India Power Monthly Review Powergrid OFS Update

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1 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 =S Institutional Equity Research INDIA POWER Monthly Review - September 213 Sector Underweight September 3, 213 Inside: Story of the month: Powergrid OFS Update Top news broadcast during the month. All-India generation performance. Deficit numbers of the month India Power: Month s valuation & stock performance India Power Monthly Review Powergrid OFS Update PGCIL OFS Update: After its initial proposal to dilute 15% of its existing paid up capital to meet the equity requirements for the increased capex target for the 12th plan which was increased from Rs1trillion to Rs1.1 trillion, Power Grid Corporation of India (PGCIL) has sought the CCEA approval for the Follow on Public Offer (FPO) to dilute 17% of its existing paid up capital. With the increase in the capex targets we revise our capitalisation from Rs188bn to Rs194.5bn for F14e. Of this the company has already capitalised Rs29.5bn in 1QF14. The company, over the past two years, has capitalised over 6% of its achieved capitalisation in the last two quarters of the financial year, which makes us believe that capitalisation this fiscal would again be backended, due to better than expected rainfall in most parts of the country. We estimate PGCIL earnings to grow at a CAGR of 18.3% over F13-15e backed by higher commissioning of assets worth Rs194.5bn in F14e & Rs191bn in F15e. We maintain our Hold recommendation with a target of Rs17. At the CMP of Rs98, the stock is trading at a 1.5x/1.3x F14e/F15e BV standalone estimates. Based on our average valuation methodology, we revise the discount the company that we assign to PGCIL vis-à-vis NTPC valuations from 2% to 1% due to its stable & robust business model. All India generation up 6.7% YoY led by impressive growth in hydel generation; Overall thermal generation was flat: In Aug 213, all India generation was up 6.7% YoY to 79.46bn units, while there was a marginal decline of 1.2% MoM. Monitored capacity increased by 9MW to199gw. Generation from hydel capacities recorded an impressive 36% YoY growth and 21% MoM growth to 19.21bn units led by improvement in PLF of state hydel capacities by 23bps to 56% on account of above average rainfall recorded throughout the country. Generation from coal based capacities continued its decline by falling 7.5% MoM. PLF s of both central and state utilities continued its downward journey as PLF s continued to drop. There was spurt in generation from nuclear capacities up 13% YoY as they continue to operate at higher PLF s vis-à-vis national average. PLFs of gas based capacities fell by 44.2% YoY to 3.25bn units. This was primarily due to unavailability of gas required for generation. PLF s of private gas capacities stood at 15%, lower than state and central capacities that are operating at higher PLF s of 28% & 24% respectively. Indonesia s coal reference price down 8.5% MoM in September 213: The Newcastle coal index continued its downward trend falling for the 22nd consecutive month to US$77.2 per tonne, down 8.5% YoY. The Richard s bay index fell by a sharper 15.6% YoY at US$71.4 per tonne. The rupee after depreciating sharply 2% YoY and 9.6% MoM in the month of August 213, arrested its fall and recovered 5.% MoM. During the month, the rupee recovered 9.33% from all time low levels of Rs We continue to expect coal prices to remain soft, going forward due to weak demand combined with inventory that continues to remain at elevated levels. Please refer to our disclaimer given at the last page. 1

2 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 Powergrid Corporation Ltd - OFS Update After its initial proposal to dilute 15% of its existing paid up capital to meet the equity requirements for the increased capex target for the 12 th plan which was increased from Rs1trillion to Rs1.1 trillion, Power Grid Corporation of India (PGCIL) sought the CCEA approval for Follow on Public Offer (FPO) to dilute 17% or 787m equity shares of Rs1 each consisting which comprises of - (a) Fresh issue of 61.8m shares (13% of existing paid up capital); (b) Disinvestment of 185.2m equity shares (4% of existing paid up capital) by the President of India. We have incorporated the dilution at INR9/share (that would fetch PGCIL Rs48.2bn). XII Plan targets revised upwards Higher capex spend increases equity requirement - PGCIL has revised its XIIth Plan capex target from Rs1 trillion to INR1.1trillion of which ~Rs2bn has already been spent in F13. The addition of Rs1bn of additional capex is on account of green energy corridors, intra-state projects, transnational interconnections, projects assigned by GoI and additional competitive bid based projects that the company plans to bid. Capex targets for the 12 th plan have been revised to INR221.5bn/224.5bn/ 225bn/225.5bn in F14e/15e/16e/17e respectively as against INR2bn each year planned earlier. This would increase the requirement of incremental equity of INR3bn over remaining plan period. As per the management, after this dilution the D/E is expected to reduce to 69/31. On-track to capitalise Rs194.5bn in F14e - With the increase in the capex targets we revise our capitalisation target from Rs188bn to Rs194.5bn for F14e. Of this the company has already capitalised Rs29.5bn in 1QF14. The company over the past two years has capitalised over 6% of its capitalisation in the last two quarters of the financial year, which makes us believe that capitalisation this fiscal will again be back-ended, due to a better than expected rainfall in most parts of the country in the current fiscal. Maintain Hold, TP revised to Rs17 - We estimate PGCIL earnings to grow at a CAGR of 18.3% over F13-15e backed by higher commissioning of assets worth Rs194.5bn in F14e & Rs191bn in F15e. Considering a regulated RoE of 18-19%, the stock is trading attractively at 1.3x F15e regulated equity. We maintain our HOLD recommendation with a target of Rs17. At the CMP of Rs98, the stock is trading at a 1.5x/1.3x F13e/F14e BV standalone estimates. Based on our average valuation methodology, we revise the discount the company that we assign to PGCIL vis-à-vis NTPC valuations from 2% to 1% due to its stable & robust business model. Mode Price Objective A. DCF Based Valuation 16 Rationale FCFE of Competitive periods till F2, with Cost of Terminal Growth rate 1% Comparative Valuation Mode and Multiple Multiple Applied Reccomended Multiple of NTPC B. 2-year Forward PE based Price C. 2-year Forward P/BV based Price D. 2-year Forward EV/EBITDA based Price Target Price (Average of A,B,C & D) 17 Source: SSLe 1% discount applied to SBICAP multiple of NTPC Please refer to our disclaimer given at the last page. 2

3 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 Income Statement (Stand Alone) Cash Flow Statement (Stand Alone) Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Y/E Mar (Rs mn) F 12 F 13p F 14e F 15e Net Sales 11, ,579 15,99 178,642 PBT 45,976 56,449 65,498 76,889 % Growth Depreciation 26,13 33,797 41,67 49,569 Operating expenses 16,53 18,214 17,155 19,443 Interest 17,771 23,467 31,976 38,975 EBIDTA 85,113 19, , ,199 Others (697) (2,562) % growth Operating CF 89, , ,8 165,432 Other Income & EO 6,21 5,956 6,136 6,233 Change in WC (15,59) 1,29 14,232 7,831 Depreciation 25,725 33,519 41,67 49,569 Direct taxes paid 9,618 1,72 12,772 14,993 EBIT 65,49 81,81 97, ,863 Others EBIT margin Net operating CF 64,25 11,46 14,54 158,27 Interest 19, , , ,974.6 Investing CF (158,343) (217,17) (228,417) (223,567) PBT 45,976 56,449 65,498 76,889 Other Investing Activities % Growth Tax provision 13,427 14,14 18,994 22,298 Free Cashflow (94,318) (16,647) (87,877) (65,297) PAT 32,55 42,345 46,53 54,591 Financing CF 8,886 99,898 88,928 64,953 % growth Dividend Net Change (13,432) (6,749) 1,51 (344) EPS (Rs) Opening Cash 36,81 23,369 16,62 17,671 BVPS (Rs) Closing Cash 23,369 16,62 17,671 17,326 Balance Sheet (Stand Alone) Key Ratios (Stand Alone) Y/E Mar (Rs mn) F 12 F 13 F 14e F 15e Y/E Mar F 12 F 13 F 14e F 15e Equity Cap 46,297 46,297 52,316 52,316 OPM Regulated Equity 171,26 239,88 273, ,551 ROCE Net worth 234, , , ,79 Interest coverage ratio(x) Total Debt 491,192 63,763 71, ,53 Debt/Equity(X) Net Deff Tax Liability & AAD 16,9 19,592 25,814 33,118 Debtors Days Deferred Revenue & Inc. from forex 27,763 37,176 37,176 37,176 Inventory Days Other Long term liabilites 14,317 9,899 11,618 13,743 Creditor Days Long Term Provisions 4,215 4,426 4,877 5,372 Dividend per share CL & Provisions Current Liabilities 13, ,42 159, ,281 Provisions 1,567 7,683 8,98 8,27 Valuation Ratios Total Liability 92,83 1,111,336 1,35,159 1,488,254 P/E Net Block 758, ,242 1,142,135 1,317,67 Price/BV Investments 11,12 9,642 9,642 9,642 EV/EBITDA Deferred Foreign currency asset 13,167 17,163 17,163 17,163 EV/Sales LT loans & advances 56,148 59,634 66,551 65,618 Market Cap/Sales CA Loans &Advances 63,299 62,654 69,668 78,764 P/CF per share Current Investments 1,833 1,833 1,833 1,833 CEPS(Rs) Inventory 4,43 5,515 4,649 5,434 Debtors 14,975 14,341 16,872 2,81 Cash & Bank 23,369 16,62 17,671 17,326 Du Pont Analysis ST loans & Advances 18,72 24,346 28,644 34,9 NPM Net Current Assets (5,411) (84,431) (97,611) (15,787) Asset Turnover (x) Misc. Exp. Leverage (x) Total Assets 92,83 1,111,336 1,35,159 1,488,254 ROE Source: Company, SSLe Please refer to our disclaimer given at the last page. 3

4 Jun-12 Jul-12 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 All India generation up 6.7% YoY led by impressive growth in hydel generation; Overall thermal generation was flat In Aug 213, all India generation was up 6.7% YoY to 79.46bn units, while there was a marginal decline of 1.2% MoM. Monitored capacity increased by 9MW to199gw. Generation from hydel capacities recorded an impressive 36% YoY growth and 21% MoM growth to 19.21bn units led by improvement in PLF of state hydel capacities by 23bps to 56% on account of above average rainfall recorded throughout the country. Generation from coal based capacities continued its decline by falling 7.5% MoM. PLF s of both central and state utilities continued its downward journey as PLF s continued to drop. There was spurt in generation from nuclear capacities up 13% YoY as they continue to operate at higher PLF s vis-à-vis national average. Going ahead, we expect generation from nuclear capacities to increase with the commissioning of the first unit of 1GW at Kudankulam. PLFs of gas based capacities fell by 44.2% YoY to 3.25bn units. This was primarily due to unavailability of gas required for generation. PLF s of private gas capacities stood at 15%, lower than state and central capacities that are operating at higher PLF s of 28% & 24% respectively. 3, 22,5 15, 7, ,5 4,5 32,5 24,5 16,5 8, ,8 4,5 4, Central Hydel Capacity Central Hydel PLF State Hydel Capacity State Hydel PLF IPP Thermal capacity IPP TH PLF Pvt. Utl. Thermal capacity Pvt. Utl. TH PLF Nuclear Capacity Nuclear PLF 75, 6, 45, 3, 15, ,5 6, 4,5 3, 1, , 37,5 25, 12, Central Thermal capacity Central Thermal PLF State Thermal capacity State Thermal PLF Central Gas capacity State Gas capacity Pvt. Gas Capacity Central Gas PLF State Gas PLF Pvt Gas PLF Central capacity State capacity Pvt. IPPS PLF Pvt. IPPS capacity Central PLF State PLF Source: CEA Please refer to our disclaimer given at the last page. 4

5 Sep-13 Jul-12 Apr May June July Aug Sept Oct Nov Dec Jan Feb Mar (Rs/kwh) (MU's) (x) (Amount spent on traded power in Rs bn) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec % INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 All India deficits at multi-year low In August 213, base deficit & peak deficit continued to be at lower levels of 4.1% and 4.5%, respectively, as demand for electricity failed to witness any pickup due to slowdown in the economy. All India PLF s continued to be steady at 54%. This was led primarily by the hydel sector where PLF s reported an increase of 11.5% MoM to 66.4%, due to the seasonality factor. PLF s of thermal capacities was down 43bps down MoM as demand for power fell for the second time during this fiscal. This we believe is primarily due to slowdown in off-take of power by the discom utilities combined with a slower than expected pickup in manufacturing sector. (16.) (12.) Base Deficit (2.) (16.) Peak deficit 28, 196, 184, (8.) (4.). (12.) (8.) (4.). 172, 16, 148, 136, Source: CEA All India Capacity All India PLF According to the CERC s monthly report on short term transaction, merchant demand on the exchanges was flat at.8% YoY but was up 14.7% MoM. However, merchant supply grew by 75.2% YoY and 16.9% MoM. We believe the financial position of discoms; a favourable monsoon and the slower pickup in industrial activity are a combination of factors that are continuing to impact discoms ability to purchase power from the short-term markets. Merchant prices moved up from 2.1/unit in July to average of Rs3.2/unit in Sept , 5, 4, 3, 2, 1, Average Daily max Daily min No Buy bids No of Sell offers Source: IEX Please refer to our disclaimer given at the last page. 5

6 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-13 Jul-12 Sep-13 (US $) (Tonnes) (USD/Tonne) (Rs/USD) Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-13 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-13 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-13 (US$/metric tonne) (USD$/metric tonne) (USD/tonne) INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 Indonesia s coal reference price down 8.5% MoM in September 213 The Newcastle coal index continued its downward trend falling for the 22nd consecutive month to US$77.2 per tonne, down 8.5% YoY. The Richard s bay index fell by a sharper 15.6% YoY at US$71.4 per tonne. The rupee after depreciating sharply 2% YoY and 9.6% MoM in the month of August 213, arrested its fall and recovered 5.% MoM. During the month, the rupee recovered 9.33% from all time low levels of Rs We continue to expect coal prices to remain soft, going forward due to weak demand combined with inventory that continues to remain at elevated levels. 18 Newcastle Coal Index 175. Richards Bay Coal Index 14 Indonesian Coal Reference Price Index , 2,5 2, 1,5 1, USD INR Source: Bloomberg Monthly FOB Gas Prices China Thermal Coal Inventory (Tonne) Qinhuangdao 5,8 Kcal Index (USD/Tonne) Please refer to our disclaimer given at the last page. 6

7 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Dec-1 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 (Rs Bn) (Rs Bn) (x) 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 1th 11th 12th Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 Dec-11 Jun-12 (Rs Bn) INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 9MW of monitored capacity added in August-13 According to the CEA, the country has added a monitored capacity of 9MW in August-213. Capacity Addition Apr'13-Aug'13 3, , 9, 72, 54, 36, Plan-wise Achievement 12% 1% 8% 6% 4% 3, 2,5 2, 1,5 1, Project Announcements 18, 2% 5 % Thermal Hydro Target Achievement % of Achievement Project Shelved Announced & Under Implementation 9 1 6, , 4, 3, 2, 1,.4.2. Source: CMIE, CEA All India Abandoned % of Electricity projects abandoned Investments at the end of quarter (A - B + C) Announced Under Implementation/Announced Please refer to our disclaimer given at the last page. 7

8 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 News-flow during the month Many Pvt Firms May Stay Away from UMPP Bidding. Click here RPower Approaches Regulator for Hiking Tilaiya Project Tariff. Click here. Pvt power firms cut output on coal scarcity, weak demand. Click here. Railways to start power trading in the open market within next two months. Click here. Torrent Power to buy natural gas from Petronet. Click here. Please refer to our disclaimer given at the last page. 8

9 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 Stock Performance India Power: Month's valuation & stock performance Price as of September 3, 213 Ticker Mkt Cap Price Book Value P/BV Exchange rate = (Rs bn) (INR) M/M YTD F14e F15e F14e F15e Nifty NIFTY INDEX 39,789 5, %.5% 2, , Sensex SENSEX INDEX 32,992 19, % 2.7% 8,312. 9, BSE POWER BSEPOWR INDEX 3,64 1, % -8.5% 1,37.2 1, PSU NTPC NTPC IN EQUITY 1, % 2.8% NHPC NHPC IN EQUITY % -4.4% Neyveli Lignite NLC IN EQUITY % -17.8% Powergrid Corporation PWGR IN EQUITY % -7.1% Mkt Cap 2, IPP'S Torrent Power TPW IN EQUITY % -49.7% JSW Energy JSW IN EQUITY % -22.% CESC CESC IN EQUITY % 24.3% Adani Power ADANI IN EQUITY % -23.6% Reliance Power RPWR IN EQUITY % 7.% KSK Energy KSK IN EQUITY % 13.7% Jaiprakash Power Ventures JPVL IN EQUITY % -41.% Tata Power TPWR IN EQUITY % -15.3% Indiabulls Power IBPOW IN EQUITY % -31.6% Mkt Cap Source: Bloomberg consensus estimates for Adani Power, Reliance Power, KSK Energy, Jaiprakash Power Ventures, Tata Power, Indiabulls Power,SSLe Recently Published Research Date Company/Industry Caption 31- Monthly Review All India generation up 5.2% YoY; 13- Neyveli Lignite - 1QF14 Review TANGEDCO commences clearing dues; Maintain BUY! 3- Power Grid Corporation - 1QF14 review Shocked!! But Maintain HOLD 2- NTPC - 1QF14 Review Top in a tough environment; Maintain BUY 1- NHPC - 1QF14 review Exactly in-line; Revise to BUY 3- Monthly Review Tariff approach paper: CERC kick starts the debate 27- JSW Energy - 1QF14 Review Rising rupee bites into PAT; Maintain BUY 26- CESC - 1QF14 review Other income falters, rest in line; Maintain BUY 26- Torrent Power - 1QF14 review In the red; Maintain HOLD 31- NHPC - 4QF13 review Grossing up impacts bottom-line; Revise to HOLD 3- Torrent Power - 4QF13 review Policy decision is the key ; Maintain HOLD 29- Power Grid Corporation - 4QF13 review New business = Growth, but with a gestation; Revise to HOLD Source: SSL, Company * above is not a exhaustive list Please refer to our disclaimer given at the last page. 9

10 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 Valuation Key Indicators NTPC PGCIL NHPC Neyveli Lignite Torrent Power CESC JSW Energy F 14e F 15e F 14e F 15e F 14e F 15e F 14e F 15e F 14e F 15e F 14e F 15e F 14e F 15e Net Sales (Rs mn) 736, , ,65 175,96 63,424 8,864 62,58 66,729 88,275 95,363 58,949 64,925 98,36 12,622 % growth EBITDA (Rs mn) 185,15 213, , ,517 42,224 57,43 2,85 27,154 1,497 12,351 15, , , ,761.3 % growth (2.1) (.6) 14.4 PAT (Rs mn) 11, ,842 46,419 54,257 26,415 37,42 14,444 17,588 1,382 3,25 6,817 7,823 7,888 1,381 EPS (Rs / share) EPS Growth (5.2) (64.1) (14.3) 32.5 P/E (x) P/BV (x) EV/EBITDA (x) EV/Sales RoNW RoCE Rating BUY HOLD BUY BUY HOLD BUY BUY Target Source: SSLe; Please refer to our disclaimer given at the last page. 1

11 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /1 Fax: sbicapresearch@sbicapsec.com KEY TO INVESTMENT RATINGS (w.e.f. February 213) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -1 to 15 percentage points); 3=SELL (expected to give absolute returns less then -1 percentage points) DISCLAIMER We, Rabindra Nath Nayak, M. Sc. (Math), CFA Lead Analyst, Alok Ramachandran, MMS (Finance) Jr. Analyst, and Aakash Fadia, MMS (Finance) Research Associate authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. 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12 INDIA POWER Monthly Review - September 213 Sector: Underweight September 3, 213 or solicitation of an offer to buy, purchase or subscribe to any securities this report shall not form the basis of or be relied upon in connection with any contract or commitment, whatsoever. This report does not solicit any action based on the material contained herein. It does not constitute a personal recommendation and does not take into account the specific investment objectives, financial situation/circumstances and the particular needs of any specific person who may receive this document. The securities discussed in this report may not be suitable for all the investors. SSL does not provide tax advice to its clients and you should independently evaluate the suitability of this report and all investors are strongly advised to seek professional consultation regarding any potential investment. Nothing in this report is intended by SBICAP Entities to be construed as legal, accounting or tax advice. 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