HSBC Power Utilities

Natural Resources & Energy Indian Utilities
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Global Research
Equipment ordering for the 11th Plan completed; focus turns to execution We examine the status of current projects; firms with operating experience and financial stability emerge as winners Reiterate OW(V) on CESC and Tata Power, N(V) on Lanco; downgrade NTPC to UW(V) from N(V)
Focus to shift on execution. Equipment ordering is now complete for the 11th Plan, achieving a critical milestone in project execution. Now, the focus will shift towards project developers in terms of project completion. We have looked at the status of projects under construction for stocks we cover. We prefer developers with operating experience, financial stability and projects that have achieved financial closure. CESC: OW(V), TP = INR345. We like CESC primarily because of its gradual capacity addition plan, which prevents it from spreading itself too thin. We ascribe no value to the real estate and retail businesses and retain our estimates, target price, and rating. Tata Power: OW(V), TP = INR1,000. Its 5.6GW of capacity addition is supported by fuel sourcing and funding strategy. We reduce our FY10e profit estimates by 21% to incorporate lower coal realisation; we lower our target price to INR1,000. Lanco Infratech: N(V), TP = INR132. 3.9GW of power projects are in advanced stages of execution, with 600MW to be operational by FY10e. However, real estate and infrastructure development continue to drag. We reduce our FY10e estimates by 18% and lower the target price to INR132. NTPC: UW(V), TP = INR142. NTPC enjoys the best positioning in terms of access to funds and fuels, but the market is ignoring delays in project execution (HSBC estimates 11.9GW vs companys guidance of 22GW). Maintain our estimates and target, but downgade to UW(V).
Valuation summary (INR) Name CESC Lanco NTPC Tata Power Curr. Ticker New Sales EBITDA price rating (bn) (bn) 242 111 171 727 CESC OW(V) 30.50 LANCI N(V) 34.01 NATP UW(V) 418.19 TPWR OW(V) 146.19 PAT New (bn) TP Old Potl TP Return 45% 19% -15% 41%
Indian Utilities
Focus on project execution
14 January 2009
Sumeet Agrawal* Analyst HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1243 sumeetagrawal@hsbc.co.in Sumit Agarwal* Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations Issuer of report: HSBC Securities and Capital Markets (India) Private Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
7.03 3.53 345 345 7.54 4.09 132 335 131.41 82.10 142 142 38.52 20.97 1,000 1,244
Source: HSBC estimates
Natural Resources & Energy Indian Utilities 14 January 2009
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Contents
Focus turns to execution
From orders to execution Potential winners BHEL to benefit from capacity addition NTPC capacity addition plan We prefer Tata Power among private-sector utilities
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3 3 5 5 7
Tata Power (TPWR)

Best-placed Indian utility Fuel and funds well tied up Valuation Risks Financials & valuation
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25 26 27 28 29
CESC Ltd (CESC)

Key triggers Valuation Risks Financials & valuation
12
13 14 14 15
Annexure
Hectic equipment ordering in 2008 Why were targets not met?
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30 30
Disclosure appendix Disclaimer
32 36
Lanco Infratech (LANCI)

De-risking the power portfolio Valuation Risks Financials & valuation
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16 18 19 20
NTPC Ltd (NATP)

Strong project pipeline, but poor execution Should continue to trade at a premium Valuation Risks Financials & valuation
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21 22 22 23 24
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Focus turns to execution

With the crucial milestone of equipment ordering for the 11th Plan complete, the focus will now shift of project execution Delays likely unavoidable due to on-the-ground issues, which will result in demand outstripping supply We expect central and state utilities to dominate capacity addition as the private sector scales back its capacity addition
From orders to execution

The size of power equipment orders formed a large part of news flow in 2008 for Indian utilities equipment for power projects worth 15GW was ordered during the year. The Ministry of Power pushed for power projects financial closure to achieve the 11th Five-Year Plan (2007-2012) target (c79GW power projects). The order flow is over; it is now time to get down to brass tacks and focus on execution. We contend that this will be the big driver over the next three years. We examine the order flows of utilities companies under our coverage and maintain that the winners will be those with operating experience, financial stability, and projects that have achieved financial closure.
Private sector: who will win?

The exuberance in the power sector resulted in a host of announcements by private players in terms of capacity addition plan. c150GW of new capacity addition, almost equivalent to Indias current installed base, was announced by different private-sector entities. We remain cautious in terms of these capacities finally coming on stream over the next decade. We maintain that it is difficult for the entire c150GW to be operational, given the funding requirement as well as execution risk. After our ground reality check, we believe only 17GW of the expected 20GW of the 11th Plan privatesector capacity addition has achieved financial closure.
Key projects awaiting financial closure
Potential winners
Central utilities to dominate capacity addition
We remain positive in terms of capacity addition by central utilities. We expect central utilities to dominate capacity addition with c21.7GW (45% of total capacity). Central utilities like NTPC and Damodar Valley Corporation should be frontrunners in terms of this capacity addition.
600MW Reliance Power Rosa II 3960MW Reliance Power Sasan UMPP (2 units of 660MW each, expected for commissioning in the 11th Plan) 540MW Goindwal Sahib by GVK Power (equipment order placed) 2400MW Sterlite Energy power project
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Private power projects in the 11th Plan (MW) Plant name State Agency Ultimate Capacity in Coal linkage Equipment vendor capacity 11th Plan status 300 300 1,000 250 540 1,080 1,200 250 3,960 1,015 1,050 1,320 1,320 750 250 600 600 2,400 4,000 600 464 445 366 108 1,128 192 70 99 1,000 400 100 100 330 1,200 300 300 1,000 250 540 1,080 1,200 250 1,320 1,015 1,050 1,320 1,320 750 250 600 600 600 1,600 600 Linkage Linkage Linkage Block Block Imported coal Imported coal Block Imported coal Linkage Imported coal Imported coal Block Block Linkage Linkage Imported coal Imported coal Zelan, Malaysia Zelan, Malaysia Dong Fang, China BHEL BHEL Shanghai Electric, China Shanghai Electric, China BHEL REL (main equipment by Shanghai Electric, China) Dongfang, China BHEL Sepco III, China SCMEC, China BHEL BHEL Shanghai Electric, China Shanghai Electric, China SEPCO, China Doosan, Korea + Toshiba China Alstom Larsen & Toubro GE China Siemens BHEL Dongfang, China Alstom Voith Siemens BHEL Dongfang, Hong Kong+Aviera India Voith Siemens Financial closure Achieved Achieved Achieved Achieved Not achieved Achieved Achieved Achieved Not achieved Achieved Achieved Achieved Achieved Achieved Achieved Achieved Not achieved Not achieved Achieved Achieved Achieved Achieved Achieved Not achieved Achieved Achieved Achieved Achieved Achieved Achieved Achieved Not achieved Expected date of commission 2009-10 2008-09 2011-12 2009-10 2011-12 2009-11 2010-12 2008-09 2011-12 2010-11 2010-12 2011-12 2009-11 2007-08 2008-09 2010-11 2011-12 2009-10 2011-12 2008-10 2008-09 2008-09 2009-10 2009-10 2008-10 2009-10 2009-10 2009-10 2011-12 2011-12 2009-10 2011-12 2011-12 2011-12
Thermal coal Amarkantak Pathadi (Lanco) U2 Chattisgarh Amarkantak Pathadi (Lanco) U1 Chattisgarh Anpara C Uttar Pr Budge Budge Ext. West Bengal Goindwal Sahib Punjab Jalipa/ Kapurdi-Lignite Rajasthan JSW Ratnagiri Maharashtra Trombay TPS Maharashtra Sasan UMPP U1,2 Madhya Pr Lanco-Nagarjuna Maithan Mundra TPP Adani Mundra TPP Adani Raigarh Raigarh Rosa St I Rosa ST II Sterlite Energy Mundra UMPP Torangallu Thermal Gas/LNG Gautami Konaseema Kondapalli CCPP II Rithala CCPP Sugen Torrent Hydro Allain Duhangan Budhil Chujachen Karcham Wangtoo Maheshwar Malana II Sorang Srinagar Teesta III Karnataka Jharkhand Gujarat Gujarat Chattisgarh Chattisgarh Uttar Pr Uttar Pradesh Orissa Gujarat Karnataka Andhra Pr Andhra Pr Andhra Pr Delhi Gujarat Himachal Pr Himachal Pr Sikkim Himachal Pr Madhya Pr Himachal Pr Himachal Pr Uttarakhand Sikkim
Lanco Lanco Lanco CESC GVK IPP JSW Tata Power Reliance Energy Lanco Tata Power Adani Adani Jin. Power Jin. Power Reliance Power Reliance Power Sterlite IPP JSW Gautami Power Oakwell Lanco NDPL Torrent RSWML Lanco Gati JPKHCL IPP Everest Power Co Sorand Power Co GVK Teesta Urja
464 445 366 Gas/LNG 108 Gas/LNG 1,128 192 70 99 1,000 400 100 100 330 1,200
BHEL Achieved Consortium including SEW Achieved & ABIR
Notes: SEW=SEW Infrastructure Limited; ABIR: ABIR Infrastructure Private Limited; SEPCO=Shandong Electric Power Construction Corp.; RSWML=Rajasthan Spinning and Weaving Mills Limited; JPKHCL=Jaiprakash Karcham Wangtoo Hydroelectric Project; NDPL=North Delhi Power Project Limited TPP=thermal power projects; CCPP=combined cycle power projects; IPP=independent power producer Source: CEA, HSBC
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Impact of credit crisis

Given the current credit crisis, we expect debt financing to private-sector projects based on merchant or aggressive competitive tariff will be difficult. Lending institutions have also been reluctant to lend at 80:20 debt to equity. We expect debt to equity to be 70:30. We believe the recent credit crisis will be beneficial to the private sector in long term. Nonavailability of funds has forced the private sector to bid for projects at a more reasonable tariff. In recent bidding invited by the Punjab State Electricity Board, a sole private developer quoted a levelised tariff of cINR3.38 per unit. This is somewhat higher than bids of less than cINR2.0 per unit for earlier thermal power projects. Thus, aggressive bidding by the private sector has taken a back seat, and projects are bid for at prices that make economic sense. We believe this financial crunch will help companies with strong balance sheets and the ability to raise funds emerge as the clear winners. We prefer such companies.
BHELs success in term of maintaining its leadership position has put to rest concerns of global competition. In the recent past, BHEL has been able to gain some of its lost ground in private-sector utilities. It has been able to secure equipment orders from developers like Jindal Power (2,400MW, INR50bn) and Jaiprakash Power (500MW, INR11.75bn).
Equipment vendors for thermal based power projects (MW) FY08a FY09e FY10e FY11e FY12e Central Central State State Private Private Total Total Overall BHEL Others BHEL Others BHEL Others BHEL Others 1,250 740 2,680 1,200 750 0 4,680 1,940 6,620 1,750 0 870 392 500 2,261 3,120 2,653 5,773 1,990 1,320 4,192 374 250 3,520 6,432 5,214 11,646 5,765 1,260 5,202 1,200 0 3,145 10,967 5,605 16,572 5,501 1,920 5,291 600 540 6,440 11,332 8,960 20,292 Total 16,256 5,240 18,235 3,766 2,040 15,366 36,531 24,372 60,903
Source: CEA, HSBC estimates
NTPC capacity addition plan

NTPC has targeted for 22GW of capacity addition plan. However, some projects are facing significant delays. Central Electricity Authority (CEA), in its recent report, has indicated c15.4GW of capacity addition by NTPC in the 11th Plan.
NTPCs capacity addition status Status Capacity commissioned Under implementation Yet to be awarded
Source: Company, HSBC estimates
Developers with projects in advanced stages of development

We maintain a positive view on projects that have achieved financial closure and significant progress in terms of execution. In this scenario, private utilities will be a mixed bag; developers like Tata Power and CESC should be better placed in term of achieving their capacity addition target.
MW 2,740 15,930 3,760
BHEL to benefit from capacity addition

BHEL was a major beneficiary of this rush toward equipment order placement. Quality concerns of imported equipment as well as currency movement helped BHEL to secure c60% market share for projects awarded for 11th Plan.
We do not think there is concern regarding funding at NTPC, which has cINR170bn in cash on its balance sheet and a cINR150bn line of credit. Its debt-to-equity ratio of c0.5:1 provides scope for future domestic bond issuances, or even raising ECBs after a few months, once the global credit scenario improves.
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NTPCs generation capacity addition plans Plant Name Ultimate Capacity to be capacity operational in 11th Plan 1,980 1,000 500 1,320 1,000 Ordered to Expected date of Status commissioning
Thermal Projects Barh-I Vallur Ennore JV Bhilai JV
Technoprom, 2011-12 Russia BHEL 2011-12 BHEL 2008-09
Bongaigaon Dadri Ext.
750 980
750 980
BHEL BHEL
2010-12 2009-11
Farakka Stage-III
500
500 1,000 1,500 500 750 740 1,000 1,980
BHEL BHEL BHEL BHEL BHEL GE BHEL Doosan, Korea+ Power Machines, Russia BHEL BHEL
2010-11 2007-09 2010-11 2010-11 2011-12 2007-08 2011-12 2009-11
Kahalgaon II Units (U) 6 & 7 1,000 Indira Gandhi TPP (Jhajjar) JV Korba III Nabinagar Ratnagiri (Dhobol) JV Simhadri-Ext. U 3 & 4 Sipat I 1,500 500 1,000 740 1,000 1,980
Various units likely to be commissioned by June 11, Dec 11 and March 12. Civil and structural work for main plant in progress Scheduled for commissioning in November 2010 U 1 commissioned. U 2 synchronisation of turbine expected, synchronisation on designated fuel due in Jan 09. Coal handling plant completed & ash handling plant to be ready by Jan 09 Units expected to go on steam in October 2010 and November 2010. Boiler piling is in progress U 5 scheduled for commissioning in Sep 09. Turbine generator (TG) erection under way. TG deck testing for U 6 also done. Hydro test completed in Nov 08. Unit 6 boiler erection in progress Commissioning likely August 2010. Work on the steam generator (SG) in progress; Boiler erection in progress Expected to slip to the 4Q09 vs 3Q09 earlier. Coal firing already complete; delay as coal bunker to be ready only by Jan 09
Anticipated date of commissioning Feb 10. Unit hydro test likely in Feb 09; TG deck casting complete
U 3 scheduled for commissioning in Nov 10. SG work in progress Under implementation. Anticipated dates of commissioning the two units: Sep 09 and Mar 10 slipped to FY10, against its original target of 3Q09
Sipat II U 4 & 5 Hydro Projects Kol Dam Lohari Nagpala
1,000 800 600
1,000 800 600
2007-09 2009-10 2011-12
Original target 1Q09; now scheduled for 3Q09 Various units anticipated to be commissioned in Dec 10, Jan 11, Feb 11 and Mar 11. Dam filling work in progress 3x150MW units targeted for commissioning in 2012-13. Work on head race tunnel (HRT), barrage, desilting chambers and power house under way All 4 units targeted for commissioning during 2011-12. Work related to HRT, barrage, desilting chambers and power house in progress
Tapovan Vishnugarh
Source: Industry, HSBC
520
520
2011-12
Key reason for delays
c3.76 GW of capacity from 11th Plan projects yet to be awarded to equipment vendors Ongoing negotiation between its international vendor, Technoprom Exports (TPE) and Power Machines of Russia for increase in project cost for 1320MW Bahr project Delay in deployment of EPC contractors by BHEL and other equipment manufacturers Hydro power project affected due to nonavailability of regulatory clearance
To mitigate any delays/lapses in capacity addition, NTPC has identified c3GW of brown field capacity addition and is looking at awarding these projects by FY09-10e.
NTPC additional capacity addition plan Project/Location Vindhyachal Rihand Vallur Muzaffarpur
Source: Company, HSBC
Capacity 1,000 1,000 500 500
Despite all these efforts, we expect NTPCs capacity addition to fall short of the plan. We expect NTPCs capacity addition to lag behind its
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plan and expect it to add c11.9GW of new capacity between FY08 and FY13e. We have extended the project execution timeline for c10 GW projects and expect these to be operational during the 12th Plan. We believe there is a significant risk in terms of NTPC achieving its capacity target, given the fact that 63% of expected capacity is scheduled for commissioning in FY11-12.
Equity funding of INR66bn

Tata Power requires INR60bn of equity funds for its projects under construction. Sources to meet its own funding requirement have been identified as INR29bn from internal accruals, with INR12bn to be obtained through sales of investments in various group companies. Any shortfall should be met through short-term borrowing in the interim. We expect that given the weak equity market scenario, fund raising through sales of investments and warrants will be a challenge. The warrant conversion price was cINR1,357 per share, which was above the prevailing market price. Hence, Tata Powers management had not subscribed to the warrant. We expect Tata Power to raise short-term debt to fund balance equity. However, we do not expect this to affect its capacity addition. It has already invested cINR20bn of its equity contribution in projects. We expect that, given the credit rating and developer support, raising short-term debt will not be an issue, and that Tata Power can raise sufficient funds for its expansion plan. Hence, we maintain that there is no significant risk to its 5.6GW of projects under construction.
We prefer Tata Power among private-sector utilities

We expect Tata Power to be well placed with its 5.6GW capacity under construction on track.
Funding tie-up
Tata Power has completed financing for two of its largest power plants under construction i.e., the 1050MW Maithon project, for which the debt component of cINR30bn is being funded by a consortium led by the State Bank of India. For its Mundra project, the company has tied up to raise USD1.8bn in foreign exchange loans and USD1.4bn in INR loans with several multilateral and domestic financial institutions. With these two big projects, most of the groups funding for plants under construction has been tied up. Funding for remaining smaller projects, such as captive projects at Jojbera and Jamshedpur, is at advanced stages of reaching financial closure. Of the total funding requirement of INR240bn during the next four years, Tata Power proposes to raise the amount through its own contribution and debt (INR180bn), a large portion of which is already tied up (INR60bn).
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Tata Powers generation capacity addition plans Project Capacity Project (MW) cost (INRbn) Debt Debt Equity Developer Developer Status of funding to (INRbn) (INRbn) stake (%) equity (INRbn) closure equity Fuel type Fuel source
Under construction Mundra
4,000
170.00
75:25 127.5
42.5
100%
42.5
Maithon (74% stake) Jamshedpur and Jojobera
1,050 240
44.50 11.10
70:30 31.2 70:30 7.8
13.4 3.3
74% 74%
9.9 2.5
Done, with USD1.8bn Imported coal forex loan and USD1.4bn rupee loan Done; funded by Domestic coal State Bank of India In advanced stage of Tolling completion arrangement In advanced stage of Imported coal completion In advanced stage of Tolling completion arrangement
Trombay Expansion 250 Haldia Sub-total In the pipeline Coastal Maharashtra Naraj Marthapur IPP Naraj Marthapur CPP Tubed IPP Jharkhand CPP Sub-total Total 120 5,660 2,400 1,000 1,270 500 500 5,670 11,330
10.66 6.05 242 101 42.0 53.3 21.0 21.0 238 480
70:30 7.5 70:30 4.2 178 70:30 75.6 70:30 29.4 70:30 37.3 70:30 14.7 70:30 14.7 172 350
3.2 1.8 64 25.2 12.6 16.0 6.3 6.3 66.4 131
100% 100%
3.2 1.8 60
10mtpa offtake agreement with KPC*/Arutmin, pricing part fixed and part linked to CERC Index Fuel linkage from Bharat Coking Coal mines Coke oven gases of Tata Steel, and linkage from West Bokaro and Mahanadi coal fields Imported coal, cost pass-through Hot flue gases from Hoogly Metcoke
100% 100% 74% 100% 74%
25.2 12.6 11.8 6.3 4.7 60.6 120
Imported Coal Domestic coal Tolling arrangement Domestic coal Tolling arrangement
Coal from Bumi Resources offtake Mandakini Coal Block Supply by procurers Captive coal block Supply by Tata Steel
* KPC= Kaltim Prima Coal Source: Company, HSBC estimates
However, we expect the projects in the pipeline to be delayed, given the equity fund constraints. Hence, we believe this will put projects under pipeline at risk. Hence, there can be uncertainty around 5.7GW of power capacity addition plan. The NPV of these five projects (Dehrand, Naraj IPP, Naraj CPP, Tubed IPP, Jharkhand CPP) based on Tata Powers ownership is cINR15.6bn, translating into INR71 per share. We assign no value to these projects, as against 50% earlier.
CESCs generation capacity addition plans Location Budge Budge Haldia I Dhumka, Jharkhand Dhenkanal, Orissa Business model Regulated Regulated Merchant Merchant Size 250 600 1,000 1,000 Cost (INRbn) 12 26 40 40
CESC: Gradual capacity addition a positive

What we like about CESC is its gradual generation capacity addition plan, which prevents it from spreading itself too thin. It has an installed capacity base of 975MW, including the 100MW New Cossipore Generating Station, which is to be decommissioned in the next two years. The company expects to add
COD 2009-10 2010-11 2012-13 2013-14 2013-14
Remarks Under implementation, commissioning in September 2009 70% land acquired, long-term coal linkage obtained, evacuation and railways feasibility study completed, no-objection certificate obtained for water drawal 110m tonnes coal block allocated, memorandum of understanding (MoU) signed with Jharkhand Govt., land acquisition process initiated MoU signed, land acquisition process initiated, coal allocation being pursued Cabinet approval received for 1800 MW power plant at Pirpainti, Bihar
Thermal/hydel power plants Merchant in West Bengal/other states

1,300-1,500MW 60
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c1.85GW capacity by FY12-13e and an additional 2.3GW by FY14-15e, thus increasing its existing capacity by 5x. It has already secured fuel for the new 1.8GW power generation capacity and has achieved financial closure for 50% of the new projects, thus providing good visibility and reducing execution risk. However, we have not factored into our valuation the 2.3GW of capacity to come by FY14-15e, as not much action has been taken yet. The status of the 1.85GW capacity under development is as follows: 250MW Budge Budge expansion under construction; to be operational by FY10 600MW Haldia phase I: Land acquisition in progress. Received coal linkage from Mahanadi coal mine, looking at awarding the equipment contract; project cost cINR26bn 1000MW Dumka, Jharkhand to be a merchant power plant. Received coal linkage from Mahugadi coal block; land acquisition in progress We have extended project execution timelines for CESCs Haldia and Dumka projects. We expect Haldia to be commissioned in FY13. We have not considered Dumka for valuation purposes.
Lanco Infratech
Lanco has undertaken an aggressive capacity addition plan. It has a pipeline of c4GW of capacity under construction and another c4GW in the pipeline. Financial closure has been achieved for projects under construction, and execution activity started. It has incurred INR50bn capex on these projects so far, including INR22bn equity contribution. We expect 600MW of Amarkantak I and II thermal power plants to be operational by 1HFY10. In terms of other capacity, 1015MW Nagarjuna Power project and Anpara C are major contributors and we expect them to be operational by April 2012 and January 2012 respectively. Hence, we believe the risk to these capacity additions is not significant. However, we expect delay in capacity addition of 3.9GW projects in the pipeline (2.64GW Babandh and 1.3GW Amarkantak). We expect them to be extended beyond FY12e and hence have not factored in these in our estimates.
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Lancos generation capacity addition plans Projects Location Fuel Capacity Est. project (MW) cost (USDm) Holding (%) PPA (years) Power Capex offtaker spent so far (INRm) Est. Status COD
Projects under execution Amarkantak I Chhattisgarh Amarkantak II Chhattisgarh Vamshi Hydro Vamshi Industrial Lanco Green Himachal Pradesh Himachal Pradesh Himachal Pradesh
Coal Coal Hydro Hydro Hydro
300 300 10 10 70
284 296 12 12 92
76% 76% 91% 91% 90%
25 PTC India 25 PTC India 35 Punjab SEB 35 Punjab SEB 35 PTC India
20,118 Feb-09 Boiler hydro test completed Dec 07, switchyard charged, switchyard connected to grid Sep-09 Boiler drum lifting completed Dec07, hydro testing completed, turbine generator (TG) erected 1,234 Dec-09 Under commissioning Dec-09 1,992 Apr-11 River diversion completed in Oct 07, river bed excavation of dam completed. Commissioning expected in Dec 09 by company 904 Apr-10 Piling completed, erection of columns in ECB started 14,534 Apr-12 Boiler drum lifting, TG casting done. TG erection to start soon. For U 2, boiler erection completed 5,704 Jul-12 Civil work for tunnel in progress 577 Apr-12 Techno-economic clearance received, infrastructure development under way 5,411 Jan-12 U 1: Boiler foundation done, boiler erection to begin. U 2: construction of boiler foundation in progress 50,474
Andhra Gas Pradesh Udupi Karnataka Importe (Nagarjuna) d Coal Lanco Energy Sikkim Hydro Lanco Uttarakhand Hydro Uttaranchal Anpara C Uttar Pradesh Coal
Kondpalli-II
400 1,015 500 152 1,200
300 955 660 220 1,100
59% Merchant 74%
NA
25 Karnataka SEB 74% 35 PTC India 90% Merchant NA 29 Uttar Pradesh SEB
100%
Total Power projects under development Babandh Orissa Coal (partly owned) Amarkantak III & IV Total Chattisgarh Coal
3,957 2,640
3,931 2,970 100% 25 years MP, Orissa and and Merchant Haryana SEBs 76% Merchant NA
Apr-14 Captive mine allocated, land acquisition initiated, PPAs secured. Financial closure in process
1,320 3,960
1,300 4,270
Apr-13 Financial closure process under way
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Company profiles
CESC Lanco Infratech NTPC Tata Power
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CESC Ltd (CESC)

Integrated utilities player with gradual capacity addition plans Current market cap 1.36x of regulated equity base, indicating little value ascribed by the market for upcoming projects, retail and real estate businesses Reiterate Overweight (V) and INR345 target. Catalysts include turnaround of retail business and financial closure on some projects
CESC is an integrated utility player under the flagship of RPG Enterprises. With installed capacity of 975MW and a customer base of 2m, the company accounts for c13% of installed generation in the state of West Bengal and c90% share of installed capacity by the private sector in the state.
Gradual capacity addition plans

What we like about CESC is its gradual generation capacity addition plan, which prevents it from spreading itself too thin. It has an installed capacity base of 975MW, including the 100MW New Cossipore Generating Station, which is to be decommissioned in the next two years. The company expects to add c1.85GW capacity by FY12-13e and an additional 2.3GW plant by FY14-
15e, thus increasing its existing capacity by 5x. It has already secured fuel for the new 1.8GW and has achieved financial closure for 50% of the new projects, thus providing good visibility and reducing execution risk. However, we have not factored into our valuation the 2.3GW of capacity to come by FY14-15e, as not much action has been taken yet.
Excellent operating performance at existing generation plants

During the year ended March 2008 (FY08), all three power plant stations achieved a combined PLF of c97%, the highest levels ever recorded by those stations. These projects also featured in the list of top generating stations with highest capacity utilisation factors in the country.
CESCs generation capacity addition plans Location Budge Budge Haldia I Dhumka, Jharkhand Dhenkanal, Orissa Thermal/hydel power plant in West Bengal/other states
Purpose Regulated Regulated Merchant
Size 250 600 1000
Cost (INRbn) 12 26 40 40 60
COD Remark 2009-10 Under implementation, commissioning in September 2009 2010-11 70% land acquired, long-term coal linkage obtained, evacuation & railways feasibility study completed, no-objection certificate obtained for water drawal 2012-13 110m tonnes coal block allocated, memorandum of understanding (MoU) signed with Jharkhand Govt., land acquisition process initiated 2013-14 MoU signed, land acquisition process initiated, coal allocation being pursued 2013-14 Cabinet approval received for 1800 MW power plant at Pirpainti, Bihar
Merchant 1000 Merchant 1300-1500MW
12
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The Budge Budge plant, with a PLF of 100.4%, had the second highest thermal power plant PLF in India during FY08. It has also received INR115m of carbon credit this year, for the last four years performance. The steady performance of all the generation units helped the company achieve a combined PLF of 93.4% for FY08, which was better than the national average of 78.6% and the private-sector average of 90.8%. In the T&D division, it has considerably reduced losses through reduction of pilferage and better collection efficiency.
be able to fund its Haldia project once required land acquisition and approval is received. However, it will require an additional INR30bn for projects in the pipeline. Funding will be an issue for these projects (2.8GW) which are at an initial stage of development e.g., Dhenkanal and others. We havent considered any of these projects into our valuation, given uncertainty attached to these projects.
Current market cap vs regulated equity base attractive valuation

The current market cap of INR29.3bn is at only 36% premium to the approved regulated equity base of INR21.5bn for FY10e after incorporating the Budge Budge capacity expansion, of 250 MW. Based on regulated return of 14% RoE, and an allowed depreciation charge of INR1.68bn and INR2.04bn for FY09 and FY10 respectively, we expect that the company generates minimum cash profits of INR4bn and INR4.8bn in the next two years. This profit does not assume any incentives and rental income that CESC has been historically receiving due to its efficient operation. Hence, even considering minimum cash profit level, it is trading at only 6x FY10e cash profit. Efficient operations achieved by its operating plants help CESC generate higher RoE over the assured 14%. As CESC exports power at a higher rate and is allowed to keep 40% of profit from export sales, it adds to the profitability over and above the prescribed return. All of the above indicates that the market is ascribing little value to the companys capacities under construction, and its retail and real estate businesses.
Fuel tied up, financial closures awaited

Capex plan for future projects Project Capacity Project Debt/ Debt Equity (MW) cost equity (INRbn) (INRbn) (INRbn) 600 1,000 1,600 26 70:30 40 70:30 66 13.5 70:30 4.5 70:30 84 1,000 1,800 40 70:30 60 70:30 184 18.2 32 46.2 9.45 3.15 58.8 28 42 129 7.8 12 19.8 4.05 1.35 25.2 12 18 55.2
Haldia I Dumka Jharkhand Sub-total Capex in T&D (for next three years) Fund for Spencers Retail (till FY10e) Sub-total Dhenkanal Orissa Haldia II Total
CESC has already tied up the fuel requirement for these projects. It has achieved financial closure for the 250MW Budge Budge expansion and is looking at financial closure for its projects at Haldia (West Bengal) and Dumka (Jharkhand). We expect financial closure for Haldia soon because (a) land acquisition is at an advanced stage, (b) fuel supply has been assured, and (c) Haldia is based on a regulated model, thus ensuring its ROE. We expect CESC to fund the equity contribution (cINR21.2bn) through (a) INR10bn cash and cash equivalents, including INR5.8bn in qualified institutional placement (QIP) money, and (b) internal accrual of INR10bn. We expect CESC to
Key triggers
Financial closure of power projects
600MW Haldia power project. This is at an advanced stage; CESC expects it to be completed soon, and has acquired c75% of the land and
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obtained coal linkage. It has received environmental and water consumption clearance. 1000 MW Dhenkanal Power Project. CESC expects to achieve financial closure for this project by the end of this year. However, we have not considered this in our projection.
of 3%, we value the company at INR234 per share.
Sum of the parts

We value the present capacity installed at the replacement cost multiple of 46.5x and value the investments of the company to its book value. We assign no value to the retail business because it is unprofitable, and there has been significant correction in the retail peer valuation. We value it at INR375 per share on SOTP basis.
Turnaround of the retail business

CESC has moderated its retail business rollout plan with 1.7msq ft of retail space by FY09e. This amounts to only a 0.55m sq ft addition, down from 1m sq ft planned previously. It is focusing on large formats for growth, as well as closing unviable and unprofitable outlets. Management expects the business to see turnaround by FY10-11.
Price to book
We have valued CESC at INR426.5, using a multiple of 0.97x book value for FY10e. Based on the average of all the three methods, we derive a target price of INR345, and retain our estimates.
Target price derivation INR per share SOTP DCF PB Target price
Value unlocking in the Spencers Retail business

Spencers Retail, 95% owned by CESC, is using cash generated from the CESC power business. However, if CESC is able to unlock value from Spencers by getting a strategic investor, this would add a valuation benchmark. We assign no value to Spencers Retail.
375 234 426.5 345
HSBC vs consensus
HSBC vs consensus (INRbn) INRbn HSBC estimates Consensus estimates % difference ____Sales ____ ____ PAT ___ FY09e FY10e FY09e FY10e 30.50 30.46 0% 32.39 33.43 -3% 3.53 3.63 -3% 3.77 4.08 -7% EPS (INR/share) _ FY09e FY10e 28.1 29.0 -3% 30.0 32.5 -8%
Source: HSBC, Reuters
Valuation
We maintain our CESC estimates and our 12month target price to INR345, an average of the following three methods.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 11%. For CESC, this translates into a Neutral band of 1-21% around the current share price. Our target price of INR345 for CESC shares implies a total return (including dividend yield) of 44.7%, which is above the Neutral band; thus, we have an Overweight (V) rating on CESC stock.
Risks
Downside risks, we believe, include deeper-thanexpected losses in the retail business and cost overruns from delayed execution.
Discounted cash flow

Discounting the future cash flows of the company assuming WACC at 12.8% and a terminal growth
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Financials & valuation: CESC Ltd

Financial statements Year to 03/2008a 03/2009e 03/2010e 03/2011e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* Price to book value FCF yield (%) Dividend yield (%)
Note: * = Based on HSBC EPS (diluted)
Overweight (V)
03/2008a 1.0 8.9 0.7 10.7 0.6 -18.2 1.7 03/2009e 1.6 6.8 0.7 8.6 0.6 -55.5 2.1 03/2010e 1.7 7.3 0.7 8.1 0.6 -39.1 2.2 03/2011e 1.8 7.3 0.7 8.2 0.5 -26.0 2.2
Profit & loss summary (INRm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (INRm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (INRm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 62,371 21,168 10,170 89,546 23,490 20,683 10,513 45,362 49,879 0 75,676 19,704 10,170 101,386 19,914 33,316 23,146 52,204 65,296 0 87,435 20,024 10,170 113,466 20,425 41,906 31,736 55,182 76,864 0 96,047 20,227 10,170 122,280 21,000 47,211 37,041 58,117 85,104 6,356 -8,937 -8,937 -343 -155 -4,544 4,328 -16,218 -16,218 -743 12,633 -13,852 7,105 -14,900 -14,900 -794 8,590 -9,757 7,777 -12,300 -12,300 -783 5,306 -6,485 35,428 3,977 -1,962 2,015 -1,480 2,496 2,496 131 2,674 2,674 30,498 7,028 -2,913 4,114 -2,068 4,008 4,008 -481 3,527 3,527 32,392 7,780 -3,141 4,639 -2,315 4,287 4,287 -514 3,772 3,772 34,383 8,489 -3,688 4,801 -2,539 4,224 4,224 -507 3,717 3,717
Issuer information Share price (INR) 242.00 Target price (INR) 345.00 Potentl tot rtn (%) 44.7
Reuters (Equity) CESC.BO Market cap (USDm) 619 Free float (%) 84 Country India Analyst Sumeet Agrawal
Bloomberg (Equity) CESC IN Market cap (INRm) 30,243 Enterprise value (INRm) 48,090 Sector Electric Utilities Contact 91 22 2268 1243
Price relative
708 608 508 408 308 208 108 2007
Cesc Ltd
708 608 508 408 308 208 108 2008

Rel to BOMBAY SE SENSITIVE INDEX
2009
2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (INR) EPS Rep (diluted) HSBC EPS (diluted) DPS Book value 22.62 22.62 4.00 383.62 28.08 28.08 5.05 415.67 30.04 30.04 5.41 439.38 29.60 29.60 5.33 462.74 0.7 4.4 6.4 5.1 11.2 5.7 2.7 23.2 2.6 60.5 0.5 6.3 7.2 5.6 23.0 13.5 3.4 44.3 3.3 18.7 0.5 5.7 7.0 5.4 24.0 14.3 3.4 57.5 4.1 22.4 0.4 5.2 6.6 5.0 24.7 14.0 3.3 63.7 4.4 21.0 42.6 -31.2 -52.0 -26.7 -37.5 -13.9 76.7 104.2 60.5 24.2 6.2 10.7 12.8 7.0 7.0 6.1 9.1 3.5 -1.5 -1.5 03/2008a 03/2009e 03/2010e 03/2011e
Source: HSBC
Note: price at close of 12 Jan 2009
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Lanco Infratech (LANCI)

Project totalling 3.9GW in advanced stages of execution Real estate continue to be an issue; however, construction business on track; reduce our FY10e estimates by 18% Remain Neutral (V), reduce target price to INR132 from INR335
De-risking the power portfolio

Lanco is currently a gas-based or non-conventional utility, with an installed base of 518MW. The issue with the existing power portfolio has been low PLF, and it is only because of the regulated return model that the company has been able to make money. In a scenario where stability of fuel supply is of prime importance, a diversified portfolio of cheaper power is key. To cater to this, Lanco is diversifying itself into thermal as well as hydro power projects, with c4GW of projects under construction and another c4MW under development.
Breakdown of installed capacity (MW)
Power purchase agreements in place for significant part of new projects

Some of the power projects are in advanced stages of development, and the company has been able to sign power purchase agreements with various states and with PTC India for some. We believe these will enable the group to raise necessary funds for these projects.
Breakdown by project type Project Offtake arrangement
6,000 5,000 4,000 3,000 2,000 1,000 0 2007 2008 2009 2011 2012 2014 2010 2013
Kondapalli I AP PPA Andhra Pradesh Aban Tamil Nadu PPA Tamil Nadu Kondapalli II AP Merchant power Amarkantak I Chattisgarh PPA PTC / MP SEB Amarkantak II Chattisgarh PPA PTC / HP GCL Amarkantak III Chattisgarh Part merchant power, part PPA Nagarjuna Karnataka PPA Karnataka DISCOMS / PSEB Anpara C UP PPA UP Disco Babanth I Orissa PPA Haryana/ MP/Orissa Babanth II Orissa Part merchant power, part PPA Lanco Green HP PPA PTC / HPGCL Vamshi Industrial HP PPA HPSEB Vamshi Hydro HP PPA HPSEB Lanco Energy Teesta Sikkim PPA MSEDCL Lanco Hydro Uttarakhand Merchant power
Note: PPA=Power Purchase Agreement;, PTC=PTC India, MP=Madhya Pradesh, HP= Himachal Pradesh, HPGCL : Haryana Power Generation Corporation Limited, MSEDCL= Maharashtra State Electricity Distribution Co. Ltd, SEB=State Electricity Board Source: Company
Coal
CCGT
Hy dro
Wind/biomass
Second, Lanco has a well-diversified generating portfolio, in terms of both fuel mix and selling arrangements i.e., regulated versus tariff-based, captive and merchant-based power plant.
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3.9GW of projects in advanced stages of execution

Lancos aggressive capacity expansion is supported by the financial closure of c3.9GW of projects. The projects are to be funded through a mix of debt and equity. The financial closure of some of these projects provides us with comfort in terms of their execution. These projects are in advanced stages of execution with the first 300MW of Amarkantak to be operational by end-FY09. The other 300MW of Amarkantak II is likely to be commissioned by September 2009. Other projects are in advanced stages of execution. We expect c620GW of capacity to be operational by FY10e, almost 2x the current installed base. Lanco has already spent cINR50.5bn in the above projects and requires an additional cINR124bn. We believe the capacity addition of 3.9GW over the next five years is not at risk. However, we believe the equity contribution should be a big challenge on the existing balance sheet. Lanco is already leveraged at 2.7x with net
debt of cINR11bn. The equity contribution of INR61bn, including INR35bn of equity investment for projects in its pipeline, is an issue. However, we do not expect any significant issue in terms of equity investment of INR26.4bn for projects under execution. Internal accruals over the next five years should address the shortfall. We have not factored in any capacity addition from project under development (Babanth and Amarkantak III and IV).
Fuel supply for projects

Lanco has already met most of its coal requirements through coal linkages, which reduces fuel risk. For the Nagarjuna Power project, though, it has entered into a long-term (12-year) fuel supply agreement. As the project is based on a regulatory model, the fuel cost is passed through to the end user, so Lanco is not exposed to the fuel cost risk.
Status of Lancos projects under execution Projects Location Fuel Capacity Est. project Holding (MW) cost (%) (INRm) Coal Coal 300 300 10 10 70 400 1,015 500 152 1,200 3,957 4,200 11,880 43,400 30,000 9,500 48,000 74,770 12,900 13,400 1,490 76% 76% 91% 91% 90% 59% 74% 74% 90% 100% 1,992 904 14,534 5,704 577 5,411 50,474 Capex spent so far (INRm) HSBC Status est. COD
Amarkantak I Amarkantak II Vamshi Hydro Vamshi Industrial Lanco Green Kondpalli-II Udupi (Nagarjuna) Lanco Energy Lanco Uttaranchal Anpara C Total
Chhattisgarh Chhattisgarh
Himachal Hydro Pradesh Himachal Hydro Pradesh Himachal Hydro Pradesh Andhra Gas Pradesh Karnataka Imported Coal Sikkim Hydro Uttarakhand Hydro Uttar Pradesh Coal
20,118 Feb-09 Boiler hydro test completed in Dec 07, switchyard charged, switchyard connected to grid Sep-09 Boiler drum lifting completed in Dec07, hydro testing completed, turbine generator erected 1,234 Dec-09 Under commissioning Dec-09 Apr-11 River diversion completed in Oct 07, River bed excavation of dam completed. commissioning expected in Dec 09 by company Apr-10 Piling completed, erection of columns in ECB started Apr-12 Boiler drum lifting and TG casting done; TG erection to start soon. For U 2, boiler erection completed Jul-12 Civil work for tunnel in progress Apr-12 Techno-economic clearance received, infrastructure development under way Jan-12 U 1: boiler foundation done, boiler erection to get started; U 2 : construction of boiler foundation in progress
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Taking care of fuel requirement Project Fuel type Status of fuel source
HSBC vs consensus
HSBC vs consensus (INRbn) INRbn HSBC estimates Consensus estimates % difference ___ Sales ___ ___ PAT _____ EPS (INR/share) _ FY09e FY10e FY09e FY10e FY09e FY10e 34.01 56.97 -40% 50.27 81.76 -39% 4.09 4.32 -5% 6.73 6.13 10% 18.4 19.5 -6% 30.3 27.7 10%
Under construction Kondapalli II AP Gas Amarkantak I Chattisgarh Domestic Coal Amarkantak II Chattisgarh Domestic Coal Nagarjuna Karnataka Imported Coal
Anpara C UP Lanco Green HP Vamshi Industrial HP Vamshi Hydro HP Lanco Energy Teesta Sikkim Lanco Hydro Uttarakhand Hydro Hydro Under pipeline Babanth I Orissa Domestic Coal 1000 MW Captive balance from Coal linkages Babanth II Orissa Domestic Coal Coal linkages Amarkantak III & IV Domestic Coal In process Chattisgarh
*SECL: South Eastern Coalfields Limited, 100% subsidiary of Coal India Ltd Source: Company, HSBC
From KG Basin Coal linkages (SECL) Coal linkages(SECL) Long term FSA from Indonesia (12 years) Domestic Coal Coal linkages (NCL) Hydro Hydro Hydro Hydro Hydro Hydro Hydro Hydro
Valuation
Based on this, we have reduced our FY09e profit estimates by 6%, driven by 3% decline in revenue and lower EPC margin. We have also extended execution time frame for EPC business, given the delays in power projects.
Real estate valuation Change in forecasts

We have factored in delays in few of its project under construction. We now expect Amarkantak I to be operational in 4QFY09e and Amarkantak II in 2QFY10e, as against earlier target of 3QFY09e and company guidance of FY09e. We have also extended project completion for Anpara C to 4QFY12e vs company guidance of FY11e. Apart from power execution delays, we have also changed our estimates for the EPC business by forecasting a 10% and 4% decline for FY09 and FY10 respectively. We have also reduced EBITDA margin estimates to 18% from 20% for FY09e.
Summary of forecast changes INRbn Sales PAT EPS (INR) ____ New_____ ____ Old______ __ Change (%) __ FY09e FY10e FY09e FY10e FY09e FY10e 34.01 4.09 18.38 50.27 6.73 30.29 37.50 5.00 22.44 52.00 7.20 32.46 -9% -18% -18% -3% -6% -7%
We have value the real estate separately and used a discount rate of 15%. We have assumed the entire Hyderabad real estate to be developed in the next eight years. Based on this, we derive an NAV of INR10.3bn. However, we have also removed the value of real estate (INR37 per share earlier) from our valuation, given the current slowdown in the real estate sector. We expect that any upturn in the real estate business to provide an upside to the stock.

We have used the discounted cash flow method to value generation, and other businesses. We have used a discount rate of 13.1% (12.8% earlier) to incorporate higher cost of debt (14% vs 12% earlier). Based on this, we derive a fair value of INR140 per share (INR297 per share earlier).
Price to book value

We have used a price-to-book multiple of 1.2x (2x earlier), a 33% discount to NTPCs target PB. Based on this, we derive a fair value of INR149 per share (INR312 earlier).
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Sum of the parts

We have also valued Lanco using SOTP, where we have used DCF based approach for the power and real estate, 4.5x EV/EBIDTA (earlier 7x) for the construction business, in line with other Indian construction companies. We have reduced our power business valuation to INR144 per share (INR248per share earlier) due to delay in existing projects and lower growth rate. We derive a fair value of INR108 per share (INR350 per share).
Sustainability of high margins in EPC business
Lanco has one of the highest engineering, procurement and construction (EPC) margins among Indian peers, despite undertaking in-house projects. These margins are higher than peers including Larsen & Toubro, Punj Lloyd or other EPC players. Also, the order backlog includes the project equipment for which it can generate only a trading margin. However, as Lanco shifts towards merchant power business, where project cost is likely to be a deciding factor, margin could come under pressure. Rising commodity prices could affect margin.
Spreading itself too thin
Target price derivation

We have used an average of fair value derived from all the above methods to derive our target price of INR132 per share.
108 140 149 132
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 11%. For Lanco, this translates into a Neutral band of 1-21% around the current share price. Our target price of INR132 for Lanco shares implies a total return of 19.1%, which is within the Neutral band; thus, we have a Neutral (V) rating on Lanco.
The company aims to excel in a wide spectrum of businesses electricity (hydro), ports, real estate, and infrastructure in a short span of time, entailing significant regulatory, financial and project execution risks. These projects typically involve long gestation periods and are fairly capital- and labour-intensive. The inability of management to closely monitor the progress of each of these businesses could result significant delays. Alternatively, any adverse development in one of the projects could take up significant management bandwidth, resulting in lack of attention to other businesses.
Real estate downturn
Risks
Funding constraints, rising interest rate risk
We believe the real estate slowdown may affect Lancos internal generation capabilities. Of the 4m sq ft of the residential area sold, c1m sq ft has been cancelled. Also, we believe there could be delays in non-SEZ development and that the development of Chennai may be put on hold.
Delay in project execution
Lanco has undertaken aggressive expansion plan with projects worth INR161.2bn under construction and another INR175bn under development. Apart from these power projects, it has been looking at real estate development as well as the infrastructure development. Any delay in terms of achieving funding for the project will affect the companys project execution capability.
Like in case of most power developers, one of the key risks relates to project execution, which depends on various regulatory, environment, and commercial clearances. Delays in obtaining clearances or any accident at the construction site may postpone execution. If cost overruns are not allowed by regulators, revenue as well as profitability is affected.
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Financials & valuation: Lanco Infratech

Neutral (V)
03/2008a 1.1 5.0 1.2 7.0 1.3 -0.2 0.0 03/2009e 1.3 6.1 1.0 6.0 1.1 -44.5 0.0 03/2010e 1.0 3.8 0.9 3.7 0.8 -10.3 0.0 03/2011e 0.9 3.3 0.8 2.2 0.6 -60.0 0.0
Profit & loss summary (INRm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (INRm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (INRm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 32,134 24,807 5,050 62,970 22,870 16,200 11,150 18,722 29,021 0 47,487 25,566 5,050 79,082 24,001 25,464 20,413 22,809 44,002 0 60,517 33,263 5,050 99,810 35,473 25,926 20,875 29,544 53,257 0 95,533 46,090 5,050 147,652 54,591 41,162 36,112 40,533 81,982 9,419 -8,520 -8,520 0 -899 -54 6,407 -16,589 -16,589 0 9,264 -11,230 13,745 -15,391 -15,391 0 462 -2,800 22,113 -38,731 -38,731 0 15,236 -17,886 32,413 6,905 -776 6,129 -832 6,175 6,175 -1,405 3,542 3,542 34,015 7,538 -1,235 6,302 -1,160 6,191 6,191 -1,391 4,088 4,088 50,274 12,600 -2,361 10,238 -1,578 9,813 9,813 -2,205 6,735 6,735 77,368 20,128 -3,715 16,413 -2,064 15,617 15,617 -3,509 10,989 10,989
Issuer information Share price (INR) 110.85 Target price (INR) 132.00 Potentl tot rtn (%) 19.1
Reuters (Equity) LAIN.BO Market cap (USDm) 505 Free float (%) 21 Country India Analyst Sumeet Agrawal
Bloomberg (Equity) LANCI IN Market cap (INRm) 24,649 Enterprise value (INRm) 45,654 Sector Electric Utilities Contact 91 22 2268 1243
Price relative
900 800 700 600 500 400 300 200 100 0 2007
Lanco Infratech
900 800 700 600 500 400 300 200 100 0 2008 2009 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (INR) EPS Rep (diluted) HSBC EPS (diluted) DPS Book value 15.93 15.93 0.00 84.20 18.38 18.38 0.00 102.58 30.29 30.29 0.00 132.87 49.42 49.42 0.00 182.30 1.2 17.5 20.9 9.8 21.3 18.9 8.3 47.0 1.6 84.5 0.9 13.4 19.7 8.0 22.2 18.5 6.5 69.4 2.7 31.4 1.0 16.3 25.7 9.9 25.1 20.4 8.0 54.6 1.7 65.8 1.1 18.8 31.4 11.1 26.0 21.2 9.8 69.8 1.8 61.2 101.9 64.5 73.0 96.7 61.6 4.9 9.2 2.8 0.3 15.4 47.8 67.2 62.5 58.5 64.7 53.9 59.7 60.3 59.1 63.2 03/2008a 03/2009e 03/2010e 03/2011e
Source: HSBC
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NTPC Ltd (NATP)

NTPC enjoys the best positioning in terms of access to funds and fuel, but market ignoring delays in project execution NTPC continues to trade at a premium valuation, defying risk of delays and reduction in RoE in FY09e Downgrade to Underweight (V) from Neutral (V) on valuation trading (1.78x FY10e PB); retain our target of INR142
Strong project pipeline, but poor execution

NTPC has a strong project pipeline with capacity addition target of 22GW by 2012e to increase its installed base to 50GW. We expect NTPC to miss its capacity addition target despite strong project execution capabilities and fund availability. NTPC saw execution delays due in the past too, from delay in land acquisition, regulatory approvals, and by equipment vendors. The Central Electricity Authority has also taken cognisance of delays in execution, and expects NTPC to commission only 15.4GW in the 11th Plan. We are more conservative, and expect it to commission 11.9GW of capacity by 2012.
Delay in coal mining a concern

NTPC has huge coal requirement annually. In 2008, it consumed c124mt, 2.6mt of which was imported. Globally, there is a shortage of coal, and coal prices are on the rise. Coal India Limited is the principal supplier of coal to NTPC. To meet its coal requirements on an ongoing basis, NTPC is developing seven coal mines, which have total reserves of 3.6bn tonnes, with an annual estimated capacity of 56m tonnes per annum (mtpa). Of the total approved advance expenditure of INR5.4bn to develop these mines, INR0.8bn was already spent as at end of the last financial year.
NTPCs coal reserves Project Est. Mine life reserves (in years) (m tonnes) 50 30 30 25 30 30 30 Est. capacity (mtpa) 15 7 5 6 5 15 3 56 25 5 86 Project devmt year expected FY10 FY11 FY11 FY12 FY11 FY13
Capacity addition plan

NTPC plans to add 20GW by FY12 to its current installed base of 29GW. We expect the projects under tendering (3.8GW) will not come on stream by FY12, leading to an overall shortfall of 10GW against planned capacity by the end of the 11th Plan period.
Pakri Barwadih 1,436 Chatti Bariatu 243 Chatti Bariatu II 354 Kerandari 229 Dulanga 260 Talaipalli 965 Chhatrasal 150 Total Own 3,637 JV with Coal India Limited Brahminni 1,900 Chichro Patsimal 356 Total 5,893
25 NA
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In addition to the seven mines, NTPC has entered into a JV with Coal India for the development and operation of two coal mines with reserves of 2.2bn tonnes. NTPC plans to commence coal production of c2.34mtpa by FY10e (vs. earlier target of FY08e) and increase it to c14mtpa by FY12. According to our analysis, this should enable NTPC to secure c9.4% of its total coal requirement in FY12 and c15% by FY17.
Stable cash flow

NTPC has a stable cash flow due to its 27GW installed base (excluding JVs). This installed base will generate a profit of INR25.7bn, based on 14% RoE, without considering any incentives. Add to this incentives earned and other non-cash expenses, and NTPC should generate cash flow of INR645bn over the next four years.
HSBC vs consensus
HSBC vs consensus (INRbn) INRbn __ Sales ___ ___PAT ____ _ EPS (INR/share) _ FY09e FY10e FY09e FY10e FY09e FY10e 82.10 79.44 3% 86.88 84.87 2% 9.9 9.6 3% 10.5 10.4 2%
Should continue to trade at a premium

We expect NTPC to trade at a premium against its peers due to: (a) stable cash flow, (b) the regulated model that enables it to pass on interest rate and fuel costs, (c) strong balance sheet, and (d) strong parentage.
HSBC 418.19 467.20 estimates Consensus 413.37 462.35 estimates % difference 1% 1%

Valuation
We take cognisance of the fact that NTPC will continue to trade at a premium to its peers. However, we believe its current valuation considers the best case scenario in term of capacity addition. Based on our replacement cost analysis, the current market capitalisation of cUSD30bn indicates an installed base of 33GW by 2010 as against installed base of c27GW in FY08.
NTPC implied capacity at current price INRbn Market cap Add Net debt Total EV Less Investment Generation project value Replacement capacity (MW) @ INR46.5m/MW
Source: HSBC
Strong balance sheet to leverage funding

To achieve its target capacity expansion of c22GW during the 11th Plan period, we estimate the company will require a capex balance of INR956bn over four years (FY09-12). We expect that most of the funding will be raised through long-term bonds and term loans. We believe this will not dilute its shareholdings. We believe NTPC has a strong balance sheet, with cINR153bn (FY08e) in cash, and we estimate that c61% of funds required for its 22GW capacity expansion programme in the 11th Plan period can be met through internal accruals.
NTPC estimated funding plan Particulars Cash balance (FY08e) SEB bonds (FY09-12e) Discrete cash flows (FY09-12e) Loans to be obtained (Already secured INR169bn of loan) Total capex required to add 20.4GW during FY09-13e
1459 181 1640 101 1539 33090
INRbn 153 66 357 376 956
We have used the average of three different approaches to value NTPC shares and, based on this, derive a target share price of INR142.
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Based on our DCF approach, we derive a value of INR123.
Sum of the parts

We have valued NTPC on SOTP value of INR165. We have valued the existing generation business at an EV/MW of INR46.5m, based on expected replacement cost and a premium for the existing business. We have not valued the captive coal mining business, as the mine development operator has yet to be appointed and there is not much clarity on the transfer pricing between the mine and the generating station. In addition, we have valued NTPCs investment in various JVs (other than power generating JVs) at 1.5x the book value of the investments, since they are at very early stages of development.
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 11%. For NTPC, this translates into a Neutral band of 1-21% around the current share price. Our target price of INR142 for NTPC shares implies a total return (including dividend yield) of -14.6%, which is below the Neutral band; thus, we have an Underweight (V) rating on the NTPC stock.
Risks
Business risks includes fuel supply concerns, delays in project execution, and an impact from higher costs on merchant power. Also, regulatory risks include a reduction in RoE due to higher efficiency norms to be set by the regulator. Upside risks to our rating include faster execution, higher efficiency norms, and the ability to raise funds at lower cost and to address the fuel issue.
Price to book
We have valued NTPC using a multiple of 1.8x FY10e book value. Based on this, we derive a fair value of INR138 per share.
NTPCs SOTP Business Generation Investments Total Less Net debt Equity value
Source: HSBC
Unit Capacity Multiple MW 30,807 Premium to 101,883 book
Value INR per share 174 19 192 27 165
46.50x 1,432,523 50.0% 152,825 1,585,347 221,950 1,363,397
Based on the average of these three values, we derive a target price of INR142, suggesting 17% downside.
165 123 138 142
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Financials & valuation: NTPC

Underweight (V)
03/2008a 3.7 12.1 2.5 18.9 2.7 -3.6 2.1 03/2009e 3.4 11.0 2.3 17.2 2.5 -0.7 2.3 03/2010e 3.2 10.3 2.1 16.2 2.3 -2.4 2.4 03/2011e 3.1 10.2 1.8 15.5 2.1 -7.0 2.5
Profit & loss summary (INRm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (INRm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 97,822 -99,442 -82,505 -28,932 16,328 -46,404 99,202 -82,556 -66,041 -29,605 1,027 -8,414 119,943 -127,945 -111,430 -33,581 30,105 -31,898 137,619 -206,790 -190,275 -35,221 93,161 -92,411 386,823 117,352 -22,060 95,292 -18,581 103,510 103,510 -28,811 74,699 74,699 418,192 131,412 -21,213 110,199 -20,910 112,502 112,502 -30,404 82,098 82,098 467,204 144,773 -23,306 121,468 -23,998 119,941 119,941 -33,057 86,884 86,884 518,285 156,979 -25,735 131,244 -26,860 126,154 126,154 -35,342 90,812 90,812
Issuer information Share price (INR) 170.90 Target price (INR) 142.00 Potentl tot rtn (%) -14.6
Reuters (Equity) NTPC.BO Market cap (USDm) 28,849 Free float (%) 11 Country India Analyst Sumeet Agrawal
Bloomberg (Equity) NATP IN Market cap (INRm) 1,409,150 Enterprise value (INRm) 1,441,764 Sector Electric Utilities Contact 91 22 2268 1243
Balance sheet summary (INRm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 6 537,900 263,157 153,605 935,533 77,030 303,147 149,542 528,629 570,428 6 599,243 304,766 190,961 1,021,970 85,788 341,530 150,569 573,647 627,266 6 703,882 313,315 186,356 1,118,644 107,959 367,031 180,674 621,290 722,888 6 884,937 280,150 139,688 1,250,018 141,737 413,523 273,836 671,087 883,668
Price relative
305 285 265 245 225 205 185 165 145 125 105 2007
NTPC
305 285 265 245 225 205 185 165 145 125 105 2008
2009
2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (INR) EPS Rep (diluted) HSBC EPS (diluted) DPS Book value 9.06 9.06 3.51 64.11 9.96 9.96 3.91 69.57 10.54 10.54 4.14 75.35 11.01 11.01 4.33 81.39 0.7 13.0 14.7 9.9 30.3 24.6 6.3 28.2 1.3 65.4 0.7 13.4 14.9 9.9 31.4 26.4 6.3 26.2 1.1 65.9 0.7 13.0 14.5 9.7 31.0 26.0 6.0 29.0 1.2 66.4 0.6 11.8 14.1 9.3 30.3 25.3 5.8 40.7 1.7 50.3 14.2 15.4 18.1 15.5 8.3 8.1 12.0 15.6 8.7 9.9 11.7 10.2 10.2 6.6 5.8 10.9 8.4 8.0 5.2 4.5 03/2008a 03/2009e 03/2010e 03/2011e
Source: HSBC
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Tata Power (TPWR)

Building a well-diversified generation portfolio supported by fuel sourcing and funding strategy Acquisition of overseas coal blocks proving to be a well-crafted strategy for security fuel; lower FY10 profit estimates 21% to incorporate lower coal realisation Reiterate Overweight (V), lower target to INR1,000 from INR1,244
Best-placed Indian utility

Building on existing experience and presence
Tata Power has established itself as a credible player in the Indian power sector by leveraging its experience of operating the largest installed base within the private sector and operating distribution circles in Mumbai and Delhi. It is the first private player to set up and operate a highvoltage transmission line in a JV with PGCIL, which completed its first year of operations in March 2008. It is now expanding its fleet of power plants across India; these are at various stages of construction and development. The success of the company is shown by its ability to
achieve financial closure and source fuel linkages for most of its projects both through captive mine allocation and acquiring coal mines in Indonesia.
Well-diversified generating portfolio

Tata Power has a well-diversified generating portfolio in terms of both fuel mix and selling arrangements i.e., regulated versus tariff based, captive and merchant based power plant. It has a well-defined capacity addition plan, with 2,400MW already under operation, 5,660MW under construction, and c5,670MW in the pipeline. Its generation portfolio consists of a diverse fuel mix, with thermal, hydro and alternative fuels accounting for 75%, 20%, and 3% respectively.
Tata Power generation portfolio

Regulated Developed 1330MW Trombay thermal 447MW Hydro power Station Under construction 250MW Trombay extension 1050MW Maithon thermal 120MW Haldia thermal Under pipeline Tariff based Captive power / IPP 428MW Jojobera 81MW Belgaum 4000MW Mundra UMPP 120MW Jamshedpur 120MW Jojobera thermal Merchant Renewable 79MW Wind
124MW Wind Power 3MW Solar PV
1000MW Naraj Marthapur IPP 1270MW Naraj Marthapur CPP 500MW Tubed IPP 500MW Jharkhand (Tata Steel)
2400MW Coastal Maharashtra
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Tata Powers generation capacity addition plans Project Capacity Project Debt Debt Equity Developer Developer Status of funding (MW) cost to (INRbn) (INRbn) stake (%) equity closure (INRbn) equity (INRbn) Fuel type Fuel source
Under construction Mundra
4,000
170.00 75:25
127.5
42.5
100%
Maithon (74% stake) Jamshedpur and Jojobera Trombay Expansion Haldia Sub-total In the pipeline Coastal Maharashtra Naraj Marthapur IPP Naraj Marthapur CPP Tubed IPP Jharkhand CPP Sub-total Total
1,050 240
44.50 70:30 11.10 70:30
31.2 7.8
13.4 3.3
74% 74%
42.5 Done, with USD1.8bn forex loan and USD1.4bn rupee loan 9.9 Done; funded by State Bank of India 2.5 In advanced stage of completion 3.2 In advanced stage of completion 1.8 In advanced stage of completion 60 25.2 12.6 11.8 6.3 4.7 60.6 120
Imported coal
Domestic coal Tolling arrangement Imported coal Tolling arrangement
250 120 5,660 2,400 1,000 1,270 500 500 5,670 11,330
10.66 70:30 6.05 70:30 242 101 70:30 42.0 70:30 53.3 70:30 21.0 70:30 21.0 70:30 238 480
7.5 4.2 178 75.6 29.4 37.3 14.7 14.7 172 350
3.2 1.8 64 25.2 12.6 16.0 6.3 6.3 66.4 131
100% 100%
10mtpa offtake agreement with KPC*/Arutmin, pricing part fixed and part linked to CERC Index Fuel linkage from Bharat Coking Coal mines Coke oven gases of Tata Steel, and linkage from West Bokaro and Mahanadi coal fields Imported coal, cost pass-through Hot flue gases from Hoogly Metcoke
100% 100% 74% 100% 74%
Imported Coal Domestic coal Tolling arrangement Domestic coal Tolling arrangement
Coal from Bumi Resources offtake Mandakini Coal Block Supply by procurers Captive coal block Supply by Tata Steel
* KPC=Kaltim Prima Coal Source: Company, HSBC estimates
Within alternative energy sources, Tata Power plans to expand its wind capacity from 78MW now to 200MW over the next year. It has plans to further explore opportunities in the wind energy space, which we believe will help the company to manage its obligation under the renewable energy target imposed on distributors in Maharashtra. We believe Tata Powers ability to create a welldiversified power plant portfolio, i.e., selling in both the regulated and the free markets will enable it to mitigate fuel and offtake risks.
Fuel and funds well tied up

Visible success in acquiring fuel to power its plants
Tata Power is well positioned to meet its fuel obligations, in our view, as it has made significant arrangements for most of its plants under construction either by way of captive mine
allocation or through fuel offtake agreement for coal supply from Indonesia. For example, it has been allocated two coal mines for its projects. It received allocation of the 189mt coal block in Jharkhand in JV with Hindalco and the 290mt Mandakini coal block in Orissa along with Jindal Photo and Monnet Ispat. It has picked up a 30% stake in KPC and Arutmin from PT Bumi Resources in Indonesia, which allows it to draw 10mt of coal supplies over the long term, which is capable of fuelling almost the entire Mundra plant. For Maithon projects, Tata Power has tied up fuel from Bharat Coking Coal mines, which reflects its ability to obtain fuel linkages for large projects.
Successful in achieving financial closure for large projects

Tata Power has completed financing for two of its largest power plants under construction i.e., the
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1050MW Maithon project, for which the debt component of cINR30bn is being funded by a consortium led by State Bank of India. For its Mundra project, the company has tied up to raise USD1.8bn in foreign exchange loans and USD1.4bn in INR loans with several multilateral and domestic financial institutions. With these two big projects, most of the groups funding for plants under construction has been tied up. Funding for remaining smaller projects, such as captive projects at Jojobera and Jamshedpur, are at advanced stages of reaching financial closure. Tata Power proposes to raise the total funding requirement of INR240bn during the next four years through its own contribution (INR60bn) and through debt (INR180bn), a large portion of which is already tied up.
HSBC vs consensus
HSBC vs consensus (INRbn) INRbn HSBC estimates Consensus estimates % difference ___ Sales ____ FY09e FY10e 146.2 150.4 -3% 142.8 169.7 -16% ___ PAT ____ FY09e FY10e 20.9 18.9 11% 24.1 26.7 -10% _ EPS (INR)__ FY09e FY10e 95.0 84.4 13% 109.3 116.1 -6%
Source: HSBC, DataStream
Valuation
Combination of valuation approaches
We value Tata Power using the methods below and derive a target price of INR1,000.

We use the discounted cash flow method to value the entire generation as well as other business. We used a discount rate of 12% (13.5% cost of equity and 6.6% cost of debt). Based on this, we derive a fair value of INR1,243 per share.
Change in forecasts
We have reduced our contribution from the coal mine business, given the declining coal prices. We expect average realisation of coal to fall to cUSD48 per tonne, a decrease of 30% from the previous year in contrast to our earlier estimate of 10% decline. Also we have decreased the coal production forecast now to 4% annual increase from earlier estimates of 7% for FY09 and 5% thereafter. Also in our estimates, we now provide for 20% provision for taxation from earlier estimates of 12.4%.
Summary of changes in forecasts (INRbn) _____ New ____ ____ Old______ __ Change (%) __ FY09e FY10e FY09e FY10e FY09e FY10e 142.82 24.11 109.26 149.11 21.29 96.49 151.99 30.42 137.82 -2% -1% -1% -6% -21% -21%
Price to book value

We value Tata Power at PB multiple of 2.0x (a slight premium of 15% to global utilities), deriving a value of INR986 per share.
Sum of the parts

We value the existing generation business at an EV/MW of INR46.5m, based on expected replacement cost. We value NDPL based on 2x price-to-book, given that it is able to generate a 16% ROE and is growing at c15% CAGR over FY08-10e. We have not considered the value derived from projects under development. Based on the SOTP approach, we value the company at INR770 per share.
Sales 146.19 PAT 20.97 EPS (INR) 95.05

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Tata Powers SOTP Business Generation NDPL Transmission lines License area distribution assets Tata BP Solar Mundra Power Project 30% stake in Bumi Resources Value of projects under construction Investments Value of projects in pipeline Total Less Net debt Equity value No. of shares
Source: HSBC
Unit MW Equity investment Book Value Book Value 8xFY08 EV/Sales NPV to Equity NPV to Equity NPV to Equity Premium to book
Particulars 3,019 2,009 2,380 5,033 8,500
Multiple 46.50x 2.00x 2.00x 2.00x 1.76x
Value (INRm) 140,373 4,019 2,428 10,067 14,946 7,802 38,768 9,492 39,597 0 267,490 -97,488 170,002 220.68
INR per share 636.1 18.2 11.0 45.6 67.7 35.4 175.7 43.0 179.4 0.0 1212 -442 770
9,492 26,398
1.00x 50% 0%
770 1243 986 1,000
Under our research model, for stocks with a volatility indicator, the Neutral band is 10 percentage points above and below the hurdle rate for Indian stocks of 11%. For Tata Power, this translates into a Neutral band of 1-21% around the current share price. Our target price of INR1,000 for Tata Power shares implies a total return (including dividend yield) of 40.7%, which is above the Neutral band; thus, we have an Overweight (V) rating on the Tata Power stock.
Risks
Business risks include equity funding for the 5.6GW under pipeline, delays in project execution, interest rate risk, and regulatory risk.
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Financials & valuation: Tata Power

Overweight (V)
03/2008a 2.1 10.5 1.5 16.1 2.1 -12.4 1.5 03/2009e 1.5 5.8 1.3 7.7 1.8 0.3 3.2 03/2010e 1.6 5.4 1.2 6.7 1.5 -5.2 3.6 03/2011e 1.3 5.1 1.1 6.5 1.3 0.2 3.8
Profit & loss summary (INRm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (INRm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity 13,152 -25,527 -69,956 -2,365 47,753 -17,073 23,268 -17,827 -17,827 -5,944 1,198 397 23,688 -25,447 -25,447 -6,833 9,981 -7,056 42,559 -36,717 -36,717 -7,042 2,241 281 108,891 21,203 -5,593 15,611 -4,881 15,485 15,485 -3,765 9,965 9,965 146,189 38,517 -7,109 31,407 -6,841 29,611 29,611 -8,302 20,975 20,975 142,816 43,359 -8,230 35,129 -6,937 33,489 33,489 -8,835 24,112 24,112 178,753 46,493 -9,085 37,408 -7,735 35,234 35,234 -8,898 24,848 24,848
Issuer information Share price (INR) 727.25 Target price (INR) 1000.00 Potentl tot rtn (%) 40.7 Bloomberg (Equity) TPWR IN Market cap (INRm) 161,004 Enterprise value (INRm) 224,164 Sector Electric Utilities Contact 91 22 2268 1243
Reuters (Equity) TTPW.BO Market cap (USDm) 3,296 Free float (%) 67 Country India Analyst Sumeet Agrawal
Balance sheet summary (INRm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 0 140,901 50,049 5,623 222,228 33,151 91,136 85,513 75,920 152,176 0 151,619 59,796 5,623 242,693 37,749 92,334 86,711 90,950 168,044 0 168,835 60,671 5,623 260,784 29,427 102,315 96,692 108,229 194,456 0 196,466 57,468 5,623 285,212 33,362 104,556 98,933 126,035 214,949
Price relative
1750 1550 1350 1150 950 750 550 350 2007
Tata Power
1750 1550 1350 1150 950 750 550 350 2008 2009 2010
Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (INR) EPS Rep (diluted) HSBC EPS (diluted) DPS Book value 45.15 45.15 10.94 344.03 95.05 95.05 23.02 412.14 109.26 109.26 26.47 490.43 112.60 112.60 27.27 571.12 1.0 10.6 15.3 8.6 19.5 14.3 4.3 101.8 4.0 15.4 0.9 14.1 25.1 11.3 26.3 21.5 5.6 87.9 2.3 26.8 0.8 14.3 24.2 11.8 30.4 24.6 6.3 84.0 2.2 24.5 0.9 13.7 21.2 11.8 26.0 20.9 6.0 74.2 2.1 43.0 68.1 94.3 130.8 127.9 21.3 34.3 81.7 101.2 91.2 110.5 -2.3 12.6 11.8 13.1 15.0 25.2 7.2 6.5 5.2 3.1 03/2008a 03/2009e 03/2010e 03/2011e
Source: HSBC
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Annexure
2008 saw hectic equipment ordering We analyse reasons why earlier plans were not achieved
Hectic equipment ordering in 2008

2008 was a momentous year, with 15GW ordered for various equipment manufacturers this was because of the push towards achieving 78GW of the governments capacity addition target. The Ministry of Power pushed to achieve financial closure, and equipment ordering led to significant news flow in 2008.
11th Plan: capacity addition plan (MW) Central Thermal Hydro Nuclear Total % 21,496 8,654 3,380 33,530 42% State 22,001 3,362 0 25,363 32% Private 17,406 3,491 0 20,897 26% Total 60,903 15,507 3,380 79,790 % 76% 19% 4%
Why 10th Five-Year Plan capacity addition targets were not met Major reasons for slippage Delay in supplies/erection by suppliers/ contractors Delay in tie-up super critical technology Non-availability of gas Delay in award of works, mainly in state sector/NLC Projects not taken up/escrow cover not given/financial closure not achieved/funds not tied up Delay in clearance/investment decisions (hydro projects) Hydro projects: delay in environmental clearance, geological surprises, natural calamities, relocation and rehabilitation issues, delay in signing of MoU, court cases Law & order problems Nuclear projects included on best effort basis (otherwise scheduled for 11th Plan) Adjustments due to change of size
Source: CEA
Total 24% 14% 11% 9% 19% 8% 11%
2% 4% -3%
Capacity addition: actual vs planned over five-year plans
50,000 40,000 30,000
100% 90% 80% 70% 60% 50% 40% 30% I IV VII IX %
Why were targets not met?

India has a poor record in achieving its power capacity addition targets. The 10th Plan achieved only 52% of the proposed installed base. Failure to achieve financial closure and delays from equipment vendors and regulators were key reasons why capacity addition targets were not met.
20,000 10,000 -
Capacity planned
Source: CEA
Capacity added
To mitigate the delays due to equipment shortage, developers have already placed equipment orders on vendors, providing sufficient time for project execution this time around. With equipment now ordered, we expect focus to shift towards execution, over the next three years.
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However, we still expect delays to hamper the capacity addition plan and expect c48GW of capacity addition over 2007-12e.
Generation capacity addition analysis (MW) FY08 FY09e FY10e 7795.2 499 220 8514.2 2250 3126.2 3138 8514.2 FY11e 6948 1281 1500 9729 4692 4028 1009 9729 FY12e 11901 2211 1000 15112 9051 3201 2860 15112 Total 38311 6646 3380 48337 21673 17122 9542 48337
Breakdown by technology Thermal 6620 5047 Hydro 2423 232 Nuclear 220 440 Total 9263 5719 Breakdown by sector Central 3240 State 5273 Private 750 Total 9263
2440 1494 1785 5719
We expect the major reasons for slippage in capacity addition will be delays from equipment vendors, failure to receive regulatory clearances for hydro projects, and the fact that most capacity addition is back-ended (36% capacity to be commissioned in FY12, as per recent CEA publications).
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Disclosure appendix
Analyst certification
The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Sumeet Agrawal
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investors existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: (1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and (2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the risk free rate for that stocks domestic, or as appropriate, regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past months average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stocks status to change. Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the analysts valuation for a stock. From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take. Prior to 15 November 2004, HSBCs ratings system was based upon a two-stage recommendation structure: a combination of the analysts view on the stock relative to its sector and the sector call relative to the market, together giving a view on the stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts. For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The target price was the level the stock should have traded at if the market accepted the analysts view of the stock.
Rating distribution for long-term investment opportunities

As of 13 January 2009, the distribution of all ratings published is as follows: Overweight (Buy) 43% (31% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 37% 20% (33% of these provided with Investment Banking Services) (21% of these provided with Investment Banking Services)
Share price and rating changes for long-term investment opportunities

Tata Power (TTPW.BO) share price performance INR vs HSBC rating history Recommendation & price target history From To Overweight Underweight Underweight (V) Overweight (V) Value 679.10 724.00 714.00 732.00 843.00 1198.00 1244.00 Date 28 July 2006 07 November 2007 17 March 2008 29 August 2008 Date 28 July 2006 30 January 2007 20 April 2007 23 May 2007 26 July 2007 04 October 2007 29 August 2008
1594 1094 594 94 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08
N/A Overweight Underweight Underweight (V) Target Price Price 1 Price 2 Price 3 Price 4 Price 5 Price 6 Price 7
Source: HSBC
Source: HSBC
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CESC Ltd (CESC.BO) share price performance INR vs HSBC rating history
Recommendation & price target history From N/A Target Price Price 1 Price 2
Source: HSBC
To Overweight (V) Value 428.00 345.00
Date 29 August 2008 Date 29 August 2008 31 October 2008
609 509 409 309 209 109 9 Jul-04 Jul-05 Jul-06 Jul-07 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jul-08 Jan-09
Source: HSBC
Lanco Infratech (LAIN.BO) share price performance INR vs HSBC rating history
Recommendation & price target history From N/A Target Price Price 1 To Neutral (V) Value 335.00 Date 29 August 2008 Date 29 August 2008
690 490 290 90 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Source: HSBC
Source: HSBC
NTPC (NTPC.BO) share price performance INR vs HSBC rating history
Recommendation & price target history From To Overweight Neutral Underweight Underweight (V) Neutral (V) Value 148.10 175.80 179.00 163.00 142.00 Date 28 July 2006 10 April 2007 04 September 2007 17 March 2008 27 October 2008 Date 28 July 2006 24 November 2006 04 September 2007 29 August 2008 27 October 2008
275 225 175 125 75 Jul-04 Jul-05 Jul-06 Jul-07 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jul-08 Jan-09
N/A Overweight Neutral Underweight Underweight (V) Target Price Price 1 Price 2 Price 3 Price 4 Price 5
Source: HSBC
Source: HSBC
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HSBC & Analyst disclosures

Disclosure checklist Company LANCO INFRATECH TATA POWER
Source: HSBC
Ticker LAIN.BO TTPW.NS
Recent price 110.85 727.25
Price Date 12-Jan-2009 12-Jan-2009
Disclosure 4 2, 5
1 2 3 4 5 6 7 8 9 10 11
HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 31 December 2008 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 30 November 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 30 November 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. As of 30 November 2008, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 14 January 2009. All market data included in this report are dated as at close 12 January 2009, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBCs analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBCs Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer
* Legal entities as at 22 August 2007 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking HSBC Securities and Capital Markets Corporation Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC (India) Private Limited Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; DE HSBC Trinkaus & Registered Office Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets 52/60 Mahatma Gandhi Road (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt S.A.E., Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Fort, Mumbai 400 001, India Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong Telephone: +91 22 2267 4921 and Shanghai Banking Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) Fax: +91 22 2263 1983 (Pty) Ltd, Johannesburg; GR HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Website: www.research.hsbc.com Madrid, Milan, Stockholm, Tel Aviv, US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. 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Indian Research Team

India
IT Services, Strategy Sanjeev Kaushik Head of Research, India +91 22 2268 1271 sanjeevkaushik@hsbc.co.in Aerospace and Defence Mahesh Bendre Analyst +91 22 2268 5444 maheshbendre@hsbc.co.in Automobiles Sachin Gupta Analyst +91 22 2268 1079 Banks Saumya Agarwal Associate +91 22 2268 1235
Singapore
Economics Robert Prior-Wandesforde Economist +65 6239 0840 robert.prior-wandesforde@hsbc.com.sg
Hong Kong
Strategy Garry Evans Head of Pan-Asian Equity Strategy +852 2996 6916 garryevans@hsbc.com.hk Airlines Mark Webb Analyst +852 2996 6574 Banks Todd Dunivant Analyst +852 2996 6599 Telecom Tucker Grinnan Analyst +852 2822 4686
sachin1gupta@hsbc.co.in
markwebb@hsbc.com.hk
saumyaagarwal@hsbc.co.in
Construction Materials, Metals & Mining Jatin Kotian Analyst +91 22 2268 1638 jatinkotian@hsbc.co.in Consumer & Retail Percy Panthaki Analyst +91 22 2268 1240
tdunivant@hsbc.com.hk
tuckergrinnan@hsbc.com.hk
percypanthaki@hsbc.co.in
Electric Utilities, Machinery, Transport Infrastructure Sumeet Agrawal Analyst +91 22 2268 1243 sumeetagrawal@hsbc.co.in Infrastructure, Real Estate Ashutosh Narkar Analyst +91 22 4089 1474 ashutoshnarkar@hsbc.co.in IT Services Yogesh Aggarwal Analyst +91 22 2268 1246 Oil & Gas Kirtan Mehta Analyst +91 80 3001 3779 Small & Mid-cap Sandeep Somani Analyst +91 22 2268 1245 Telecom Rajiv Sharma Analyst +91 22 2268 1239 Economics Manas Paul Economist +91 80 3001 3667 Strategy Vivek R Misra Strategist +91 80 3001 3699
yogeshaggarwal@hsbc.co.in
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HSBC Power Utilities

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Natural Resources & Energy Indian Utilities

Source: HSBC estimates

Natural Resources & Energy Indian Utilities 14 January 2009

Tata Power (TPWR)

CESC Ltd (CESC)

Disclosure appendix Disclaimer

Lanco Infratech (LANCI)

NTPC Ltd (NATP)

Natural Resources & Energy Indian Utilities 14 January 2009

Focus turns to execution

From orders to execution

Private sector: who will win?

Natural Resources & Energy Indian Utilities 14 January 2009

BHEL Achieved Consortium including SEW Achieved & ABIR

Natural Resources & Energy Indian Utilities 14 January 2009

Impact of credit crisis

Source: CEA, HSBC estimates

NTPC capacity addition plan

Developers with projects in advanced stages of development

MW 2,740 15,930 3,760

BHEL to benefit from capacity addition

Natural Resources & Energy Indian Utilities 14 January 2009

Thermal Projects Barh-I Vallur Ennore JV Bhilai JV

Technoprom, 2011-12 Russia BHEL 2011-12 BHEL 2008-09

Bongaigaon Dadri Ext.

500 1,000 1,500 500 750 740 1,000 1,980

2010-11 2007-09 2010-11 2010-11 2011-12 2007-08 2011-12 2009-11

Sipat II U 4 & 5 Hydro Projects Kol Dam Lohari Nagpala

1,000 800 600

1,000 800 600

2007-09 2009-10 2011-12

Key reason for delays

Capacity 1,000 1,000 500 500

Natural Resources & Energy Indian Utilities 14 January 2009

Equity funding of INR66bn

We prefer Tata Power among private-sector utilities

Natural Resources & Energy Indian Utilities 14 January 2009

Under construction Mundra

Maithon (74% stake) Jamshedpur and Jojobera

70:30 31.2 70:30 7.8

3.2 1.8 64 25.2 12.6 16.0 6.3 6.3 66.4 131

100% 100% 74% 100% 74%

25.2 12.6 11.8 6.3 4.7 60.6 120

* KPC= Kaltim Prima Coal Source: Company, HSBC estimates

CESC: Gradual capacity addition a positive

COD 2009-10 2010-11 2012-13 2013-14 2013-14

Thermal/hydel power plants Merchant in West Bengal/other states

Natural Resources & Energy Indian Utilities 14 January 2009

Natural Resources & Energy Indian Utilities 14 January 2009

Coal Coal Hydro Hydro Hydro

76% 76% 91% 91% 90%

400 1,015 500 152 1,200

300 955 660 220 1,100

59% Merchant 74%

Apr-13 Financial closure process under way

Source: Company, HSBC

Natural Resources & Energy Indian Utilities 14 January 2009

Natural Resources & Energy Indian Utilities 14 January 2009

CESC Ltd (CESC)

Gradual capacity addition plans

Excellent operating performance at existing generation plants

Purpose Regulated Regulated Merchant

Size 250 600 1000