CMP: INR174 TP: INR229 Buy. Expect capacity addition to accelerate

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1 BSE SENSEX S&P CNX,884 5,078 3 October 20 Update Sector: Utilities CMP: INR74 TP: INR229 Buy Expect capacity addition to accelerate Base returns protected despite fuel availability constraints Bloomberg IN Equity Shares (m) 8, Week Range (INR) 2/0,6,2 Rel. Perf. (%) 4/7/2 M.Cap. (INR b),434.7 M.Cap. (USD b) 29.2 Y/E March E 203E Sales (INR b) EBITDA (INR b) NP* (INR b) EPS (INR)* EPS Growth (%) BV/Share (INR) P/E (x) P/BV (x) EV/EBITDA (x) EV/ Sales (x) RoE (%) RoCE (%) * Reported Pre Exceptional Earnings; factoring in tax gross up by MAT Shareholding pattern % (Sep-) GoI, 84.5 Interactions with 's project management team strengthened our confidence of achieving capacity addition of ~9.2GW in FY2/3. BTG awards of 5-8GW in FY2 is an important milestone; to double projects under construction from 4.GW currently. Near term Fuel sourcing issues are only cyclical and not structural. Longer term, plans to ramp up production from captive coal mines and use inland waterways for coal transportation. Execution delayed meaningfully, but confident of ~9.2GW capacity addition in FY2/3 Our interactions with 's project management team strengthened our confidence in achieving capacity addition of ~9.2GW in FY2/3. Project execution has gained momentum and large portfolio of projects in advanced stages of commissioning will offset slippages in some planned projects. There exists various comforting factors: () as at March 20, capex incurred for capacities to be commissioned in FY2 stood at 64%, (2) large part of the 4.GW under construction entered the construction phase in FY07/FY08, (3) the July 20 review of thermal capacity addition by Central Electricity Authority (CEA) expects capacity addition of 9.2GW by the end of FY3, and (4) easing execution constraints in the chain. BTG awards of 5-8GW in FY2 an important milestone targets to award BTG contracts for 5-8GW in FY2, which will improve visibility for 2th Plan capacity addition targets at ~25GW. There also exist possibilities to revive certain brownfield expansion projects totaling ~5GW, which can expedite project execution. Others, 3.7 Foreign, 3.6 Domestic Inst, 8.2 Stock performance ( year) Jan- Sensex - Rebased Jul- Oct- Fuel supply: near term issues one-off; LT sourcing strategy in-place has assured coal linkages for ~90% of installed capacity and is better placed to address incremental fuel requirement given captive mines, PPA structure with fuel cost pass through, etc. has been given in-principal approval for additional 5 coal blocks by Ministry of Coal (for ~7.7GW projects). This is in addition to 7 blocks allocated earlier, with production potential of 47m tons (~0GW capacity). Development of inland water transportation system for coal transportation will address logistics issue for Eastern plants. Currently, PLFs of 2.2GW located in East is impacted (HFY2 PLF at 75% for these plants v/s 89% for the rest of ). Base returns protected despite fuel availability constraints We expect to deliver net profit CAGR of % over FY-3. We estimate net profit at INR90.7b for FY2 (up 4%) and INR07.3b for FY3 (up 8%), translating into an EPS of INR and INR3, respectively. The stock trades at 5.8x FY2E and 3.4x FY3E EPS, and at 2x FY2E and.8x FY3E BV. Buy with a target price of INR229. Nalin Bhatt (NalinBhatt@MotilalOswal.com); Satyam Agarwal (AgarwalS@MotilalOswal.com); / Vishal Periwal (Vishal.Periwal@MotilalOswal.com)

2 Execution delayed meaningfully, but there are comforting factors Expect capacity addition to accelerate Delays in capacity addition over the past 3-4 years have impacted stock performance. However, there is significant pick-up in project execution; capacity addition on a rolling 4-quarter basis will be closer to ~5GW per year. This should lead to a pick-up in earnings growth momentum. Going forward capacity addition on a rolling 4-quarter basis will be closer to ~5GW per year Strengthened confidence in s ability to achieve FY2 capacity addition target Our interactions with s project management team strengthened our confidence that it will be able to achieve the capacity addition target of 4.3GW in FY2. There is significant pick-up in project execution and large portfolio of projects in advanced stages of commissioning will offset slippages in some planned projects. Delays in capacity addition over the past 3-4 years have impacted stock performance. Capacity addition in HFY2 stands at just 660MW, entailing a meaningful bunchingup in 2HFY2. In FY3, given the execution stages of various projects, particularly Rihand and Vindhyachal, we expect the capacity addition of 5GW to be more evenly spread. While the bunching-up in 2HFY2 exposes to execution delays, we believe that capacity addition on a rolling 4-quarter basis will be closer to ~5GW per year. This should lead to a pick-up in earnings growth momentum. to commission 9.2GW in FY2/3 as per CEA Quarterly capacity addition by (GW) Vallur (TNEB JV) Simhadri 660 Sipat Jhajjar Vallur (TNEB JV) 660 Sipat Mauda Jhajjar Vindhyachal Rihand Bongaigaon Rihand Vindhyachal Mauda Vallur Expn (Ph II) Oct- Nov- Nov- Nov- Feb-2 Mar-2 Mar-2 Mar-2 Mar-2 Apr-2 Jul-2 Oct-2 Oct-2 Nov-2 Dec-2 Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q FY FY2 FY3 Large portfolio of projects in advanced stages of commissioning V Source: Company/CEA Expect bunching up of capacity additions to drive earnings growth 3 October 20 2

3 Capacity addition to accelerate, given substantial progress on 4.GW of capacity under construction (GW) 78 Installed capacity Grow th (% YoY) CAGR of 3% CAGR of 7% CAGR of 3% FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY9 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY0 FY FY2E FY3E FY4E Source: Company/MOSL The July 20 review of thermal capacity addition by CEA expects capacity addition of 9.2GW by the end of FY3 has established a more robust project implementation and monitoring mechanism at the corporate office, setting up of land acquisition cell, etc Meaningful execution delays, but there exist comforting factors According to the progress report submitted to CEA, as at March 20, has incurred 64% of the total capex on planned capacity addition in FY2. This is comforting, given that 0-5% of the capex consisting of retention money, ancillaries, etc is generally incurred post project commissioning. BTG awards by over the past 3.5 years (excluding the recent bulk tender) have been just ~3.5GW; a large part of the 4.GW under construction today entered the construction phase in FY07/FY08. Given the time periods in project execution (post factoring in delays) and the current status of project implementation, we expect a large part of these capacities to be commissioned by mid FY4. The July 20 review of thermal capacity addition by CEA expects capacity addition of 9.2GW by the end of FY3. This again provides comfort on the expected pace of capacity additions. Project execution period elongated in FY07-09, given the sizeable number of projects entering the construction phase. This led to shortages in terms of capacities available with vendors, availability of skilled manpower, etc. Over the past few years, there has been a meaningful augmentation of manufacturing and execution capabilities in the system. This has also coincided with slower progress on several of the projects under construction and limited pace of new contract awards, particularly by the private IPPs. During this period, has also established a more robust project implementation and monitoring mechanism, including delegation of decision making at sites, establishment of a project monitoring center at the corporate office, setting up of land acquisition cell, etc. These factors should aid project execution for strong players like going forward and result in much more shortened time period. 3 October 20 3

4 Status of physical projects planned for commissioning in FY2 Project Capacity Cost Incurred (FY) (MW) (INR b) (INR b) (%) Sipat St-, Vallur Ph-, Jhajjar Simhadri Ph-II, Mauda Unit FY2 Target 4, GW of 4.GW under construction projects are brownfield expansions Brownfield projects: Capacity under construction Project Capacity (MW) Sipat-I,980 Simhadri-II Indira Gandhi Jhajjar JV,000 Nabinagar-JV,000 Rihand-III,000 Vindhyachal-IV,000 Muzzafarpur-II JV 390 Total Under construction brown filed projects 6,870 has GW of brownfield projects (possible expansions) Brownfield projects: Possible expansions Project Capacity (MW) North Karanpura,980 Tanda II,320 Badarpur IV,050 Kawas II,300 Gandhar II,300 Talcher -III,320 Mauda- II,320 Vindhyachal- V Singrauli III Total possible brown field projects 0,590 Source: Company/MOSL 3 October 20 4

5 BTG awards of 5-8GW in FY2 an important milestone Need to shorten execution time to maintain growth momentum During FY2, targets to award BTG contracts for 5-8GW of capacity, including bulk tender of 660MW (9 units) and 800MW (9 units). has also taken various initiatives to shorten the execution period for new project awards. There also exist possibilities to revive certain brownfiled expansion projects, which can expedite overall project execution. BTG awards are critical and delays beyond FY2 will meaningfully impact the 2th Plan capacity addition targets ~25GW ~5GW of projects impacted by CEPI can be can be set up under brown field expansion Targets award of 5-8GW BTG contracts in FY2; attempting to shorten execution period Projects under construction of 4.GW will be largely commissioned by FY4; new BTG awards in FY2 will contribute to capacity additions only from end-fy5/fy. This will lead to slowdown in the pace of capacity addition in the interim period. While the gap can be partly bridged through gas-based capacities, this is contingent on gas allocations. During FY2, targets to award BTG contracts for 5-8GW of capacity, including bulk tender of 660MW (9 units) and 800MW (9 units). It has already opened boiler and turbine bids for 800MW; boiler bids for 660MW are sub judice. These awards are critical and delays beyond FY2 will meaningfully impact the 2th Plan capacity addition targets. Successful project awards will improve visibility for 2th Plan capacity addition targets at ~25GW. has also taken various initiatives to shorten the execution period for new project awards. We understand that the execution time for the 800MW bulk tender was months v/s ~55 months in certain earlier tenders by private IPPs. Further, as part of its community development initiatives, undertakes skill set development programs for the local population at the time of land acquisition, which partly addresses the issue of manpower availability. There also exist possibilities to revive certain brownfiled expansion projects, some of which were impacted by the Comprehensive Environment Pollution Index. We understand that ~5GW of additional projects can be set up through this route, including at Vinhdyachal, Unchahar, Simhadri, Ramagundam, etc. The advantage will be availability of land and certain clearances, which can expedite project execution. Trend in capacity under construction (GW): Several projects entered construction phase in 2007 FY2 includes 7.5GW projects (comprising of 9 units of 660MW, 9 units of 800MW and 5GW additional projects) FY07 FY08 FY09 FY0 FY FY2E Source: Company/MOSL 3 October 20 5

6 Bulk tendering basis: 660MW sets Project/State Sets Capacity (No) (MW) Solapur 2.0,320 Meja 2.0,320 Nabinagar 3.0,980 Mauda-ll 2.0,320 Total-I 9.0 5,940 Bulk tendering basis: 800MW sets Project/State Sets Capacity (No) (MW) Kudgi-I, Karnataka 3.0 2,400 Darlipali-I, Orissa 2.0,600 Lara-I, Chattisgarh 2.0,600 Gajmara 2.0,600 Total-I 9.0 7,200 Declining trend of capacity addition in FY5, given delays in BTG awards (GW) FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY9 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY0 FY FY2E FY3E FY4E FY5E Source: Company/MOSL 3 October 20 6

7 Fuel supply: near term issues one-off; LT sourcing strategy in place Captive mines, inland water transportation, coal import and most importantly PPA structure to help protect returns has assured coal linkages for ~90% of installed capacity and is better placed to address incremental fuel requirement given captive mines, PPA structure with fuel cost pass through (allowing usage of imported coal blending), addressing logistics challenges, etc. Dependence on CIL for incremental quantity is limited. has been given in-principal approval for additional 5 coal blocks by Ministry of Coal to meet fuel requirement for its upcoming project totaling to 7.7GW. This is in addition to 7 blocks allocated earlier, with production potential of 47m tons (~0GW capacity). Our interactions with management and Ministry of Power indicate possibilities of restoration of de-allocated mines. has also commenced work on developing in-land water transportation system, which would initially cater to Farakka/Kahalgaon projects but would be later on routed to cater to its other major projects in East/North. Facilities catering to both these projects would be operational in next 8 months. Near term Fuel supply issues: structural or one-off? Over the past 6 months, has been facing lower generation at few of its projects and this is perceived to be arising out of "fuel scarcity/supply" issues, which in our view is inappropriate. Total capacity impacted stands at ~4.5GW, accounting for 3% of installed capacity and lower percentage of regulated equity (old projects). Thus, the impact on profitability is relatively much lower. Most of these projects are commissioned before FY09 and thus, have Fuel Supply Agreement signed for 90% operating rates, except for Farakka/Kahalgaon. Infact, all units operated at 80%+ in HFY2. Farakka/Kahalgaon FSA has been under negotiation, given the logistics issue and that has partially impacted operating rates. We believe that ash-pond (Korba), Telangana issues (Ramagundum, Simhadri), Water supply issue (Badarpur), Kahalgaon (rail 'roko') are "one-off "issues, which would correct in the medium term. For instance, in July 20, PLF at Talcher was impacted given the Orissa Pollution Control Board issue, and since then the PLF has improved from 58% to 74%. Andhra Pradesh government has now adopted "zero-tolerance" policy on Telangala and thus active government intervention should result in a resolution of the strike at Singareni Coal Mines. Also, the issue of water supply at Badarpur project is due to temporary closure of Agra Canal, leading to lower generation. Similarly, has already started taking corrective action towards repair and augmenting ash-pond for its Korba project. Media Article: Telangana: AP govt adopts zero tolerance policy Fresh from his talks with senior figures in the central government, Chief Minister Kiran Kumar Reddy on Monday adopted a policy of 'zero tolerance' towards Telangana agitators trying to disrupt public services. At the same time, he plugged his familiar line that the agitators were causing difficulties to their own people, including loss of jobs to Telangana youth and disrupting of the academic schedule of its students. Putting into practice the 'get tough' diktat from the Centre, the government moved to break the strike in the APSRTC and persuaded one section of the striking union to call off the strike. The strike breakers were induced with juicy welcome-back sops including pay for the strike period and a festival advance. This only triggered rifts within the RTC union and stung the Telangana Joint Action Committee (TJAC) into swearing defiance against the government's strong-arm tactics. At a press conference on Monday, the Chief Minister made pointed mention of the jobs Telangana youth stand to lose if the strike continued. 3 October 20 7

8 He said the government has decided to notify recruitment to. lakh jobs in various departments by the end of this year. "The finance department has already gave clearance for 30,000 jobs. Around 4.5 lakh students are eagerly waiting to take the Group-2 exam. All this will be affected by the stir," he said. He also leveraged the disquiet among parents over dislocated academic schedules in schools and colleges. Along with the soft spiel came tough talk. "Stern action will be taken against breakers of law and order, however big they may be. Those who burn buses will be put behind bars," he said. In concert with the tough talk by the government, APSRTC sent more buses into the streets of Hyderabad under police escort. Senior police officials convened press conferences to threaten tough laws against agitators intending to derail train services from Wednesday. Groups of parents gathered at the gates of colleges and schools and berated Telangana agitators for disrupting their children's studies. TJAC denounced these protests as orchestrated maneouvres and vowed to intensify the Sakala Janula Samme from Tuesday. TJAC leaders suspect that the Congress high command directed Kiran Kumar Reddy to break the strike ahead of K Chandrasekhar Rao's visit to Delhi on Tuesday. As a signal of defiance, TJAC, which had earlier decided to exempt educational institutions from the strike, decided to go ahead with its fiat of forcing closure of schools until October 5. HFY2 project PLF for all coal station at 80% or above, except for Farakka/Kahalgaon Major station average PLF for HFY2 continued to be robust at 80%+, despite heavy monsoon period, which partially impacted operating rates of 64 6 major thermal projects in 2QFY2 Simhadri Sipat Ramagundem Rihand Talcher Dadri Unchahar Vindhyachal Singrauli Badarpur Korba Tanda Talcher Farakka Kahalgaon Availability and PLF - fixed charge recovery linked to availability ensures at least base RoE has consistently maintained its availability 00% PAF PLF above 85%, and lower PLF could be a function of 95% multiple factors including 90% forced outages. Recovery of fixed charge to availability 85% thus insulates from any under recovery risks 80% QFY08 2QFY08 3QFY08 4QFY08 QFY09 2QFY09 3QFY09 4QFY09 QFY0 2QFY0 3QFY0 4QFY0 QFY 2QFY 3QFY 4QFY QFY2 Source: Company/CEA 3 October 20 8

9 Region-wise trend in PLF (%) PLFs of 2.2GW plants located in the eastern region are impacted (HFY2 PLF Northern Region Western Region Southern Region Eastern Region at 75% for these plants v/s 80 89% for the rest of ), 70 given the logistical 60 constraints, impacting 50 project returns Aug-0 Sep-0 Nov-0 Dec-0 Jan- Feb- Mar- May- Jun- Jul- Aug- Sep- Source: Company/MOSL All India: Coal based projects PLF impacted Generation for coal based project is generally lower during monsoon season and PLFs being as low as 60%. Given the up-tick in Coal Generation (BUs) PLF (%) demand from 2H, we believe even high cost projects (like Farakka/ Kahalgaon) would also get higher despatch, improving Aug Sep-09 4 Oct Nov Dec Jan-0 48 Feb-0 45 Mar-0 5 Apr-0 47 May-0 47 Jun-0 45 Jul-0 44 Aug-0 43 Sep Nov-0 45 Dec-0 49 Jan- 53 Feb- 48 Mar May- 52 Jun- 48 Jul- 49 Aug- 45 Sep- 42 PLFs for projects Source: Company/MOSL Hydro generation remains strong: Contributes 53% of incremental generation in HFY2 YTDFY2 YTDFY Generation PLF (%) Generation PLF (%) Thermal-Coal & Lignite Thermal-Gas Nuclear Hydro Bhutan IMP 4.0 NA 4. NA Total* Source: Company/MOSL 3 October 20 9

10 PLF for coal projects impacted: Structural or One-off PLF of coal plants (%) generation of coal plants (BUs) Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug Ash handling issue for Talcher and Korba plant resolved in short period of time A) Talcher TPP (3,000MW) B] Korba TPP (2,600MW) Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- A] Farakka TPP (2,00MW) B] Kahalgaon TPP (2,340M W) 20 PLF impacted due to logistics, FSA negotiations 00 PLF impacted due to logistics, FSA negotiations Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- D] Badarpur TPP (705MW) E] Ramagundum TPP (2,600MW) 00 Water supply constrained due to temporary closure of agra canal 25 Issue of low er coal due to SCCL strike ow ing to telangana issue Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-0 Apr-0 Jun-0 Aug-0 Dec-0 Feb- Jun- Aug- 3 October 20 0

11 Efforts aimed at securing LT fuel supply 's LT fuel sourcing strategy includes () addressing the logistical challenges for plants in the eastern region by using inland waterways for large scale coal transportation, and (2) ramping up production from captive mines. For captive mining, the management seemed hopeful of the revocation of mine deallocation, given the substantial progress achieved. has already appointed the Mine Developer and Operator (MDO) for PB and Talaipalli mines. It has received stage- environment clearance for Kerandari and Chatti Bariatu mines. Dulanga mine has been brought out of the 'No-Go' area classification. The company targets production of 2.3m tons in FY3, growing to 47m tons by FY7. The de-allocated mines contribute 3m tons of production; even in a scenario of de-allocation, captive production of 35m tons is expected by FY7. Coal ministry had given in-principle approval for allotment of five coal blocks through government dispensation route to 's four power projects - MW in Rai Bareilly, UP;,600 MW at Kudgi in Karnataka;,600 MW at Gajmara in Orissa and 3,960 MW at Barethi in Madhya Pradesh. Thus, a very large part of the fuel requirement for the incremental capacity commissioning in the 2th Plan will be met through captive mines. Using inland waterways is not something new for for coal transportation, as it has already been using the navigation route for transportation of equipments in the past. The company has already awarded the contract to Jindal-IJF to set up the transport system including facilities for loading, unloading, barges, etc, which will aid large scale coal transportation. The facilities are expected to be operational over the next 8 months, and will address one of the key logistics challenges for. Currently, PLFs of 2.2GW plants located in the eastern region are impacted (HFY2 PLF at 85% for these plants v/s 89% for the rest of ), given logistical constraints, impacting project returns. Of the incremental 0m tons requirement till FY7, sourcing from captive mines will be 45m-50m tons. Any major delays in ramp-up could be a key risk to incremental capacity addition Captive mines have an important role in securing supplies MDO Coal Peak Capacity Geological Coal Appointment Production (m tons) Reserves (m tons) PB Mine Dec 200 Sept 2 5,436 Chatti Bariatu Aug 20 March Kerandari Feb 202 Sept Talaipalli Sept 3 8,267 Source: Company 's Fuel Basket (FY2) Coal (m tons) FY2 Remarks Particulars FY FY2E Coal India (ACQ) SCCL Linkage Do - Imports (Actual) For FY2, 4m tons actual as GCV is higher Bi-lateral procurement Agreement signed with SCCL and ECL E-auction If any required Total Sufficient for 92% availability Source: Company 3 October 20

12 Diversifying fuel mix Share of imported coal at 5% (v/s 3% in FY07) Spot gas procurement at 25% v/s Nil in FY07 Imported coal (m tons) % to Total consumption Gas Supply R-LNG FY07 FY08 FY09 FY0 FY FY07 FY08 FY09 FY0 FY has increased the share of imported coal / spot gas procurement over the last four years Source: Company/CEA 3 October 20 2

13 Base returns protected despite fuel availability constraints Capacity incentives to offset decline in generation incentives Till FY, 's incentive profile has been largely skewed towards generationlinked incentives. This is likely to change, with increasing contribution from capacity-based incentives. Besides, higher contribution from merchant profit (300MW) and mining would add to incentives. We expect to deliver net profit CAGR of % over FY-3. Buy with a target price of INR229. will have new streams of incentives / incremental earnings in the form of merchant profits, return on coal mining, etc Increase in capacity-based incentives, in our opinion, will offset the possible decline in generation-linked incentives Efficiency-based incentives to drive earnings, maintain returns Currently, 's efficiency incentives can be largely classified as: () generation based (heat rate, unscheduled interchange income, plant availability factor), and (2) capacity based (interest on working capital, savings on cost of operations and maintenance, etc). Going forward, will also have new streams of incentives / incremental earnings in the form of merchant profits, return on coal mining, etc. Till FY, 's incentive profile has been largely skewed towards generationlinked incentives, supported by higher operating factors. There has been negligible contribution from capacity-based incentives. Going forward, we expect O&M incentives to go up significantly as Man/MW ratio declines from the current 0.9 to 0.5 over FY-7 (given accelerated pace of capacity commissioning). This will be a very meaningful addition, and we calculate the possible O&M incentives at INR8b-9b in FY5 v/s negligible currently. Similarly, increased contribution from merchant profit (300MW) and mining would add to incentives. These combined with increase in capacity-based incentives, in our opinion, will offset the possible decline in generation-linked incentives [given lower PLFs, impact on thermal efficiency, and lower UI earnings]. Our earnings estimates for FY2/3 factor in lower operating rates of 82-85% for 's new capacities commissioned post March This lowers overall RoE v/s old projects, with 90% ACQ coal availability contracts. Incentive composition to be more broadbased (paise/unit) Generation based Capacity based New streams Till FY, 's incentive 4 profile has been largely skewed towards generation- 0 0 linked incentives, supported by higher operating factors FY04 FY FY06 FY07 FY08 FY09 FY0 FY FY2E FY3E FY4E FY5E Source: Company/CEA 3 October 20 3

14 Buy with a target price of INR229 We expect to deliver net profit CAGR of % over FY-3. We estimate net profit at INR90.7b for FY2 (up 4%) and INR07.3b for FY3 (up 8%), translating into an EPS of INR and INR3, respectively. The stock trades at 5.8x FY2E and 3.4x FY3E EPS, and at 2x FY2E and.8x FY3E BV. Buy with a target price of INR229. Financials and valuations Year Net sales PAT * EPS* EPS P/E P/BV ROE ROCE EV/ EV/ End * (INR M) (INR M) (INR) GR. (%) (X) (X) (%) (%) Sales EBITDA 03/0A 463,226 84, /A 548,740 79, /2E 623,700 90, /3E 706,7 07, * Pre Exceptional Earnings; We have factored in ROE gross-up based on MAT wef FY onwards Trend in quarterly earnings growth (YoY, %) Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q 2Q 3Q 4Q Q FY05 FY06 FY07 FY08 FY09 FY0 FY FY2E Source: Company/CEA 3 October 20 4

15 Financials and Valuation Income Statement (INR Million) Y/E March E 203E Net Sales 370,90 49, , , , ,7 Change (%) Other operating income 0 0 6, 5,00 Total Expenditure 255,453 34,76 339,22 422,892 47, ,93 % of Sales EBITDA 5,457 05,062 24,04 25,848 58,68 75,880 Margin (%) Depreciation 2,385 23,645 26,50 24,857 29,476 39,282 EBIT 94,072 8,47 97,603 00,992 29,42 36,598 Interest 7,98 20,229 8,089 2,49 8,7 24,468 Other Income - Rec. 26,458 3,723 29,34 40,995 25,45 27,39 Profit before Tax 02,549 92,9 08,855 20,496 35,876 39,520 Current Tax 28,40,582 2,573 29,470 36,29 32,239 Deferred Tax Tax Rate (%) Reported PAT 74,48 8,330 87,282 9,025 99,655 07,279 EO Exp/(Inc) -, ,742,445 8,947 0 Adjusted PAT 75,688 80,720 84,540 79,580 90,708 07,279 Change (%) Margin (%) Balance Sheet (INR Million) Y/E March E 203E Equity Share Capital 82,455 82,455 82,455 82,455 82,455 82,455 Total Reserves 443,93 49,246 54,79 596, ,7 72,023 Net Worth 526, ,70 624,74 678, ,57 794,478 Deferred liabilities Total Loans 285, , , , ,987 67,084 Capital Employed 84,58 935,628,0,692,2,754,284,588,47,59 Gross Block 533, , ,50 727,552,005,345,280,045 Less: Accum. Deprn. 272, ,53 320, ,92 364, ,950 Net Fixed Assets 260, , ,63 392, , ,095 Capital WIP 224, ,049 32, , , ,895 Investments 52,672 39,835 48,07 23,448 9,062 5,893 Curr. Assets 255, , , , , ,70 Inventory 26,757 32,434 33,477 36,39 42,79 48,405 Account Receivables 29,827 35,842 66,54 79,243 76,895 67,767 Cash and Bank Balance 49,332 2,7 44,595,853 5,007 34,800 Others 49,572 78,26 62,960 76,48 86,933 9,738 Curr. Liability & Prov. 79,299 06,886 07,58 30,729 83,344 6,002 Account Payables 55,483 74,39 76,876 03,205 54,25 35,26 Provisions 23,8 32,495 30,705 27,524 29,29 30,875 Net Current Assets 76,89 202,367 99, ,239 74,20 76,708 Appl. of Funds 84,58 935,628,0,692,2,753,284,588,47,59 E: MOSL Estimates 3 October 20 5

16 Financials and Valuation Ratios Y/E March E 203E Basic (INR) EPS (Adjusted) Cash EPS BV/Share DPS Payout (%) Valuation (x) P/E Cash P/E P/BV EV/Sales EV/EBITDA Return Ratios (%) RoE RoCE Working Capital Ratios Fixed Asset Turnover (x) Asset Turnover (x) Debtor (Days) Inventory (Days) Working Capital Turnover (Days) Leverage Ratio (x) Current Ratio Interest Cover Ratio Debt/Equity Cash Flow Statement (INR Million) Y/E March E 203E OP/(Loss) before Tax 02,549 92,9 08,855 20,496 35,876 39,520 Interest 7,98 20,229 8,089 2,49 8,7 24,468 Depreciation 2,385 23,645 26,50 24,857 29,476 39,282 Direct Taxes Paid -28,40 -,582-2,573-29,470-36,29-32,239 (Inc)/Dec in WC -8,439-2,794 -,330-5,405 38,83-8,705 CF from Operations 05,075 2,409 5,542 3,969 86,033 52,327 CF fr. Oper. incl EO Exp. 05,075 2,409 5,542 3,969 86,033 52,327 (inc)/dec in FA -82,798-29, -0,965-20,74-245, ,956 (Pur)/Sale of Investments -8,27-2,837 8,236-24,623-4,386-3,9 CF from Investments -9,069-4,953-93,729-45, ,2-230,25 (Inc)/Dec in Debt 27,062 73,772 32,292 53,92 97,66 27,097 Dividend Paid -23,954-24,666-26,056-29,438-32,230-34,695 Interest -7,98-20,229-8,089-2,49-8,7-24,468 Others 7,053 4,05-28,08 27,642 6,58-6,342 CF from Fin. Activity 2,80 42,928-39,934 30,625 53,233 6,59 Inc/Dec of Cash,86 3,384-8,2 7,258-0,846 -,207 Add: Beginning Balance 33,46 49,332 2,7 44,595,853 5,007 Closing Balance 49,332 2,7 44,595,853 5,007 34,800 E: MOSL Estimates 3 October 20

17 Motilal Oswal Company Gallery

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