(Frozen at Apr’14) rate to MCLR
Regulated equity post-useful plant life  
Specific provisions
Thermal
Special provision for thermal Post-25 year returns  na
PAF
- effective PAF PAF calculation ex-scheduled annual maintenance  na
- Quarterly calculation  na
Coal-loss cost pass-through 85kcal/kWh allowance for storage loss 
Special allowance Hiked for pre-FY14 plants, small cut for post-FY14 
Heat rate 4.5% to 5%
PLF incentive Peak @ 65 paise / kWh vs 50 paise/kWh 
Fuel cost - SHR 200 / 210 / 250 - 2410kcal/kWh vs 2450kcal/kWh 
Transmission
O&M Higher TAF of 97.5% for HVDC vs 96% earlier 
TAF Quarterly calculation 
Sharing of benefits with beneficiaries Increase in proportion from 40% to 50%  
Source: CLSA, CEA

Challenging environment under the previous regulator

The regulator at the helm has an impact on administration and implementation,
which impacts regulatory utilities’ abilities to earn the regulated return. Coal
handling loss pass-through within the power plant for IPP has been one such
instance. Here the provisions in the FY14-19 regulation and subsequent
inordinate delays in its correction by CERC not only hurt IPP ROEs, but also
investor confidence in the regulatory regime as it was not only devoid of the
realities on the ground, but also exposed lethargy in the system/autocratic
behaviour of select regulatory members. Despite the government’s advisory to
CERC to allow 85-120kcal/kWh handling-loss between "as-received" and "as-
fired" way back in February 2018, the issue has still not been resolved. NTPC has
already suffered under-recovery of 240-280bps of its ROE or 2.4-2.8% of 15.5%
its regulatory ROE for eight quarters, and will continue for another two quarters
of 2HFY19 before it is corrected in regulation FY19-24, led by the new
progressive regulator - discussed above.
Despite the government’s CEA’s advice to CERC

advisory to CERC to allow
85-120kcal/kWh handling-
loss between "as-received"
and "as-fired" way back in
February 2018, the issue is
still not resolved
Source: CLSA, MoP
13% of the regulated return NTPC: Coal under-recovery (FY18)

was lost by NTPC in FY18 FY18 Regulated return - Rs73.6bn
on account of the handling
loss between “as-received”
and “as-fired’ not allowed to
be passed through
Post tax coal under
recovery
13%
Regulated return
87%

New treatment for 25-year old assets

We estimate 10-13.5GW of CERC’s draft regulation proposes a steep fall in regulated equity once the ‘useful
NTPC’s capacity to be 25- life’ of an asset is over, which for thermal plants is 25 years. If implemented, this
years old . . . move could reduce NTPC’s regulated equity by 1%YoY in FY20, reducing its
incentive to run the plants. However, as these plants supply ultra-low cost power
. . . but their share of to discoms, they may not like them being closed and may opt for a viable option of
regulated equity is much
letting NTPC earn 15-20 paisa/kWh (15%+ ROE) to ensure sub-Rs2/kWh power.
lower and states would not
like them to be shut as they The regulator opened a new window under regulation FY19-24, called the “special
are their lowest cost provision for thermal generating station” for single-part tariff post-25 years.
plants . . .
. . . hence, discoms and NTPC: plants with more than 25 years of life
NTPC may decide a viable Plants >25 years old FY19CL FY20CL FY21CL FY22CL FY23CL FY24CL
option for NTPC to keep Capacity (MW)
running the plants by paying Year FY93 FY94 FY95 FY96 FY97 FY98
15-20 paise/kWh of ROE Singrauli 2,000 2,000 2,000 2,000 2,000 2,000
(as currently) to get a sub- Rihand 1,000 1,000 1,000 1,000 1,000 1,000
Rs2/kWh ‘firm’ power Unchahar - I 420 420 420 420 420 420
Korba 2,100 2,100 2,100 2,100 2,100 2,100
Vindhyachal 1,260 1,260 1,260 1,260 1,260 1,260
Ramgundam 2,100 2,100 2,100 2,100 2,100 2,100
Farrakka 1,100 1,600 1,600 1,600 1,600 1,600
Kahalgaon 210 420 630 840 840 840
Dadri Thermal - - 840 840 840 840
Talcher STPS - - - 1,000 1,000 1,000
Talcher TPS - - - 460 460 460
Total 10,190 10,900 11,950 13,620 13,620 13,620
Merit order operation/constrained generation to unlock cheap power of IPPs

As per the merit order operation (MOO), a pair of generator and discom will be
scheduled at the national level, versus the current practice of tied up capacities at
the plant level. Plants will be utilised based on their energy charge rate (ECR),
ensuring those with lower ECRs are utilised first - reducing the overall cost of
power generation.
Net savings will be shared 50:50 between the discom and the generator.
Our basis of estimate suggests cost savings from MOO reform to save Rs11bn on
a net basis for discoms and add Rs5-6bn to NTPC PAT. Implementation of MOO
could begin from 1QFY20.
Our BoE estimate suggests NTPC: Plant-wise tariff (FY16)

cost savings from MOO 600 (Paise/kWh)
reform to add Rs6bn to 500
NTPC PAT
400 W. avg=307
300
200
100
0
Talcher
Farakka III
Simhadri II
Korba I & II
Ramagundem III
Rihand I
Vindhyachal III
Sipat I
Dadri Coal I
Unchahar II
Talcher Kaniha I
Vindhyachal IV
Tanda
Simhadri I
Kahalgaon II
Rihand III
Barh-II
Korba III
Vindhyachal II
Unchahar I
Farakka I & II
Kahalgaon I
Vindhyachal V
Ramagundem I & II
Badarpur
Dadri Coal II
Rihand II
Sipat II
Vindhyachal I
Talcher Kaniha II
Singrauli
Mouda I
Unchahar III

We believe NTPC will turn NTPC net profit, capex and free cash flow
FCF positive by FY20CL 200 (Rsbn)
Free cashflow Net profit Capex
150
100
50
0
(50)
(100)
(150)
(200)
(250)
(300)
(350)
FY13 FY14 FY15 FY16 FY17 FY18 FY19CL FY20CL FY21CL FY22CL
We are more confident its NTPC capex versus capitalisation

capitalisation to capex ratio 450 (Rsbn)
Capex Capitalization
will improve from FY19
400
350
300
250
200
150
100
50
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19CL FY20CL FY21CL FY22CL
As NTPC achieves NTPC CWIP as a percentage of total assets and leverage

commercialisation of its 3,500 (Rsbn) Gross block (%) 140
ongoing projects, CWIP as a CWIP and capital advances
percentage of total fixed 3,000 CWIP - % of total fixed assets 120
assets will halve from 31% Gross debt/equity
in FY18 to 15% by FY21CL 2,500 100
2,000 80
1,500 60
1,000 40
500 20
0 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL

The increase in CWIP as a NTPC’s increase in CWIP as a percentage of total fixed assets led to a lower ROE
percentage of total fixed 16 (%) (%) 40
assets led to a decline in ROE (LHS) CWIP - % of total fixed assets
ROE during FY09-2016 35
14
We expect ROE to improve
30
from FY17, as the
proportion of CWIP to total 12
25
fixed assets declines
10 20
15
8
10
6
5
4 0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19CL
FY20CL
FY21CL
Recent stock fall could turn; RE to rise 53% over FY18-21CL

NTPC’s stock price is down 13% over the past three months on under-recoveries.
Capacity additions are on track, except for Barh 1. It hasn't bought any stressed
private IPP assets despite pressure from banks. We believe the fear of the NHPC
and SJVN M&A is unwarranted, as we deem this transaction of acquiring central
government stakes to be accretive - EPS +7%. We expect leverage to rise
marginally, from 1.2x to 1.4x, on account of this transaction. It will also help
NTPC to achieve its non-fossil capacity enhancement target. We expect it to see
a 13% profit Cagr over FY18-21CL. The stock is value trading close to -2sd on PE
and at a 1.0x FY20CL PB for 12% ROE.
While EPS growth is likely NTPC: Average PE

to expand at a 13% Cagr 13.5 (x)
over FY18-21CL . . .
+2sd
. . . NTPC is trading
below 12.5
-2sd +1sd
11.5
Avg
10.5
-1sd
9.5
-2sd
PE
8.5
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Dec 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18

We estimate NTPC to NTPC: One-year forward PB

generate an 11%-13% ROE 3.1 (x)
over FY19-21CL
2.9
It is currently trading at 1x 2.7
one-year forward PB 2.5
This is a decade low 2.3

2.1 +1sd
1.9
1.7
Avg
1.5
1.3
-1sd
1.1
0.9
Apr 11
Sep 11
Dec 12
Apr 16
Sep 16
Dec 17
Aug 09
Aug 14
Jul 12
Jul 17
Nov 10
Oct 13
Nov 15
Oct 18
Mar 09
Feb 12
Mar 14
Feb 17
Jan 10
Jun 10
May 13
Jan 15
Jun 15
May 18
Source: CLSA
Indian utility valuation comps

Stock Rec Price Mkt EPS PE (x) EV/Ebitda (x) PB (x) Net gearing (%) ROE (%) Div yield (%)
code (Rs) cap Cagr (%)
(US$m) (18-21) FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL FY19CL FY20CL
Power
Adani Transmission ADANI IN SELL 200 3,138 23.7 33.2 28.3 12.5 11.4 4.6 4.0 239 184 15 15 0.3 0.5
CESC² CESC IB BUY 653 1,233 6.7 6.0 5.5 4.4 3.9 0.6 0.5 40 30 9 11 1.8 2.0
JSW Energy JSWE.BO SELL 70 1,640 11.2 11.6 10.7 5.0 5.5 1.0 1.0 106 89 9 9 4.3 4.7
NTPC NTPC IS BUY 149 17,373 13.9 10.6 9.6 6.4 6.0 1.1 1.1 123 117 11 11 3.3 4.2
Power average 14.1 12.6 7.6 7.0 1.7 1.6 161 138 12 12 2.4 2.7
NTPC’s PLF improved by NTPC thermal PLF vs the all-India thermal PLF
about 300bps in November 90 (%) NTPC PLF All India PLF
2018 over November 2017
85
80
75
70
65
60
55
Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18
Source: CLSA, CEA

NTPC’s generation NTPC generation vs capacity growth (YoY)

remained flat in 2QFY19 on 20 (YoY %)
Generation Capacity
coal-shortages and plant
maintenance, many of
15
which were back in
operation by 3Q . . .
10
. . . capacity at the parent
now stands at 46.1GW 5
(5)
(10)
(15)
Sep 12 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18
Source: CLSA, CEA
Coal stock availability NTPC monthly coal-based generation

remained a problem at 25 (BU) (%) 20
Coal generation YoY (RHS)
NTPC for 2QFY19 . . .
15
. . . coal-based generation 20
was flat for the quarter. . . 10
15
5
0
10
(5)
5
(10)
0 (15)
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA
. . . whereas gas generation NTPC monthly gas-based generation

declined by 30% during 1.8 (BU) (%) 120
2QFY19 Gas generation YoY (RHS)
1.6 100
1.4 80
60
1.2
40
1.0
20
0.8
0
0.6
(20)
0.4 (40)
0.2 (60)
0.0 (80)
Dec 12
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Source: CLSA, CEA

NTPC capacity additions

Capacity (MW) FY16 FY17 FY18 FY19CL FY20CL FY21CL FY22CL FY23CL
Bongaigaon - 250 - - - - - -
Bongaigaon - - 250 - - - - -
Bongaigaon - - - 250 - - - -
Unchahar - IV - - 500 - - - - -
Vindhyachal - V 500 - - - - - - -
Barh - I - - - - - 660 - -
Barh - I - - - - - - 660 -
Barh - I - - - - - - 660 -
Barh - II 660 - - - - - - -
Karimnagar - I - - - - - 800 - -
Karimnagar - I - - - - - - 800 -
Mauda-II - 660 - - - - - -
Mauda-II - - 660 - - - - -
North Karanpura - - - - 660 - - -
North Karanpura - - - - - 660 - -
North Karanpura - - - - - - 660 -
Solapur - - 660 - - - - -
Solapur - - - 660 - - - -
Tanda - - - - 660 - - -
Tanda - - - - - 660 - -
Khargone STPP - - - - - 660 - -
Khargone STPP - - - - - - 660 -
Darli Palli - - - 800 - - - -
Darli Palli - - - - 800 - - -
Gadarwara - - - - 800 - - -
Gadarwara - - - - - 800 - -
Kudgi - I - - 800 - - - - -
Kudgi - I - - 800 - - - - -
Kudgi - I - - - 800 - - - -
Kudgi - II - - - - - - - -
Kudgi - II - - - - - - - -
Lara - I - - - 800 - - - -
Lara - I - - - - 800 - - -
Lara - II - - - - - - - -
Lara - II - - - - - - - -
Talcher new - - - - - - - 660
Talcher new - - - - - - - 660
Singrauli I - - - - - - - 660
Singrauli II - - - - - - - 660
Coal-based 1,160 910 3,670 3,310 3,720 4,240 3,440 2,640
Koldam Hydro 200 - - - - - - -
Koldam Hydro 200 - - - - - - -
Koldam Hydro 200 - - - - - - -
Koldam Hydro 200 - - - - - - -
Tapovan Vishnugad - - - - - 130 - -
Singrauli Hydro - - 8 - - - - -
Hydel capacity addition 800 - 8 - - 520 - -
Solar/wind capacity addition - 510 300 500 600 500 800 800
Total capacity addition (ex-subs/JV) 1,960 1,420 3,978 3,810 4,320 5,260 4,240 3,440
Lata Tapovan - - - - - - 171 -
Rammam-III Hydro - - - - - - 120 -
Total Subs - - - - - - 291 -
NTPC Railways JV - BRBCL 250 - 250 500 - - - -
Meja (NTPC-UPRUVNL JV) - - - 1,320 - - - -
New Nabinagar (NTPC-BSEB JV) - - - 660 660 660 - -
Muzaffapur - (Unit 2) 110 - - - - - - -
Muzaffapur - (Unit 4) - - 195 - - - - -
Patratu Vidhyut JV - - - - - - 1,600 -
Patratu Vidhyut JV - - - - - - - 800
JVs - 575 - - - - 1,320 -
Total JVs 360 770 445 2,480 660 660 2,920 800
Total JVs and subsidiaries (MW) 360 770 445 2,480 660 660 3,211 800
Total capacity addition 2,320 2,190 4,423 6,290 4,980 5,920 7,451 4,240
Source: CLSA, CEA, Company

We expect NTPC to add NTPC commercialised capacity

13.3 GW of capacity at the FY ends March 31, (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Coal (MW) 35,085 38,755 42,065 45,785 50,025
parent level over FY19- Gas (MW) 4,017 4,017 4,017 4,017 4,017
21CL Hydel (MW) 800 800 800 800 1,320
Solar (MW) 620 928 1,428 2,028 2,528
Own capacity 40,522 44,500 48,310 52,630 57,890
Growth (%) 3.6 9.8 8.6 8.9 10.0
JV (MW) 6,771 6,891 9,371 10,031 10,691
Total capacity (MW) 47,293 51,391 57,681 62,661 68,581
Overall PLF % 70.5 68.2 66.7 69.5 71.6
Gross generation (MU) 250,314 265,798 282,217 320,577 362,931
Growth (%) 3 6 6 14 13
NTPC (parent) income statement

FY ends March 31, (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Revenue for NTPC, which is Total operating income 783,865 849,035 938,252 1,072,197 1,240,214
- Growth (%) 7.1 8.3 10.5 14.3 15.7
the sum of regulated ROE Fuel cost 475,722 483,155 528,349 616,346 726,852
and pass-through costs, will Employee benefits exp 43,246 45,307 46,757 48,253 49,797
increase in line with the rise Repair and maintenance 23,097 27,550 28,431 29,341 30,280
in regulated equity and Admn, other exp and provisions (net) 27,827 58,123 59,983 61,902 63,883
Discount on electricity sales 7,730 8,280 9,067 10,378 12,013
costs
Ebitda 206,244 226,622 265,665 305,977 357,389
Ebitda margin (%) 26.3 26.7 28.3 28.5 28.8
- Growth (%) 5.5 9.9 17.2 15.2 16.8
Depreciation and amortization 59,208 70,989 80,578 96,876 113,137
Ebit 147,036 155,633 185,087 209,101 244,251
Ebit margin (%) 18.8 18.3 19.7 19.5 19.7
- Growth (%) 2.3 5.8 18.9 13.0 16.8
Interest and finance cost 35,972 39,843 52,093 61,980 72,462
Interest and other income 10,689 17,553 18,377 20,110 22,596
Growth in recurring PAT PBT 121,753 133,343 151,372 167,231 194,386
PBT margin (%) 15.5 15.7 16.1 15.6 15.7
will increase in line with the - Growth (%) (0.5) 9.5 13.5 10.5 16.2
growth of regulated equity Total tax 28,563 28,426 35,445 38,963 39,436
Rec PAT 93,189 104,917 115,927 128,268 154,950
Rec PAT margin (%) 11.9 12.4 12.4 12.0 12.5
- Growth (%) (3.2) 12.6 10.5 10.6 20.8
Other extraordinary adjustments 663 (1,485) 0 0 0
Reported PAT 93,853 103,432 115,927 128,268 154,950
NTPC (parent) cashflow statement

Rep PAT 93,853 103,432 115,927 128,268 154,950
NTPC’s cash-flow from D&A 59,208 70,989 80,578 96,876 113,137
Add: interest exp 35,972 39,843 52,093 61,980 72,462
operations will remain Less: other income (9,052) (15,725) (16,495) (18,171) (20,599)
healthy to fund its capex - Change in inventories 5,056 4,474 (7,017) (6,076) (11,809)
- Change in debtors (4,057) 5,600 (6,200) (3,321) (13,438)
- Change in short-term loans and advs (273) (69,849) 8,010 11,800 16,067
- Change in other CA (6,251) (12,850) (12,549) (7,099) (17,170)
- Change in current liab 21,700 29,875 14,630 30,220 41,001
Change in working capital 16,175 (42,750) (3,126) 25,524 14,652
Annual capex is likely to be Changes in long-term advs and other NCA 5,615 47,524 (40,218) (1,038) (1,698)
under Rs250bn from Changes in non-current liab 984 1,135 29,695 33,458 38,989
Cashflow from operations 202,756 204,446 218,454 326,896 371,893
FY19CL Capex (278,172) (258,415) (264,209) (220,424) (248,030)
Change in investment (5,593) (10,951) (25,815) (17,205) (7,382)
Other income 9,052 15,725 16,495 18,171 20,599
Others 0 0 0 0 0
Cashflow from investing (274,714) (253,642) (273,529) (219,459) (234,813)
Change in equity 0 0 0 0 0
Change in reserves 2,216 2,414 0 0 0
Change in debt 137,104 147,483 134,793 28,897 37,277
We expect a gradual Dividend and dividend tax (46,693) (50,381) (49,062) (62,041) (74,946)
increase in dividend out-go Interest exp (35,972) (39,843) (52,093) (61,980) (72,462)
as profit rises Cashflow from financing 56,655 59,674 33,637 (95,124) (110,131)
Changes in cash (15,303) 10,479 (21,438) 12,314 26,949
Opening cash balance 44,608 29,305 39,784 18,346 30,659
Closing cash balance 29,305 39,784 18,346 30,659 57,608

NTPC (parent) balance sheet

Share capital 82,455 82,455 82,455 82,455 82,455
Reserves and surplus 879,858 935,323 1,002,187 1,068,415 1,148,418
Net worth 962,312 1,017,778 1,084,642 1,150,869 1,230,873
Deferred revenue - AAD and others 20,811 20,859 13,428 13,428 13,428
NTPC enjoys an un-levered Long-term borrowings 973,393 1,086,976 1,200,367 1,240,865 1,307,643
balance sheet to carry out Other long-term liabilities - total 22,778 21,880 22,536 19,519 22,027
its expansion plans Long-term provisions 4,632 4,809 4,963 5,122 5,286
Non-current liabilities - total 1,015,651 1,137,751 1,288,268 1,362,225 1,467,991
Networth and long-term liabilities 1,998,773 2,168,957 2,378,906 2,519,090 2,704,860
Gross block 1,603,304 1,891,257 2,196,005 2,543,788 2,947,819
Accumulated depreciation (609,747) (680,735) (761,313) (858,189) (971,326)
Net block 993,557 1,210,522 1,434,692 1,685,599 1,976,493
We expect CWIP to peak in CWIP 762,606 744,856 698,489 577,833 430,043
Construction stores in progress 44,765 32,976 38,805 32,102 23,891
FY17 . . . Fixed assets (incl CWIP) 1,800,928 1,988,354 2,171,986 2,295,534 2,430,427
Non-current investments 89,524 100,475 126,290 143,495 150,877
Long-term loans and advs 168,792 115,687 153,500 150,928 148,097
Non-current assets - total 2,076,548 2,227,401 2,477,066 2,618,857 2,762,830
. . . as the commercialisation Current investments 0 0 0 0 0
Inventories 65,048 60,574 67,590 73,667 85,476
of ongoing projects picks up Trade receivables 81,379 75,780 81,980 85,300 98,739
Cash and bank balances 29,305 39,784 18,346 30,659 57,608
Short-term loans and advs 5,716 75,565 67,555 55,755 39,687
Current assets - total 283,999 367,103 363,421 380,431 433,729
Short-term borrowing done Short-term borrowings 30,006 65,003 65,003 65,003 28,003
CM of long-term borrowings 64,822 63,724 85,126 73,525 81,023
to pay advance freight to Trade payables 48,761 55,926 60,639 69,569 80,721
Indian railways during FY18 Other current liabilities. 138,535 160,005 169,576 188,755 214,389
has peaked Short-term provisions 79,649 80,888 81,234 83,346 87,561
Current liabilities - total 361,773 425,548 461,580 480,198 491,698
Total assets 1,998,773 2,168,957 2,378,907 2,519,090 2,704,861
NTPC (parent) key ratios and valuation

CMP (Rs) 148 148 148 148 148
Shares O/s (m) 8,245 8,245 8,245 8,245 8,245
EPS growth will pick up Market cap (Rsm) 1,220,328 1,220,328 1,220,328 1,220,328 1,220,328
Rec EPS (Rs) 11.3 12.7 14.1 15.6 18.8
from FY18 as NTPC
EPS growth (%) (3.2) 12.6 10.5 10.6 20.8
achieves a higher COD Rec P/E (x) 12.9 11.5 10.4 9.4 7.8
CEPS (Rs) 18.5 21.3 23.8 27.3 32.5
P/CEPS (x) 7.9 6.8 6.1 5.3 4.5
DPS (Rs) 4.8 5.1 4.9 6.2 7.5
Its dividend yield will Yield % 3.2 3.5 3.4 4.3 5.1
BVPS (Rs) 116.7 123.4 131.5 139.6 149.3
gradually increase to 4% by P/BV (x) 1.3 1.2 1.1 1.0 1.0
FY20CL from 3% in FY17 Networth (Rsm) 962,312 1,017,778 1,084,642 1,150,869 1,230,873
Capital employed 2,045,381 2,257,567 2,495,541 2,626,981 2,780,578
Gross debt (Rsm) 1,068,221 1,215,704 1,350,496 1,379,393 1,416,670
Cash and cash eqv 29,305 39,784 18,346 30,659 57,608
Net debt (Rsm) 1,038,916 1,175,920 1,332,151 1,348,733 1,359,061
Gross D/E (x) 1.11 1.19 1.25 1.20 1.15
Net D/E (x) 1.08 1.16 1.23 1.17 1.10
EV (Rsm) 2,259,244 2,396,248 2,535,988 2,552,571 2,562,899
EV/Ebitda (x) 10.3 9.7 8.9 7.8 6.7
EV/MW (Rsm) 55.8 53.8 52.5 48.5 44.3
DuPont Analysis
- PAT/Ebit (%) 63.4 67.4 62.6 61.3 63.4
We believe its ROE already - Ebit/sales (%) 18.8 18.3 19.7 19.5 19.7
bottomed in FY17 with - Sales/assets (%) 40.2 39.5 39.5 41.9 45.9
CWIP peaking during the - Assets/networth (%) 208.0 217.3 226.1 229.1 227.0
same year Rec ROE (%) 9.9 10.6 11.0 11.5 13.0
ROCE (%) 8.1 8.0 8.6 8.9 9.9
Power ROE (%) 19.7 19.3 18.0 17.4 17.6

Valuation details
We value NTPC using a DCF-based valuation methodology. We assume a 7.75%
risk-free rate, 5.5% equity-risk premium and 0.83 beta to calculate a CoE of
12.3%. Improved capitalisation can give a much-needed boost to earnings and
return ratios for NTPC. Improvement in PLFs and coal production would be
positive events but would have a limited impact on earnings in the near term.
Investment risks
Delay in equipment ordering/capex, lower utilisation rates and lower incentives at
its coal-based power plants can lead to a structural slowdown in NTPC’s earnings
growth and a peak in its ROEs.
Recommendation history of NTPC Ltd (NTPC IS)

Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
200
180
160
140
120

13 Dec 2018 BUY 180.00 20 Dec 2016 O-PF 176.00
04 Nov 2018 BUY 190.00 29 Oct 2016 O-PF 165.00
24 Sep 2017 BUY 200.00 20 Aug 2016 U-PF 165.00
08 Jul 2017 BUY 186.00 03 Aug 2016 U-PF 155.00
04 Mar 2017 O-PF 176.00 03 May 2016 U-PF 143.00
13 Jan 2017 O-PF 190.00 12 Jan 2016 U-PF 150.00
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Revenue 731,338 731,960 783,865 849,035 938,252 1,072,197 1,240,214
Cogs (ex-D&A) (488,336) (437,986) (475,722) (483,155) (528,349) (616,346) (726,852)
Selling & marketing expenses - - - - - - -
Other SG&A - - - - - - -
Other Op Expenses ex-D&A (85,320) (98,553) (101,899) (139,259) (144,238) (149,874) (155,973)
Op Ebitda 157,683 195,421 206,244 226,622 265,665 305,977 357,389
Op Ebit 108,566 143,697 147,036 155,633 185,087 209,101 244,251
Interest income 28,094 11,654 10,689 17,553 18,377 20,110 22,596
Net interest inc/(exp) 658 (21,311) (25,283) (22,290) (33,716) (41,869) (49,866)
Asset sales/other cash items - - - - - - -
Taxation (22,436) (26,082) (28,563) (28,426) (35,445) (38,963) (39,436)
Profit after tax 86,788 96,304 93,189 104,917 115,927 128,268 154,950
Profit for period 86,788 96,304 93,189 104,917 115,927 128,268 154,950
Minority interest 0 0 0 0 0 0 0
Net profit 86,788 96,304 93,189 104,917 115,927 128,268 154,950
Extraordinaries/others 16,121 11,392 663 (1,485) 0 0 0
Dividends (24,791) (33,202) (46,693) (50,381) (49,062) (62,041) (74,946)
Retained profit 78,118 74,494 47,159 53,051 66,864 66,227 80,004
Adjusted profit 86,788 96,304 93,189 104,917 115,927 128,268 154,950
EPS (Rs) 10.5 11.7 11.3 12.7 14.1 15.6 18.8
Core EPS (Rs) 10.5 11.7 11.3 12.7 14.1 15.6 18.8
DPS (Rs) 2.5 3.4 4.8 5.1 4.9 6.2 7.5
Profit and loss ratios

Growth (%)
Revenue growth (% YoY) 4.7 0.1 7.1 8.3 10.5 14.3 15.7
Ebitda growth (% YoY) 1.2 23.9 5.5 9.9 17.2 15.2 16.8
Ebit growth (% YoY) (5.1) 32.4 2.3 5.8 18.9 13.0 16.8
Net profit growth (%) (4.5) 11.0 (3.2) 12.6 10.5 10.6 20.8
EPS growth (% YoY) (4.5) 11.0 (3.2) 12.6 10.5 10.6 20.8
Adj EPS growth (% YoY) (4.5) 11.0 (3.2) 12.6 10.5 10.6 20.8
DPS growth (% YoY) (56.5) 34.0 42.7 7.1 (3.9) 26.5 20.8
Core EPS growth (% YoY) (4.5) 11.0 (3.2) 12.6 10.5 10.6 20.8
Margins (%)
Ebitda margin (%) 21.6 26.7 26.3 26.7 28.3 28.5 28.8
Ebit margin (%) 14.8 19.6 18.8 18.3 19.7 19.5 19.7
Op cashflow margin 21.5 17.7 22.4 21.2 19.5 26.4 25.8
Returns (%)
ROE (%) 10.4 11.1 9.9 10.6 11.0 11.5 13.0
ROA (%) 4.6 5.5 5.0 4.9 5.2 5.5 6.3
ROIC (%) 6.0 6.9 6.0 5.9 6.2 6.6 7.7
ROCE (%) 8.2 9.5 8.5 8.0 8.5 9.1 10.2
Effective tax rate (%) 20.5 21.3 23.5 21.3 23.4 23.3 20.3
Ebitda/net int exp (x) - 9.2 8.2 10.2 7.9 7.3 7.2
Exceptional or extraord. inc/PBT (%) - - - - - - -
Dividend payout (%) 23.8 28.7 42.3 40.2 35.0 40.0 40.0

Balance sheet (Rsm)

Inventories 74,530 70,104 65,048 60,574 67,590 73,667 85,476
Current assets 354,854 293,777 283,999 367,103 363,421 380,431 433,729
Fixed assets 1,353,426 1,581,965 1,800,928 1,988,354 2,171,986 2,295,534 2,430,427
Investments 90,321 83,930 89,524 100,475 126,290 143,495 150,877
Goodwill 0 0 0 0 0 0 0
Other non-current assets 172,247 191,711 186,096 138,572 178,790 179,828 181,526
Total assets 1,970,847 2,151,383 2,360,547 2,594,504 2,840,486 2,999,288 3,196,559
Short term loans/OD - 12,995 30,006 65,003 65,003 65,003 28,003
Long-term debt/leases/other 785,323 850,970 973,393 1,086,976 1,200,367 1,240,865 1,307,643
Convertible bonds - - - - - - -
Total liabilities 1,154,273 1,238,446 1,398,234 1,576,727 1,755,844 1,848,419 1,965,686
Share capital 82,455 82,455 82,455 82,455 82,455 82,455 82,455
Retained earnings 734,119 830,482 879,858 935,323 1,002,187 1,068,415 1,148,418
Reserves/others 0 0 - 0 0 0 0
Shareholder funds 816,574 912,937 962,312 1,017,778 1,084,642 1,150,869 1,230,873
Minorities/other equity 0 0 0 0 0 0 0
Total equity 816,574 912,937 962,312 1,017,778 1,084,642 1,150,869 1,230,873
Total liabs & equity 1,970,847 2,151,383 2,360,547 2,594,504 2,840,486 2,999,288 3,196,559
Total debt 859,953 931,116 1,068,221 1,215,704 1,350,496 1,379,393 1,416,670
Net debt 731,165 886,509 1,038,916 1,175,920 1,332,151 1,348,733 1,359,061
Adjusted EV 1,301,185 1,363,622 1,367,297 1,522,888 1,693,842 1,820,578 1,979,526
BVPS (Rs) 99.0 110.7 116.7 123.4 131.5 139.6 149.3

Key ratios
Current ratio (x) 1.2 0.9 0.8 0.9 0.8 0.8 0.9
Growth in total assets (% YoY) 9.8 9.2 9.7 9.9 9.5 5.6 6.6
Growth in capital employed (% YoY) 11.5 16.6 12.9 13.4 8.9 3.8 4.0
Net debt to operating cashflow (x) 4.7 6.8 5.9 6.5 7.3 4.8 4.2
Gross debt to operating cashflow (x) 5.5 7.2 6.1 6.7 7.4 4.9 4.4
Net debt/Ebitda (x) 4.6 4.5 5.0 5.2 5.0 4.4 3.8
Gearing
Net debt/equity (%) 89.5 97.1 108.0 115.5 122.8 117.2 110.4
Interest cover (x) 5.0 4.7 4.4 4.3 3.9 3.7 3.7
Debt Cover (x) 0.2 0.1 0.2 0.1 0.1 0.2 0.2
Inventory days 47.9 60.3 51.8 47.5 44.3 41.8 40.0
Debtor days 32.0 38.2 36.9 33.8 30.7 28.5 27.1
Creditor days 47.0 46.9 39.1 39.5 40.3 38.6 37.7
Working capital/Sales (%) (0.4) 0.5 (1.6) 3.6 3.6 0.8 (0.5)
Working capital/Capital employed (%) (0.2) 0.2 (0.7) 1.5 1.5 0.3 (0.3)
Other ratios (%)
EV/OCF (x) 8.3 10.5 7.8 8.4 9.3 6.4 6.2
EV/FCF (x) (17.7) (8.9) (13.4) (19.5) (20.8) 29.1 27.5
EV/Sales (x) 1.8 1.9 1.7 1.8 1.8 1.7 1.6

Cashflow (Rsm)
Operating adjustments (5,657) (36,001) (53,183) (52,202) (69,161) (80,832) (89,302)
Working capital changes 26,862 (6,716) 16,175 (42,750) (3,126) 25,524 14,652
Interest paid / other financial expenses - - - - - - -
Tax paid 0 0 0 0 0 0 0
Other non-cash operating items (21,687) (22,843) 6,599 48,659 (10,523) 32,419 37,291
Net operating cashflow 157,200 129,861 175,836 180,328 182,855 283,088 320,030
Capital expenditure (230,905) (282,792) (278,172) (258,415) (264,209) (220,424) (248,030)
Free cashflow (73,705) (152,932) (102,336) (78,087) (81,354) 62,663 72,000
Acq/inv/disposals 7,259 6,391 (5,593) (10,951) (25,815) (17,205) (7,382)
Int, invt & associate div (1,644) 2,530 - - - - -
Net investing cashflow (225,290) (273,872) (283,765) (269,366) (290,024) (237,630) (255,412)
Increase in loans 188,252 71,163 137,104 147,483 134,793 28,897 37,277
Dividends (24,791) (33,202) (46,693) (50,381) (49,062) (62,041) (74,946)
Net equity raised/(buybacks) (119,697) 21,870 2,216 2,414 - - -
Net financing cashflow 43,765 59,831 92,627 99,517 85,730 (33,144) (37,669)
Incr/(decr) in net cash (24,326) (84,180) (15,303) 10,479 (21,438) 12,314 26,949
Exch rate movements - - - - - - -
Opening cash 153,114 128,788 44,608 29,305 39,784 18,346 30,659
Closing cash 128,788 44,608 29,305 39,784 18,346 30,659 57,608
OCF PS (Rs) 19.1 15.7 21.3 21.9 22.2 34.3 38.8
FCF PS (Rs) (8.9) (18.5) (12.4) (9.5) (9.9) 7.6 8.7

Growth (%)
Op cashflow growth (% YoY) 4.4 (17.4) 35.4 2.6 1.4 54.8 13.0
FCF growth (% YoY) - - - - - - 14.9
Capex growth (%) 7.3 22.5 (1.6) (7.1) 2.2 (16.6) 12.5
Capex/sales (%) 31.6 38.6 35.5 30.4 28.2 20.6 20.0
Capex/op cashflow (%) 146.9 217.8 158.2 143.3 144.5 77.9 77.5
Operating cashflow payout ratio (%) 13.1 21.3 22.4 23.4 22.2 18.1 19.4
Cashflow payout ratio (%) 15.8 25.6 26.6 27.9 26.8 21.9 23.4
Free cashflow payout ratio (%) - - - - - 99.0 104.1
DuPont analysis
Ebit margin (%) 14.8 19.6 18.8 18.3 19.7 19.5 19.7
Asset turnover (x) 0.4 0.4 0.3 0.3 0.3 0.4 0.4
Tax burden (x) 0.8 0.8 0.8 0.8 0.8 0.8 0.8
Return on assets (%) 4.6 5.5 5.0 4.9 5.2 5.5 6.3
Leverage (x) 2.2 2.4 2.4 2.5 2.6 2.6 2.6
ROE (%) 10.4 11.1 9.9 10.6 11.0 11.5 13.0
EVA® analysis
Ebit adj for tax 86,265 113,073 112,541 122,455 141,747 160,382 194,699
Average invested capital 1,431,287 1,650,240 1,876,186 2,066,099 2,270,913 2,433,932 2,544,433
ROIC (%) 6.0 6.9 6.0 5.9 6.2 6.6 7.7
Cost of equity (%) 12.5 12.5 12.5 12.5 12.5 12.5 12.5
EVA/IC (%) (3.4) (2.5) (3.3) (3.5) (3.1) (2.7) (1.8)
EVA (Rsm) (48,438) (41,728) (61,843) (71,351) (69,365) (65,999) (45,025)

SJVN
Rs25.50 – N-R
Bharat Parekh No new project starts until 2021

bharat.parekh@clsa.com Stable no-growth annuity with high dividend yield
+91 22 6650 5020
SJVN, a joint-sector regulated power utility, proved a value trap as the stock lost
27% during 2018 on derating, despite being high yield (6.2%) at the beginning of
the year. It does not expect much growth in regulated equity until FY21, as its
next project will not be commissioned before end-2021. It has 1.9GW
operational capacity, which saw a 6% Cagr in FY13-18. Ownership uncertainty
from the government’s plan to divest its 64% stake to NTPC, which is resisted by
its state partner, created an over-hang on management motivation.
9 January 2019 Hydro major going abroad

SJVN has operational capacity of 1.9GW (Nathpa Jhakri 1,500MW, Rampur
India Hydro 412MW and RE 79MW). Its capacity grew at a meagre pace of 6% Cagr
Power FY13-18. It plans to triple its capacity to 6GW, with another 1.6GW of projects
under construction (UC) in Nepal and Bhutan, and 1.9GW of projects at the
Reuters SJVN.NS investment approval (IA) stage.
Bloomberg SJVN IN
Priced on 7 January 2019 Lacks new projects until FY21
CNX Nifty @ 10,771.8 SJVN does not expect much growth in regulated equity until FY21, as its next
12M hi/lo Rs38.70/24.05 project Naitwar Mori (3% of capacity) will not commission before end-2021. Its
next project after that, Arun III (47% of capacity), will start in 2023, so investors
will have to be patient.
Shares in issue 3,930m
Free float (est.) 9.4% Entering thermal sector
Market cap US$1.4bn With a pure hydro portfolio for 30 years, SJVN plans to diversify into thermal. It
signed an MOU with Bihar power companies in January 2013 for the
3M ADV US$0.4m
development of the 1320MW Buxar plant. Land acquisition has been completed.
Foreign s'holding 3.04% It has also procured long term domestic coal linkage from Central Coalfields (Coal
Major shareholders India subsidiary). The tender process for the equipment contract has started and
Government of India 63.8% investment approval is with the Indian government. Post the start of its capacity
Government of HP 26.8 %
Edgbaston Asian 1.1 % UC and IA, the hydro/thermal/renewable mix will change to 73:24:3.
ICICI Prudential life 1.07 %
Stock boasts of compelling value but lacks growth
SJVN’s stock lacks growth, with consensus estimating its EPS to enjoy just a 2%
Cagr FY18-21. This is also reflected in its valuation. Its stock is down 35% since
the start of 2018, currently trading at 0.77x one-year forward PB (12.5% below
its -1sd of its valuation band). However, the stock is a strong contender on
dividend yield trading at 8% (FY20) vs NTPC (4.2%) and PWGR (2.8%).
1M 3M 12M
Absolute (2) (4) (29)
Financials
(Rs) (%)
40 120 Year to 31 March 17A 18A 19IBES 20IBES 21IBES
38
110
Revenue (Rsm) 26,793 22,300 25,291 25,726 25,978
36 Net profit (Rsm) 15,754 11,738 12,946 12,804 12,600
100
34 EPS (Rs) 4.01 2.99 3.29 3.26 3.21
32 90 EPS growth (% YoY) (25) 10 (1) (2)
30 PE (x) 6.26 8.4 7.62 7.7 7.83
80
28 SJVN (LHS)
Dividend yield (%) 11.4 8.4 9.2 8.0 7.6
26 Rel to Nifty 70 ROAE (%) 18.04 12.19 12 11.6 11
24 60 PB (x) 0.86 0.92 0.82 0.74 0.68
Dec 16 Aug 17 Apr 18 Dec 18 Net gearing (%) (15) (12) na na na
Source: Bloomberg Source: Company, Capital Line, Bloomberg

SJVN - N-R India power generation
SJVN (parent): Financial snapshot

(Rsm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Sales 18,297 19,275 16,821 18,736 28,175 24,940 26,793 22,300 25,291 25,726 25,978
Growth - YoY (%) 5 (13) 11 50 (11) 7 (17) 13 2 1
Ebitda 15,902 16,790 14,401 16,045 24,338 20,529 21,902 16,885 19,606 19,756 19,709
Ebitda margin (%) 87 87 86 86 86 82 82 76 78 77 76
PAT 9,121 10,814 10,523 11,146 18,056 12,797 15,754 11,738 12,946 12,804 12,600
Growth - YoY (%) 19 (3) 6 62 (29) 23 (25) 10 (1) (2)
Source: Bloomberg, Capital Line
SJVN plans to triple its SJVN: Organisational structure

capacity from 1.9GW
currently (constant since SJVN
FY15) to 6GW (6GW)
Under Investment
Operational Under survey
construction approval
(1.9GW) (0.6GW)
(1.6GW) (1.9GW)
(33%) (10%)
(26%) (31%)
Parent (1.9GW) Parent (84MW) Parent (0.5GW) Parent (0.6GW)

 Nathpa Jhakri  Luhri Stage-I  Sunni Dam
(1500MW) Hydro (210MW) Hydro
 Rampur Hydro Subs  Devsari Hydro (382MW)
(412MW) (0.9GW) (252MW)  Luhri Stage-II
 Renewable  Arun 3 Hydro
(79MW) (900MW) (172MW)
Subs (1.3GW)
 Buxar Thermal
JV (0.6GW) (1320MW)
 Kholongchhu
Hydro
(600MW)
After having a pure hydro SJVN: Capacity split

portfolio since inception (30
yrs), SJVN is diversifying SJVN
toward thermal . . . (6GW)
. . . it signed an MOU with Under Investment

Bihar power cos. in January Operational Under survey
construction approval
(1.9GW) (0.6GW)
2013 for the development (33%)
(1.6GW) (1.9GW)
(10%)
of 1320MW Buxar STPP in (26%) (31%)
Bihar
Hydro (1.9GW) Hydro (1.5GW) Hydro (0.5GW) Hydro (0.6GW)
 Nathpa Jhakri  Arun 3  Luhri Stage-I  Sunni Dam
(1500MW) (900MW) Hydro Hydro
 Rampur Hydro  Kholongchhu (210MW) (382MW)
(412MW) Hydro  Devsari  Luhri Stage-II
(600MW) Hydro Hydro
(252MW) (172MW)
Renewables
(79MW) Renewables
(84MW) Thermal
(1.3GW)
 Buxar
Thermal
(1320MW)

Street estimates bleak SJVN (parent): Revenue and growth - YoY (%)
revenue numbers for FY19- 30 (Rsbn) (%) 60
21
50
25
40
20 30
20
15
10
10 0
(10)
5
(20)
0 (30)
Ebitda margin on a steady SJVN (parent): Ebitda and margin (%)

decline since FY15 30 (Rsbn) (%) 88
Ebitda Margin (RHS)
86
25
84
20
82
15 80
78
10
76
5
74
0 72
Flattish PAT on account of SJVN (parent): PAT and growth - YoY (%)
stagnant revenue 20 (Rsbn) (%) 80
18
60
16
14
40
12
10 20
8
0
6
4
(20)
2
0 (40)

B/S stuck in CWIP is low for SJVN (parent): Capital work in progress (as % of total assets)
SJVN when compared with 200 (Rsbn) Gross block CWIP (%) 30
NHPC or NLC Other non-current assets WC
CWIP (% of total assets) (RHS)
25
160
20
120 15
10
80
5
40 0
Street estimates SJVN’s SJVN (parent): Book value per share

BVPS to grow at 11% Cagr 40 (Rs) (%) 14
over FY18-21E
35 12
10
30
8
25
6
20
4
15
2
10
0
5 (2)
0 (4)
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Stock currently trading at SJVN (parent): P/BV - One-year forward

8% lower than -1sd from 1.45 (x)
10-year average one-year
forward PB of 1.02x 1.35
1.25
1.15 +1sd
1.05
Avg
0.95
-1sd
0.85
0.75
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Nov 18
May 10
May 11
May 12
May 13
May 14
May 15
May 16
May 17
May 18

SJVN lacks growth . . . SJVN (parent): Total shareholder yield (%)
18 (%)
. . . however, the stock is a Dividend yield Buyback/capital return yield
strong contender on the 16
dividend yield parameter
14
12
10
(2)
SJVN commissioned SJVN (parent): Operational capacity addition

Rampura hydro plant 2,100 (MW)
(412MW) in FY15 . . .
2,000
. . . since then, there has
1,900
been no major
commissioning . . . 1,800
1,700
. . . consensus estimates its
EPS to grow at 2% Cagr 1,600
over FY18-21E
1,500
1,400
1,300
1,200
1,100
1,000
SJVN has a pipeline of SJVN: Projects in pipeline

2.5GW of capacity Particulars State Capacity (MW)
planned . . . Under pre-construction and investment approval
Buxar thermal Bihar 1,320
. . . it is entering thermal Devsari hydro Uttarakhand 252
through the Buxar TPP Dhaulasidh hydro Himachal Pradesh 66
(1,320MW) Luhri stage-I hydro Himachal Pradesh 210
Total 1,848
Under survey and investigation
Luhri stage-II hydro Himachal Pradesh 172
Sunni Dam hydro Himachal Pradesh 382
Jakhol Sankri hydro Uttarakhand 44
Total 598
Grand total 2,446

Ebitda/PAT declined at a SJVN (parent): Summary profit and loss statement

Cagr of 11.5%/13.4% Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
between FY15 and FY18 Revenue 18,736 28,175 24,940 26,793 22,300
Ebitda 16,045 24,338 20,529 21,902 16,885
Depreciation (4,745) (6,410) (6,772) (6,800) (3,645)
Ebit 11,299 17,928 13,757 15,103 13,240
Net interest expense 2,083 3,833 2,009 3,949 2,733
Taxes (2,236) (3,705) (2,969) (3,298) (4,235)
Rec PAT 11,146 18,056 12,797 15,754 11,738
Exceptional - (1,289) 1,276 (312) 511
Rep PAT 11,146 16,768 14,073 15,441 12,249
Balance sheet has been SJVN (parent): Summary balance sheet

stagnant since FY14 Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
Shareholder's fund 282,460 307,575 316,427 290,148 300,179
Minority interest 30,657 33,257 31,681 33,822 29,349
Net block 295,868 279,161 226,095 222,226 211,728
CWIP 149,240 163,775 167,416 175,876 190,871
Short-term borrowings - - - (3,025) (2,800)
Trade payables (2,234) (1,649) (1,304) (1,576) (1,838)
Total assets 541,084 561,557 577,106 546,174 543,258
Operating cashflow SJVN (Parent): Summary cashflow statement

distributed as dividends due Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
to lack of expansion plans PBT 13,382 20,473 17,042 18,739 16,484
Depreciation 4,745 6,410 6,772 6,800 3,645
Interest (net) (1,839) (1,758) (988) (2,875) (2,097)
Change in working capital (537) (7,217) 3,218 3,842 1,333
Other non-cash adjustments (4,209) (3,085) (3,963) (3,571) (3,721)
Capex (10,108) (4,653) (2,940) - -
Purchase of investments (0) (64) (4,591) (1,186) (290)
Other investing activities 2,580 1,945 (190) (9,977) 1,239
Change in debt - 762 - - -
Dividend paid (3,970) (6,657) (4,344) (11,252) (9,926)
Interest paid (332) (524) (744) (841) (843)
Other financing activities 217 (1,223) (1,958) (4,120) (11,954)
Net changes in cash (70) 4,408 7,314 (4,441) (6,130)

Tata Power
Rs74.70 - BUY
Bharat Parekh Deleveraging story

bharat.parekh@clsa.com Challenges for Indo coal remain
+91 22 6650 5020
Tata Power is one of India’s largest integrated private sector players spread
across IPPs, transcos and discoms (1.2% of India’s volume). Domestic-market
obligations, price caps in Indonesia and IPP losses hurt near-term growth, but we
like its net-long coal exposure to the seaborne market and balance-sheet
deleveraging. It has already divested defence holdings and Tata
Communications, vindicating its stand on the latter. BUY on deleveraging non-
core asset sales, expansion in renewables and stock value at 1.2x FY20CL BV.
9 January 2019 Large integrated private player; holds portfolio across GTD and coal
Tata Power is one of India’s largest integrated private sector players in the power
India market, and the second largest private player after Adani Group, with generation
Power capacity of 10.8GW. It is one of the few IPPs with an about 30% contribution
from clean energy. It has transmission capacity of 3,520ckm, making it the fourth
Reuters TTPW.BO largest private sector company. It provides electricity to 2.5m customers across
Bloomberg TPWR IB
Mumbai, Delhi and Ajmer. It has a strategic 30% stake in Indocoal KPC, which
Priced on 7 January 2019 owns mines in Indonesia, providing a natural hedge against rising coal prices.
12M hi/lo Rs99.90/61.05 Indo coal spreads down 32%, highest contraction in past 12 quarters
12M price target Rs96.00 Coal Ebitda (KPC + BSSR + coal infra), which accounted for 28% of its
±% potential +28% consolidated number, fell 3% YoY. Spreads contracted to US$16.7/t, down 30%
Shares in issue 2,704.6m YoY, the highest contraction in the past 12 quarters. This was led by the
Free float (est.) 67.0% Indonesian government’s 25% domestic market obligation (DMO) regulation with
Market cap US$2.88bn price caps at US$70/t. Despite the cost of production rising 26% YoY, as coal-
mines were not able to pass on the cost, ASPs rose only 1.7%.
3M ADV US$8.4m
Foreign s'holding 27.1% Divestiture on track; valuations reasonable at 1.2x FY20CL BV
Major shareholders Net debt to equity improved to 2.3x in 2Q19 vs 2.9x (2Q18). It has already
Tata Group 33.0% divested its holdings in defence and Tata Communications, vindicating its stand
LIC of India 11.1%
on accelerated deleveraging of its B/s in FY19. The US$401m sale of its 30%
stake in Arutmin is a step in the right direction. Ahead, we look for the divesture
of Tata Ceramics and Tata Projects (3% of SOTP) by FY20. BUY on deleveraging
Blended ESG Score (%)* by non-core asset sales, expansion in renewables and stock value at 1.2x FY20CL
Overall 51.3 BV. Our target price is based on a SOTP-DCF methodology for its CGPL business,
Country average 63.7 PE multiples for its regulated power utility and EV/Ebitda methodology for its
GEM sector average 57.8 coal businesses.

1M 3M 12M
Absolute (5.8) 18.6 (25.0) Financials
Relative (6.5) 13.6 (26.5) Year to 31 March 17A 18A 19CL 20CL 21CL
(Rs) (%)
105 110 Net profit (Rsm) 13,202 14,339 16,575 18,802 21,152
105
EPS (Rs) 4.9 5.3 6.1 7.0 7.8
95 100
CL/consensus (16) (EPS%) - - 100 99 94
95
85 90 EPS growth (% YoY) 42.3 8.6 15.6 13.4 12.5
85 PE (x) 15.3 14.1 12.2 10.7 9.6
75 80 Dividend yield (%) 1.4 1.6 1.8 1.9 2.0
75
FCF yield (%) (16.6) (5.2) 26.9 7.8 4.6
65 Tata Power (LHS) 70
Rel to Nifty PB (x) 2.0 1.5 1.3 1.2 1.1
65
55 60 ROE (%) 13.4 12.3 11.7 11.8 11.9

Tata Power - BUY India power generation
Profit & Loss (Rsm)

Revenue 272,113 295,121 339,712 15.1 349,731 361,151
Cogs (ex-D&A) (169,114) (180,141) (191,455) (203,660) (216,827)
Op Ebitda 51,605 60,140 74,878 24.5 78,861 81,317
Op Ebit 31,719 35,957 51,004 41.8 54,903 57,667
Other non-Op items - - 0 - -
Taxation 458 (1,699) (8,124) (10,197) (10,623)
Profit after tax 3,059 924 5,698 516.5 9,388 11,977
Minority interest 10,142 13,414 10,877 (18.9) 9,415 9,175
Net profit 13,202 14,339 16,575 15.6 18,802 21,152
Adjusted profit 13,202 14,339 16,575 15.6 18,802 21,152
Depreciation/amortisation 19,886 24,183 23,874 (1.3) 23,959 23,650
Working capital changes 57,369 (25,103) 52,950 5,247 (752)
Other items (30,682) (38,229) (44,447) (53,685) (56,341)
Net operating cashflow 78,292 (3,192) 83,381 30,424 24,223
Free cashflow (33,554) (10,439) 54,259 15,719 9,225
M&A/Others (5,895) 5,664 (6,157) (6,795) (7,318)
Increase in loans 43,937 (18,543) 67,696 17,972 50,409
Dividends (2,814) (3,246) (3,679) (3,896) (4,004)
Net equity raised/other 1,237 28,880 8,552 (70.4) 13,657 10,566
Net financing cashflow 42,361 7,090 72,568 923.5 27,734 56,972
Incr/(decr) in net cash 2,911 2,316 120,670 5,111.4 36,658 58,879
Exch rate movements - - - - -
Cash & equivalents 9,542 11,858 132,528 1,017.6 169,186 228,065
Other current assets 144,030 86,819 88,010 1.4 88,991 90,090
Fixed assets 468,988 452,439 457,687 1.2 448,432 439,781
Investments 108,592 195,335 125,926 (35.5) 132,222 138,834
Other non-current assets 34,565 29,337 32,176 9.7 35,353 38,738
Total assets 821,975 828,804 903,970 9.1 943,321 1,006,345
Short-term debt 162,798 188,273 197,686 5 207,571 217,949
Accounts payable 55,290 56,098 50,617 (9.8) 52,110 53,811
Provisions/other LT liabs 51,210 46,438 46,438 0 46,438 46,438
Shareholder funds 98,958 133,765 149,708 11.9 167,921 188,712
Minorities/other equity 37,527 38,990 38,990 0 38,991 38,990
Total liabs & equity 821,974 828,805 903,970 9.1 943,321 1,006,345
Revenue growth (% YoY) (5.2) 8.5 15.1 2.9 3.3
Ebitda margin (%) 19.0 20.4 22.0 22.5 22.5
Ebit margin (%) 11.7 12.2 15.0 15.7 16.0
Net profit growth (%) 42.3 8.6 15.6 13.4 12.5
Op cashflow growth (% YoY) nm (104.1) nm (63.5) (20.4)
Capex/sales (%) 41.1 2.5 8.6 4.2 4.2
Net debt/equity (%) 312.2 240.8 184.0 156.1 133.1
Net debt/Ebitda (x) 8.3 6.9 4.6 4.1 3.7
ROE (%) 13.4 12.3 11.7 11.8 11.9
ROIC (%) 7.7 2.7 4.7 5.8 6.9

Tata Power is an integrated Tata Power: Organisational structure

player in India’s private
Tata Power
sector, possessing 10.8GW
of generation capacity with
distribution capacity Generation Other
Distribution Transmission
(10.8GW) investments
possessing 1.2% of all-India
DISCOM volume . . . Thermal Renewables Hydro Mumbai Coal-mines,
Mumbai
(7.7GW) (2.4GW) (0.69GW) (4.7BU) Indonesia
. . . it holds a strategic stake
in coal mines in Indonesia, CGPL Trombay TPREL TPC Delhi
PTL
Power
(4.15GW) (1.43GW) (0.68GW) (0.45GW) (8.6BU) trading
which provides a natural
hedge against rising Maithon Jojobera WREL Ajmer
International Shipping
international coal prices (1.05GW) (0.43GW) (1.01GW) (0.3BU)
Rithala Haldia Parent

(0.1GW) (0.12GW) (0.38GW)
IEL
International
(0.38GW)
Coal Ebitda (KPC + Tata Power (consolidated): Ebitda during 2QFY19

BSSR + coal infra) fell 3%
YoY as ASP growth slowed
down, given that Indonesia
imposed 25% domestic
market obligation (DMO)
with price caps ($70/t) and
delay in pass-through at
CGPL
Source: CLSA, Company, Amt. in Rs.cr, Rs1cr = Rs10mn
The losses at CGPL, Tata Power: Net long coal position

Mundra, are largely
compensated by
profitability at coal mines in
Indonesia . . .
. . . however, this is not

playing out since last two
quarters as Indonesian
government has imposed
25% DMO with price caps
Source: CLSA, Company, Amt. in Rs.cr, Rs1cr = Rs10mn

Tata Power 2QFY18: Break-up of consolidated Ebitda Tata Power 2QFY19: Break-up of consolidated Ebitda
Coal Ebitda
Coal Ebitda
28%
29%
Non-coal Non-coal
Ebitda Ebitda
71% 72%
Source: CLSA, Company Source: CLSA, Company
Spreads contracted by 32%, Tata Power coal sales realisation and cost of production
leading to the highest (US$/t)
65 FOB realisation Cost of production
contraction in the past 12
quarters 60
55
50
45
40
35
30
25
20
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
After having expanded for Tata Power: Spread between realisation and cost of production
eight quarters since (US$/t)
40
4QFY16 . . .
35
. . . the spreads contracted
by 19% in 1Q19 and 32% in 30
2Q19 . . .
25
. . . led by the Indonesian
government’s 25% DMO 20
15
10
0
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19

Coal volume fell 11% YoY Tata Power: Coal sales
25 (mt) (%) 30
Sales YoY growth (RHS)
20
20
10
15
0
(10)
10
(20)
5
(30)
0 (40)
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
Coal prices were up 14% Movement in Indonesian coal prices

YoY in Sep-18 to 140 (US$/ton) (%) 100
US$104.8/t . . . Indo (6322Kcal) Indo (6322Kcal) YoY (RHS)
120 80
. . . despite that Tata Power
is unable to take the benefit
100 60
as the prices have been
capped at US$70/t under
the DMO regulation 80 40
60 20
40 0
20 (20)
0 (40)
Sep 13
Dec 13
Sep 14
Dec 14
Sep 15
Dec 15
Sep 16
Dec 16
Sep 17
Dec 17
Sep 18
Dec 18
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Jun 13
Jun 14
Jun 15
Jun 16
Jun 17
Jun 18
Tata Delhi discom: Regulated equity Mumbai operations regulated equity

14,000 (Rsm) 40,000 (Rsm)
12,000 37,500
10,000
35,000
8,000
32,500
6,000
30,000
4,000
2,000 27,500
0 25,000
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
Source: CLSA, Company Source: CLSA, Company

Delhi licence area’s Tata Delhi discom: Regulated assets

regulated assets stand at 56,000 (Rsm)
Rs41.2bn (flat YoY)
54,000
52,000
50,000
48,000
46,000
44,000
42,000
40,000
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
Mumbai’s operations Mumbai operations regulated assets

regulated assets rose 28% 21,000 (Rsm)
YoY during 2QFY19
19,000
17,000
15,000
13,000
11,000
9,000
7,000
5,000
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
Source: CLSA, Company 2QFY19
Delhi discom (TPDDL) PAT TPDDL quarterly PAT (Rsm)

was up 3x YoY led by lower 1,500 (Rsm) (%) 200
PAT YoY growth (RHS)
AT&C losses and higher
incentives 150
1,000 100
50
500 0
(50)
0 (100)
(150)
(500) (200)
(250)
(1,000) (300)
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19

Tata Power: 2QFY19 entity-wise break-up of financials
Tata Power’s net debt to Tata Power: Net debt/equity (x)

equity has fallen
considerably from 2.9x in
2QFY18 to 2.3x . . .
. . . we expect further
reduction as non-core
assets shall get divested
Renewables portfolio Tata Power renewables: 2QFY19 consolidated summary

remains profitable led by a
well-bid tariff

We look for the divesture Tata Power: SOTP valuation

of Tata Ceramics and Tata SOTP of Tata Power Rsm Rs/sh Comments
Projects (3% of SoTP) by Power business 94,204 35 9x 1-yr fwd earnings
FY20 Maithon Power (IPP) 17,716 7 1.5x P/B
Mundra UMPP (46,650) (17) DCF based value
Indonesian coal-mines 61,068 23 4.5x EV / Ebitda
Renewables 12,429 5 1x P/B
Walwhan Renewables 9,127 3 10x P/E
Power investments 39,533 15
- Delhi distribution business 28,706 11 10x 1-yr fwd earnings
- Tata Transmission link 6,713 2 10x 1-yr fwd earnings
- IEL 4,114 2 10x 1-yr fwd earnings
Non-core investments 39,679 15
- TCS/Tata Sons 39,121 14 60% discount to TP
- Others (Tata projects and others) 7,858 3 At 40% discount to 20x FY17 PE
- Tata Teleservices (Maharashtra) 500 0 35% discount to CMP
-Less: debt towards Tata Tele buyback (7,800) (3)
Investments divested 32,330 12
- Defence business 10,830 4 0.9x EV/OB
- Tata Comm 21,500 8 35% discount to TP
Total 259,435 96
Source: CLSA
Mundra UMPP (CGPL) Tata Power: Summary of consolidated performance

struggled on under- FY ends on 31 March (Rsm) 2QFY18 2QFY19 % YoY
recoveries (Rs0.83/kWh, Tata Power standalone
+20% YoY), led by a delay in Revenue 17,690 19,220 8.6
passing on coal price . . . Ebitda 8,160 8,100 (0.7)
PAT 420 2,980 609.5
. . . this, coupled with MTM CGPL
FX adjustment, CGPL losses Revenue 16,480 16,240 (1.5)
rose by 38% Ebitda 660 (140) (121.2)
PAT (3,360) (4,630) 37.8
TPDDL (Delhi discom)
Revenue 19,410 20,330 4.7
TPDDL reported 23% Ebitda 2,220 2,730 23.0
growth in Ebitda led by a PAT 200 820 310.0
higher AT&C incentive Powerlinks
Revenue 250 190 (24.0)
Ebitda 240 180 (25.0)
PAT 230 140 (39.1)
Tata Power Trading/TPTCL
Revenue 11,400 11,090 (2.7)
Ebitda 50 200 300.0
PAT 10 120 1100.0
Maithon/MPL
Revenue 6,460 6,150 (4.8)
Ebitda 2,030 1,610 (20.7)
PAT 670 400 (40.3)
Tata Power Solar
Revenue 4,690 3,130 (33.3)
Coal Ebitda fell 4% YoY . . . Ebitda 490 290 (40.8)
PAT 170 10 (94.1)
. . . spreads contracted by Tata Power Renewable
32% - highest since past 12 Revenue 1,340 1,950 45.5
quarters . . . Ebitda 1,750 1,880 7.4
PAT 920 390 (57.6)
. . . this was on account of Coal cos and coal infra
Indonesian government’s Revenue 21,830 21,940 0.5
25% DMO regulation Ebitda 7,640 7,360 (3.7)
PAT 3,830 3,650 (4.7)

We expect revenue to grow Tata Power (consolidated): Profit and loss

at 7% Cagr over FY18-21CL Profit and loss (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Revenue 272,113 295,121 339,712 349,731 361,151
Fuel costs (169,114) (180,141) (191,455) (203,660) (216,827)
Employee costs (12,959) (14,102) (15,230) (16,448) (17,764)
Other costs (38,435) (40,738) (58,148) (50,761) (45,243)
Total costs (220,508) (234,981) (264,833) (270,870) (279,834)
Ebitda 51,605 60,140 74,878 78,861 81,317
Ebitda margin (%) 19.0% 20.4% 22.0% 22.5% 22.5%
Other income 2,022 3,196 2,678 2,678 2,678
Depreciation (19,886) (24,183) (23,874) (23,959) (23,650)
Interest (31,140) (36,530) (39,860) (37,996) (37,746)
PBT 2,601 2,623 13,822 19,585 22,600
Exceptional income
PBT after EI 2,601 2,623 13,822 19,585 22,600
Taxes 458 (1,699) (8,124) (10,197) (10,623)
Eff tax rate (%) (17.6) 64.8 58.8 52.1 47.0
We expect PAT to grow at PAT 3,059 924 5,698 9,388 11,977
14% Cagr over FY18-21CL Share of associates and minority interest 10,142 13,414 10,877 9,415 9,175
PAT after MI 13,202 14,339 16,575 18,802 21,152
Tata Power: Balance sheet

Balance sheet (Rsm) FY17 FY18 FY19CL FY20CL FY21CL
Share capital 2,705 2,705 2,705 2,705 2,705
Reserves and surplus 96,253 131,060 147,003 165,216 186,007
We expect net worth to Total shareholder equity 98,958 133,765 149,708 167,921 188,712
grow at 12% Cagr over Statutory reserves 6,442 6,442 6,442 6,442 6,442
FY18-21CL Unsecured perpetual securities 15,000 15,000 15,000 15,000 15,000
Minority interest 18,690 20,153 20,153 20,153 20,153
Special appropriation towards project cost 5,336 5,336 5,336 5,336 5,336
Capital grant 78 78 78 78 78
Service line contribution from consumers 6,980 6,980 6,980 6,980 6,980
Non-current liabilities
Long term borrowings 257,214 223,563 266,444 268,894 297,617
Other long term liabilities 30,904 38,281 38,281 38,281 38,281
Long term provision 2,707 3,000 3,000 3,000 3,000
Tata Power has started to Total liabilities and shareholder equity 459,908 457,756 516,579 537,242 586,756
deliver on deleveraging . . . Non-current assets
Net block 447,209 448,398 441,161 431,906 423,255
. . . we expect its net debt to Goodwill on consolidation (net of impairment) 17,325 16,416 16,416 16,416 16,416
equity ratio to improve to Non-current investments 108,592 119,930 125,926 132,222 138,834
1.3x in FY21CL from 2.3x in Long term loans and advances 17,110 765 1,140 955 983
FY18 Other non-current assets 16,539 27,740 30,514 33,566 36,922
Current assets
Current investments 10,978 4,362 4,798 5,278 5,805
Inventories 15,996 16,231 16,986 17,487 18,058
Cash and bank balance 9,542 11,858 132,528 169,186 228,065
Short term loans and advances 26,898 7,549 7,549 7,549 7,549
Loans and advances 0 62,561 0 0 0
Total CA 191,894 197,228 271,155 310,287 371,966
Current liabilities
Short-term borrowings 162,798 188,273 197,686 207,571 217,949
Trade payables 55,290 56,098 50,617 52,110 53,811
Other current liabilities 141,290 123,773 135,885 143,119 144,460
Short-term provisions 2,077 1,934 2,593 2,669 2,756
Total current liabilities 361,455 370,079 386,781 405,469 418,978
Total assets 459,908 457,756 516,579 537,242 586,757

Tata Power: Cashflow statement

Cashflow statement FY17 FY18 FY19CL FY20CL FY21CL
Cash from operations 107,733 26,129 124,323 69,502 63,051
PAT 3,059 924 5,698 9,388 11,977
Tata Power will generate Add deferred tax (3,370) (12,442) 0 0 0
healthy operating cashflow Add interest 31,140 36,530 39,860 37,996 37,746
Add depreciation and impairment 19,886 24,183 23,874 23,959 23,650
Less other income (2,022) (3,196) (2,678) (2,678) (2,678)
Working capital change 59,040 (19,870) 54,032 6,330 330
Others 0 0 3,537 (5,492) (7,973)
Cash from investments (117,742) (1,583) (35,279) (21,499) (22,316)
Capex (111,847) (7,247) (29,122) (14,705) (14,999)
Investments 2,107 (11,201) (2,774) (3,051) (3,357)
Other income 2,022 3,196 2,678 2,678 2,678
Others (10,024) 13,670 (6,061) (6,422) (6,639)
Cash from financing 11,221 (11,682) 24,698 (11,344) 18,144
We expect no requirement Equity 1,192 1,463 0 0 0
of additional equity to be Increase in reserves 1,461 34,807 15,942 18,213 20,792
raised
Debt 43,937 (8,176) 52,295 12,334 39,101
Interest costs (31,140) (36,530) (39,860) (37,996) (37,746)
Dividends (2,814) (3,246) (3,679) (3,896) (4,004)
Others (1,416) 0 0 0 0
Change of cash 1,212 12,864 113,742 36,658 58,879
Cash start 4,710 5,922 18,786 132,528 169,186
Cash end 5,922 18,786 132,528 169,186 228,065
Given deleveraging by non- Tata Power: Key ratios and valuation

core asset sales, expansion Key ratios and valuation (Rs) FY17 FY18 FY19CL FY20CL FY21CL
in renewables . . . Price 74.7 74.7 74.7 74.7 74.7
No. of shares (m) 2,705 2,705 2,705 2,705 2,705
. . . the stock is a value BUY
at 1.2x FY20CL BV for an Adjustment factor 1 1 1 1 1
about 12% ROE Adjusted shares (m) 2,705 2,705 2,705 2,705 2,705
Market cap (Rsm) 194,782 194,782 194,782 194,782 194,782
EPS 4.9 5.3 6.1 7.0 7.8
Rec EPS - Growth (%) 42.3 8.6 15.6 13.4 12.5
DPS 1.0 1.2 1.4 1.4 1.5
BVPS 36.6 49.4 55.3 62.1 69.8
PB (x) 2.0 1.5 1.3 1.2 1.0
EV/Ebidta (x) 11.7 9.9 7.0 6.4 5.9
EV/MW (x) 65.9 64.8 57.3 54.7 52.5
Dividend yield (%) 1.4 1.6 1.8 1.9 2.0
ROE (%) 13.4 12.3 11.7 11.8 11.9
- Rec PAT/PBT (%) 507.5 546.6 119.9 96.0 93.6
- PBT/Ebit (%) 7.7 6.7 25.7 34.0 37.5
- Ebit/Sales (%) 12.4 13.3 15.8 16.5 16.7

Valuation details
Our target price is based on a SOTP - DCF methodology for its CGPL business, PE
multiples for its regulated power utility and EV/Ebitda methodology for its coal
businesses. We value its investment in TCS at CLSA target price and recently
entered divestures at their expected realisable value.
Investment risks
Delay in resolution of compensatory tariff issue, sharp correction in international
coal prices, INR depreciation and delay in deleveraging of the balance sheet are
the key risks.
Recommendation history of Tata Power Co Ltd (TPWR IB)

110 Other analysts U-PF SELL
Stock price (Rs)
No coverage N-R
100
90
80
70
60

27 Jul 2018 BUY 96.00 01 Dec 2016 BUY 88.00
03 May 2018 BUY 105.00 24 Aug 2016 SELL 73.00
21 May 2017 BUY 100.00 25 May 2016 U-PF 77.00
10 Feb 2017 BUY 97.00 07 Feb 2016 U-PF 68.00
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Revenue 343,669 286,929 272,113 295,121 339,712 349,731 361,151
Cogs (ex-D&A) (166,441) (170,886) (169,114) (180,141) (191,455) (203,660) (216,827)
Selling & marketing expenses (51,895) (21,576) (22,052) (26,523) (28,645) (30,937) (33,412)
Other SG&A - - - - - - -
Other Op Expenses ex-D&A (55,927) (31,074) (29,342) (28,316) (44,733) (36,273) (29,595)
Op Ebitda 69,405 63,393 51,605 60,140 74,878 78,861 81,317
Op Ebit 47,663 46,906 31,719 35,957 51,004 54,903 57,667
Interest income 3,523 913 2,022 3,196 2,678 2,678 2,678
Net interest inc/(exp) (33,470) (31,445) (29,118) (33,334) (37,181) (35,318) (35,067)
Asset sales/other cash items - - - - - - -
Taxation (10,556) (6,803) 458 (1,699) (8,124) (10,197) (10,623)
Profit after tax 3,637 8,658 3,059 924 5,698 9,388 11,977
Profit for period 3,637 8,658 3,059 924 5,698 9,388 11,977
Minority interest (2,410) 618 10,142 13,414 10,877 9,415 9,175
Net profit 1,227 9,276 13,202 14,339 16,575 18,802 21,152
Extraordinaries/others 0 0 0 0 0 0 0
Dividends (3,372) (3,372) (2,814) (3,246) (3,679) (3,896) (4,004)
Retained profit (2,145) 5,904 10,388 11,092 12,896 14,907 17,148
Adjusted profit 1,227 9,276 13,202 14,339 16,575 18,802 21,152
EPS (Rs) 0.5 3.4 4.9 5.3 6.1 7.0 7.8
Core EPS (Rs) 0.5 3.4 4.9 5.3 6.1 7.0 7.8
DPS (Rs) 1.0 1.0 1.0 1.2 1.4 1.4 1.5
Profit and loss ratios

Growth (%)
Revenue growth (% YoY) (3.6) (16.5) (5.2) 8.5 15.1 2.9 3.3
Ebitda growth (% YoY) (9.9) (8.7) (18.6) 16.5 24.5 5.3 3.1
Ebit growth (% YoY) (4.2) (1.6) (32.4) 13.4 41.8 7.6 5.0
Net profit growth (%) (84.0) 655.8 42.3 8.6 15.6 13.4 12.5
EPS growth (% YoY) (85.0) 609.5 42.3 8.6 15.6 13.4 12.5
Adj EPS growth (% YoY) (85.0) 609.5 42.3 8.6 15.6 13.4 12.5
DPS growth (% YoY) 8.6 4.3 0.0 15.4 13.4 5.9 2.8
Core EPS growth (% YoY) (85.0) 609.5 42.3 8.6 15.6 13.4 12.5
Margins (%)
Ebitda margin (%) 20.2 22.1 19.0 20.4 22.0 22.5 22.5
Ebit margin (%) 13.9 16.3 11.7 12.2 15.0 15.7 16.0
Op cashflow margin 7.6 (4.6) 28.8 (1.1) 24.5 8.7 6.7
Returns (%)
ROE (%) 1.1 8.3 13.4 12.3 11.7 11.8 11.9
ROA (%) 1.7 3.6 4.9 1.5 2.4 2.8 3.1
ROIC (%) 2.2 5.0 7.7 2.7 4.7 5.8 6.9
ROCE (%) 8.5 8.6 5.9 6.2 9.1 10.3 10.9
Effective tax rate (%) 74.4 44.0 (17.6) 64.8 58.8 52.1 47.0
Ebitda/net int exp (x) 2.1 2.0 1.8 1.8 2.0 2.2 2.3
Exceptional or extraord. inc/PBT (%) 0.0 0.0 0.0 0.0 0.0 - -
Dividend payout (%) 206.3 30.3 21.3 22.6 22.2 20.7 18.9

Balance sheet (Rsm)

Inventories 18,442 13,734 15,996 16,231 16,986 17,487 18,058
Current assets 149,164 171,186 191,894 134,667 271,155 310,287 371,966
Fixed assets 417,638 377,557 468,988 452,439 457,687 448,432 439,781
Investments 27,326 114,468 108,592 195,335 125,926 132,222 138,834
Goodwill 66,258 55 17,325 16,416 16,416 16,416 16,416
Other non-current assets 94,043 37,331 34,565 29,337 32,176 35,353 38,738
Total assets 754,429 701,207 821,975 828,804 903,970 943,321 1,006,345
Short term loans/OD 82,136 145,889 162,798 188,273 197,686 207,571 217,949
Long-term debt/leases/other 341,184 245,796 272,824 239,533 282,054 284,503 313,227
Convertible bonds 0 0 0 0 0 0 0
Total liabilities 586,314 567,375 685,489 656,049 715,273 736,409 778,642
Share capital 2,705 2,705 2,705 2,705 2,705 2,705 2,705
Retained earnings 122,716 94,792 96,253 131,060 147,003 165,216 186,007
Reserves/others 0 0 0 0 0 0 0
Shareholder funds 125,421 97,497 98,958 133,765 149,708 167,921 188,712
Minorities/other equity 42,694 36,335 37,527 38,990 38,990 38,991 38,990
Total equity 168,115 133,832 136,485 172,756 188,698 206,912 227,702
Total liabs & equity 754,429 701,207 821,974 828,805 903,970 943,321 1,006,345
Total debt 423,320 391,685 435,622 427,806 479,741 492,074 531,176
Net debt 408,311 385,054 426,080 415,948 347,213 322,888 303,111
Adjusted EV 571,455 476,683 516,448 426,290 426,961 396,341 369,952
BVPS (Rs) 46.4 36.0 36.6 49.5 55.3 62.1 69.8

Key ratios
Current ratio (x) 0.7 0.6 0.5 0.4 0.7 0.8 0.9
Growth in total assets (% YoY) 5.7 (7.1) 17.2 0.8 9.1 4.4 6.7
Growth in capital employed (% YoY) 5.2 (10.0) 8.4 4.6 (9.0) (1.1) 0.2
Net debt to operating cashflow (x) 15.7 (28.9) 5.4 (130.3) 4.2 10.6 12.5
Gross debt to operating cashflow (x) 16.3 (29.4) 5.6 (134.0) 5.8 16.2 21.9
Net debt/Ebitda (x) 5.9 6.1 8.3 6.9 4.6 4.1 3.7
Gearing
Net debt/equity (%) 242.9 287.7 312.2 240.8 184.0 156.1 133.1
Interest cover (x) 1.4 1.5 1.1 1.1 1.3 1.5 1.6
Debt Cover (x) 0.1 0.0 0.2 0.0 0.2 0.1 0.0
Inventory days 43.0 34.4 32.1 32.6 31.7 30.9 29.9
Debtor days 53.7 57.9 49.4 46.0 46.5 53.6 53.5
Creditor days 107.6 102.9 107.2 112.8 101.7 92.1 89.2
Working capital/Sales (%) 1.5 14.9 (6.0) (20.0) (14.9) (16.2) (15.8)
Working capital/Capital employed (%) 0.9 8.2 (2.9) (10.0) (9.4) (10.7) (10.8)
Other ratios (%)
EV/OCF (x) 22.0 (35.8) 6.6 (133.6) 5.1 13.0 15.3
EV/FCF (x) (69.1) 159.2 (15.4) (40.8) 7.9 25.2 40.1
EV/Sales (x) 1.7 1.7 1.9 1.4 1.3 1.1 1.0

Cashflow (Rsm)
Operating adjustments - - - - - - -
Working capital changes (5,670) (37,555) 57,369 (25,103) 52,950 5,247 (752)
Interest paid / other financial expenses (33,842) (32,358) (31,140) (36,530) (39,860) (37,996) (37,746)
Tax paid 0 0 0 0 0 0 0
Other non-cash operating items (3,925) (6,803) 458 (1,699) (4,587) (15,689) (18,596)
Net operating cashflow 25,967 (13,323) 78,292 (3,192) 83,381 30,424 24,223
Capital expenditure (34,239) 16,318 (111,847) (7,247) (29,122) (14,705) (14,999)
Free cashflow (8,272) 2,995 (33,554) (10,439) 54,259 15,719 9,225
Acq/inv/disposals (2,022) 65,594 2,107 (11,201) (2,774) (3,051) (3,357)
Int, invt & associate div (173) (7,997) (8,002) 16,865 (3,383) (3,743) (3,961)
Net investing cashflow (36,434) 73,915 (117,742) (1,583) (35,279) (21,499) (22,316)
Increase in loans (2,697) (32,245) 43,937 (18,543) 67,696 17,972 50,409
Dividends (5,121) (2,814) (2,814) (3,246) (3,679) (3,896) (4,004)
Net equity raised/(buybacks) 20,692 (34,283) 2,653 36,270 15,942 18,213 20,792
Net financing cashflow 11,496 (68,970) 42,361 7,090 72,568 27,734 56,972
Incr/(decr) in net cash 1,028 (8,378) 2,911 2,316 120,670 36,658 58,879
Exch rate movements 0 - - - - - -
Opening cash 13,981 15,009 6,631 9,542 11,858 132,528 169,186
Closing cash 15,009 6,631 9,542 11,858 132,528 169,186 228,065
OCF PS (Rs) 10.2 (4.9) 28.9 (1.2) 30.8 11.2 9.0
FCF PS (Rs) (3.3) 1.1 (12.4) (3.9) 20.1 5.8 3.4

Growth (%)
Op cashflow growth (% YoY) (11.2) (151.3) nm (104.1) nm (63.5) (20.4)
FCF growth (% YoY) - - (1,220.4) - - (71.0) (41.3)
Capex growth (%) (20.5) (147.7) - (93.5) 301.9 (49.5) 2.0
Capex/sales (%) 10.0 5.7 41.1 2.5 8.6 4.2 4.2
Capex/op cashflow (%) 131.9 (122.5) 142.9 (227.0) 34.9 48.3 61.9
Operating cashflow payout ratio (%) 9.8 - 3.6 - 4.4 12.8 16.5
Cashflow payout ratio (%) 13.0 - 3.6 - 4.4 12.8 16.5
Free cashflow payout ratio (%) - 112.6 - - 6.8 24.8 43.4
DuPont analysis
Ebit margin (%) 13.9 16.3 11.7 12.2 15.0 15.7 16.0
Asset turnover (x) 0.5 0.4 0.4 0.4 0.4 0.4 0.4
Tax burden (x) 0.3 0.6 1.2 0.4 0.4 0.5 0.5
Return on assets (%) 1.7 3.6 4.9 1.5 2.4 2.8 3.1
Leverage (x) 4.7 4.8 5.6 5.3 4.8 4.7 4.5
ROE (%) 2.3 5.7 2.3 0.6 3.2 4.7 5.5
EVA® analysis
Ebit adj for tax 12,214 26,267 37,306 12,669 21,026 26,317 30,562
Average invested capital 567,261 520,703 481,735 472,495 448,114 450,218 441,216
ROIC (%) 2.2 5.0 7.7 2.7 4.7 5.8 6.9
Cost of equity (%) 14.5 14.5 14.5 14.5 14.5 14.5 14.5
EVA/IC (%) (6.4) (5.0) (5.4) (6.3) (4.6) (3.8) (3.0)
EVA (Rsm) (36,181) (26,064) (25,950) (29,911) (20,699) (17,114) (13,118)

Torrent Power
Rs264.05 – N-R
Bharat Parekh Cleaner IPP, efficient discom

bharat.parekh@clsa.com Integrated play on power reforms
+91 22 6650 5020
Torrent Power, with a presence across generation, transmission and distribution
(GTD), is well positioned to capitalise on the sector’s turnaround, given its
under-utilised capacities and under-leveraged balance sheet. It has a blend of
regulated and market-driven businesses across generation and discoms. It plans
to quickly ramp up its renewables portfolio and is one of India’s more profitable
utilities, with a 13% ROE, despite gas independent power producer (IPP) losses
and the stock trading at 12x FY19 consensus PE.
9 January 2019 Contender to play power reforms; presence across GTD

Torrent has a blend of regulated (Sugen IPP, Ahmedabad and Surat circles) and
India market driven businesses (Dgen, Bhiwandi and Agra circles) across generation and
Power discoms. It has operational capacity of 3.6GW divided into thermal/renewable at
84:16 with 75% being gas-based. It also has 942MW of wind based projects
Reuters TOPO.BO under construction, post which the mix will change to 67:33. On the distribution
Bloomberg TPW IB
front, it operates license/franchise circles, at remarkably low T&D losses across
Priced on 7 January 2019 the cities of Ahmedabad, Gandhinagar, Surat, Bhiwandi and Agra spanning
1,367km².
12M hi/lo Rs307.35/211.50
An efficient operator in an inefficient sector
Torrent, with its under-levered balance sheet, is set to benefit from India’s power
Shares in issue 481m reforms, given its presence across GTD. It is an efficient player across verticals,
Free float (est.) 37.6% whether its IPP business operating turbines below regulatory norms or its
Market cap US$1,8bn discoms, where it has the lowest T&D losses in the country at its regulatory
discoms. It runs India’s most efficiently-regulated discoms in Gujarat with the
3M ADV US$5.5m
lowest T&D losses, and has successfully pioneered private entry into the
franchise model by turning around more difficult discoms. Torrent, as a private
Major shareholders franchise, has cut AT&C losses in Bhiwandi, one of the toughest circles in India
Torrent Pvt Ltd 53.6%
(17.3% in FY18 vs 21.7% in FY13) and Agra (20.9% in FY18 vs 51.3% in FY13).
LIC of India 5.9%
Axis Mutual Fund 4.3%
UTI Mutual Fund 2.4% Trading 20% below 10Y average PB; not a yield play
Torrent is trading at 12x FY19 consensus EPS versus forecast 10% Cagr in EPS
over FY18-20. Its stock has been flat over the past 12 months and is currently
trading at 1.2x one-year forward PB, 20% below its 10-year average of 1.5x. Its
depressed FY18 ROE at 13% was due to losses at its stranded gas-based power
plants, indicating that its core regulatory business is very profitable. Given its
growth utility stance, it is not a dividend-yield play, which has been fairly volatile
Stock performance (%) and low versus public sector undertakings such as NTPC, PWGR and gas
1M 3M 12M companies.
Absolute 3 18 (4)
Financials
(Rs) (%)
310 130 Year to 31 March 16A 17A 18A 19E 20E
125
290 Revenue (Rsm) 116,805 100,001 115,121 132,582 152,236
120
270 115 Net profit (Rsm) 9,002 4,290 9,423 10,175 11,409
250 110 EPS (Rs) 18.9 8.9 19.6 21.2 23.7
105
230 EPS growth (% YoY) 133 -53 120 8 12
100
210 95 PE (x) 13.4 28.4 12.9 12.0 10.7
190 90 Dividend yield (%) 2.8 0.0 1.1 na na
85
170 Torrent Power ROAE (%) 13.9 6.4 12.9 11.9 11.9
Rel to Nifty (RHS) 80
150 75 PB (x) 1.9 1.8 1.6 1.4 1.2
Dec 16 Aug 17 Apr 18 Dec 18 Net gearing (%) 94.9 108.6 108.4 na na
Source: Bloomberg Source: Company

Torrent Power - N-R India power generation
Torrent Power (consolidated): Financial snapshot

(Rsm) FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Sales 68,183 79,535 82,210 86,811 103,960 116,805 100,001 115,121 132,582 152,236
Growth - YoY (%) 17 3 6 20 12 (5) 15 15 15
Ebitda 20,530 23,081 13,508 13,135 20,799 30,616 24,603 31,171 35,170 38,162
Ebitda margin (%) 29 16 15 20 26 25 27 27 25
PAT 10,546 12,526 3,867 1,053 3,597 9,002 4,290 9,423 10,175 11,409
Growth - YoY (%) 19 (69) (73) 242 150 (52) 120 8 12
Torrent has a portfolio of Torrent Power: Organisational structure

assets across the entire
power sector value
chain . . . Torrent
Power
. . . with a further 942MW

of wind-based projects Generation Distribution
under construction
Licensed Franchised
Thermal Renewable
distribution distribution
Under-
Operational Operational
cons.
Sugen Gas Unosugen Dgen Amgen Solar - Wind -  Ahmedabad/  Bhiwandi

1,147.5MW Gas Gas Coal 138MW 942MW Gandhinagar, (3.7BU
382.5MW 1200MW 362MW Wind - Surat, Dahej - 2% of Mah.,
430MW (11.7BU 0.3% of India)
- 11% of Guj.,  Agra (2.2BU
1% of India) - 2% of UP,
0.2% of India)
Start-up losses from high- Torrent Power: ROE

cost gas-based generation 25 (%)
and conservative a/c has
caused ROE volatility
20
15
10
0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F

Street expects revenue to Torrent Power (consolidated): Revenue and YoY growth
grow at constant rate over 160 (Rsbn) (%) 25
FY19-20
140 20
120
15
100
10
80
5
60
0
40
20 (5)
0 (10)
Increase in revenue is Torrent Power (consolidated): Ebitda and margin

expected to be partly offset 45 (Rsbn) (%) 35
Ebitda Margin (RHS)
by narrowing Ebitda margin
40
30
35
25
30
25 20
20 15
15
10
10
5
5
0 0
FY14 was a challenging year Torrent Power (consolidated): PAT and YoY growth
for gas-based power 14 (Rsbn) (%) 300
companies on account of
non-supply from the KG-D6 12 250
basin . . .
200
10
. . . and consensus forecasts
a 10% profit Cagr over 150
FY18-20 8
100
6
50
4
0
2 (50)
0 (100)

Unviable gas-based new Torrent Power (consolidated): Capital work in progress and as % of total assets
power generation led an 250 (Rsbn) Gross block CWIP (%) 45
end to Torrent's generation Other non-current assets WC
company capex, leading to CWIP (% of total assets) (RHS) 40
fall in CWIP from FY14 . . .
35
200
. . . while start of large 30
renewable (wind) capex
could drive future spending 25
150
20
15
100
10
50 0
Book value is expected to Torrent Power (consolidated): Book value per share
grow at constant rate over 250 (Rs) (%) 20
FY19-20
200 15
150 10
100 5
50 0
0 (5)
FY13 FY14 FY15 FY16 FY17 FY18 FY19F FY20F
Stock currently trading at Torrent Power (consolidated): PB - one-year forward

24% below 10-year average 3.7 (x)
one-year forward PB
3.2
2.7
2.2 +1sd
1.7
Avg
1.2
-1sd
0.7
0.2
Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18

Very volatile PAT over the Torrent Power (consolidated): Summary profit and loss statement
past few years Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
Revenue 86,811 103,960 116,805 100,001 115,121
Ebitda 13,135 20,799 30,616 24,603 31,171
Depreciation (5,846) (7,205) (9,157) (10,059) (11,315)
Ebit 7,289 13,594 21,459 14,544 19,856
Net interest expense (4,540) (5,961) (8,489) (8,671) (5,846)
Taxes (1,670) (3,777) (3,874) (1,576) (4,489)
Rec PAT 1,079 3,857 9,097 4,298 9,521
Minority and associates (26) (30) (20) (8) (98)
Rec PAT (after MI and associates) 1,053 3,827 9,076 4,290 9,423
Exceptional - (230) (74) - -
Rep PAT (after MI and associates) 1,053 3,597 9,002 4,290 9,423
CWIP has remained at same Torrent Power (consolidated): Summary balance sheet
level since FY15, reflecting Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
lack of capacity expansion Shareholder fund 62,053 65,557 64,705 68,921 77,195
Net block 101,747 150,782 151,289 168,035 178,707
CWIP 45496.1 2330.3 2132.9 3320.9 3925.1
Cash and cash equivalents 15,582 17,703 7,797 2,693 3,176
Short-term borrowings - (1,096) - (766) -
Trade payables (6,354) (6,339) (7,359) (7,338) (6,587)
Total assets 168,437 168,584 178,464 182,892 198,146
Operating cashflow saw a Torrent Power (consolidated): Summary cashflow statement

19% Cagr over FY14-18 and Particulars (Rsm) FY14 FY15 FY16 FY17 FY18
has been the main source of PBT 2,749 7,404 12,896 5,873 14,010
capex Depreciation 5,544 7,205 9,157 10,059 11,315
Interest (net) 5,702 7,965 10,209 9,798 7,789
Change in working capital (549) (655) 366 (691) (2,976)
Other non-cash adjustments 110 596 (7,126) (1,480) (2,504)
Capex (11,973) (13,796) (13,049) (24,500) (22,807)
Purchase of investments (13) (13) (13) (1,593) (96)
Other investing activities 3,133 2,231 3,957 4,876 (1,282)
Change in debt 13,844 (1,151) (8,017) 2,481 5,315
Dividend paid (990) (253) (2,853) (16) (1,081)
Interest paid (9,561) (11,694) (11,818) (10,334) (8,285)
Other financing activities 1,081 1,042 1,058 1,128 938
Net changes in cash 9,076 (1,119) (5,232) (4,399) 336

Low and volatile dividend Torrent Power (consolidated): Total shareholder yield
yield over past few years 4.5 (%)
Dividend yield Buyback/capital return yield
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
Torrent has an integrated Torrent Power: Portfolio of thermal assets

portfolio of generation and
distribution assets . . .
. . . with an operational
capacity of 3.6GW divided
into thermal/renewables at
84:16, with 75% being gas-
based capacity
Source: Company

Torrent Power is a well-run Torrent Power: Operational performance overview

efficient private-sector
player in the power
market
In addition to improving
distribution volume, AT&C
losses have come down
One of India’s lowest T&D

losses at its regulatory
discoms
Source: Company
AT&C and T&D losses Torrent Power: Key technical stats

reducing YoY
Source: Company

Notes

Appendices India power generation
Appendix 1: UDAY - Power reform 3.0

A lot is riding on India launched a third round of power reforms on 5 November 2015 after two
UDAY reforms prior initiatives failed to achieve the desired results, leading to mounting losses at
discoms. If successful, power reforms should help increase the states’ capacity to
buy power and reduce payment risks; banks on capex funding and lower risk to
their balance sheets; and Coal India on improved demand for coal.
Rajasthan, UP and TN are State Utilities - Energy Consumption (Mkwh), debt and loss (FY14)
the weakest links of the 50 SEB profit/loss without subsidy (Rsbn)
power value chain Gujarat
0 Delhi Karnataka Maharashtra
(50) Punjab AP
Haryana
(100) MP
(150)
TN Rajasthan
(200)
UP
(250)
SEB Debt (Rsbn)
(300)
100 200 300 400 500 600 700 800 900 1,000 1,100
Source: Government, PFC, CLSA
The key reasons why this plan has a higher chance of success is that it is focused
on cost cutting, rather than tariff hikes. Bank funding will only be for discom
losses approved by the government and will enforce financial discipline on
discoms through alignment with state finances. Below we show how discoms
could have path-to-zero losses by FY19.
Conservative scenario: we UDAY potential benefits and path to discoms’ breakeven

still see US$9.7bn savings Area Details Amount Savings Assumptions
which could wipe off (Rsbn) (Rsbn) (%)
discom losses Interest-rate reduction 3% on 25% discom debt 35 26 75
Interest-rate reduction 4% on 75% discom debt 135 101 75
Debt takeover by state 8% on 75% discom debt 270 203 75
AT&C loss reduction Reduce to 15-10% 575 115 20
Supply of domestic coal and coal swapping 360 108 30
Demand-side management (DSM) LED, appliances etc 585 59 10
PAT 76 23 30
Transmission losses 1% of intra-state 16 5 30
Total 2,052 639
We outline the key points in the UDAY scheme:
Debt clean-up to end legacy issues

Debt transfer to states is  States will take over 75% of discom debt, as on 30 September 2015, over two
key to cleaning up of the years - 50% of discom debt will be taken over in 2015-16 and 25% in 2016-17.
‘sins of the past’, but that’s
not all . . .  The government of India will not include the debt taken over by the states as
per the above scheme in the calculation of fiscal deficit of respective states in
the financial years 2015-16 and 2016-17.

 States will issue non-SLR, including SDL bonds in the market or directly to the
respective banks/financial institutions (FIs) holding the discom debt to the
appropriate extent.
 Banks/FIs will convert discom debt not taken over by the state into loans or
bonds with an interest rate not more than the bank’s base-rate plus 0.1%.
Alternately, this debt may be fully or partly issued by the discom as state-
guaranteed discom bonds at prevailing market rates, which will be equal to or
less than the bank base rate plus 0.1%.
 States accepting UDAY and performing as per operational milestones will be given
additional/priority funding through the Rs760bn Deendayal Upadhyaya Gram Jyoti
Yojana (DDUGJY), Rs654bn Integrated Power Development Scheme (IPDS), Power
Sector Development Fund (PSDF) or other of MOP and Ministry of New and
Renewable Energy schemes.
Hard timelines seem set to UDAY: Activities to reduce billing losses

achieve desired effect Activity Benefit End date
Compulsory feeder and Ability to track losses at the feeder and Feeders - 30 Jun 2016
Distribution Transformer (DT) DT level for corrective action DTs - 30 Jun 2017
metering by states
Consumer indexing & GIS Identification of loss-making areas for 30 Sep 2018
mapping of losses corrective action
Upgrade or change transformers, Reduce technical losses and 31 Dec 2017
meters, etc minimise outages
Smart metering of all consumers Smart meters will be tamper proof and Consumption > 500 units/
consuming above 200 allow remote reading, thus helping month - 31 Dec 2017
units/month reduce theft Others - 31 Dec 2019
UDAY: Equipment installation details

Area Units installed (lakh) End date
Feeder & DT meters 13 2017
Smart meters
>500 units/mth 100 2017
200-500 units/mth 250 2019
DT 4.2 2017
Conductors 11.2 2017
LED
Bulbs, domestic 7,700 2019
Streetlights 350
Eff agri pumps 100 2019
Appliances
Fans 1,600 2019
A/Cs 18
Potential savings across states

 States will also be supported with additional coal at notified prices and, in
case of availability through higher capacity utilisation, low-cost power from
NTPC and other Central Public Sector Undertakings (CPSUs).
NTPC could save Rs85.7bn UDAY: Illustration of NTPC savings

from domestic production Area Savings (Rsbn) Savings (Rs/kWh)
and coal linkage Substituting imported coal, 73 0.3
rationalisation MoU/eauction coal by 100% ACQ coal
Rationalisation/swapping of 12.7 0.05
coal sources including freight charges
Total 85.7 0.35

 States not meeting operational milestones are subject to forfeit their claims on
IPDS (scheme to ensure 24/7 power for all) and DDUGJY (rural electrification
scheme) grants.
 UDAY is optional for all states. However, states are encouraged to take the
benefit early as benefits are dependent on performance.
UDAY: Potential savings by state

State Input energy AT&C losses AT&C loss Potential saving if AT&C
18-19 (MkWh) 13-14 target by 18-19 loss reduces to target (Rsbn)
Haryana 55,788 34 15 54
Uttar Pradesh 108,378 25 15 52
Rajasthan 79,170 27 15 47
Madhya Pradesh 68,848 28 15 45
Tamil Nadu 108,438 22 15 40
Odisha 31,654 39 15 38
West Bengal 42,770 32 15 36
Maharashtra 139,659 14 10 31
Bihar 18,259 46 15 29
Jammu & Kashmir 16,447 49 15 28
Andhra Pradesh 115,826 15 10 28
Karnataka 77,430 22 15 27
Punjab 63,448 18 10 25
Gujarat 84,289 16 10 25
Jharkhand 11,608 42 15 16
Chhattisgarh 27,424 23 15 11
Kerala 27,403 16 10 9
Delhi 37,691 14 10 8
Uttarakhand 15,452 19 10 7
Assam 8,804 30 15 7
Himachal Pr 11,990 15 10 3
Arunachal Pr 803 68 15 2
Meghalaya 2,035 35 15 2
Sikkim 548 71 15 2
Puducherry 3,825 16 10 1
Manipur 792 44 15 1
Nagaland 854 38 15 1
Tripura 1,375 28 15 1
Mizoram 612 33 15 1
Goa 4,721 11 10 0
Total 575
Why UDAY has a better chance of success

Aligning discom losses and Apart from cost cutting focus and control over bank funding, this is the first
budget over long term is time the government is aligning state fiscals with discom financials. This is as
key to making UDAY states will take over the future losses of discoms in a graded manner and fund
successful
them as follows:
D iscom debt to be taken over by states

Year FY16 FY17 FY18 FY19 FY20 FY21
Previous year's discom 0% of 0% of 5% of 10% of 25% of 50% of the
loss to be taken over by loss of loss of loss of loss of loss of previous year
state FY15 FY16 FY17 FY18 FY19 loss
Source: PIB

Appendix 2: Power surrendered by discoms

India: Power surrendered
Capacity surrendered by states Owner Installed Power surrendered (MW)
State Plant capacity As of Mar-16 As of May-18
(MW)
Delhi Anta (NTPC) NTPC 44 44 44
Delhi APPCL Jhajjar (Aravali) NTPC - Haryana Power Generating Company 693 693 693
Delhi Auraiya (NTPC) NTPC 72 72 72
Delhi BTPS (Badarpur) NTPC 705 285 285
Delhi Charnera-III NHPC 29 29 29
Delhi Dadri- Gas NTPC 91 91 91
Delhi Dadri Stage- II (Thermal) NTPC 735 735 735
Delhi Dulharti NHPC 50 50
Delhi Koldam NTPC 87 87
Delhi Parwat U-II NHPC 66 66 66
Delhi Tehri HEP THDC 103 103 63
Delhi Oulhasli NHPC - 50
DNH Mouda STPS Stage-I NTPC - 56
DVC Farakka STPS- III NTPC - 32
DVC New Muzaffarpur TPS Expansion NTPC - BSEB - 10
DVC New Muzaffarpur TPS Expansion Project NTPC - BSEB 110 10
DVC New Nabinagar STPS NTPC - Nabinagar Power Generating Company 1,980 54
DVC Talcher Stage-I NTPC - 3
Haryana Anta NTPC - 24
Haryana Auraiya NTPC - 39
Haryana Dadri NTPC - 41
HP Anta NTPC 419 15 15
HP Auriya NTPC 663 22 22
HP Dadri NTPC 830 25 25
Jharkhand Barh STPP NTPC 1,320 80
Jharkhand Farakka STPS-III NTPC 500 32 32
Madhya Pradesh Barethi NTPC 3,960 990
Madhya Pradesh Gandhar NTPC 657 117
Madhya Pradesh Kawas NTPC 656 140
Madhya Pradesh Khargone STPS NTPC 1,320 660
Madhya Pradesh Mouda II NTPC 1,320 212
Madhya Pradesh Mouda STPS Stage-I NTPC 1,000 156
Manipur Bongaigaon TPS Unit 2 & 3 NTPC 750 31
Meghalaya Bongaigaon TPS NTPC 750 53
Meghalaya Bongaigaon TPS NTPC 750 53
Odisha BARH STPP-I UI-3 NTPC 1,980 418 448
Odisha BARH STPP-II U 1,2 NTPC 1,320 166 166
Odisha MUZAFFARPUR Ext. U-l,2 NTPC 390 30 30
Odisha New Nabinagar U 1-3 NTPC 1,980 155
Punjab Anta NTPC 419 65
Punjab APPCL Jhajjar NTPC - Haryana Power Generating Company 1,500 23
Punjab Auraiya NTPC 663 101
Punjab Dadri NTPC 830 147
Punjab Farakka NTPC 1,600 22
Punjab Kahalgaon NTPC 840 51
Punjab Unchahar- I NTPC 420 36
Punjab Charnera-III NHPC 231 18
Punjab Sewa-II NHPC 120 10
Punjab Parbati-III NHPC 520 41
Punjab Uri-II NHPC 280 20
Rajasthan APCPL, Jhajjar NTPC - Haryana Power Generating Company 1,500 10 10
Rajasthan APCPL, Jhajjar NTPC - Haryana Power Generating Company 1,500 304
Sikkim Barh STPP NTPC 660 10 10
Tripura Bongaigaon TPS Unit 2 & 3 NTPC 750 56
West Bengal Muzaffarpur TPS Expansion Stage - II NTPC - BSEB - 34
NEEPCO Kemang HEP NEEPCO - 131
Total 37,165 3,559 6,285
NTPC 35,766 3,311 5,857
NTPC (% of total) 96% 93% 93%

Appendix 3: Competitive wind power

Wind tariffs have matched the lows of solar. However, our deep dive study and
on-ground research suggests that developers shall still be able to make healthy
equity IRRs of 15-17%. Main reasons attributable to this are - a decline in capital
SECI Bid III
cost by 5-15% on large orders (each order is 20-25% of annual sales of vendor)
and the vendors are under-utilised. The sites are being developed at far-off windy
locations by building EHV 220kV lines over 30-65kms to connect to PWGR sub-
station. Advance turbine technology with a 50-60% higher hub-height and 25-
35% bigger rotor blade to capture more wind and deliver 30-60% higher energy
vs old turbines.
Project can deliver 16% India Wind: Equity IRR of SECI third wind auction (Tariff - Rs2.44/kWh)
equity IRR Bid III (300 MW) (Rsm) Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
Generation (MUs) 951 1,004 1,004 1,004 1,004 1,004
Power sale 2,321 2,449 2,449 2,449 2,449 2,449
Ebitda 2,275 2,400 2,299 2,293 2,287 2,280
Depreciation - (602) (602) (602) (602) (602) (602)
Interest - (1,218) (1,318) (1,276) (1,168) (1,083) (1,032)
PBT 461 519 505 636 750 835
Tax (98) (111) (108) (136) (160) (178)
PAT 363 408 397 500 590 657
Cashflow
Rec .PAT - - 363 408 397 500 590 657
(+) Depreciation - - 602 602 602 602 602 602
Total - - 964 1,010 999 1,102 1,192 1,259
Capex (9,500) (7,600) (1,900) - - - - -
Debt funding/(repayment) 7,125 5,700 1,425 - (602) (602) (602) (602)
Working capital (387) (21) - - - -
Net cashflow to equity (2,375) (1,900) 103 988 397 500 590 657
Equity IRR (%) 16.0
Source: CLSA, SECI
A 100bps change in PLF and SECI III Tariff: Sensitivity to PLF and Interest cost
50bps change in long-term (%) PLF (%)
interest rates can change 36.2% 37.2% 38.2% 39.2% 40.2%
equity IRR by 130bps 7.5% 15.2 15.9 16.8 17.5 18.4
Int. 8.0% 14.7 15.5 16.4 17.3 18.0
cost 8.5% 14.2 15.2 16.0 16.9 17.6
(%) 9.0% 13.9 14.7 15.7 16.4 17.3
9.5% 13.4 14.3 15.2 16.0 16.9
Source: CLSA
Gamesa has introduced the Siemens Gamesa - SG 2.1-122 vs 114: Boasts of higher energy from swept area
longest blades of 60 metres
vs 56 metres to hike energy
capture by 7% from the
same turbine
These would be introduced

via SG2.1-122 turbine at
Kutch for its largest order in Source: CLSA, Gamesa brochure
India of 300MW (143 x
2.1MW) order from an IPP,
which won SECI III auction

Appendix 4: UP discoms - Existing structure

India has been well known UP discom: Existing tariff structure
for charging electricity on
the basis of category
of user
Agriculture was charged the

lowest rate, whereas
commercial space was
charged the highest
Under new National tariff

policy, government
proposes to simplify tariff
Source: CLSA, Uttar Pradesh tariff order

Clearly, the amendment is a UP discoms: Existing tariff structure

break-through proposal,
changing the practice
We believe this will limit

cross-subsidisation and
discipline consumers
Source: CLSA, Uttar Pradesh tariff order

Appendix 5: Stressed and stalled power capacity

13GW worth of under- Bucket 1: Under-construction capacity
construction capacity has Sr no. Plant Cap (MW) Cost (Rsbn) Actual spent (Rsbn) % spent
been stalled for the want of Under construction - Stalled
funds/PPA/FSA/viability 1 Akaltara TPP (Naiyara) 1,800 135 32 24
2 Lanco Amarkantak Mega TPP-II 1,320 108 95 88
If timely action is not taken, 3 Bhavanapadu TPP Ph-I 1,320 93 38 41
even capacity at advance 4 Singhitarai TPP 1,200 84 68 80
stage of commissioning 5 Amravati TPP Ph-II 1,350 66 8 11
could stall 6 KVK Nilanchal TPP 1,050 60 20 34
7 Tori TPP Ph-I 1,200 57 50 88
8 Gorgi TPP 660 39 5 14
9 Bijora Ghanmukh TPP 600 35 4 12
10 Matrishri Usha TPP Ph-II 540 32 30 93
11 Matrishri Usha TPP Ph-I 540 29 42 144
12 Tori TPP Ph-II 600 25 3 12
13 Deveri (Visa) TPP 600 20 12 59
14 Salora TPP 135 7 20 270
15 Niwari TPP 45 3 3 116
Sub total 12,960 794 429 54
Under construction - Potential stress
16 Lanco Vidarbha TPP 1,320 104 53 51
17 Lanco Babandh TPP 1,320 104 76 73
18 Malibrahmani TPP 1,050 63 63 100
19 Thamminapatnam TPP stage -II 700 50 51 102
20 Mahan TPP 600 39 41 105
21 Tuticorin TPP (Ind-Barath) 660 36 24 66
22 Uchpinda TPP 360 29 29 97
23 Ind Barath TPP 350 20 21 106
24 Shirpur TPP 150 12 11 94
Sub total 6,510 458 370 81
Grand total 19,470 1,252 799 64
Cost (US$bn) 17.9 11.4
Source: CLSA, CEA, *for actual spend - wherever updated cost was not available, we have assumed the debt
portion @ 70% of the total cost and have considered interest during construction @ 12% to get the updated cost

Appendix 6: NTPC’s plan to desulphurise

Some 25-yr-old thermal NTPC: Plants for FGD
plants that do not have Capacity FY19 FY20 FY21 FY22 FY23
space to install emission- (MW)
control equipment could be Operating stations
Simhadri 2,000 - - - 2,000 -
forced to close down post-
Bongaigaon 500 500 - - - -
FY23
Kahalgaon 2,340 - - - 840 1,500
Barh 1,320 - - - 1,320 -
NTPC plans to install flue-
Korba 2,600 - - - 1,100 1,500
gas desulphurisation (FGD-
Sipat-I 1,980 - - - 1,980 -
for SOx mitigation) Sipat-II 1,000 - - - - 1,000
equipment at 63GW of its Lara 800 - - - 800 -
current and future Kudgi 2,400 - - - 1,600 800
capacities Vindhyachal-I & II 2,260 - - - 840 1,420
Vindhyachal-III & IV 2,000 - - - 1,000 1,000
Vindhyachal-V 500 - - - - -
Mouda-I 1,000 - - - 1,000 -
Mouda-II 1,320 - - - 1,320 -
Solapur 660 - - - 660 -
Talcher Kaniha 3,000 - - - 2,000 1,000
Talcher Thermal 460 - 460 - - -
Ramagundam-I & II 2,100 - - - 1,100 1,000
Ramagundam-III 500 - - - - 500
Singrauli 2,000 - - - 800 1,200
Rihand-I 1,000 - - - 1,000 -
Rihand-II & III 2,000 - - - 1,000 1,000
Unchahar-I, II & III 1,050 - - - 840 210
Unchahar-IV 500 - - - 500 -
Dadri-II 980 - 980 - - -
Dadri-I 840 - 840 - - -
Tanda 440 - 440 - - -
Farakka 2,100 - - - 1,100 1,000
Muzaffarpur (KBUNL)-I 220 - 220 - - -
Muzaffarpur (KBUNL)-II 390 - - - 390 -
Nabinagar-BRBCL 500 - - - 500 -
Bhilai (NSPCL) 574 - - - 500 -
Jhajjar - (APCPL) 1,500 - 1,500 - - -
Rourkela (NSPCL) 120 - - - - -
Vallur - NTECL 1,500 - - - 1,500 -
Meja - MUNPL 660 - - - 660 -
Durgapur (NSPCL) 120 - - - - -
Projects under construction
Bongaigaon 250 250 - - - -
Lara 800 - - - 800 -
North Karanpura 1,980 - - 660 1,320 -
Gadarwara 1,600 - - - 1,600 -
Khargone 1,320 - - 660 660 -
Solapur 660 - - - 660 -
Darlipall 1,600 - - - 1,600 -
Tanda II 1,320 - - - 1,320 -
Telangana 1,600 - - 800 800 -
Barh I 1,980 - - - 1,320 660
Khulna - BIFPCL 1,320 - - - - -
Nabinagar-BRBCL 500 - - - - 500
Nabinagar -NPGCL 1,980 - - - 1,320 660
Patratu-PVUNL 2,400 - - - - 2,400
Rourkela - NSPCL 250 - - - 250 -
Durgapur - NSPCL 40 - - - - -
Meja -MUNPL 660 - - - 660 -
Total 65,494 750 4,440 2,120 38,660 17,350

Important disclosures India power generation
Companies mentioned
ABB Ltd (N-R)
Adani Enterprises (N-R)
Adani Power (ADANI IB - RS50.4 - SELL)
Adani Transmission (ADANIT IN - RS200.2 - SELL)
Avantha Group (N-R)
Banpu (BANPU TB - BT16.4 - BUY)
Bharat Heavy Elec (BHEL IB - RS72.2 - SELL)
Bharatpur Electricity Services (N-R)
Bharti Infratel (BHIN IS - RS293.8 - O-PF)
Bikaner Electricity Supply (N-R)
BSEB (N-R)
CESC (CESC IB - RS653.2 - BUY)
CGPL (N-R)
Cheung Kong Infra (1038 HK - HK$60.00 - BUY)
China Power (2380 HK - HK$1.80 - U-PF)
CLP (2 HK - HK$89.90 - SELL)
Coal India (COAL IS - RS234.5 - BUY)
CR Power (836 HK - HK$15.84 - BUY)
Cummins (N-R)
Datang Power (991 HK - HK$1.85 - O-PF)
EEPL (N-R)
Egco (EGCO TB - BT247.0 - BUY)
Electricite de France (N-R)
Gail (GAIL IB - RS357.2 - BUY)
Gamesa Corp Tec (N-R)
GE Power (N-R)
GE T&D (N-R)
Glow Energy (GLOW TB - BT88.5 - O-PF)
GMR Infrastructure (N-R)
Gujarat Gas (GUJGA IN - RS657.0 - BUY)
Gujarat Petronet (GUJS IB - RS175.0 - BUY)
Haryana Power (N-R)
HK & China Gas (3 HK - HK$16.44 - SELL)
HK Electric (2638 HK - HK$8.12 - SELL)
HN Renewables (958 HK - HK$2.10 - BUY)
Huadian Fuxin (816 HK - HK$1.80 - BUY)
Huadian Power (1071 HK - HK$3.56 - O-PF)
Huaneng Power (902 HK - HK$5.03 - U-PF)
Indian (N-R)
Indocoal KPC (N-R)
Indraprastha Gas (IGL IS - RS273.6 - BUY)
Jaigad Power (N-R)
Jaiprakash Power (N-R)
JSW Energy (JSW IB - RS70.0 - SELL)
JSW Green (N-R)
JSW Group (N-R)
JSW Steel (JSTL IB - RS289.6 - SELL)
Kalpataru Power (N-R)
KEC (N-R)
Kepco Plant S&E (051600 KS - ₩33,200 - O-PF)
Kota Electricity Distribution (N-R)
KSK Mahanadi Power (N-R)

L&T Tech (LTTS IS - RS1,633.5 - BUY)

Longyuan Power (916 HK - HK$5.54 - BUY)
Mahanagar Gas (MAHGL IN - RS905.8 - BUY)
Maithon (N-R)
MPL (N-R)
Neepco (N-R)
NHPC (N-R)
NLC India (N-R)
NTPC (NTPC IS - RS148.6 - BUY)
Petronet LNG (PLNG IB - RS217.2 - SELL)
Power Assets (6 HK - HK$55.00 - O-PF)
Power Grid (PWGR IB - RS198.4 - O-PF)
PTC India (N-R)
Ratch (RATCH TB - BT51.8 - U-PF)
Scheider Electric (N-R)
Siemens AG (N-R)
SJVN (N-R)
Solar Energy Corporation of India (N-R)
Sterlite Grid (N-R)
Tata Ceramics (N-R)
Tata Power (TPWR IB - RS74.7 - BUY)
Tata Power Trading (N-R)
Tata Projects (N-R)
Tata Solar Power (N-R)
Tenaga (TNB MK - RM13.94 - BUY)
TERPL (N-R)
Thermax (N-R)
Torrent Power (N-R)
Toshiba (6502 JP - ¥3,220 - O-PF)
TPDDL (N-R)
TPIPL (N-R)
TPREL (N-R)
TPTCL (N-R)
Triveni Engineering (N-R)
WREL (N-R)
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Other covered stocks

Adani Power ADANI IB

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Watch Bharat Parekh’s

Power sector turning around ........................................................................................ 4

Demand-supply balance favours IPPs ........................................................................ 13

Regulatory - Headwind to tailwind ............................................................................ 42

Valuations are compelling ........................................................................................... 58

Power and politics mix in India

2 bharat.parekh@clsa.com 9 January 2019

India IPPs: Covered valuation comps

9 January 2019 bharat.parekh@clsa.com 3

Power sector turning around

UDAY - Solid sector turnaround recipe

These four pillars will lead UDAY: Cornerstone of power reforms

Cut T&D loss

Discom debt refinancing

Hard stop to discom losses

4 bharat.parekh@clsa.com 9 January 2019

. . . Uttar Pradesh was the (20)

Pattern of taking over UDAY: Discom debt to be taken over by states

Implementation of reform 3.0 - Different this time

UDAY: Key differences vs previous reforms

9 January 2019 bharat.parekh@clsa.com 5

Multipronged strategy to wipe out discom losses

If UDAY is 30% successful, UDAY: Path to discom breakeven

Initial signs of demand India power: Generation growth

6 bharat.parekh@clsa.com 9 January 2019

State-wise consumption, growth and per capita consumption (FY18)

Per Capita Consumption (Units)

State-wise consumption, growth and per capita consumption (FY16)

Per Capita Consumption (Units)

9 January 2019 bharat.parekh@clsa.com 7

Profligacy to prudence: Discom losses down to a third

UDAY has clearly turned UDAY: Discoms’ losses reduced

. . . discom losses are down (200)

(Rsbn) TN MP Rajasthan UP Haryana Others

100% of both urban and Metering statistics of 27 UDAY states

8 bharat.parekh@clsa.com 9 January 2019

UDAY: State-wise liabilities and issuance of bonds by states/discoms

 AT&C loss reduction

9 January 2019 bharat.parekh@clsa.com 9

Key issues to watch

How IPPs are helping discoms cut costs

10 bharat.parekh@clsa.com 9 January 2019

Outstanding dues across India power: Outstanding dues of all-India discoms¹

As on Sep-18, they were up 300

Three-stage beneficiaries of this cycle

1. Stage 1: improved utilisation at existing regulated IPPs, such as NTPC, and

2. Stage 2: merchant power IPPs, such as JSWE, CESC Genco.

3. Stage 3: new power equipment vendors, such as BHEL & L&T-Mitsubishi.

9 January 2019 bharat.parekh@clsa.com 11

Rajasthan’s turnaround and “free-power” - Method in madness

India power: Rajasthan discom losses

3) Monthly cap of Rs833/HH, meaning no gaming is allowed

12 bharat.parekh@clsa.com 9 January 2019

Demand-supply balance favours IPPs

. . . India’s UDAY reforms India power: Demand drivers

Power for All-led electrification

9 January 2019 bharat.parekh@clsa.com 13

Pace of electrification has All India: Household electrification progress

Select large states, such as Saubhagya scheme: Top-10 state-wide electrification