Event Update

April 25, 2012

Sector View
Neutral

Power Sector Update Coal Indias draft FSAs; glass half full
After the President of India directed Coal India (CIL) to sign fuel supply agreements (FSAs) with power plants commissioned till December 2011 by March 2012; Coal India issued draft FSAs that are completely against power producers. While it dilutes the penalty to CIL (in a much bigger way), the draft FSAs puts PLFs of recently commissioned thermal power plants at risk (at 60-70% against 80%). No wonder the Central Electricity Authority (CEA) has put the list of power plants facing coal shortage at 32 (declined in March but has increased on a YoY basis). However, we believe augmenting of coal supplies by Coal India to power utilities can alleviate power IPPs woes. In FY12, CIL supplied ~311 MT to the power sector. If FSAs were to be signed for the list of power plants commissioned in FY10, FY11 and FY12 (list given below), incrementally the company would need to supply 100 MT (a far cry from the current level). Even at 64% of PLFs; incremental coal supply would be 70-75 MT. Key highlights of modified fuel supply agreement All duties, levy to be pass through: Power utilities purchasing coal will have to bear all duties, levies and royalties. This will include the liabilities arising out of the MMDR Bill. Effectively, as and when the MMDR Bill comes into effect, Coal India will increase prices proportionately. Force majeure clause: The clause shields Coal India from supply of fuel as per LOA due to 1) Government of India or relevant state governments refusal to grant or renew any required permit or mining lease or governmental approvals related to land acquisition and environment/forest clearance, 2) law and order problem, strikes and civil disturbances Import of coal in case of domestic fuel shortage : CIL shall have, at its sole discretion, the option to supply the balance quantity of coal through import to be delivered at unload port at cost plus pricing including service charges of CIL. In the event, the quantity offered for imported coal is not accepted by the purchaser, no penalty shall be applicable for the shortfall to CIL. Power producers will have to pay imported coal prices. Hence, no pooling of prices will happen Timely execution of power projects: The FSA directs power companies to complete all activities within 24 months of LoAs (with a grace period of 180 days). The purchaser shall have completed the construction, as per the implementation schedule specified in detailed project report/techno-economic feasibility report submitted during the validity of letter of assurance (LoA).This would be result in exclusion of power projects, which are delayed Coal for long term PPAs only: CIL will provide coal only to those capacities that have long-term PPAs. Thus, coal will be available only to regulated entities Penalty clause for CIL: The penalty for Coal India in the event of fuel shortfall will be minimal (0.01%)

BSE Power Index outperforms Nifty by just 1% YTD year

140 135 130 125 120 115 110 105 100 13-Feb 16-Jan 30-Jan 27-Feb 2-Jan 12-Mar 26-Mar 23-Apr
41 7.6 395.1 3 377.1 9 353 389.1 4 395.6

NIFTY

BSE Power

Source : Bloomberg, ICICIdirect.com

Coal Indias thermal coal production .

440 420 400 380 360 340 320

Co al P ro ductio n

Source : Coal India, Media reports

International thermal coal prices have declined by 9% YTD

135 130 USD/ tonne 125 120 115 110 105 100 Oct-11 Mar-11 May-11 Nov-11 Jun-11 Aug-11 Apr-11 Jul-11 Dec-11 Feb-11 Sep-11 Jan-12

Source: Bloomberg

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

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9-Apr

We spoke to private IPPs (Reliance Power, JPVL, Tata Power and CESC) to get their opinion on the draft FSAs. The following were their views Most of them opined that they had NO option but to sign these FSAs Converting LoAs into FSAs was itself a significant change In case of shortfall, majority of them will import a lower grade coal or buy coal from e-auction For plants that are commissioned in FY10-12 (Reliance Power, Tata Power), companies are getting fuel ranging from 60-90% of PLFs Our take on draft FSAs: Private IPPs will sign draft modified FSAs with minor modifications as best (in absence of any other attractive option). However, we believe Coal India would face coal shortage if the production continues to grow at 5% per annum. To augment supplies, the company will have to set up 1) coal washeries 2) Speed up environment clearance on projects (at least 70 projects await environment clearance from state and central authorities) 3) Inventory liquidation of 72 million tonne and 4) clear logistics constraints for supply of coal. On the other hand, media reports do indicate that ~54 coal blocks will be auctioned (no production/reserves mentioned); currently the selection of consultants is under progress and is a step in the right direction.
Exhibit 1: Coal India expects production and offtake by power sector
FY09 Coal India Thermal coal Production Coal India Offtake by Power Incremental offtake by power - from FY12-15 Incremental coal required by power plants - at 64% PLFs 377.2 296.7 FY10 395.1 298.9 FY11 389.9 304.3 FY12E 395.0 311.0 FY13E 417.6 325.7 FY14E 438.5 342.0 FY15E 460.4 359.1 48.1 70-75

Source: Coal India Annual report, ICICIdirect.com Research

Assumptions for offtake calculation: For the last three years, the power sector as percentage of total thermal power production is 75-78%. For FY12E, we have assumed 78% as percentage of total thermal power offtake. We have assumed 5% production growth based on the current scenario.

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Exhibit 2: List of Power plants commissioned in FY11 with letter of assurance from Coal India
Sr. No. Project Name Linked Capacity (MW) Source LoA Quantity MT Required coal quantity @ 80% PLF 2.0 2.6 2.1 2.0 2.0 2.0 2.4 1.0 2.0 1.8 2.4 2.4 0.2 0.2 0.2 0.2 2.6 1.2 0.2 2.6 0.2 0.2 0.2 0.2 2.6 2.0 2.6 2.0 2.1 0.2 2.0 1.2 2.0 2.0 2.0 53.6 Required coal quantity @ 64% PLF 1.6 2.1 1.7 1.6 1.6 1.6 1.9 0.8 1.6 1.5 1.9 1.9 0.1 0.1 0.1 0.1 2.1 1.0 0.1 2.1 0.1 0.1 0.1 0.1 2.1 1.6 2.1 1.6 1.7 0.1 1.6 1.0 1.6 1.6 1.6 42.9

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Kothagudem IV Ext. U-l Sipat Unit-1 Maithan RB Unit-1 Kodarma Unit-1 Durgapur Steel Unit-1 Khaperkheda Unit-5 Sterlite (Jharsuguda) Unit-3 Harduaganj Ext Unit-8 Indira Gandhi (Aravali) U-2 Mundra, Adani Ph III U-l Lanco Anpara 'C' Unit-2 Lanco Anpara 'C' Unit-1 Khamberkhera Unit-1 Khamberkhera Unit-2 Maqsoodpur Unit-1 Barkhera Unit-1 Sipat Unit-2 Rosa Unit-3 Kundarki Unit-1 Mahatma Gandhi (CLP) Unit-1 Maqsoodpur Unit-2 Barkhera Unit-2 Utraula Unit-1 Kundarki Unit-2 Mundra, Adani III Unit-2 Bhusawal Unit-4 Mundra, Adani III Unit-3 Bellary Unit-2 Maithan RB Unit-2 Utraula Unit-2 Durgapur Steel Unit-2 Rosa Unit-4 Vellure-JV TN Unit-1 Simhadri Unit-4 Bhusawal Unit-5 Total

500 660 525 500 500 500 600 250 500 462 600 600 45 45 45 45 660 300 45 660 45 45 45 45 660 500 660 500 525 45 500 300 500 500 500 13412

MCL SECL BCCL MCL ECL MCL MCL CCL MCL MCL (70% dom. linkage) NCL NCL CCL CCL CCL CCL SECL CCL CCL CCL CCL CCL CCL CCL MCL (70% dom. linkage) MCL 70% dom. MCL BCCL CCL ECL CCL MCL MCL MCL

2.3 3.1 1.7 2.3 1.9 2.3 2.3 2.1 2.3 2.1 2.1 2.1 0.2 0.2 0.2 0.2 3.1 1.1 0.2 2.6 0.2 0.2 0.2 0.2 2.1 2.3 2.1 2.3 2.0 0.2 1.9 1.1 2.3 2.3 2.3 56.0

Source: Infraline, ICICIdirect.com Research

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Exhibit 3: List of power plants commissioned in FY10 with letter of assurance from Coal India
Sr. No. Project Name Linked Capacity (MW) Source LoA Quantity MT Required coal quantity @ 80% PLF 1.2 0.8 1.0 1.0 2.0 1.0 0.8 1.0 2.0 1.0 2.0 1.2 1.0 1.2 1.0 1.0 2.4 21.6 Required coal quantity @ 64% PLF 1.0 0.7 0.8 0.8 1.6 0.8 0.6 0.8 1.6 0.8 1.6 1.0 0.8 1.0 0.8 0.8 1.9 17.3

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Pathadi (LANCO) Unit-1 Bakreshwar St.-II Unit-5 Bhilai JV Unit-1 Bhilai JV Unit-2 Kahalgaon St- II Ph.-II Unit-7 Suratgarh Unit-6 Kota Unit-7 Budge Budge III Unit-3 Dr. N. Tata Rao TPP-IV Chabra Unit-1 Dadri Ext Unit-5 Rosa Unit-1 New Parli Unit-2 Pathadi (LANCO ) Unit-2 Paras Ext. Unit-2 Chandrapura Unit-7 RGTPS HissarU-1 Total

300 210 250 250 500 250 195 250 500 250 490 300 250 300 250 250 600 5395

SECL ECL SECL SECL ECL SECL SECL ECL/BCCL MCL SECL CCL CCL MCL SECL MCL CCL MCL

1.5 0.8 1.2 1.2 2.3 1.2 1.0 0.9 2.3 1.2 2.0 1.2 1.2 1.5 1.2 1.0 2.8 24.4

Source: Infraline, ICICIdirect.com Research

Exhibit 4: List of power plants commissioned in FY09 with letter of assurance from Coal India
Sr. No. Project Name Linked Capacity (MW) Source LoA Quantity MT Required coal quantity @ 80% PLF 1.0 1.0 1.2 2.0 2.0 2.4 2.4 2.0 2.0 2.4 0.8 2.0 2.0 23.2 Required coal quantity @ 64% PLF 0.8 0.8 1.0 1.6 1.6 1.9 1.9 1.6 1.6 1.9 0.7 1.6 1.6 18.6

1 2 3 4 5 6 7 8 9 10 11 12 13

Chabra Unit-2 Raidrar TPS Unit-8 Rosa Unit-2 Dadri Ext Unit-6 Mejia Ext, Unit-1 RG TPS, Hissar U-2 Sterlite Energy Unit-2 Indira Gandhi (Aravali) U-1 Korba III Unit-7 Sterlite Energy Unit-1 Rayal seema St.-II Unit-5 Farakka Unit-6 Simhadri Unit-3 Total

250 250 300 490 500 600 600 500 500 600 210 500 500 5800

SECL MCL CCL CCL MCL/CB MCL MCL MCL SECL MCL/ CB MCL ECL SECL

1.156 1.011 1.234 2.016 1.06 2.774 2.45 2.318 2.312 1.27 1.011 2.31 2.31 23

Source: Infraline, ICICIdirect.com Research

Exhibit 5: No of power plants with coal stock for less than seven days
The number of power plants with coal stocks for less than seven days has declined but the number is significant on a YoY basis

50 40 30 24 20 10 0 Nov-10 Aug-10 Aug-11 28 19 17 32 32 29 28 31 18 22

47 48 45 39 27 27 27 24 25 25 24 24 27 34 32

Nov-11

Feb-10

Feb-11

May-10

Source: CEA, ICICIdirect.com Research

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May-11

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Feb-12

ICICIdirect.com coverage universe (Power)

NTPC Idirect Code Mcap(| cr) Lanco Infratech Idirect Code Mcap(| cr) Neyveli Lignite Idirect Code Mcap(| cr) PTC Idirect Code Mcap(| cr) NHPC Idirect Code Mcap(| cr) JP Power Idirect Code Mcap(| cr) Tata Power Idirect Code Mcap(| cr) CESC Idirect Code Mcap(| cr) Power Grid Idirect Code Mcap(| cr) POWGRI 50600.0 CMP Target % Upside 110 118 7.3 FY11 FY12E FY13E 8388.7 10067.9 11414.2 5.7 6.3 7.1 19.0 17.2 15.3 12.4 11.6 11.3 2.4 2.2 2.0 12.4 12.6 12.9 14.1 13.6 12.4 CESC 3238.2 CMP Target % Upside 257 327 27.2 FY11 FY12E FY13E 4942.5 5908.7 6576.6 22.0 34.9 37.4 11.7 7.4 6.9 8.1 6.9 7.9 0.9 0.8 0.8 5.9 8.8 8.9 7.4 9.0 8.0 JAIHYD 10504.0 TATPOW 24885.0 CMP Target % Upside CMP Target % Upside 42 50 19.0 105 109 3.8 FY11 FY12E FY13E FY11 FY12E FY13E 736.9 1655.2 2727.2 19450.8 24378.1 26913.1 0.8 1.4 2.7 9.2 4.1 5.2 50.8 27.6 14.7 11.9 25.3 20.2 28.1 17.8 12.8 10.3 8.3 9.5 1.6 1.9 1.4 1.9 1.8 1.7 3.2 6.8 9.8 15.9 7.2 8.4 3.9 5.6 7.1 10.6 10.7 8.0 NHPC 23,371.4 CMP Target % Upside 20 28 43.6 FY11 FY12E FY13E 4225.3 5673.4 5330.2 1.8 2.3 1.8 11.1 8.4 10.6 12.5 10.6 12.6 1.0 0.9 0.9 8.8 10.7 8.1 6.7 8.8 7.1 POWTRA 1,737.6 CMP Target % Upside 59 62 5.1 FY11 FY12E FY13E 8,997.3 8,584.1 11,690.6 4.7 3.8 4.1 12.6 15.5 14.5 14.2 13.4 12.3 0.8 0.8 0.7 6.4 5.0 5.2 9.1 5.8 7.2 NEYLIG 13,925.0 CMP Target % Upside LANINF 3,578.2 CMP Target % Upside 20 18 (7.7) 185 83 94 13.3 FY11 FY12E FY13E FY11 FY12E FY13E 7783.7 9734.7 11986.1 3949.1 4407.9 5034.0 1.9 0.3 0.8 7.7 7.4 7.3 10.4 58.6 25.7 10.7 9.7 11.3 8.0 45.1 24.9 10.5 10.7 9.0 9.4 13.7 15.4 1.2 1.2 1.1 9.6 1.7 2.9 11.6 11.9 9.7 8.9 7.4 6.2 12.2 11.6 10.5 NTPC 137,699.3 CMP Target % Upside 167 185 10.8 FY11 FY12E FY13E Sales (| cr) 58981.3 62371.7 64743.9 EPS (|) 10.7 11.4 11.3 PE (x) 16.1 15.1 15.3 EV/E (x) 10.3 13.0 12.2 PB (x) 2.1 1.9 1.8 RoNW (%) 13.0 12.7 11.7 RoCE (%) 12.5 11.0 10.2

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RATING RATIONALE

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