House of Debt - Credit Suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

21 October 2015

Asia Pacific/India

Equity Research

Regional Banks (Diversified Financials IN (Asia)/

Insurance IN (Asia)/Banks IN (Asia))

House of Debt SECTOR REVIEW

Still in the Woods

Figure 1: ~20-90% debt with House of Debt groups under high stress

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Lanco Group JaypeeGroup

GMR Group VideoconGroup

GVK Group Essar Group Adani Group RelianceADAG

JSW Group VedantaGroup

Low Stress Moderate Stress High Stress

Source: Company data, Credit Suisse

■ Degree of financial stress rising. Three years since our first 'House of

Debt' report, we find that despite attempts at deleveraging, financial stress at

these groups has intensified further. All the groups saw further rises in debt

in FY15, which is now up 7x over past eight years to ~12% of system loans.

Their interest cover dropped to 0.8x vs 0.9x in FY14 and debt/EBITDA rose

to 7x. Moreover, while their loans are still "standard" at the banks, in past

few weeks ~35-65% of debt of four groups (Jaypee, Lanco, Essar, and

GMR) has been downgraded to default by rating agencies.

■ De-leveraging hasn’t yielded results. Even as some groups cut back on

capex and looked to sell assets (JPA and GMR), their debt/EBITDA have

deteriorated further as the relatively better assets (contributing to as much

as 70% of EBITDA) were sold. Many of their projects now have 20-70% cost

overruns pushing their capital costs even above replacement costs. With a

significant (30-60%) capacity still under construction, a large (15-170% of

P&L interest) is still being capitalised.

■ High forex and commodity exposure weigh on the outlook. Most of the

groups have high exposure to commodities and downswing here adds to

their stress. Few groups (GVK, Adani and Lanco) also made debt-funded

international coal mine acquisitions. In addition, with 15-60% of their debt

being in foreign currency, their debt servicing outlook continues to be of

concern. We estimate that 20-90% of debt (aggregate US$48 bn, equivalent

to ~100% of system GNPAs) for some of these groups is now facing severe

stress. Including this, total stressed loans of Indian banks would be at ~17%.

We therefore continue to prefer consumer lenders over corporate lenders.

Our preferred banks are HDFC Bank and IndusInd. We remain cautious on

SBI (N), ICICI (N), PNB (U), and BOI (U).

Research Analysts

Ashish Gupta

91 22 6777 3895

[email protected]

Kush Shah

91 22 6777 3862

[email protected]

Prashant Kumar

91 22 6777 3942

[email protected]

21 October 2015

House of Debt 2

Focus table and charts Figure 2: Debt servicing ratios have deteriorated for most groups

Rs mn Gross Debt EBITDA EBIT PAT Int cover (x) Debt/EBITDA (x) Debt/equity (x)

FY13 FY14 FY15 FY15 FY15 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Adani Group 811,220 844,404 960,313 123,704 88,485 19,481 1.1 1.3 7.3 6.5 2.9 3.1

Essar Group* 986,448 999,497 1,014,646 83,709 28,360 (7,877) 0.3 0.8 11.1 8.5 4.6 3.9

GMR Group 408,249 450,459 479,766 25,546 7,421 (27,333) 0.4 0.2 16.0 16.8 5.4 7.1

GVK Group 269,640 310,268 339,332 7,397 341 (8,347) 0.5 0.0 21.7 32.0 7.4 12.2

Jaypee Group 636,541 729,792 751,637 61,383 44,511 (17,272) 0.8 0.6 11.1 11.9 6.9 7.1

JSW Group 461,180 530,278 581,715 130,257 88,015 31,461 2.0 1.9 4.1 4.2 1.8 1.8

Lanco Group 410,844 440,824 471,024 16,939 5,802 (20,367) 0.1 0.2 24.6 23.1 16.1 43.8

Reliance ADAG 1,135,439 1,218,940 1,249,564 165,027 112,611 45,435 1.2 1.3 7.4 6.8 1.2 1.1

Vedanta Group 996,108 1,012,272 1,033,404 231,954 107,601 (234,837) 1.6 1.3 1.8 2.3 0.4 0.7

Videocon Group 407,681 N/A 454,055 (1,127) (16,492) 51,196 (0.3) (0.3) 285.5 N.M. 8.4 3.8

Total 6,523,349 6,944,415 7,335,456 844,789 466,654 (168,461) 0.9 0.8 6.8 7.0 1.9 2.1

Source: Company data, CS *Essar P&L numbers are for FY14, debt is based on data available for FY15 rest assumed to be same as FY14

Figure 3: High share of debt rated as default Figure 4: Debt to market cap increased for all companies

65%

36%

37% 38%

0%

10%

20%

30%

40%

50%

60%

70%

-

100

200

300

400

500

600

Jaypee Essar GMR Lanco

Debt rated as default (Rs bn) % of total group debt

-

5.0

10.0

15.0

20.0

25.0

30.0

JaypeeInfra

AdaniPower

GMRInfra

Videocon JP Power GVKPower

JP Ass LancoInfra

FY14 FY15Debt to Market cap (x)

Source: Company data, CARE, ICRA, CRISIL, Credit Suisse Source: Company data, Credit Suisse

Figure 5: Large cost overruns in multiple projects Figure 6: Debt/EBITDA to rise post asset sales

0%

10%

20%

30%

40%

50%

60%

70%

80%% increase in project cost

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

JP Power Lanco Infra

FY15 Debt/Ebitda (x) FY15 Debt/Ebitda post asset sale (x)

Source: Company data, Sigma Insights, Credit Suisse Source: Company data, Credit Suisse

Figure 7: Debt levels haven't come down, despite asset sales Figure 8: Total stressed loans for Indian banks at ~17%

355

110

429 398

150

390

FY13 NetDebt

Asset sales FY15 NetDebt

Jun-13 NetDebt

Asset salesDec-14 NetDebt

GMR Infra Videocon

4.5%

5.4%

4.5%

2.2%

16.6%

Gross NPAs Restructured exSEBs

Stressed Houseof Debt

Steel & Others Total ProblemLoans

Total system problem loans (%)

Source: Company data, Credit Suisse Source: Company data, Credit Suisse

21 October 2015

House of Debt 3

House of Debt Degree of financial stress rising

Three years since our first 'House of Debt' report, we find that despite attempts at

deleveraging, financial stress at these groups has intensified further. All these groups saw

further rises in debt in FY15 (up 7x over the past eight years to ~12% of system loans).

The overall interest cover for the House of Debt companies is now at 0.8x vs 0.9x in FY14.

About 80% of the debt is with groups that had debt/EBITDA>6x in FY15 and nearly half

with groups where IC<1. While interest cover is less than 1, a large 15-170% of P&L

interest) is still being capitalised.

The rising stress on 'House of Debt' groups is visible in multiple instances of default over

the past year. For four of the groups (Jaypee, Lanco, Essar, and GMR), ~40-65% of group

debt has already been downgraded to default ("D" rating) by rating agencies. There have

been instances of visible default (Jaypee Group FCCB) and cases of some banks

classifying loans as NPAs (Essar Steel and GVK coal mines acquisition debt). Auditor

reports have also highlighted eight 'House of Debt' groups instances of delays in payments

on ~US$16 bn of loans (~15% of group's debt) overdue of more than 90 days.

De-leveraging hasn’t yielded results

Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their

debt/EBITDA have deteriorated further as the relatively better assets (contributing to as

much as 70% of EBITDA) were sold. In groups like GMR and Videocon the absolute level

of debt has continued to rise despite the asset sales on account of ongoing capex and

operational losses. Debt levels have continued to rise even as groups have significantly

cut back on capex (20-70%) due to a lack of funds. Lanco has seen negligible capex over

the past two years even with ~57% of its total planned power capacity still under

construction. The increase in debt has outpaced the rise in capex by a margin (120-

195%). Many of their projects now have 20-70% cost overruns pushing their capital costs

even above replacement costs. With a significant (30-60%) capacity still under

construction, a large (15-170% of P&L interest) is still being capitalised.

High forex and commodity exposure weigh on the

outlook

Most of the groups have high exposure to commodities and any downswing here adds to

their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international

coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency,

their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt

(aggregate US$48 bn, equiv to ~100% of system GNPAs) for some of these groups is now

facing severe stress. Including this, total stressed loans of Indian banks would be at ~17%.

We therefore continue to prefer consumer lenders over corporate lenders. Our preferred

banks are HDFC Bank and IndusInd. We remain cautious on SBI (N), ICICI (N), PNB (U),

and BOI (U).

Previous reports

House of Debt

House of Debt – Revisited

https://plus.csintra.net/ECP_S/app/container.html#loc=/MENU_RESEARCH_DETAIL?ldocid=991849241

https://plus.csintra.net/ECP_S/app/container.html#loc=/MENU_RESEARCH_DETAIL?ldocid=1021449371

2

1 O

cto

ber 2

015

Ho

us

e o

f De

bt

4

Valuation summary

Figure 9: Valuation Summary

CS

Rating

CMP Target +/- Mkt cap P/B (x) P/Adj B (x) EPS growth (%) P/E (x) ROE (%) P/PPoP (x)

Rs Rs (%) (US$ bn) FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E

Private Sector Banks

Axis O 507 654 29% 18.6 2.3 2.0 2.4 2.0 18 23 14 11 18 19 8 7

HDFC Bank O 1,096 1,240 13% 42.5 3.8 3.3 3.8 3.3 21 24 21 17 19 20 13 10

ICICI N 287 306 7% 25.7 1.8 1.6 2.0 1.8 21 17 12 11 16 17 9 7

Kotak Mahindra N 657 682 4% 18.5 3.6 3.1 3.6 3.1 9 39 30 22 13 15 21 18

Yes Bank N 770 811 5% 5.0 2.4 2.0 2.4 2.1 23 21 13 11 20 20 8 6

J&K Bank O 91 124 36% 0.7 0.7 0.6 0.8 0.7 51 23 6 5 12 13 3 2

IndusInd O 962 1,080 12% 8.8 3.3 2.9 3.3 2.9 24 26 23 18 18 17 15 11

Public Sector

Bank of Baroda N 175 162 -8% 6.2 0.9 0.8 1.3 1.0 48 27 8 6 12 14 4 3

Bank of India U 142 130 -8% 1.7 0.3 0.3 0.7 0.6 (10) 60 6 4 6 9 2 1

PNB U 137 110 -20% 4.1 0.6 0.6 1.1 0.9 37 23 6 5 11 12 2 2

SBI N 255 247 -3% 30.4 1.1 1.0 1.5 1.3 26 21 9 7 12 13 5 4

Union Bank O 174 205 18% 1.8 0.6 0.5 0.9 0.8 24 25 5 4 12 14 2 2

IOB U 37 29 -21% 1.0 0.3 0.3 0.9 0.8 nm 94 15 8 2 4 2 2

Non-bank fin

Bajaj Finance N 5,013 4,800 -4% 4.3 3.4 2.8 3.6 3.0 39 41 20 14 21 22

HDFC O 1,315 1,501 14% 32.0 6.1 5.4 6.1 5.4 17 19 30 25 22 23 20 17

IDFC O 60 82 37% 1.5 0.5 0.5 0.5 0.5 (15) 10 6 6 8 9 4 3

Indiabulls N 744 800 7% 5.0 3.4 2.9 3.5 3.0 17 28 13 10 28 30

LIC Housing Fin O 478 575 20% 3.7 2.6 2.2 2.7 2.3 23 38 14 10.1 20 23

L&T Finance U 69 50 -27% 1.8 1.4 1.2 2.1 13 32 15 12 9 11 6 5

M&M Finance O 235 310 32% 2.1 1.9 1.6 2.1 1.8 40 34 10 8 20 23

SCUF N 1,857 1,630 -12% 2.0 2.6 2.2 2.7 2.4 27 23 17 14 16 17

Shriram Transport N 968 970 0% 3.4 2.1 1.8 2.2 2.0 53 16 14 12 16 16 6 5

SKS Microfinance O 449 480 7% 0.9 4.4 3.4 4.4 3.4 36 37 22 16 22 24

Core Business

ICICI N 227 246 20.3 1.7 1.5 1.8 1.6 15 20 12 10 15 16 7 6

HDFC O 695 882 16.9 4.3 3.7 4.3 3.7 16 19 19 16 24 25 9 7

Source: Company data, Credit Suisse estimates

21 October 2015

House of Debt 5

Degree of financial stress rising The ten 'House of Debt' groups saw debt levels increase further +5% in FY15 and up 12%

since our last edition in 2013. Debt for these groups is now up 7x over the past eight years

(now equivalent to ~12% of system loans). The overall interest cover for the House of

Debt companies is now at 0.8x vs 0.9x in FY14. About 80% of the debt is with groups that

had debt/EBITDA>6x in FY15 and nearly half with groups where IC<1. While interest

cover is less than 1, a large 15-170% of P&L interest is still being capitalised.

The rising stress on 'House of Debt' groups is visible in multiple instances of default over

the past year. For four of the groups (Jaypee, Lanco, Essar, and GMR), ~40-65% of group

debt has already been downgraded to default ("D" rating) by rating agencies. There have

been instances of visible default (Jaypee Group FCCB) and cases of some banks

classifying loans as NPAs (Essar Steel and GVK coal mines acquisition debt). Auditor

reports have also highlighted eight 'House of Debt' groups instances of delays in payments

on ~US$16 bn of loans (~15% of group's debt) overdue of more than 90 days.

Figure 10: Debt levels for the 'House of Debt' companies have increased further

1,004

1,465

2,242

2,820

3,773

5,548

6,523 6,944

7,335

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Borrowings of 10 corporate groups (Rs bn)


Debt levels up 7x over the past eight years

The ten 'House of Debt' groups saw debt levels increase further +5% in FY15 and up 12%

since our last edition in 2013. The pace of debt increase has moderated in the past couple

of years as they have pulled back on capex and some groups have sold assets to bring

down debt levels.

The rise in debt of the top ten groups has now slowed to industry loan growth in FY15 and

the share of these groups debt with remains high at 12% of banking sector loans (27%

share of corporate loans).

21 October 2015

House of Debt 6

Figure 11: Loan growth has slowed to system levels… Figure 12: …share within system remained high at ~12%

0%

10%

20%

30%

40%

50%

60%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Top 10 groups loan growth (% yoy) Industry loan growth (% yoy)

6%

7%

8%

9%

10%

13%13%

12%12%

0%

2%

4%

6%

8%

10%

12%

14%

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Share in system loans (%)


Over the past two years, all the 'House of Debt' companies have seen their debt levels rise.

Figure 13: Debt levels for all the 'House of Debt' companies have increased in FY15

100

300

500

700

900

1,100

1,300

RelianceADAG

VedantaGroup

EssarGroup*

AdaniGroup

JaypeeGroup

JSW GroupGMR Group LancoGroup

VideoconGroup

GVK Group

FY13 FY14 FY15Gross Debt (Rs bn)


Adani (+14% YoY) and Videocon (+11% YoY) have seen the largest increases in debt

levels. Adani's debt increase has been on account of its acquisitions and is likely to go up

further in FY16 as it is consummates couple of other acquisitions currently under way.

Figure 14: Adani and Videocon have seen the largest increases in debt levels in FY15

14%

11%

10% 9%

7%7%

3%3%

2%2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

AdaniGroup

VideoconGroup

JSW Group GVK Group LancoGroup

GMR Group JaypeeGroup

RelianceADAG

VedantaGroup

EssarGroup*

Increase in gross debt in FY15


21 October 2015

House of Debt 7

Debt servicing ratios continue to worsen

While the increase in debt levels has slowed in FY15, these companies have seen

profitability weaken, as a result of which debt servicing ratios have deteriorated over the

past year. Interest cover for the group has fallen further to 0.8x, while debt/EBITDA is up

to ~7x and debt to equity has increased to 2.1x.

Figure 15: Debt servicing ratios have worsened for most groups

Rs mn Gross debt EBITDA EBIT PAT Int Cover (x) Debt/EBITDA (x) Debt/Equity (x)

FY13 FY14 FY15 FY15 FY15 FY15 FY14 FY15 FY14 FY15 FY14 FY15

Adani Group 811,220 844,404 960,313 123,704 88,485 19,481 1.1 1.3 7.3 6.5 2.9 3.1

Essar Group* 986,448 999,497 1,014,646 83,709 28,360 (7,877) 0.3 0.8 11.1 8.5 4.6 3.9

GMR Group 408,249 450,459 479,766 25,546 7,421 (27,333) 0.4 0.2 16.0 16.8 5.4 7.1

GVK Group 269,640 310,268 339,332 7,397 341 (8,347) 0.5 0.0 21.7 32.0 7.4 12.2

Jaypee Group 636,541 729,792 751,637 61,383 44,511 (17,272) 0.8 0.6 11.1 11.9 6.9 7.1

JSW Group 461,180 530,278 581,715 130,257 88,015 31,461 2.0 1.9 4.1 4.2 1.8 1.8

Lanco Group 410,844 440,824 471,024 16,939 5,802 (20,367) 0.1 0.2 24.6 23.1 16.1 43.8

Reliance ADAG 1,135,439 1,218,940 1,249,564 165,027 112,611 45,435 1.2 1.3 7.4 6.8 1.2 1.1

Vedanta Group 996,108 1,012,272 1,033,404 231,954 107,601 (234,837) 1.6 1.3 1.8 2.3 0.4 0.7

Videocon Group 407,681 N/A 454,055 (1,127) (16,492) 51,196 (0.3) (0.3) 285.5 N.M. 8.4 3.8

Total 6,523,349 6,944,415 7,335,456 844,789 466,654 (168,461) 0.9 0.8 6.8 7.0 1.9 2.1

Source: Company data, Credit Suisse; *Essar P&L numbers are for FY14, debt is based on data available for FY15 rest assumed to be same as

FY14

Overall interest cover for the 'House of Debt' companies is at 0.8x vs 0.9x in FY14 and

about half of the debt is with the groups that had IC<1 in FY15. While IC is less than 1, a

large amount of interest (15-170% of P&L interest) is being capitalised.

Figure 16: Interest cover declined for most companies… Figure 17: …despite a large portion of interest being

capitalised

(0.5)

-

0.5

1.0

1.5

2.0

2.5

FY14 FY15

171%

81% 79%

50%

34%29% 28%

22%17% 16% 16%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%% of int capitalised


21 October 2015

House of Debt 8

5-65% of some group's debt now downgraded to

default

Five 'House of Debt' groups have had multiple instances of default across various group

companies. Rating agencies have now assigned the default "D" rating to ~5-65% of debt

for these groups. For Jaypee Group, almost two-thirds of the group debt is now in the

default category including standalone parent company debt. Other groups have also seen

multiple defaults at the SPV level for power and road projects.

Figure 18: 5-65% of debt with 'House of Debt' companies in default

65%

36% 37% 38%

5%

0%

10%

20%

30%

40%

50%

60%

70%

-

100

200

300

400

500

600

Jaypee Essar GMR Lanco GVK

Debt rated as default (Rs bn) % of total group debt

Source: Company data, CARE, ICRA, CRISIL, Credit Suisse

Figure 19: Overall 73% of HoD company debt has been downgraded

Company name Previous rating Current rating Date of last rating

change

Adani Enterprises A A * 23-Mar-15

Adani Ports & SEZ AA- AA+ 3-Aug-15

Adani Power BBB BBB * 20-Feb-15

Essar Steel C D 19-May-15

Essar Oil A- A 3-Sep-15

Essar Shipping A BB 15-Jan-14

GMR Infra BBB BBB- 28-Sep-15

GVK Power & Infra A- BBB+ 12-Dec-13

JP Associates BB D 23-Jul-15

JP Power BBB- D 6-Oct-15

Jaypee Infratech BB D 25-Sep-15

JSW Steel AA AA 17-Oct-14

JSW Energy AA- AA- * 27-Oct-14

Lanco Infra BB D 23-Oct-12

Reliance Infra AA- A+ * 28-Mar-15

Reliance Power A- * A- 5-Feb-15

Reliance Comm A- A- 28-Dec-12

Reliance Capital AA+ AAA 13-Aug-13

Vedanta Resources BB- BB- * 9-Sep-15

Vedanta Ltd AA+ AA 6-Aug-15

Source: Company data, CARE, ICRA, CRISIL, Credit Suisse

21 October 2015

House of Debt 9

Multiple instances of visible default

Two-thirds of JPA Group debt in default category

JP Group has had multiple instances of default in 2015 with the pressure on debt servicing

intensifying. In Feb-15, JP Power defaulted on repayment of its US$200 mn FCCB and

had to renegotiate with the debtors on terms of repayment. JP Power's standalone rating

was downgraded to "D" from BBB+ at the start of 2015 on account of frequent delays in

servicing of term loans related to Nigrie projects (link) and also weak liquidity and

impending large repayment obligations for its corporate term loans. Rating agencies also

downgraded JP Associate's standalone debt to default (D rating) in Jul-15 (link).

Essar Steel classified as NPA by few banks

Essar Steel was classified as NPA during the 4Q15 results by HDFC Bank and was sold to

asset reconstruction companies after taking a 40% haircut. Similarly, Bank of India also

classified the account as NPA.

Among other 'House of Debt' companies, some of the exposures to Lanco and GVK have

also been classified as NPAs by the banks. Exposure to GVK Australian coal mine

"Hancock" has been classified as NPA by Syndicate Bank in its 1Q16 results.

Auditors highlight delays in debt servicing as well

Going through the annual reports available for 'House of Debt' companies, we find

instances where auditors have highlighted that the company has been in default for a

period of up to 360 days. According to their auditors report, eight of the ten 'House of Debt'

groups were in default last year. Total debt with these companies in default was at US$53

bn (~48% of total debt with the groups) of which US$37 bn were reported to be in default

for 0-90 days by the auditors. While some of these accounts are "restructured" at the

banks, most of them continue to be classified as "standard".

Figure 20: Auditors report also highlight default to lenders

Company (Rs mn) Total debt

(Rs bn)

Default during

the year

Default at BS

date Default days

Jun-15 -

Int cover (x)

Videocon* 460 18,204 - 1-88 days 0.7

Essar Oil 271 16,301 104 N/A 2.0

GMR Infra 480 12,452 2,240 N/A 0.4

Lanco Infra 400 N/A 10,352 N/A 0.2

Essar Ports 65 8,545 1,420 0-211 days 1.5

Essar Shipping 53 2,593 4,178 0-360 days (0.5)

R Infra# 258 3,708 3,016 0-90 days 0.8

Essar Steel# 363 N/A 6,295 0-141 days N/A

GVK Power 252 4,584 641 5-288 days 0.4

Adani Power 449 3,000 - 30-53 days 0.7

Jaypee Power 322 N/A 2,276 1-59 days 1.0

Jaypee Infra 91 N/A 1,623 1-88 days 1.1

Total 3,457 69,387 32,145

Total - overdue less than 90 days

2,466 49,957 16,595

Source: Company data, Credit Suisse; # - default is for associate or JV company; * year ending December

2014

http://www.careratings.com/upload/CompanyFiles/PR/JAIPRAKASH%20POWER%20VENTURES-10-06-2015.pdf

http://www.careratings.com/upload/CompanyFiles/PR/JAIPRAKASH%20ASSOCIATES%20LTD-07-23-2015.pdf

21 October 2015

House of Debt 10

De-leveraging hasn’t yielded results Even as some groups cut back on capex and looked to sell assets (JPA and GMR), their

debt/EBITDA have deteriorated further as the relatively better assets (contributing to as

much as 70% of EBITDA) were sold. In groups like GMR and Videocon the absolute level

of debt has continued to rise despite the asset sales on account of ongoing capex and

operational losses. Debt levels have continued to rise even as groups have significantly

cut back on capex (20-70%) due to a lack of funds. Lanco has seen negligible capex over

the past two years even with ~57% of its total planned power capacity still under

construction. The increase in debt has outpaced the rise in capex by a margin (120-

195%). Many of their projects now have 20-70% cost overruns pushing their capital costs

even above replacement costs. With a significant (30-60%) capacity still under

construction, a large (15-170% of P&L interest) is still being capitalised.

Debt/EBITDA levels have continued to rise

Primarily operational assets generating healthy EBITDA have found buyers and

consequently debt/EBITDA levels have deteriorated post sale.

Jaypee group has been most active in selling assets and will realize Rs220 bn from these

asset sales. It has sold 8.4MT of cement capacity for Rs50 bn and firmed up sale of

another 4.9MT for Rs54 bn. Its power venture is also selling 1,391 MW of hydro plants to

JSW Energy that will bring down debt levels by ~30%. However, as these plants

contributed 59% to FY15 EBIT and the debt/EBITDA would rise post sale. The group is

also in talks to sell its 500 MW Bina project, post which residual capacity PLF is just 35%.

Figure 21: JPVL debt/EBITDA to increase post asset sales Figure 22: JPVL remaining power projects facing

challenges

-

5

10

15

20

25

30

-

50

100

150

200

250

300

350

FY15A FY15 (ex-hydro assetssold)

FY15 (ex-hydro assetssold & Bina)

Debt (Rs bn) Debt/EBITDA (x)

Project Capacity

(MW)

Fuel

Source

Project

Cost

Remarks

Nigrie 1320 Coal 102,380 Downgraded to default

Bina I 500 Coal 34,700 Looking to sell the asset

Vishnu

Prayag

400 Hydro 16,698

Bara I 1980 Coal 138,700 33% cost overrun; FSA

challenges


Similar, Lanco has in Apr-15 completed sale of its 1,200 MW Udupi power plant to Adani

that will help reduce debt levels by 15%. However, as this project contributed 69% of its

FY15 EBITDA, post-sale debt/EBITDA would rise sharply. PLF for its residual operational

capacity is just 40%.

21 October 2015

House of Debt 11

Figure 23: Lanco's debt/EBITDA to increase on sale of

Udupi

Figure 24: Udupi contributed 69% of Lanco's FY15

EBITDA and 15% of debt

0

10

20

30

40

50

60

70

300

325

350

375

400

FY15A FY15 (ex-Udupi)

Debt Debt/EBITDA (x)

Udupi69%

Ex-Udupi31%

Lanco Infra - Contribution to FY15 EBITDA


Despite asset sales, debt levels have continued to rise

GMR and Videocon, even with large asset sales, have seen their debt levels go up. The

increase in debt has significantly outpaced capex and helped fund operational losses. In

case of GMR, most of the power projects left continue to face operational challenges and

would be hurdle to further de-leveraging through asset sales. Videocon as well, even post

the sale of its 10% stake in the Mozambique asset, hasn’t seen any reduction in debt

levels.

Figure 25: GMR's debt has continued to increase even

with asset sales

Figure 26: All of GMR's larger operational power projects

facing challenges

355

110

245 245

114

360

69

429

FY13 NetDebt

Asset salesbetweenFY13-15

Net Debtpost asset

sales

Capex inclcapitalised

interest

Others FY15 NetDebt

GMR Infra

Capacity

(MW)

Fuel Revised

cost

(Rs mn)

Comments

Kamalganga-I 1050 Coal 65,190 Downgraded to default

rating*

EMCO 600 Coal 39,480 Downgraded to default

rating

Chattisgarh 1370 Coal 120,110 Downgraded to default

rating

Kakinada 220 Gas 14,190 Low PLF on lack of gas

availability

Vemagiri I 370 Gas 11,530 Low PLF on lack of gas

availability

Rajahmundry 768 Gas 40,600 Low PLF on lack of gas

availability

Source: Company data, Credit Suisse Source: Company data, Credit Suisse; * for delays in repayments

21 October 2015

House of Debt 12

Figure 27: Videocon—debt levels haven't come down

even with large asset sales

Figure 28: Videocon continues to make EBIT losses

398

150

248 248

53

301

390

89

Jun-13 NetDebt

Assetsales

Net Debtpost asset

sales

Capex Others Dec-14Net Debt

(20)

(15)

(10)

(5)

-

5

10

15

20

25

ConsumerElec

Oil and Gas Telecom Power Others Total

Jun-13 Dec-14EBIT (Rs bn)


Debt-to-market cap reflects rising stress

The continued sharp contraction in their market cap reflects the pressure on the financials

of these groups. While debt levels are up to 2-17% over the past year, debt-to-market cap

has increased by 20-150% for a large number of the companies. Debt-to-market cap for

some of the groups is now 15-30x.

Figure 29: Debt-to-market cap has increased for most companies

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY14 FY15Debt to Market cap (x)


Large cost overrun threat to project viability

A large number of projects especially from power and road sectors have seen delays in

completion which has led to cost overruns. Some of the projects now have reported cost

overruns of 20-70%. Notably, the capex cost for a few of these projects is now higher than

the post overrun is now higher than normative replacement.

21 October 2015

House of Debt 13

Figure 30: Cost overrun of 20-80% for under construction

projects

Figure 31: Project cost higher than replacement cost in

many cases

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

50

100

150

200

250

300Original Cost Revised Cost % increase in project cost (RHS)

-

20

40

60

80

100

120

140

160

Cost per MW Replacement cost

Source: Company data, Sigma Insights, Credit Suisse Source: Company data, Sigma Insights, Credit Suisse

Debt increase continues to outpace capex

In our previous edition (House of Debt – Revisited), we stated that 2014 would be the year

of reckoning as a large amount of capacity was to come on stream. However, many of

these projects continued to be delayed and most groups have pulled back on capex given

their high leverage. However, the increase in net debt for these groups has outpaced the

amount spent on capex in FY15.

Figure 32: The increase in net debt… Figure 33: …is outpacing capex spends in FY15

17%16%

15%14%

12%

8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%% Increase in net debt in FY15

193%181%

157%

121% 118%111%

0%

50%

100%

150%

200%

250%Increase in net debt as a % of capex (%)


21 October 2015

House of Debt 14

Figure 34: Rise in net debt has outpaced capex incurred

-

5

10

15

20

25

30

35

40

45

50

JP Power R Power R Infra Adani Ports GVK Group Essar Oil Essar Ports Jaypee Infra Lanco Group

FY15 Increase in net debt FY15 Capex

Rs bn


While some of these groups still have a large percentage of capacity still under

construction, capex spends have declined YoY due to a lack of funds. Lanco Infratech has

~57% of capacity still under construction, but capex during the past two years has been

close to nil and there has been no progress on under-construction projects.

Figure 35: Large capacity still under construction… Figure 36: …while capex declined due to a lack of funds

65%

57%

47%

42%

30% 29%

0%

10%

20%

30%

40%

50%

60%

70%

ReliancePower

Lanco Group JP PowerVenture

Essar Group GVK Group GMR Group

% of capacity under construction

17% 15%

-17%

-32% -32%

-44% -46% -48% -50% -51%

-67%-71%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Decrese in capex spends (YoY % )


21 October 2015

House of Debt 15

High forex and commodity exposure weigh on the outlook Most of the groups have high exposure to commodities and any downswing here adds to

their stress. Few groups (GVK, Adani and Lanco) also made debt-funded international

coal mine acquisitions. In addition, with 15-60% of their debt being in foreign currency,

their debt servicing outlook continues to be of concern. We estimate that 20-90% of debt

for some of these groups now faces severe stress. We therefore continue to prefer

consumer lenders over corporate lenders.

High commodity exposure adding to stress

The profitability of commodity sectors, especially steel and coal, is under significant

pressure resulting in deterioration debt servicing ability. Many of these groups have ~10-

95% of debt linked to their commodity exposures. Of the groups, JSW and Essar have

significant exposure to the steel sector (~70-80% of group debt). Adani, GVK and Lanco

have significant exposure to coal mining (10-22% of group debt).

Figure 37: Large part of debt exposure of the groups linked to commodities

0

200

400

600

800

1,000

1,200

0%

20%

40%

60%

80%

100%

Vedanta JSW Essar Videocon Adani GVK Lanco

Debt linked to commodities sector % of total Rs bn


The steel sector has been one of the worst performers with a sharp squeeze on the

profitability. As shown in Fig 31, EBITDA per tonne are near its historical lows and would

squeeze overleveraged firms like JSW and Essar Steel.

Figure 38: Historical low EBITDA per tonne to put significant pressure on leveraged firms

-

50

100

150

200

250

300

350

400

500

600

700

800

900

1,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

EBITDA per tonne (USD)* Selling Price per tonne (USD)

Source: Company data, Credit Suisse estimates; * avg for Tata, JSW and SAIL

Vedanta has also seen a sharp drop in realisation from other metals like aluminium and

copper.

21 October 2015

House of Debt 16

Figure 39: Sharp drops in realisations for Al and copper… Figure 40: …to affect Vedanta's profitability as well

1,000

1,400

1,800

2,200

2,600

3,000

3,400

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

LME Aluminium Cash ($/t)

0

2,000

4,000

6,000

8,000

10,000

12,000

Oct-07 Dec-08 Feb-10 Apr-11 Jun-12 Aug-13 Oct-14

Copper US$/T

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Mine acquisitions also at risk

Three of the groups, i.e. Adani, Lanco and GVK, made coal mine acquisitions in Australia

between 2009 and 2011. For Adani and GVK, mines production is unlikely to start in the

foreseeable future and needs large additional capex while offtake for Lanco Griffin

continues to be much lower than earlier estimates.

Adani Carmichael coal mine: Adani Group acquired Abbot Point port terminal for

US$2 bn in 2011 and Carmichael coal mine for another US$1 bn. The project requires

further investments of ~US$7 bn for extraction and transportation of coal to ports. Has

been delated due to environmental clearances.

GVK Hancock mine: GVK acquired Hancock coal mines in US$1.3 bn transaction in

2011. The project requires investments of ~US$7 bn as well for it to take off. Similar to

Adani coal mines, it is stuck on account of environmental issues.

Lanco Griffin: Lanco acquired Griffin coal mine for US$720 mn in 2011. The offtake

from the mine (~2.4MT) continues to be much lower than its earlier estimates. The

company has deferred expansion plan amid falling coal prices.

With coal prices now at almost eight years low, these acquisitions combined ~US$5 bn

worth of investments is now at risk.

Figure 41: Significant investments in coal mines at risk Figure 42: As coal prices are down ~60% from 2011 levels

0%

4%

8%

12%

16%

20%

0

20

40

60

80

100

120

140

Adani Carmichael GVK Hancock Lanco Griffin

Investment in coal mines Investments (Rs bn) % of group debt*

0

40

80

120

160

Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15

Coal prices ($ Tn)

Source: Company data, Credit Suisse; * assuming investment to be

80% debt funded

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

High forex debt poses additional risk

For some of these companies, a large share of their debt is forex denominated. This also

has been one of the reasons for the sharp cost overruns in some of the projects.

21 October 2015

House of Debt 17

Indian banks also report their exposure to companies vulnerable to currency depreciation

in their annual reports. These highlight that the bank's exposure to vulnerable corporate

(>80% impact on EBITDA for peak currency volatility in the past ten years) is at 15-57% of

their net worth.

Figure 43: Large forex debt to hurt companies Figure 44: Banks' exposure to high risk corporates at 15–

57% of net worth

59% 58%

48% 47%

41% 40% 38%

34%31% 31%

25%22%

20%

15%

0%

10%

20%

30%

40%

50%

60%

70%% of foreign currency debt

57%

44%42%

32%29%

22%

16% 16% 15% 14%

0%

10%

20%

30%

40%

50%

60%

YesB Indus Canara Axis ICICI PNB BOI BOB SBI HDFCB

High risk unhedged foreign currency exposure* As a % of networth


Significant amount of debt due within a year

Some of the companies have 5-50% of long-term debt (~US$15 bn) maturing within the

next year and would need refinancing. Also, 5-37% of their debt is short term (~US$20 bn)

that needs to be rolled over.

Figure 45: Large share of debt falling due over the next 12 months

0%

10%

20%

30%

40%

50%

60%Long term debt due in 1 year Short term debtAs a % of total debt


Some good assets within each group…

Most of these groups, there are some assets that have been generating healthy cash

flows. In particular group assets in Airports, refining, ports and cement have been showing

steady performance.

21 October 2015

House of Debt 18

Figure 46: Some good assets within each group

Group Key assets Remarks

Adani Group Adani Ports Ports profits > group profits

Essar Group Essar Oil & Essar Ports Businesses with debt/EBITDA <6x

GMR Group Airports Contributed 67% of group EBITDA

GVK Group Airports Only business with EBITDA>interest

Jaypee Group Cement Cash positive business

JSW Group Energy Healthy profitability; diversification

against high commodity exposure

Vedanta Group Hind Zinc & Cairn Cash rich companies with healthy

EBITDA generation


….but~20-90% of group debt under high stress

However, with pressure on the steel and power businesses, 20-90% of debt (aggregates

~US$48 bn, equivalent to 100% of system GNPAs) for some of these groups. Lanco and

Jaypee have the highest share of stressed loans (at ~80-90%) while GMR, GVK, Essar

and Videocon have close to two-thirds of their debt under stress.

Figure 47: Large share of debt is facing high stress

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Lanco Group JaypeeGroup

GMR Group VideoconGroup

GVK Group Essar Group Adani Group RelianceADAG

JSW Group VedantaGroup

Low Stress Moderate Stress High Stress


We have classified debt as high stress based on -

1. If debt has been downgraded to "D" by rating agencies

2. Power projects:

o if operational project is at debt/EBITDA >12x or

o an under construction has had more than 35% cost overrun, or

o it is a gas-based projects or

o operating at PLF of less than 40%

3. Commodity exposure – If debt/EBITDA > 12x

21 October 2015

House of Debt 19

Figure 48: Large share of debt is in "high stress" bucket

Share of debt with

groups

Low Stress Moderate

Stress

High Stress Comments

Adani Group 377,313 250,797 318,196

Adani Power 250,797 198,196 Tiroda, Kawai are re-financed under 5:25, classified as moderate stress;

Rest primarily linked to Mundra

Abbott Point Terminal 120,000 Australian coal mine project stuck on environmental as well as viability

concerns

Adani Ent 200,000

Adani Ports 177,313

Essar Group 383,256 - 678,091

Essar Power 214,976* Power business – 1.5GW is gas based, 1.8GW has seen 40% cost overrun

Essar Steel 363,032 Debt to EBITDA at 16.6x

Essar Oil, port & others 383,256 Low risk

Essar Shipping 53,383 Debt to EBITDA at 23x

GMR Group 158,847 - 320,919

GMR Energy 274,209 All major coal based projects in default; Gas based capacity of ~1.3GW

operating at low PLF

Highways 36,711 Debt with highway projects already default rated

GMR Male 10,000 Project contract cancelled by the government

Airport 90,000

Others 68,847

GVK Group 120,060 219,272

Power Projects 115,213 Gas based capacity of ~900MW; ~50-70% overrun in coal & hydro plants.

GVK Hancock 65,345 Coal mines delayed on environmental concerns

Airports 120,060 Airport EBITDA>interest cost

Roads & Others 38,706 Negligible EBITDA generation

Jaypee Group - 115,490 539,147

JP Power 195,329 Standalone rating downgraded to D; Nigrie rated D; Bara overrun ~33%

Jaypee Infra 91,018 Rating downgraded to D on delay in debt servicing

Jaiprakash Associate 252,800 Standalone debt downgraded to "D" rating

Others 115,490

JSW Group 92,941 488,774 -

JSW Steel 488,774 FY15 Debt/ EBITDA 5x, rose to 7.2x in Jun-15

JSW Energy 92,941 Debt to EBITDA 2.1x

Lanco Group - 30,421 440,603

Power - coal based 294,158 Anpara downgraded to D; Amarkantak low tariff; Under construction

projects (Vidarbha & Babandh) seeing 60-70% cost overrun;

Power - Gas based 35,445 Operating at sub-optimal PLF

Griffin coal mine 39,000 Lower than expected offtake and profitability

EPC & others 30,421

Reliance ADA Group 360,820 655,940 232,804

R Infra 257,660 Debt to EBITDA >7x

R Power 99,430 232,804 Ex- Rosa and Butibori, rest of the projects facing challenges. Sasan PPA

tariff low, Chitrangi has seen 35% cost overrun

R Comm 398,280

R Capital 261,390

Vedanta Resources 965,018 Commodity exposure; moderate pressure on sharp correction in

commodity prices

Videocon 113,514 45,406 295,136 Telecom and Oil & Gas exposure stressed

Source: Company data, Credit Suisse;*based on FY14 numbers

21 October 2015

House of Debt 20

Increasing risks for corporate focused lenders

The corporate banks are already trading at multiples that are at a discount to the consumer

lenders on account of the large reported differential in their asset quality trends over the past

three years. However, debt for these groups is still "standard" in books of the banks, The

rising intensity of stress for these borrowers and downgrades from rating agencies,

increases the possibilities of these slipping to NPLs. The share of stressed loans with these

groups is equivalent to ~4.5% of system loans (equiv to ~100% of current reported Gross

NPAs). Including this, total system impaired loans would be at ~17% of system loans. As the

pace of NPA recognition accelerates, it will pose risk to management's guidance and market

expectations of impaired asset formation over the next 12-18 months. We remain cautious

on corporate lenders, in particular the state-owned banks, as they are under-provisioned and

undercapitalised.

Figure 49: Exposure to at-risk sectors at 100-350% of networth for corporate lenders

0

50

100

150

200

250

300

350

Canara Union OBC SBI BOI PNB BOB Yes ICICI Axis HDFCB

Funded Exposure to "at-risk" sectors (% of networth)

Power Other Infra Steel


Figure 50: Incl stressed "House of Debt" loans, total system stressed loans at ~17%

4.5%

5.4%

4.5%

2.2%

16.6%

Gross NPAs Restructured ex SEBs Stressed House of Debt Steel & Others Total Problem Loans

Total system problem loans (%)

Source: Company data, Credit Suisse estimates

21 October 2015

House of Debt 21

Adani Group The Adani Group has interests in mining, ports and the power sector. Adani Enterprise has

coal mines in India, Australia and Indonesia with reserves in excess of 10 bn t. Adani

Power has India's largest private sector power capacity with 11,040 MW of operating

capacity (including acquisitions). Adani Ports has seven operating ports handling 145MT

of cargo.

While most other groups have been looking to deleverage, Adani has acquired port assets

(in FY15) and two power plants (in FY16). Its debt levels in FY15 therefore went up

another 16% to Rs840 bn and will increase further in FY16.

Within the group, Adani Ports is well placed operationally and has healthy debt servicing

ratios. This, however, accounts for only 20% of the group debt. Adani Power even prior to

the recent acquisition accounts for >50% of group debt and has been incurring losses for

the past four years. Most of its capacity is already commissioned and operating at a

reasonable 67% PLF, despite which it continues to have interest cover <1. Moreover, as

38% of EBITDA being recognised is "compensatory tariff", the company has seen 10-25%

cost escalations in most of its power projects. With ~44% of the company's power capacity

lacking domestic fuel linkage, the company acquired a coal block in recent auctions, which

will result in escalation in fuel cost. The profitability is also impacted owing to low tariffs,

(especially for its Mundra Project) despite booking compensatory tariffs.

Adani Enterprises has also been facing issues at its US$4.2 bn Carmichael mine, as the

environmental clearance had been delayed. As a result of the delay in obtaining

clearances, the company has seen project costs rise 20%.

Post Mar-15, Adani Group has restructured its holdings, post which Adani Enterprise is not

the holding company for Adani Power and Adani Ports, and the promoter holding has

fallen to 58.1% and 56.3%, respectively.

Figure 51: Adani Group structure post recent re-structuring

ADANI GROUP (New structure - Jun-15)

Gautam Adani & promoter groups

Adani Enterprises Ltd~200 bn

Adani Mining Pty, Australia

100%

75% (15.7%)

Adani Power~445 bn

Adani Port & SEZ~180 bn

58.1%56.3%

Adani Global Pte Ltd Singapore

100%

Estimated Group Debt –

Rs 1,000bn

Figures in bold indicate total promoter group holding

Figures in red ( ) indicate % of holding that is pledged

Abbott Point, Australia120 bn

100%

Corporate

Guarantee USD 800 mn

Adani Transmission~45 bn

75%

Source: Company data, BSE, Credit Suisse

21 October 2015

House of Debt 22

Adani Enterprises has seen its debt increase 16% in FY15 to Rs840 bn. With acquisition

of two power projects it has another Rs100 bn of commitments in FY16.

Figure 52: Debt levels continued to rise, up 16% YoY in FY15

Gross debt FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Adani Enterprise 61,041 120,842 174,389 331,013 692,011 691,220 724,404 840,313

Adani Ports 20,655 28,957 37,062 35,953 175,678 114,308 129,340 177,313

Adani Power 10,112 49,897 105,855 245,027 360,053 409,011 443,969 448,993


Profitability of the port has remained robust aiding overall interest cover up to 1.3x vs 1.1x

in FY14. However, with Adani Power continuing to incur losses, overall group level

debt/EBITDA remains high at 6.5x. Moreover, stripping the "compensatory tariff" being

recognised debt/EBITDA would be even higher at 7.9x.

Figure 53: Debt servicing ratios saw slight improvements in FY15

Gross

Debt

Equity EBITDA EBIT PAT Interest cover (x) Debt/EBITDA (x) D/E (x)

FY14 FY15 FY14 FY15 FY14 FY15

Adani Enterprise 840,313 257,278 123,704 88,485 19,481 1.1 1.3 7.3 6.5 2.9 3.1

Adani Ports 177,313 107,679 39,023 29,906 23,143 2.3 2.5 4.3 4.3 1.4 1.6

Adani Power (pre-acq) 448,993 57,246 58,365 37,759 (8,156) 0.7 0.8 8.7 7.5 6.6 7.6


Figure 54: Adani Group structure prior to re-structuring

ADANI GROUP (Old structure)

Gautam Adani & promoter groups

Adani Enterprises Ltd840 bn (725 bn)

Adani Mining Pty, Australia

100%

75% (15.7%)

Adani Power448 bn (443 bn)

Adani Port & SEZ180 bn (130 bn)

75% (7.8%)

Adani Global Pte Ltd Singapore

100%


Rs 950bn



Abbott Point, Australia120 bn

100%

Corporate

Guarantee

USD 800 mn

69% (42.1%)75% (42%)


Operations

Adani Power's had 9,240 MW of operational capacity (excluding acquisitions), which

operated at ~68% PLF in FY15, with EBITDA increasing 17%. Though debt/EBITDA

improved, it remained elevated at 7.5x. Interest costs rose 23% YoY and therefore despite

operating at a reasonable PLF interest cover was 0.8x and company reported Rs8.2 bn

21 October 2015

House of Debt 23

loss in FY15. The 4,620 MW Mundra project was bid at a low tariff and in 2013 CERC

allowed compensatory tariff. However, the SC has put a stay on the interim order received

from APTEL allowing compensatory tariff.

The company continues to book compensatory tariff for its Mundra, Tiroda and Kawai

project power sales, despite which it reported losses in FY15. Excluding the compensatory

tariff, Adani Power interest cover was at 0.3x and debt/EBITDA 12.1x in FY15. Adani

Power has also completed the acquisition of the 1,200 MW Udupi power plant from Lanco

Infra w.e.f., 20 April 2015, though it still saw a loss in 1Q16.

Debt levels

Adani Enterprise's debt levels increased 16% YoY to Rs840 bn. While Adani Power debt

remained flat at ~Rs450 bn, it entered into a binding agreement to acquire a 600 MW

power plant from the Avantha Group in Mar-15 for Rs42 bn. It also completed acquisition

of the 1,200 MW plant from Lanco Infra in Apr-15 for Rs63 bn on account of which the

debt would increase further. Adani Ports' debt increased 37% to Rs177 bn on account of

the acquisition of Dhamra Port for Rs55 bn.

Asset sales

After hiving off Abott Point to the promoters, the company has not looked to reduce debt

through asset sales, and acquired capacities in the power sector.

Future expansion

Adani Power plans to set up two coal-fired plants with a capacity of 1,600 MW in

Bangladesh with a capital cost of ~US$1.5-2 bn. Its objective is to reach 20 GW of

capacity by 2020.

Adani Enterprises reportedly needs to spend ~US$7.7 bn over the next three years at

Carmichael Mine, ~US$4.2 bn (up from US$3.5 bn) to get the mine operational and

another US$3.5 bn to set up the rail link to Abbott Point and set up a terminal to transport

60MTPA of coal once the mine is operating at full capacity. The project has been delayed

for environmental issues. With the fall in coal prices from US$130/t to US$50/t over the

past three years, the pace at which these projects are now undertaken is uncertain.

Adani Power has entered into an agreement with the government of Rajasthan, to set up a

10 GW solar power park. The estimated investment is ~US$9 bn, in a 50:50 JV with the

govt. Adani Enterprises has also entered into an MoU with the Chattisgarh government to

invest Rs250 bn (US$4 bn) in the state to set up two projects.

Debt servicing

Adani Power has had IC<1 for the past 15 consecutive quarters. According to news

articles (link, link), Adani Power has reportedly refinanced Rs190 bn of debt under the 5:25

scheme for its Rajasthan and Maharashtra plants; the interest rate has remained the same

at 12%, while the tenure has increased from 10 to 19 years. The companies would also

get an 18-month moratorium towards repayment of principal.

Adani Enterprise also has ~Rs90 bn of long-term debt (11% of total debt) up for

repayment in FY16E, along with Rs195 bn of short-term debt.

Figure 55: Adani Group—project details

Project Capacity

(MW)

Est. CoD Power

source

FY15 PLF FY16 PLF

YTD

Project

original

Cost

revised

Cost per

MW

PPA

Kawai 1,320 Operational Coal 68.0% 66.6% 70,290 80,000 61 91%

Mundra 4,620 Operational Coal 75.0% 85.2% 191,060 207,950 45 74%

Tiroda 3,300 Operational Coal 57.0% 70.2% 155,520 184,941 56 93%

Udupi (acquired from Lanco) 1,200 Operational Coal 61.0% 74.0% 51,340 63,000 53 100%

Korba (acquired from Avantha) 600 Operational Coal N/A N/A N/A 42,000 70 35%

Source: Company data, Credit Suisse, Sigma Insights

http://www.financialexpress.com/article/economy/companies/adani-power-in-line-for-525-model-relief/62004/

http://www.financialexpress.com/article/industry/companies/another-rs-9500-cr-recast-under-525/81928/

21 October 2015

House of Debt 24

Figure 56: Debt levels continue to rise as IC remains low Figure 57: Net debt-to-equity has increased to 3.1x

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

500

550

600

650

700

750

800

850

900

FY12 FY13 FY14 FY15

Gross Debt (Rs bn) IC (x )Adani Group

2.7

2.8

2.9

3.0

3.1

3.2

3.3

550

600

650

700

750

800

850

FY12 FY13 FY14 FY15

Net Debt (Rs bn) Debt/Equity (x )Adani Group


Figure 58: >50% of FY15 group debt is with Adani Power Figure 59: Large share of foreign currency debt

Adani Ent23%

Adani Power51%

Adani Ports21%

Adani Trans5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Adani Ports Adani Ent Adani Power

% of Foreign currency debt % of debt due in 1 year (RHS)


Figure 60: Excluding the compensatory tariff,

debt/EBITDA would be at 10.7x

Figure 61: Project cost has gone up, while tariff were bid

aggressively

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY15 FY15 (exclcompensatory

tariff)

1Q16 1Q16 (exclcompensatory

tariff)

EBITDA (Rs mn) Debt/EBITDA (x) (RHS)Adani Power

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0%

5%

10%

15%

20%

25%

Udupi Tiroda Kawai Mundra

% Increase in project cost Levelised Tariff's


21 October 2015

House of Debt 25

Essar Group The Essar Group has interests in steel, power, ports, refining and shipping. Among these,

Essar Oil (Refining) and Essar Ports, which account for one-third of group debt are well

placed, with operational performance in FY15 remaining stable. Essar Oil has 20MT of

refining capacity and Essar Ports has 104MMTPA of capacity, with plans of increasing it to

196MMTPA. While, debt levels increased, interest cover is relatively better at 1.6x.

Essar Steel has 10MT of capacity and accounts for ~36% of group debt. It continues to

remain under stress, as utilisation remains low (35% in FY15 and YTD FY16), pricing is

under pressure and even as EBITDA improved in FY15, its interest cover is well below 1x.

Moreover, ~40% of its debt is in foreign currency. The account slipped to NPL at a couple

of banks in FY15.As per news reports, other banks have refinanced the loans under 5:25.

Essar Power (20% of group debt) has 3.9 GW of operating capacity and has another 2.8

GW under construction, most of which is expected to be commissioned in FY18. Of its

operating capacity, one-third is gas-based and stranded (0% PLF). Of its coal-based

capacity, its plant at Salaya (saw a 37% cost overrun) is based on imported coal and

operating at 63% PLF. Its Mahan plant (had a 48% cost overrun) that saw its coal block

being cancelled last year operated at 9% PLF in FY15. It won the Tokisud North coal block

in recent auctions, agreeing to pay a royalty of Rs1,110/t which would push up fuel costs

further. It expects the mine to be operational by Sep-15.

Additionally, the group may have seen debt at the holding company level go up over the

past year as it undertook delisting of Essar Energy Plc. The group is also reportedly in

talks with Rosneft for selling a 50% stake in Essar Oil to pare down this debt.

Figure 62: Essar Group's structure and debt

ESSAR GROUP

Essar Global Ltd

Essar Port Holdings

Mauritus Ltd

Essar Energy Plc, UKN/A (500 bn)

Essar Shipping Ltd53 bn (56 bn)

Essar Steel Holdings Ltd

Essar Ports Ltd65 bn (60 bn)

Essar Oil271 bn (238 bn)

Essar Steel Ltd363 bn (383 bn)

Essar Power Ltd60.6% (100%)

75% (100%)

Essar Projects Ltd


Rs 1,000bn

13.18% (99%)

61.2% (100%)

75% (99.7%)

72.5% (71.5%)



0.6% (100%)

Source: Company data, BSE, Credit Suisse; *group debt is calculated assuming Essar Energy debt to be same as FY14

21 October 2015

House of Debt 26

As Essar Energy has been delisted its debt details are unavailable, as also for the holding

company. Essar Oil and Essar Ports saw FY15 debt levels increase YoY by 14% and 9%,

respectively, while Essar Steel saw FY15 debt fall by 5% YoY on account of capital

infusion by the promoters and asset sales/sale and lease back undertaken during the year.

Figure 63: Debt levels remained largely flat

Gross debt FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Essar Energy Plc 170,374 134,613 170,995 247,368 420,558 523,974 500,130 N/A

Essar Steel 62,581 74,764 184,014 267,626 319,164 351,809 383,346 363,032

Essar Oil 98,153 100,317 103,537 145,469 177,244 247,419 238,454 271,266

Essar Ports 41,701 67,389 75,075 44,815 55,051 57,370 59,699 65,290

Essar Shipping 49,891 56,376 53,295 56,322 53,383

Total 274,655 276,765 430,084 609,699 851,148 986,448 999,497 N/A


While debt servicing ratios improved for the group, on account of improvement in

performance of Essar Oil and profit on sale/sale and lease back booked by Essar Steel,

they continued to remain elevated, with debt/EBITDA at 8.5x and debt equity at 3.9x.

Figure 64: Debt servicing ratios remained high, with debt/EBITDA at 8.5x

Gross

debt

Equity EBITDA EBIT PAT Interest coverage (x) Debt/EBITDA (x) D/E (x)


Essar Energy Plc N/A N/A N/A N/A N/A 0.8 N/A 8.5 N/A 2.8 N/A

Essar Steel 363,032 38,682^ 21,160 12,045 4,665 (0.1) 0.3 68.1 16.6 16.0 9.1

Essar Oil 271,266 39,118 47,349 39,778 15,270 0.8 1.6 5.1 5.0 8.0 6.1

Essar Ports 65,290 34,197 12,930 10,537 3,912 1.6 1.6 4.8 4.9 1.9 1.9

Essar Shipping 53,383 68,801 2,270 (1,970) (4,590) 0.1 (0.4) 10.4 23.3 0.8 0.8

Total 752,971 180,798 83,709 60,389 19,258 0.3 0.8 11.1 8.5 4.6 3.9

Source: Company data, Credit Suisse * group numbers for FY14 & FY15 are arrived excluding Essar Energy to ensure comparability ^

excluding revaluation reserves

Operations

Essar Steel's production remained relatively weak in FY15, producing 3.3MT of capacity

and has maintained a similar rate in 1Q16. Essar Oil has seen an improvement in

performance with the expansion in global refining margins. Essar Power's plants continue

to operate at low PLF’s on account of the unavailability of fuel.

Debt levels

While details are unavailable for Essar Energy, debt levels for the rest of the group

companies have been largely flat (+2% YoY). Essar Steel has managed to bring down

nominal debt levels aided by the sale and lease back of its slurry pipeline. Essar Oil and

Essar Ports saw debt levels increase YoY. Both Essar Steel and Essar Oil have also been

converting INR debt to foreign currency debt to lower the P&L interest burden and now

40% of Essar Steel and 60% of Essar Oil debt is in foreign currency.

Asset sales

Essar Steel has entered into a sale and lease back transaction, selling its Orissa slurry

pipeline for Rs40 bn, earning a profit of Rs28 bn on the transaction. It has entered into a

take-or-pay contract for 20 years, agreeing to pay Rs7.2 bn each year. The company has

also sold its oxygen plant for Rs8.5 bn and is looking to sell its Vizag slurry pipeline and

coke oven plant for Rs36 bn each over the coming year to help bring down debt levels

(link). Essar Steel Holdings also infused capital of Rs13 bn in FY15 in Essar Steel which

helped improve gearing for the company.

http://www.essar.com/upload/pdf/FY15_Performance.pdf

21 October 2015

House of Debt 27

Future expansions

Essar Power is currently working on developing ~2,790 MW of power capacity. The

company has shelved plans of further expansion of ~3 GW. The 1,800 MW under

construction Tori plant has also seen some delays, since the mines were de-allocated in

Aug-14 (link). The company is also looking to convert the Hazira and Bhander plants from

gas-based to coal-based on account of a lack of gas supplies. Essar Steel has completed

its expansion of its steel plant to 10MT and has some expansion left for increasing

capacity of its pelletisation plant in Orissa from 6MT to 12MT and setting up of a coke

oven plant which together would need a capex of ~Rs12 bn.

Debt servicing

Since Sep-12, the group has raised ECBs amounting to ~US$1.5 bn, of which ~US$1 bn

has been used towards refinancing of existing loans. Essar Steel and Essar Oil have

converted close to half their debt to USD-denominated debt. Essar Steel is also looking to

refinance loans under the 5:25 scheme. Essar Steel has also been recognised as NPA

with HDFC Bank and Bank of India, post which, Essar Steel's debt has been downgraded

to 'D' by CARE.

Figure 65: 3,910 MW of operating capacity, with another 2,790 MW under construction

Fuel

Source

FY15

PLF

Project cost

Project Capacity Status Original Revised PPA FSA

Hazira 515 Operational Gas 0% 14,330 Captive

Bhander 500 Operational Gas Captive Essar Steel

Vadinar 120 Operational Mix Captive Essar Oil

Vadinar P1 380 Operational Gas Captive Essar Oil

Vadinar P2 510 Operational Coal Captive

Algoma 85 Operational Gas Captive

Salaya I 1,200 Operational Coal 63% 48,220 66,000 83% Imported coal

Mahan I 600 Operational Coal 9% 48,594 72,000 0%

Mahan II 600 FY16 Coal N/A

Hazira II 270 FY16 Gas

Paradip 120 FY16 Coal

Tori I 1,200 FY18 Coal 56,996 83,080 62% No Fuel

Tori II 600 FY18 Coal 23,293 40% No Fuel

Source: Company data, Sigma Insights, Credit Suisse

Figure 66: Steel and power account for 56% of group debt Figure 67: While IC has improved, it remains below 1x

Steel36%

Power *20%

Oil27%

Ports6%

Shipping5%

Others *6%

(0.2)

-

0.2

0.4

0.6

0.8

1.0

1.2

570

600

630

660

690

720

750

780

FY12 FY13 FY14 FY15 *

Gross Debt (Rs bn) IC (x )

Source: Company data, Credit Suisse *Power & Others debt is based

on FY14 numbers

Source: Company data, Credit Suisse * Data for Essar Energy Plc has

been excluded to ensure comparability

http://www.financialexpress.com/article/economy/lenders-pull-plug-on-essar-project/87059/

21 October 2015

House of Debt 28

GMR Group In the past two years, GMR has sold about 23 assets to raise ~Rs110 bn (link), but debt

levels have continued to rise, up 18% over the period. The company intends to raise a

further Rs40 bn over the next 12 months through assets and equity issuance to reduce

debt. GMR Infra has 4.6 GW of operating power capacity with another 830 MW under

construction. 1,358 MW (~30% of operating capacity) is from gas-based plants that

operated at 0% PLF in FY15. With the recent allocation of subsidised gas this should see

some improvement in FY16 but will still be well below 50%.

The 1,650 MW of thermal power capacity operated at ~50% PLF in FY15. In addition, the

recently commissioned 1,370 MW Chhattisgarh plant has seen a 45% cost overrun. The

company has also acquired two coal mines in recent auctions, as a result of which fuel

costs are likely to rise sharply. The company currently has PPA for only 35% of the

capacity, and if the additional costs not allowed to be passed on, profitability will be

depressed. ICRA has also downgraded credit rating of the project to D. The company also

has two airports, nine road projects and coal mine investments in Indonesia.

During FY15 the airport segment reported a loss, as EBITDA declined 13% YoY. The road

segment saw EBITDA decline 20% YoY in FY15, and interest cost continued to be higher

than EBITDA.

With stress remaining elevated, debt servicing ratios worsened further in FY15. As a result

of which, the company saw credit rating for six of its subsidiaries being downgraded to

default in FY16. Four of its six operational power plants are now rated 'D', along with two

of its road projects, resulting in ~40% of its debt having a 'D' rating.

Figure 68: GMR Group's structure and debt

GMR GROUP

GMR Holdings Private Limited

20 bn (10 bn)

GMR Infrastructure Ltd

480 bn (450 bn)

GMR Airports Limited

GMR Energy Limited

52.0% (82.0%)

67.8% (64.6%)

92.6%

GMR Hyderabad Intl Airport

GMR Highways Limited

Delhi International

Airport

61.2%52.5%

100%97.1%

GMR VemagiriPower

GMR KamalangaEnergy Ltd

77.8%92.6%

GMR Kishangarh

Udaipur

GMR Hyderabad Vijayawada

90%100%


Rs 500 bn

GMR Renewable

Energy Limited

100%

GMR Power

Corporation

47.2%

EMCO Energy Ltd

92.6%




http://articles.economictimes.indiatimes.com/2015-03-30/news/60643792_1_gmr-infrastructure-fresh-debt-terdal

21 October 2015

House of Debt 29

Debt levels continue to rise up 7% YoY and up 18% since FY13.

Figure 69: Gross debt has continued to increase


GMR Infrastructure 79,769 125,004 211,713 244,296 360,289 408,249 450,407 479,766


Profitability continued to remain under pressure, with the company reporting a loss in

FY15. P&L interest costs were up 20% YoY, as a result of which interest cover was lower

at 0.2x in FY15 vs 0.4x in FY14. Debt servicing ratios remain stretched, with debt-to-

EBITDA at 16.8x and debt equity at 7.1x. The company reported an EBITDA of Rs25 bn

against P&L interest expense of Rs36 bn (capitalised interest was Rs12 bn in FY15).

Figure 70: Debt servicing ratios have worsened further

Gross

debt



GMR Infrastructure 479,766 60,203 25,546 7,421 (27,333) 0.4 0.2 16.0 16.8 5.4 7.1


Operations

During FY15, the airport segment for GMR Infra also turned loss making, with revenue for

the airport segment down 16% YoY. In Feb-15, the airport regulator has via its draft order

planned to reduce the airport charges by ~78% for the period 2014-19 for the Delhi airport,

as against an increase of 43% requested by GMR (link). This would put further pressure

on profitability for the segment, even as energy and highway segments continue to see

pressure on profitability.

GMR Infra commissioned all three units of the Kamalanga power plant as planned in FY14,

but PLF remained low and was at 53% in FY15, while project cost overrun was ~44%. Of

its gas-based plants, both Vemagiri and Kakinada are not producing any power on

account of a lack of gas supply. Its Vemagiri and Rajahmundry plants have received gas in

recent auctions and would be able to operate at 30% PLF from Jun-15 to Sep-15 and at

50% PLF for the six months from Oct-15 to Mar-16.

The recently commissioned 1,370 MW Chhattisgarh plant has seen a 45% cost overrun;

with the cost now at Rs88 mn per MW, it is well above replacement cost. The project has

also bid aggressively for two captive coal mines, (paying a royalty of Rs478/t and Rs704/t)

as a result of which fuel costs are likely to increase sharply. The company has entered into

a PPA for only for 35% of the capacity, and with the additional royalty cost not allowed to

be passed on, profitability is likely to remain stressed.

Debt levels

While the company is focussed on asset sales to bring down debt, net debt levels have

continued to increase up 21% over the past two years. Gross debt is up 6x over the past

seven years, while gross fixed asset (including CWIP) is up 5.3x.

Asset sales

In the past two years, GMR has sold about 23 different assets to raise close to Rs110 bn,

but debt levels have continued to rise, up 18% over the past two years. The company

intends to raise Rs40 bn over the next 12 months through divestment of assets. It has put

a freeze on capital expenditure for the next 2-3 years.

The company had done a rights issue of ~Rs15 bn, which could help bring down debt

marginally, but with market cap at Rs60 bn, capital raises are unlikely to meaningfully

bring down debt levels. The company has also filed the DRHP for an IPO of GMR Energy

Ltd.

http://www.livemint.com/Politics/nSS9l7FoopZ9rFoikXbGWN/Airport-regulator-proposes-78-reduction-in-Delhi-airport-ch.html

21 October 2015

House of Debt 30

Future expansions

One unit of the Chattisgarh plant was commissioned in FY15, while the second unit has

been commissioned in 1Q16. The 768 MW Rajahmundry plant that had been suspended

on account of a lack of gas availability has been commissioned post winning the gas in the

reverse auction. Work is under way at the Bajoli Holi plant and is expected to be

commissioned by FY18, while the Alakananda plant is still in early stages. The company

also has another 1,725 MW of hydro plants which are in early stages of development and

unlikely to be commissioned over the next couple of years.

Debt servicing

With Rs480 bn of domestic debt, the company would need to make an EBITDA of ~Rs50

bn just to meet interest expense. The company also has ~Rs58 bn of long-term debt due

in FY16. The company has had IC<1 for every quarter since Mar-10 (22 quarters). Even

based on EBITDA, IC<1 is below 1x.

While the parent company, GMR Infra, has a credit rating of BBB, debt at many of its

subsidiaries has been downgraded. Rs110 bn of loans for the Chattisgarh and Kamalanga

projects was downgraded to D from BB rating in Apr-15 (link). Debt of ~Rs18 bn at GMR

Hyderabad-Vijayawada Expressway was also downgraded to D by CARE in Sep-15 (link)

on account of default.

The company is looking to refinance the Rs45 bn loan under the 5:25 scheme for its

Kamalanga project and is looking for additional funding of Rs4 bn to meet cash flows.

Earlier, GMR had refinanced the Rs30 bn loan for EMCO Energy, with SBI taking the

largest exposure of Rs13 bn. GMR Holdings received structured long-term financing of

Rs10 bn from KKR in Sep-14 (link).

Figure 71: Majority of power capacity is now operational

Project Capacity Operational

/ CoD

Fuel

source

FY15

PLF

1H16

PLF

Original Revised Cost per

MW

PPA

Kamalanga - I 1,050 Operational Coal 52.7% 63.1% 45,400 65,190 62 87%

EMCO 600 Operational Coal 53.0% 75.1% 34,800 39,480 66 92%

Kakinada 220 Operational Gas 0.0% 0.0% 6,030 14,090 66 100%

Vemagiri I 370 Operational Gas 0.0% 16.8% N/A 11,530 31 100%

Chennai 200 Operational Diesel 32.9% 0.4% 8,250 9,800 49 100%

Raikheda 1,370 Operational Coal N/A N/A 82,900 120,100 88 35%

Rajahmundry 768 Operational Gas N/A N/A 32,500 40,600 53 N/A

Bajoli Holi 180 FY18 Hydro N/A N/A N/A 22,050 123 N/A

Alaknanda 300 FY18 Hydro N/A N/A N/A 21,000 70 N/A


Figure 72: Interest cover now down to 0.2x… Figure 73: …while debt/EBITDA has increased to 16.8x

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

300

350

400

450

500

FY12 FY13 FY14 FY15

Gross Debt (Rs bn) IC (x )GMR Infra

12.0

14.0

16.0

18.0

20.0

10

15

20

25

30

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )GMR Infra


http://www.business-standard.com/article/companies/icra-downgrades-gmr-group-s-loan-ratings-to-default-grade-115041300095_1.html

http://www.business-standard.com/article/companies/rating-slashed-to-default-for-gmr-s-road-project-115092400013_1.html

http://www.business-standard.com/article/reuters/kkr-to-lend-175-million-to-gmr-infrastructure-source-114091600216_1.html

21 October 2015

House of Debt 31

Figure 74: Interest cost greater than EBITDA for all

segments (ex-airports)

Figure 75: Gas-based power accounts for 35% of capacity

-

5,000

10,000

15,000

20,000

25,000

Airports Energy Highways Others

FY14 EBITDA FY14 Interest FY15 EBITDA FY15 Interest

Coal60%

Gas35%

Others5%


Figure 76: Despite asset sales, debt continues to rise Figure 77: Power projects have seen large cost overruns

355

110

245 245

114

360

69

429

FY13 NetDebt

Asset salesbetweenFY13-15

Net Debtpost asset

sales

Capex inclcapitalised

interest

Others* FY15 NetDebt

GMR Infra

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-

10

20

30

40

50

60

70

80

90

100

Raikheda EMCO Kamalanga Rajahmundry

Cost per MW % increase in project cost

Source: Company data, Credit Suisse; * working capital and operating

losses

Source: Company data, Sigma Insights, Credit Suisse estimates

21 October 2015

House of Debt 32

GVK Group GVK Group is infrastructure sector-focussed with interests in power and airports. It has

1,244 MW of operational power capacity, of which 914 MW is gas-based that operated at

just 7% PLF in FY15. The company in Jun-15 commissioned a 330 MW hydro project

which had seen a 75% cost overrun. It also has a 540 MW coal-based capacity under

construction, which has seen a 55% increase in estimated cost. The company has another

4,100 MW of power capacity under development at early stages of capex.

The group has three road projects (of which one is operational) and has three airports (two

are operational). It has been looking at listing of its airport division to prune debt levels.

In 2011, the company acquired coal mines in Australia with a capacity of 80 MTPA for

US$1.26 bn, of which US$560 mn was deferred (link). The project is estimated to require

additional ~US$10 bn. However, GVK Hancock is yet to receive the mining permit. GVK

Power has a 10% stake in GVK Coal Developers, which is the holding company for the

Australian projects. Loans for this acquisition were reportedly downgraded to NPA recently

by one of the state-owned banks.

Profitability at GVK Power remains weak, with EBIT ~zero and the company making losses for

the past three years. Debt/EBITDA has increased to 32x, while debt equity is now at 12.2x.

Figure 78: GVK Group's structure and debt

GVK GROUP

Indira Krishna Reddy

GVK Power & Infrastructure Ltd 250 bn (225 bn)

GVK GautamiPower Ltd

11 bn (10 bn)

GVK Coal Developers

(Singapore) Pte Ltd

10% 47%

14.6%

54.3%

Bangalore Airport & Infra Developers Pvt

Ltd

AlaknandaHydro Power40 bn (36 bn)

74%

Bangalore International

Airport Limited

43%

100%

Mumbai Intl Airport Pvt Ltd 81 bn (76 bn)

51%


Rs 340 bn

GVK Power Goindwal Sahib26 bn (24 bn)

74%


Hancock Galilee (Kevin’s Corner

coal project)

Hancock Coal (Alpha coal

project)

Hancock Alpha West (Alpha west

coal project)

GVK Galilee Infra (Rail and Port

projects)

100% 49%79%79%


http://www.smh.com.au/business/mining-and-resources/hancock-extends-deadline-for-gvk-on-galilee-basin-purchase-20140915-10h6mt.html

21 October 2015

House of Debt 33

Debt levels have seen a continuous rise, up 10% in FY15 and up 5x over the past four

years.

Figure 79: Debt levels up another 11% in FY15


GVK Power & Infra * 12,910 29,798 50,577 62,458 209,574 269,640 310,268 339,332

Source: Company data, Credit Suisse *incl debt with the Australian asset

Profitability worsened with interest cover close to nil in FY15. The company incurred a loss

of Rs8.3 bn in FY15 and saw significant erosion of equity on account of consistent losses

in the past three years. As a result D/E has increased to 12x; debt/EBITDA stands at 32x.

Figure 80: Debt servicing ratios worsened sharply, with interest cover down to 0x and debt EBITDA up to 32x

Gross

debt



GVK Power & Infra 251,988 19,387 7,397 341 (8,347) 0.5 0.0 21.7 32.0 7.4 12.2


Operations

Of the operational power plants, Jegurupadu operated at 15% PLF in FY15, while Gautami

operated at 0% PLF during the year. The airport segment continued to make losses in

FY15, which the company expects to break even in FY16, with both Mumbai and

Bangalore airports now operational.

Debt levels

GVK Power saw a 10% increase in debt in FY15, with net debt up 12% to Rs236 bn, while

total gross debt (including Australian assets) is up 9% to Rs340 bn.

Asset sales

GVK also sold 1.16 mn sq ft of land development rights near Mumbai airport for Rs5.8 bn

in Aug-14. The company is looking to increase asset sales to help bring down debt levels.

Future expansions

GVK has two projects under construction, of which the Alaknanda Hydro Power plant has

been commissioned in 1Q16. The project has seen a three-year delay and a 75% increase

in expected capex. The company's 540 MW coal-based plant has also seen a three-year

delay and a 55% cost increase and is expected to be commissioned in FY16. The

company has 4.1 GW of power projects under planning, which are unlikely to be

operational over the next couple of years.

Debt servicing

Interest cover declined sharply in FY15, to 0.02x, as the company's EBIT was down 93%

YoY and interest cost increased 55% in FY15 on account of the completion of the Mumbai

airport. Interest costs are likely to increase further in FY16 with the commissioning of its

two power projects. Capitalised interest was high in FY15 at 85% of P&L interest (Rs12bn,

45% of total interest cost), despite which the company has had IC <1 for 14 consecutive

quarters.

The company has interest of Rs1.9 bn of loans due but not paid as of Mar-15, compared

with Rs960 mn due last year, with interest overdue for more than 90 days in most cases.

The company has also defaulted on its principal repayment in certain cases.

With debt-to-market cap at ~20x, equity raising is unlikely to help bring down debt levels

meaningfully and the company would need to accelerate its asset sales. The company has

~Rs55 bn of debt due within the next 12 months.

21 October 2015

House of Debt 34

Figure 81: PLFs remain low for the operational assets on account of a lack of gas supply

Project Capacity Operational /

CoD

Fuel

source

FY15

PLF

1H16

PLF


MW

Original Revised PPA

Jegurupadu 445 Operational Gas 14.7% 20.2% N/A 19,186 43 N/A 1Q10 93%

Gautami Power 469 Operational Gas 0.0% 13.0% N/A 17,980 38 4Q06 1Q10 80%

Alaknanda 330 Operational Hydro N/A N/A 26,977 47,236 143 FY12 1Q16 100%

Goindwal Sahib 540 FY16 Coal N/A N/A 29,638 45,730 85 FY13 FY16 100%


Figure 82: Investments in various segments

Project Capacity Est. CoD Remarks/ issues

Airport

Mumbai Airport 45mn Operational 60-year concession period

Bangalore Airport 20mn Operational 60-year concession period

Indonesia Airport FY16

Road

Jaipur-Kishangarh 542kms Operational 20-yr concession period incl construction of 30 months.

Deoli – Kota 332kms FY16 26-yr concession period incl construction of 30 months.

Bagodara – Vasad 611kms FY16 27-yr concession period incl construction of 30 months.

Resources

Alhpa & Kevin Coal 80bn tonnes 80 bn t of reserves and capacity of 80MTPA.


Figure 83: Interest cover has fallen to 0x… Figure 84: …while debt-to-EBITDA has increased to 32x

-

0.2

0.4

0.6

0.8

1.0

100

140

180

220

260

300

FY12 FY13 FY14 FY15

Gross Debt (Rs bn) IC (x )GVK Power

15.0

19.0

23.0

27.0

31.0

35.0

5

6

7

8

9

10

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )GVK Power


Figure 85: Share of gas based capacity high at 73% Figure 86: Net debt increase continues to outpace capex

Hydro27%

Gas73%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

FY13 FY14 FY15

Capex incurred Increase in net debt


21 October 2015

House of Debt 35

Jaypee Group Jaypee Group has interest in power, cement, real estate, roads and EPC. It now has 2,220

MW of operational power capacity (post asset sales) and another 1,980 MW under

construction, while 3 GW is under the planning stage. It has residual ~20.2 MTPA of

cement capacity, post sales which are under progress, and would fall to 17MT if the sales

that are in talks are completed.

The group has been aggressive in selling assets to prune its debt over the past two years

and will realise about Rs220 bn from these asset sales. Jaiprakash Associates has

already concluded sales of 8.4MT of cement capacity for Rs50 bn, but debt levels are

estimated to be still up 18% over the past two years. It has already firmed up sale of

another 4.9MT of cement capacity for Rs54 bn, which is expected to be concluded later

this year, once clarity emerges on the transfer of the mines linked with the plant.

Jaiprakash Power has also sold two hydro plants of 1,391 MW capacity for Rs93 bn and is

in talks for sale of its 500 MW Bina project. However, as the 1,391 MW hydro plants

contributed 59% of FY15 EBIT, the loss of EBITDA from these projects would result in

debt-to-EBITDA moving up further. The two residual thermal plants at JP Power have

been operating at low ~35% PLF. Moreover, post its mine getting cancelled by the

government, the group had acquired mines in the recent auction (paying royalty of Rs712/t

and Rs2,505/t) which will be a drag on their profitability. Owing to cost overruns of 25-32%

the capital cost of these plants are also now high at Rs70 mn per MW.

Jaypee Infratech has also been facing liquidity crunch even post completion of its

expressway project owing to its real estate exposure. The company has over the past few

weeks witnessed downgrade of its debt to D by the rating agencies. Many of group's other

subsidiaries and the parent have also defaulted on their debt obligations and already 65%

of group's debt is classified as D by the rating agencies.

Figure 87: Jaypee Group's structure and debt

JAYPEE GROUP

JP InfraventuresPrivate Limited

Jaiprakash Associates Ltd

750 bn (730 bn)

Jaiprakash Power Ventures Ltd

322 bn (275 bn)

Jaypee Cement Corp Ltd

Jaypee InfratechLtd 91 bn (86bn)

100%

28.3% (32.7%)

39.4% (45.1%)

60.7% (99.8%)

63.6% (95.2%)71.64% (93.3%)

JPSK Sports PvtLtd

90.5%

Jaypee Ganga Infrastructure

Corporation Ltd

100%


Rs 750 bn

2.9%(4.3%)


Figures in ( ) indicate previous year holding %


Source: Company data, BSE, Credit Suisse; * Jaiprakash Associates FY15 Annual report isn't out, assumed proportionate increase in current

maturities

21 October 2015

House of Debt 36

Debt levels have continued to rise, up 3% YoY in FY15 despite significant asset sales.

Figure 88: Debt levels continue to rise, despite asset sales


JP Associates 115,832 194,788 352,711 444,450 535,878 636,541 729,792 751,637*

JP Power Venture 9,001 9,889 68,660 133,459 165,173 230,149 275,029 322,329

Jaypee Infratech 2,000 20,154 57,232 63,321 76,562 81,032 86,743 91,018

Source: Company data, CS; *FY15 AR is not out, assumed proportionate increase in current maturities

With debt levels rising and profitability declining further, interest cover declined to 0.6x in

FY15. Debt/EBITDA and debt/equity also increased further to 11.9x and 7.1x, respectively.

Loss for the year more than doubled in FY15 to Rs17 bn.

Figure 89: Debt servicing ratios worsened further, with IC at 0.6x and debt equity at 7.1x

Gross

debt



JP Associates 751,637 102,422 61,383 44,511 (17,272) 0.8 0.6 11.1 11.9 6.9 7.1

JP Power Venture 322,329 64,107 27,790 22,610 1,511 1.0 1.0 13.3 11.3 4.2 4.9

Jaypee Infratech 91,018 63,465 13,368 13,065 3,504 1.4 1.5 6.4 6.7 1.4 1.4


Operations

The company's three operational power plants operated at low PLFs (30-55%) in FY15.

Profitability for Jaypee Power improved in 1Q16, but with the sale of plants effective 25

Jun-15, profitability is likely to be impacted for the remainder of the year.

Debt levels

Debt levels increased 3% YoY, despite asset sales of Rs65 bn being completed. The

company is likely to receive Rs150 bn from asset sales (1,391 MW of hydro plants and

4.9MTPA of cement capacity) during the current year, which should help bring debt levels

down in FY16. However, the company has sold a third of its operational power capacity

and is likely to result in sharp decline in profitability in FY16.

Asset sales

The company has been looking to aggressively sell assets in order to bring down debt

levels. The company sold its cement plant in Gujarat in FY14 for Rs38 bn and two of its

cement plants in MP and HP for Rs54 bn to Ultratech in Dec-14; the deal is yet to be

completed, as the company awaits clarity with regards to the transfer of the mines.

JP Power also sold two operating hydro power plants of 1,391 MW for Rs93 bn to JSW

Energy in Feb-15. While debt levels could come down by ~30%, they contributed ~59% of

FY15 EBIT and debt/EBITDA is likely to go up post the sale of these assets. The company

would have reported a loss of Rs3 bn vs the reported profit of Rs1.5 bn in FY15 if we were

to exclude these two assets. The company is also in talks to sell its 500 MW Bina plant for

a reported valuation of Rs35 bn.

Future expansion

While the company has been selling assets, there are projects that are currently under

construction. The company is in the process of setting up ~2 GW of power capacity, with

another 4 GW under different stages of development and 5MT of cement plants.

Debt servicing

Jaiprakash Associates' debt was recently downgraded to default status by CARE, as the

company defaulted on repayment of a bond. Jaypee Infra was looking to refinance Rs103

bn of debt for its Yamuna Expressway project under the 5:25 scheme, but the company

has defaulted on repayment of its loan, and has been downgraded to D by CARE. The

company has had IC<1 for the past nine consecutive quarters. With debt-to-market cap at

~22x, capital raising is unlikely to help bring down debt levels meaningfully.

21 October 2015

House of Debt 37

Figure 90: Post-cost escalations, cost per MW is higher than replacement cost

Project Capacity Status Fuel

Source

FY15

PLF

YTD16

PLF

Project cost Cost per

MW

COD PPA

Original Revised Original Revised

Nigrie 1,320 Operational Coal 30% 33% 81,000 102,380 78 3Q14 4Q15 38%

Bina I 500 Operational Coal 56% 11% 27,500 34,700 69 4Q13 70%

Vishnu Prayag 400 Operational Hydro 52% 40% N/A 16,698 42 FY07 100%

Bara I 1,980 FY16 Coal N/A N/A 104,500 138,700 70 2Q15 3Q16 100%


Figure 91: Company has undertaken significant asset sales over the past couple of years

Date Company Asset Enterprise value Buyer Status

Sep-13 JPA 4.8mt cement capacity in South India 38,000 Ultratech Cement Completed

May-13 Jaypee Infra 300 acres of land along the Yamuna Expressway 15,290 Gaursons Completed

Mar-14 JPA 74% of 2.1MT bokaro cement JV with SAIL 8,510 Dalmia Completed

Jul-14 JPVL 1,091 MW Karcham and 300MW Baspa hydro projects 97,000 JSW Energy Completed, post FY15

Aug-14 JPA 1.5MT grinding capacity at Panipat 3,600 Shree Cement Completed

Dec-14 JPA Two cement plants with 4.9MT capacity in MP 54,000 Ultratech Cement Awaiting approvals

May-15 JPA 2.2MT plant in Bhilai 20,000 Ultratech Cement In talks

Jun-15 JPA 1MT cement unit in Sikandarabad 5,000 Heidelberg In talks

Sep-15 JPVL 500 MW Bina power plant 35,000 JSW Energy In talks

Total 276,110


Figure 92: Interest cover has declined steadily… Figure 93: …as debt-to-EBITDA has increased to 12x

0.4

0.6

0.8

1.0

1.2

1.4

1.6

500

550

600

650

700

750

800

FY12 FY13 FY14 FY15

Gross Debt (Rs bn) IC (x )Jaypee Group

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

50

55

60

65

70

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )Jaypee Group


Figure 94: Debt/EBITDA will rise post asset sale Figure 95: PLF for operating projects falls further in FY16

-

5

10

15

20

25

30

-

50

100

150

200

250

300

350

FY15A FY15 (ex-hydro assetssold)

FY15 (ex-hydro assetssold & Bina)

Debt (Rs bn) Debt/EBITDA (x)JP Power

0%

10%

20%

30%

40%

50%

60%

Nigrie Bina I Vishnu Prayag

FY15 YTD FY16


21 October 2015

House of Debt 38

JSW Group JSW Steel has a capacity of 14 MTPA, JSW Cement has 6MTPA and JSW Energy has

3,140 MW of operational capacity with 240 MW under construction. It is in the process of

acquiring 1,391 MW of hydro capacity from Jaiprakash Power for Rs93 bn and in talks to

acquire its 500 MW Bina project for a reported valuation of Rs35 bn. It has also entered

into a non-binding MoU with Monnet Ispat to acquire its 1,050 MW under construction

thermal power plant.

JSW Steel (84% of group debt) has seen muted operating performance, as revenue

increased 3% YoY and EBIT remained flat YoY as interest costs were up 15%, while debt

increased 8% YoY resulting in worsening of debt servicing ratios. 1Q16 saw interest cover

fall below 1x as the company reported a loss. The weakening in commodity prices is likely

to keep profitability under pressure. A large ~40% of its borrowings are in foreign currency.

JSW Energy (16% of group debt) is relatively better placed and has seen improvement in

the operating performance, with EBITDA growing 11% YoY in FY15. However, it sells 41%

of its power through the merchant route and with weakness in power demand, the

company has seen a drop in profitability in 1Q16. On account of its low gearing, it's

expanding inorganically and with the acquisition of JP Power's hydro plants, its debt equity

level will move up ~2x.

Figure 96: JSW Group's structure and debt

JSW GROUP

JSW Group(Sajjan Jindal)

JSW Steel488 bn (430 bn)

JSW Energy92 bn (101 bn)

SahyogTradcorp

JSW Holding

JSW Investments

DantaEnterprises


Rs 580 bn

7.4%

7.4%

5.0%

60.9%

4.3%

40%

7.2%

5.6%

2.5%

5.3%

4.2%

15.7%

75%


Figures in ( ) indicate previous year holding %

Source: Company data, BSE, Credit Suisse; * JSW Steel debt includes acceptances

21 October 2015

House of Debt 39

Total debt increased by 10% YoY in FY15, with JSW Energy debt down 5% YoY, and

JSW Steel debt (including acceptances) up 14% YoY.

Figure 97: Debt levels continue to rise up 10% YoY


JSW Steel* 142,397 220,055 212,228 254,263 282,036 294,120 429,214 488,774

JSW Ispat 72,250 73,558 71,859 69,341 67,878 63,295 N/A N/A

JSW Energy 22,727 59,272 78,701 96,380 99,933 103,766 101,065 92,941

Total 237,374 352,884 362,789 419,984 449,846 461,180 530,278 581,715

Source: Company data, Credit Suisse * including acceptances

Profitability improved for JSW Energy in FY15, interest cover improved to 2.5x and debt

equity reduced to 1x. JSW Steel on the other hand saw profitability remain flat, as debt

levels have gone up leading to deterioration in coverage ratios.

Figure 98: Debt servicing ratios have seen a marginal worsening

Gross

debt



JSW Steel 488,774* 230,541 94,023 59,678 17,966 2.0 1.7 4.6 5.0 1.9 2.0

JSW Energy 92,941 75,180 36,234 28,337 13,495 2.0 2.5 2.7 2.1 1.4 1.0

Total 581,715 305,721 130,257 88,015 31,461 2.0 1.9 4.1 4.2 1.8 1.8

Source: Company data, Credit Suisse * including acceptances

Operations

JSW Steel's debt/EBITDA increased slightly to 5x in FY15. With steel downswing,

debt/EBITDA increased to 7.5x in 1Q16 as interest cover fell to 0.8x and the company

reported a loss for the quarter.

JSW Energy had stable performance in FY15 with debt/EBITDA at 2.1x. However, as it

sells 41% of its power through the merchant route, with weakness in power demand,

utilisation fell in 1Q16 resulting in a 10% drop in EBITDA and a 20% fall in profits.

Debt levels

Debt levels were up 10% YoY for the group in FY15 with JSW Steel's debt (including

acceptances) increasing 14% YoY. JSW Energy's debt fell 8% YoY in FY15, but this will

likely double post acquisition of the hydro plants. It would go up further if the planned

acquisition of JP's 500 MW Bina plant or Monnet's 1,050 MW plant go through.

Asset sales

The company is comfortable with its debt levels, and is not looking to sell any assets.

During the year, JSW Energy has acquired two hydro projects of 1,391 MW (300 MW

Baspa and 1,091 MW Karcham Wangtoo) from Jaiprakash Power for an enterprise value

of Rs93 bn.

Future expansion

JSW Steel is undertaking brownfield expansion at Dolvi, looking to increase its capacity

from 3.3MTPA to 5MTPA, at a cost of Rs33 bn, which is expected to be commissioned in

FY16. JSW Cement has 6MTPA of cement capacity in Karnataka, post acquisitions made

by JSW Energy, JSW Cement has slowed on its capacity expansion plans.

Debt servicing

The group has had no trouble meeting its debt obligations so far. However, with the rising

stress in the steel sector, interest cover for JSW Steel has fallen below 1x over the past

couple of quarters. With the acquisitions being undertaken by JSW Energy, its debt levels

are rising and debt/EBITDA could see a further increase (2x in FY15). JSW Energy is also

looking to refinance Rs60 bn of debt under the 5:25 scheme (link).

http://www.livemint.com/Companies/HQJX8WhvJ492Q8VCQpHjdP/JSW-Energy-in-talks-to-recast-6000-cr-debt-under-525-sche.html

21 October 2015

House of Debt 40

Figure 99: Majority of capacity is operational


source

FY15

PLF

1Q16

PLF

Project Cost Cost per

MW

PPA

Original Revised

Ratnagiri 1,200 Operational Coal 72.9% 66.8% 45,000 54,840 46 25%

Raj West 1,080 Operational Coal 77.8% 71.8% 50,750 68,688 64 100%

Torangallu Imp 260 Operational Coal 97.8% 92.6% N/A 11,050 43 0%

Torangallu Ext 600 Operational Coal 97.3% 76.6% N/A 18,180 30 0%

Baspa - II 300 Operational Hydro 47.9% N/A 68,250 N/A N/A 100%

Karcham Wangtoo 1,091 Operational Hydro 48.2% N/A N/A N/A N/A 12%

Kutehr 240 FY17 Hydro N/A N/A 17,980 N/A N/A N/A


Figure 100: Interest cover declined, as int cost was up 9% Figure 101: Debt/EBITDA increased sharply in 1Q16

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

200

250

300

350

400

450

500

550

600

650

FY12 FY13 FY14 FY15 1Q16 *

Gross Debt (Rs bn) IC (x )JSW Group

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

50

70

90

110

130

150

FY12 FY13 FY14 FY15 1Q16 *

Ebitda (Rs bn) Debt/Ebitda (x )JSW Group

Source: Company data, Credit Suisse Source: Company data, Credit Suisse; *1Q16 EBITDA annualised and

assuming debt levels as of Mar-15

Figure 102: JSW Steel EBITDA/t has seen a continuous

decline

Figure 103: Post acquisition, 59% of power sale is

through PPAs

-

20

40

60

80

100

120

140

160

FY11 FY12 FY13 FY14 FY15 1Q16

EBITDA/tonne (USD/t)

PPA59%

Merchant41%

JSW Energy - 4,531 MW


21 October 2015

House of Debt 41

Lanco Group Lanco Group is primarily focused on the power sector and has some investments in roads.

It has 3,450 MW of operational power capacity, of which 1,586 MW is gas-based and

1,800 MW is coal-based, with another 4,636 MW of capacity under construction. The

group had also acquired Griffin coal mine in Australia for A$750 mn.

46% of its operating capacity is gas-based that operated at just 9% PLF in FY15. Of its

1,800 MW of coal-based capacity, PLF has been better at 67% in FY15. However, on

account of low tariff bids (1,200 MW Anpara project) and a lack of linkage coal (300 MW

Unit-II of its Amarkantak project), these plants continue to be loss making. While, the

company sold its Udupi plant and will see a cash inflow of Rs63 bn in FY16, its

debt/EBITDA levels will only rise further as that plant contributed 70% of FY15 EBITDA.

Lanco Infra has seen continued stress on profitability and has made losses for the past

four years. Interest cover remains low at 0.2x, even as 33% of its total interest expense is

being capitalised. While the company has 4.6 GW of power capacity still under-

construction it has had little capex spend in the past couple of years. On account of the

delays, these projects have witnessed a 50-60% cost overrun.

Its Australian coal mine (Griffin) was acquired in 2011, and production remains well below

its guidance, producing 2.4MT as against the planned 5MT. The company also plans on

increasing capacity to 15MTPA by FY18 which is currently in the planning phase. The

parent company's debt is currently rated as default by CRISIL. However, most of its loans

are still standard at the banks and two of its projects are seeking refinance under the 5:25

scheme. Banks are also looking to take control of 500MW Teesta project under SDR route.

Figure 104: Lanco Group's structure and debt

Lanco Group

Lanco Infratech Ltd 400 bn (375 bn)

Lanco Group Ltd

55% 100%

68.1% 93%


Rs 470 bn

Lanco Power

LancoKondapalli

LancoAmarkantak

Lanco Thermal Power

Tasra Mining & Energy

LancoResources

International

100%

59% 100%

100%

LancoAnpara

100%

The Griffin Coal Mining Co.

100%

LancoHoskote Highway

LancoDevihalli

Highways

26.4% 26.1%

100%100%

Lanco Hills Technology

79.1%




21 October 2015

House of Debt 42

Debt levels have continued to rise, up 6% in FY15. The company completed sales of its

Udupi plant in FY16 for Rs63 bn (15% of FY15 debt) but as that plant contributed ~69% of

FY15 EBITDA and debt servicing ratios will further deteriorate.

Figure 105: Debt levels up 6% YoY


Lanco Infratech 31,650 55,970 83,614 166,517 313,934 410,844* 440,824* 471,024*

Source: Company data, Credit Suisse * includes debt for Vidarbha and Babandh projects, which is not

consolidated

Interest cover remains low at 0.2x, as the company has not covered interest for the past

18 quarters. On account of continued losses, debt-to-equity increased to 43.8x in FY15.

Debt/EBITDA declined marginally, but remained elevated at 23.1x in FY15.

Figure 106: Debt servicing ratios remain weak, with debt equity increasing to 43.8x

Gross

Debt



Lanco Infratech 399,024 8,914 16,939 5,802 (20,367) 0.1 0.2 24.6 23.1 16.1 43.8


Operations

The company has 3,450 MW of operational capacity, of which 1,586 MW is gas-based and

is operating at 9% PLF in FY15. ~1,100 MW of gas-based capacity has obtained power in

recent auctions and would be able to operate at 25% PLF for the period Jun-Sep-15. The

company has also won gas in the recent auction and would be able to run the 1,100 MW

capacity at 50% PLF from Oct-15 to Mar-16. The non-gas-based projects were operating

at ~67% PLF. However, the PPA for its 1,200 MW Anpara project has been bid

aggressively and is likely to incur losses. Its 300 MW Unit-1 of its Amarkantak project had

a PLF of 86%, while Unit-II did not generate any power on account of a lack of linkage coal.

The company also has an EPC division, with an order book of Rs280 bn. However,

revenue declined from Rs85 bn in FY12 to Rs15 bn in FY15. The toll collection from its

two road projects amounted to US$16 mn in FY15, against a project cost of US$308 mn.

Debt levels

Debt levels have continued to increase for the company, up 6% YoY to Rs399 bn. While

the company will get Rs63 bn from the Udupi sale, it has capex commitments of ~Rs200

bn of which ~Rs160 bn would be debt funded for its 4.6 GW of plants under construction.

Asset sales

The company has sold its 1,200 MW Udipi power plant to Adani Power at an EV of Rs63

bn, and this would help reduce debt by ~15%. The company has also sold its 70 MW

hydropower plant along with two 5 MW plants for Rs6.5 bn.

Future expansion

The company has pushed back capacity expansion plans by a year for all their projects

currently under construction, with no capex being incurred over the past couple of years.

The company is expanding capacity, with 4,636 MW of power capacity under construction.

For its three larger projects (3,960 MW), the company has obtained approval from banks

in Mar-15 for a 50-60% cost escalation, following which work had re-commenced in Apr-15.

The company would need further funds of Rs200 bn, of which Rs40 bn is planned via

equity while the remaining Rs160 bn would be debt funded.

Debt servicing

The company has ~Rs22 bn of long-term debt due within the next 12 months, with another

Rs45 bn in short-term debt. Interest cover was at 0.2x in FY15, and the company has had

IC<1 for the past 18 consecutive quarters. While the sale of its Udupi plant would help

21 October 2015

House of Debt 43

reduce debt by ~15% it would also reduce operating profits. The project had an EBITDA of

Rs11.6 bn in FY15, contributing 69% of overall EBITDA for the company. The company is

also looking to refinance its loans for the Kondapalli and Amarkantak plants under the 5:25

scheme. Banks have approved strategic debt restructuring (SDR) for its 500 MW Teesta

project which is under construction, and would be looking for a buyer for the project.

Figure 107: Under construction projects have seen significant delays leading to large cost escalations

Project cost COD


Source

FY15

PLF

1Q16

PLF


MW

Original Revised

Anpara 1,200 Operational Coal 79.3% 85.8% 56,400 47 FY11 FY12

Amarkanatak I & II 600 Operational Coal 42.7% 40.5% 31,380 52 FY09 FY10

Kondapalli I 368 Operational Gas 19.0% 7.0% 33,390 91 FY13

Kondapalli II 366 Operational Gas 0.0% 0.0% 18,300 11,884 32 FY10 FY11

Kondapalli III 732 Operational Gas 0.0% 0.0% 33,390 46 FY13

Karuppur 120 Operational Gas 55.4% 73.6%

Budhil 64 Operational Hydro 37.7% 34.9%

Amarkantak III & IV 1,320 FY17 Coal N/A N/A 65,000 105,000 80 FY12 FY17

Vidarbha 1,320 FY18 Coal N/A N/A 69,360 105,000 80 FY14 FY18

Babandh 1,320 FY18 Coal N/A N/A 69,300 105,000 80 FY13 FY18

Teesta 500 FY18 Hydro N/A N/A

Solar 100 FY18 Solar N/A N/A

Uttaranchal 76 FY18 Hydro N/A N/A


Figure 108: Debt levels continue to rise… Figure 109: …as debt/EBITDA has increased to 23x

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

200

250

300

350

400

450

FY12 FY13 FY14 FY15


10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

10

15

20

25

30

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )


21 October 2015

House of Debt 44

Figure 110: Capex has come to a halt Figure 111: No progress on under-construction projects

-

10

20

30

40

50

60

70

80

FY12 FY13 FY14 FY15

Capex incurred (Rs bn)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Amarkantak 3&41320 MW

Teestha500 MW

Phata Byung76 MW

Babandh1320 MW

Vidarbha1320 MW

% completed as of FY14 % completed as of FY15


Figure 112: Under-construction projects have seen large

cost escalations on account of delays

Figure 113: Debt/EBITDA will increase post Udupi sale

46%

48%

50%

52%

54%

56%

58%

60%

62%

64%

-

10

20

30

40

50

60

70

80

90

Amarkantak III & IV Babandh Vidarbha

Cost per MW % increase in project cost (RHS)

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

300,000

320,000

340,000

360,000

380,000

400,000

420,000

FY15A FY15 (ex-Udupi)

Debt Debt/EBITDA (x)

Source: Company data, Sigma Insights, Credit Suisse Source: Company data, Credit Suisse

21 October 2015

House of Debt 45

Reliance ADA Group Reliance ADA Group has presence in several sectors including infra, power, telecom, and

finance. Reliance Infra is involved in power distribution, transmission and trading. It also

has cement business (5.8MT operational and 4.5MT under construction), roads (11

projects, of which ten are operational), defence (recently acquired a stake in Pipavav

Defence), metros (Mumbai Metro commenced operations in FY15), airports (five

operational airports in Maharashtra) and an EPC division (order book of Rs51 bn). It has

50MTPA mining capacity at Sasan and in Indonesia.

Reliance Power has an operational power capacity of ~6 GW with another 10 GW under

construction. It commissioned its 3,960 MW Sasan plant during the year, which has seen a

47% cost overrun; with an aggressively bid PPA, profitability is likely to be under pressure.

For the company despite an increase in operating capacity from 2,500 MW to 5,950 MW

over the past two years, profits have remained flat. Work on its residual 10 GW of capacity

is progressing slowly and none of the projects are likely to be operational before FY18.

Reliance Infra's profitability has also been under pressure and its interest coverage has

dropped below 1x. The company is also in the process of acquiring a controlling stake in

Pipavav Defence.

Reliance Communication has also seen continued pressure on its operating performance.

It has therefore been looking to deleverage. A Rs61 bn equity raise in FY15 helped trim

debt levels by 5%. It is also looking to sell stake in its tower business and enter spectrum

sharing contracts with Rjio to reduce debt levels further.

Reliance Capital has been in the process of raising equity by selling a 49% stake in both

its asset management and life insurance businesses to Nippon Life.

Figure 114: Reliance ADA's group structure and debt levels

Reliance ADA GROUP

Reliance Inceptum PvtLtd

Reliance Communications

Enterprises

Reliance Project Ventures and Management

Reliance Power332 bn (300 bn)

Reliance Comm398 bn (420 bn)

Reliance Infra258 bn (243 bn)

Reliance Cap261 bn (256 bn)

19.2% (53.5%)

42.2% (37.5%)

75% (34.8%)

40.4% (27.3%)

48.5% (30.5%)

29.1% (34.6%)

59.7% (16.8%)

Reliance Wind Turbine Installators Industries

38.7% (45%)

52.6% (33.1%)

ADA Group

Holding Cos


Rs 1, 250 bn

12.1%




21 October 2015

House of Debt 46

Debt levels for the group have remained largely flat (+3% YoY), as while RComm debt has

declined 5%, Reliance Power has seen an 11% YoY increase.

Figure 115: Debt levels up for R Infra and R Power, while RComm has seen a decline


Reliance Infra 59,036 101,054 85,839 123,052 182,897 219,762 242,891 257,660

Reliance Power 4,483 13,325 22,406 73,348 150,650 275,107 300,499 332,234

Reliance Comm 258,217 391,623 297,154 390,714 383,030 415,470 419,780 398,280

Reliance Capital 93,262 141,071 145,193 201,536 198,390 225,100 255,770 261,390

Total 414,998 647,072 550,592 788,650 914,967 1,135,439 1,218,940 1,249,564


Interest cover dipped below 1x for Reliance Infra in FY15, on account of an increase in

interest costs on commissioning of the Mumbai Metro project, while EBIT declined 10%

YoY. RComm has seen an improvement on account of the capital raise which has helped

reduce debt and lower interest costs.

Figure 116: Debt servicing ratios remain stressed

Gross

Debt



Reliance Infra 257,660 269,745 29,106 20,778 18,002 1.4 0.9 6.9 7.5 0.7 0.8

Reliance Power 332,234 206,320 25,350 20,113 10,283 2.3 1.9 14.2 12.3 1.4 1.5

Reliance Comm 398,280 379,360 71,900 33,730 7,140 0.7 1.2 6.1 5.2 1.3 1.0

Reliance Capital 261,390 133,240 38,670 37,990 10,010 1.3 1.4 6.3 5.7 1.7 1.7

Total 1,249,564 988,665 165,027 112,611 45,435 1.2 1.3 7.4 6.8 1.2 1.1


Operations

R Power has commenced operations at its 3,960 MW Sasan plant, which was operating at

65% PLF in FY15. However, the tariff was aggressively bid, and the company is unlikely to

be profitable unless it receives a favourable order from the CERC. The company had bid

for the Sasan project, with the expectation of using the excess coal from the captive coal

mines at Sasan, for the 3,960 MW power plant being set up at Chitrangi, where power is to

be sold at merchant rates. This, however, has faced regulatory hurdles. Despite the new

capacity coming on stream, R Power PAT has remained flat over the past two years.

Reliance Cement which has 5.8MT of operating capacity has won a coal mine in the

auction, having 5.7MT reserves, agreeing to pay a royalty of Rs1,402/t. The group is

reportedly looking to sell these plants.

Debt levels

Debt levels for the group have remained largely flat in FY15. Debt equity is reasonable at

1.1x, while debt/EBITDA remains high at 6.8x. 46% of group debt is in foreign currency.

Asset sales

RComm plans to reduce debt to Rs20 bn by Sep-16, via asset sales. It is looking to sell

stake in its tower company. Reliance Capital has also raised ~Rs64 bn in recent years

(Rs18 bn over the past year) by divesting stake in its life insurance (26%) and asset

management businesses (49%). Reliance Defence Systems, a subsidiary of Reliance Infra,

has acquired a 43% stake in Pipavav defence for ~Rs21 bn.

Future expansion

Reliance Power has 10 GW power projects under construction, and is planning to set up a

3,000 MW LNG-based combined cycle power plant in Bangladesh at a capital cost of

~US$3 bn over the next three years. The company's Samalkot plant did not take off due to

a decline in gas output from the KG D6 basin, and the company is planning on using the

equipment procured for the project in Bangladesh (link).

http://www.financialexpress.com/article/economy/reliance-power-adani-power-sign-mous-to-set-up-plants-in-bangladesh/81332/

21 October 2015

House of Debt 47

Reliance Power recently terminated its contract for the development of the 3,960 MW

Tilaya power plant. It had bid for the project at a tariff of Rs1.77/unit in 2009 and estimated

to incur capex of Rs360 bn. The company has also withdrawn from the 7,480 MW gas-

based power plant in Dadri, Uttar Pradesh.

Debt servicing

Reliance Infra reportedly refinanced loans of Rs16.5 bn for its Mumbai Metro project in

June, by doubling the tenure of the loan and reducing interest rates by 125 bp to 11.75%.

The project commenced operations in Jun-14. R Infra has had IC<1 for the past four

quarters.

Reliance Power has also reportedly refinanced loans for two of its projects, 600 MW

Butibori plant and the 1,200 MW Rosa power plant in an effort to bring down interest costs.

It is seeking loan refinancing for the Sasan project as well.

Figure 117: Under construction projects have seen significant delays leading to large cost escalations

Project Capacity

(MW)

Status Power Source FY15 PLF Project Cost Cost per

MW

COD

Original Revised Original Revised

Rosa 1,200 Operational Linkage Coal 81.7% 51,620 60,000 50 2Q11 4Q12

Butibori 600 Operational Linkage Coal 69.2% 28,100 40,630 68 1Q10 4Q14

Sasan 3,960 Operational Captive Coal 65.3% 183,420 270,000 68 1Q14 4Q15

Krishnapatnam 3,960 FY18 Imported Coal N/A 165,376 195,000 49 2Q14 FY18

Chitrangi 3,960 FY18 CaptiveCoal N/A 158,420 210,000 53 2Q15 FY18

Samalkot 2,620 Gas N/A N/A 100,800 42


Figure 118: Interest cover remains low at 1.3x… Figure 119: …while debt/EBITDA has is at 6.6x

1.0

1.1

1.2

1.3

1.4

1.5

800

900

1,000

1,100

1,200

1,300

FY12 FY13 FY14 FY15

Gross Debt (Rs bn) IC (x )Reliance ADA Group

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

100

110

120

130

140

150

160

170

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )Reliance ADA Group


Figure 120: R Power projects have seen large escalations Figure 121: PAT has remained flat despite increase in cap

0%

10%

20%

30%

40%

50%

25

35

45

55

65

75

Sasan Butibori Chitrangi* Krishnapatnam* Rosa

Cost per MW Cost escalation (%) (RHS)

-

2,000

4,000

6,000

8,000

10,000

12,000

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY12 FY13 FY14 FY15

Operational Capacity PAT (Rs mn) (RHS)

Source: Company data, Sigma Insights, CS; * under construction Source: Company data, Credit Suisse

21 October 2015

House of Debt 48

Vedanta Group Vedanta Resources has interests across oil, zinc, copper, aluminium, iron ore and power.

It owns a 60% stake in Cairn India and 65% in Hindustan Zinc. Vedanta’s aluminium

operations are spread across Balco (51% stake, 570kt smelter) and Jharsuguda which has

a 1.75 mn t smelter capacity. It also has a 1 mn t alumina refinery at Lanjigarh. Vedanta

has 3,360 MW of operational power capacity (2,400 MW at Jharsuguda, 660MW at TSPL

and 300 MW at Korba), with another 1,520 MW set to be commissioned in FY16 (2x660

MW at TSPL – delayed by two years, 300 MW at Korba).

The sharp fall in global commodity prices has adversely impacted Vedanta’s EBITDA.

2015 EBITDA was down 32%/16%/15% for its oil/Zinc International/power businesses. Its

Indian Zinc operations registered moderate growth of 7%. While the ramp-up helped

EBITDA growth in the Aluminium segment, the sharp fall in both LME prices and physical

premiums in the last six months has meaningfully eroded profitability. Vedanta has already

put the start-up of additional pots at Balco-II on hold and moderated output of its Lanjigarh

alumina refinery given paucity of bauxite from domestic sources and falling alumina prices

(external purchase now more attractive). Meanwhile, delays in government approvals (to

use power from the 2,400 MW unit at Jharsuguda for the captive smelters) hamper ramp-

up at the more efficient JSG smelters and result in lower PLFs (just 39% last year).

Vedanta has plans to incur further ~US$5 bn of capex, of which US$1 bn is scheduled for

FY16 (revised down from US$2 bn). Its gross debt has remained largely flat at US$16.7 bn.

Figure 122: Vedanta Group's structure and debt

VEDANTA GROUP

Vedanta Resources PlcDebt 1,033bn (1,012bn)Cash 509 bn (536 bn)

Vedanta LtdDebt 784 bn (812 bn)Cash 451 bn (454 bn)

Konkola Copper Mines

79.4%

TalawandiSabo Power

Liberia Iron Ore Assets

Hind ZincCash 308 bn

(255 bn)

Bharat Aluminium(BALCO)

Skorpionand Lisheen

BlackMountain

AustralianCopper Mines

51% 64.9% 100%100% 100%

Volcan, Bahamas

Cairn India LtdCash 161 bn

(181bn)

Estimated Group

Gross Debt - Rs 1,030 bn

Net Debt - Rs 525 bn

100%

74%

69.7%

TwinstarHoldings

100%

43.2%

59.5%

18.7%

59.9%



21 October 2015

House of Debt 49

The group has managed to keep debt levels largely flat over the past three years.

Figure 123: Gross debt levels are largely flat


Vedanta Resources Plc 163,576 281,320 449,548 536,388 934,725 996,108 1,012,272 1,033,404


While debt levels have remained flat, the group has seen its profitability weaken, leading

to declines in debt servicing ratios. Interest cover has declined to 1.3x. The company has

reported a large loss during the year (on account of impairment charge on its oil and gas

assets) which has led to the erosion of equity resulting in debt equity increasing to 0.7x.

Figure 124: Debt servicing ratios have worsened over the year

Gross

Debt



Vedanta Resources Plc 1,033,404 735,444 231,954 107,601 (234,837) 1.6 1.3 1.8 2.3 0.4 0.7

Vedanta Ltd 784,045 538,753 220,446 148,854 (156,458) 2.5 2.6 1.8 1.5 0.5 0.6

Hind Zinc - 433,531 74,196 67,754 81,780 137.4 288.2 (3.7) (4.1) (0.7) (0.7)

Cairn - 588,702 96,207 59,532 44,796 274.6 292.7 (1.3) (1.7) (0.3) (0.3)


Operations

Vedanta Resources saw a decline in profitability in FY15, with EBITDA and EBIT declining

14% and 22%, respectively. This has largely been on account a fall in profitability in their

oil & gas business. Cairn has seen EBIT fall 48% in FY15 and is likely to fall further in

FY16 unless oil prices were to see a sharp recovery.

The company has taken a US$6.6 bn write-off relating to its Rajasthan and Sri Lanka

blocks on account of the fall in crude oil prices, resulting in the company reporting losses

in FY15.

The company has restarted mining operations in Karnataka in Feb-15 and expects to

restart mining at Goa in 3Q16.

Debt levels

Debt levels for the company are reasonable, with Cairn and Hindustan Zinc having zero

debt. Most of the group debt, is at Vedanta Ltd. Vedanta India has debt of Rs780 bn, while

Vedanta Resources has a gross debt of Rs1,030 bn, while net debt is significantly lower at

Rs525 bn. Gross debt levels remained largely flat YoY, while net debt was up 10% YoY.

Asset sales

The company's debt levels have remained largely flat, with debt servicing ratios relatively

healthy, on account of which the company is not looking to sell assets to bring down debt

levels.

Future expansion

The company has spent US$1.5 bn in FY15 and has a capex of US$5.2 bn pending in

order to complete its expansion plans of which US$1 bn is scheduled for FY16 (revised

down from US$2 bn). Its 1,980 MW Talawandi power plant is close to completion, with

Unit-II undergoing trial runs. This project has seen a delay of over two years.

Debt servicing

In Jan-15, Moody's downgraded Vedanta Resources Plc, from Stable to Negative, while

S&P downgraded it from BB to BB- with a negative outlook. Interest cover declined in

FY15 to 1.3x.

21 October 2015

House of Debt 50

Figure 125: Interest cover > 1x, but it has been declining... Figure 126: ...along with a decline in EBITDA

1.5

2.0

2.5

3.0

3.5

4.0

4.5

800

850

900

950

1,000

1,050

1,100

FY12 FY13 FY14 FY15


0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

150

200

250

300

350

400

450

FY12 FY13 FY14 FY15

Ebitda (Rs bn) Debt/Ebitda (x )


Figure 127: EBITDA has declined for most segments Figure 128: Progress on under-construction projects has

been slow

(500)

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY14 Revenue FY15 Revenue FY14 EBITDA FY15 EBITDAUSD bn

0%

20%

40%

60%

80%

100%

120%% of capex incurred as of FY14 % incurred in FY15


21 October 2015

House of Debt 51

Videocon Group The group has interests in oil & gas exploration, consumer electronic, telecom and power.

The company has interests in oil & gas exploration in Brazil, Indonesia, Australia and East

Timor and aims to convert the company from a consumer durable firm to a global oil & gas

exploration and production company. The company has spent Rs90 bn in capex in the

segment over the past two years, while EBIT continues to remain negative. The group plans

to invest Rs160 bn (US$2.5 bn) in the oil & gas sector over the next three years (link).

Currently Ravva is the only operational block, in which it has a 25% stake. In 2014, the

company sold its interest in the Mozambique asset for US$2.5 bn (Rs150 bn). However,

its net debt has remained largely flat (-2% YoY) as it has spent Rs44 bn on oil & gas

capex and had a high interest burden of Rs50 bn over the period. The group has now

stake in four fields in Brazil in a 50:50 JV with BPCL. These assets were expected to be

operational by FY18, but BPCL has been guiding for a delay. Notably, Petrobras, which is

the developer of three of these four blocks, has also been facing stress on account of its

high debt (link).

It is one of the smaller telecom operators in India, operating in six circles with ~7.6 mn

customers (<1% market share). It acquired 5Mhz spectrum in the Nov-12 auction in the six

circles for ~Rs22 bn. Since then, the company has not incurred significant capex in the

telecoms segment and continues to make losses at the EBIT level.

Revenues from the oil & gas segment contribute 9% of overall revenue and have declined

4% YoY and likely to decline further, given the sharp decline in crude prices since Dec-14.

The consumer electronics segment, which accounts for ~85% of revenues, has grown 5%

YoY, with overall revenue growth muted at 8% YoY.

Figure 129: Videocon Group's structure and debt

Videocon Group

Videocon Industries454 bn

(408 bn)

Videocon Energy Ltd

Pipavav Energy Pvt

Ltd

Videocon International Electronics

100% 100%

Videocon(Promoter

Holding cos)

65.6% (83.1%)

Videocon Telecommuni

cations

Videocon Mauritius

Energy Ltd

Value Industries 11bn

Ravva Oil & Gas Field Joint Venture

25%

IBV Brazil PetroleoLimitada

100%

Videocon Hydrocarbon Holdings Ltd

Trend Electronics 7 bn

18.8%5.0%

100%

0.9% 0.1%


Rs 460 bn

92.9%

100%

50%

Chhattisgarh Power

Ventures

100%



BM POT-16-Potiguar

BM-C-30 Campos

BM-ES-24-Esprito Santos

BM-SEAL-11-Sergipe

20% 15%12.5%10%


http://in.reuters.com/article/2015/07/03/videocon-brazil-oil-gas-idINKCN0PD1HD20150703

http://www.livemint.com/Companies/rW9O1WGOmR1yu40NKejJAJ/Videoconwill-be-an-oil-and-gas-firm-in-three-years-saysVe.html

21 October 2015

House of Debt 52

Despite the sale of assets (Rs150 bn over the past year), gross debt is up ~11% over the

past 18 months, while net debt is largely flat at Rs390 bn.

Figure 130: Debt levels up 7x over the past eight years

FY07 FY08 FY09 FY10 FY11 FY12 Jun-13 Dec-14

Videocon Ind 62,832 69,988 113,852 121,136 144,199 272,834 407,681 454,055


Operating profit of the company continued to remain weak, with interest cover at (0.3x)

and EBITDA also turning negative for the 18 months ended Dec-14. Debt to equity has

improved to 3.8x on account of a sharp increase in reserves as profit from the sale of 10%

in the Mozambique asset resulted in the company booking a profit of Rs139 bn during the

year.

Figure 131: Operating profitability weakened further in FY15

Gross

debt

Equity EBITDA EBIT PAT Interest cover (x) Debt/EBITDA (x) D/E (x)

Jun-13 Dec-14 Jun-13 Dec-14 Jun-13 Dec-14

Videocon Ind (18 month) 454,055 102,052 (1,127) (16,492) 51,196 (0.3) (0.3) 285.5 (519.5) 8.4 3.8

Source: Company data, Credit Suisse *Debt/EBITDA has been annualised

Operations

The company has historically been a consumer appliances company and ~85% of the

revenue for Videocon Industries comes from the consumer electronics which saw

revenues grow 5% YoY. Oil & gas, which contributes 9% of overall revenues, saw a 4%

decline in revenues. Overall EBITDA turned negative for the 18 months ended Dec-14, on

account of losses in its oil & gas and telecoms segments.

The company reported a PAT of Rs51 bn for the 18 months ended Dec-14, on account of

the gain of Rs139 bn on sale of Mozambique block, excluding which it had a loss of ~Rs41

bn.

Debt levels

Debt levels for the company have continued to rise, up from Rs120 bn in FY11 to Rs450

bn as of Dec-14, with net debt remaining largely flat over the past 18 months (-2% YoY).

Asset sales

Despite the sale of its stake in the Mozambique asset for Rs150 bn gross debt has

continued to rise, up 10% YoY to over Rs450 bn while net debt has remained largely flat at

Rs390 bn.

Future expansion

The company had also planned two 1,200 MW coal-based power plants in Chhattisgarh

and Gujarat (Pipavav), but there appears to be little progress on these. In 2010, the

company had begun work on setting up the 1,200 MW capacity in Pipavav for Rs60 bn,

with land acquisition completed in 2011 and the plant was expected to be operational by

FY15. However, progress appears to be slow and the projects are unlikely to be

operational soon.

Debt servicing

The company had negative EBIT for the 18 months ended Dec-14, and has had interest

cover less than 1 for the past 13 consecutive quarters. With market cap at ~Rs45 bn, debt

to market cap is high at 10x.

The company recently took shareholders' approval, allowing lenders to convert a part or

entire quantum of loans up to Rs750 bn into equity if they so decide.

21 October 2015

House of Debt 53

Figure 132: Debt continues to rise, while IC is negative Figure 133: EBITDA has been weak for the past four years

(0.8)

(0.6)

(0.4)

(0.2)

-

380

420

460

FY12 Jun-13 Dec-14


3.0

4.0

5.0

6.0

7.0

8.0

9.0

(20)

(15)

(10)

(5)

-

5

10

FY12 Jun-13 Dec-14

Ebitda (Rs bn) Debt/Equity (x )


Figure 134: Oil & Gas and telecom remain EBIT negative Figure 135: Oil & Gas accounted for 83% of FY15 capex

(20)

(15)

(10)

(5)

-

5

10

15

20

25

ConsumerElec


Jun-13 Dec-14EBIT (Rs bn)

(10)

-

10

20

30

40

50

60

70

80

ConsumerElec


Capex (Rs bn) Jun-13 Dec-14


Figure 136: Despite asset sales, debt levels remain flat Figure 137: Operating performance weakens further

398

150

248 248

53

301

390

89

Jun-13 NetDebt

Assetsales

Net Debtpost asset

sales

Capex Others* Dec-14Net Debt

(20)

(10)

-

10

20

30

40

50

60

FY12 Jun-13 Dec-14

EBIT Interest

Rs bn


21 October 2015

House of Debt 54

Companies Mentioned (Price as of 19-Oct-2015)

Adani Enterprises Ltd. (ADEL.BO, Rs93.7) Adani Ports & SEZ (APSE.BO, Rs317.75) Adani Power Ltd (ADAN.BO, Rs28.7) Axis Bank Limited (AXBK.BO, Rs506.7) Bank of India (BOI.BO, Rs141.7) Cairn India Ltd (CAIL.BO, Rs159.9) Essar Oil (ESRO.BO, Rs192.6) Essar Ports Ltd (ESRS.BO, Rs118.2) Essar Shipping (ESPL.BO, Rs20.05) GMR Infrastructure Ltd (GMRI.BO, Rs13.81) GVK Power & Infrastructure (GVKP.BO, Rs8.05) HDFC Bank (HDBK.BO, Rs1096.2) Hindustan Zinc Limited (HZNC.BO, Rs158.4) ICICI Bank (ICBK.BO, Rs287.2) ING Vysya Bank (VYSA.BO, Rs1027.7) Indian Overseas Bank (IOBK.BO, Rs36.65) IndusInd Bank (INBK.BO, Rs962.25) JSW Energy (JSWE.BO, Rs89.3) JSW Steel Ltd (JSTL.BO, Rs890.4) Jaiprakash Associates Ltd. (JAIA.BO, Rs14.31) Jaiprakash Power Ventures Ltd (JAPR.BO, Rs7.3) Jammu and Kashmir Bank (JKBK.BO, Rs90.95) Jaypee Infra (JYPE.BO, Rs13.88) Kotak Mahindra Bank Ltd (KTKM.BO, Rs656.95) Lanco Infratech Ltd. (LAIN.BO, Rs5.14) Nippon Life Insurance (Unlisted) Punjab National Bank Ltd (PNBK.BO, Rs137.1) Reliance Capital Ltd (RLCP.BO, Rs407.5) Reliance Communication Ltd (RLCM.BO, Rs81.95) Reliance Infrast (RLIN.BO, Rs382.05) Reliance Power Ltd (RPOL.BO, Rs48.7) Rio Tinto (RIO.L, 2440.0p) Rosneft (ROSN.MM, Rbl251.5) State Bank Of India (SBI.BO, Rs254.5) Union Bank of India (UNBK.BO, Rs173.5) Vedanta Limited (VDAN.BO, Rs108.2) Vedanta Resources PLC (VED.L, 542.0p) Videocon (VEDI.BO, Rs135.45) Yes Bank Ltd (YESB.BO, Rs770.05)

Disclosure Appendix

Important Global Disclosures

Ashish Gupta and Prashant Kumar, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. an d Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional b enchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12 -month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

21 October 2015

House of Debt 55

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 59% (34% banking clients)

Neutral/Hold* 26% (35% banking clients)

Underperform/Sell* 13% (23% banking clients)

Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outper form, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names

The subject company (JSTL.BO, BOI.BO, INBK.BO, VED.L, APSE.BO, HDBK.BO, CAIL.BO, VDAN.BO, JSWE.BO, RLCM.BO, KTKM.BO, RIO.L, ROSN.MM) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, RIO.L) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (KTKM.BO, RIO.L) within the past 12 months

Credit Suisse has managed or co-managed a public offering of securities for the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, RIO.L) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (JSTL.BO, BOI.BO, INBK.BO, VED.L, APSE.BO, HDBK.BO, HZNC.BO, CAIL.BO, VDAN.BO, JSWE.BO, RLCM.BO, YESB.BO, KTKM.BO, RIO.L, ROSN.MM) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (KTKM.BO, RIO.L) within the past 12 months

Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014

Credit Suisse may have interest in (ESRO.BO, VYSA.BO, ESPL.BO, VEDI.BO, GMRI.BO, JAPR.BO, LAIN.BO, RLIN.BO, GVKP.BO, JYPE.BO, JAIA.BO, RLCP.BO, ESRS.BO, ADAN.BO, RPOL.BO, ADEL.BO, JKBK.BO, JSTL.BO, BOI.BO, INBK.BO, AXBK.BO, APSE.BO, HDBK.BO, HZNC.BO, CAIL.BO, IOBK.BO, VDAN.BO, JSWE.BO, PNBK.BO, UNBK.BO, RLCM.BO, YESB.BO, SBI.BO, ICBK.BO, KTKM.BO)

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (YESB.BO).

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

21 October 2015

House of Debt 56

The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (RIO.L).

The following disclosed European company/ies have estimates that comply with IFRS: (VED.L, RIO.L, ROSN.MM).

An analyst involved in the preparation of this report received third party benefits in connection with this research report from the subject company (JSTL.BO)

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (JSTL.BO, INBK.BO, HDBK.BO, JSWE.BO, RLCM.BO, KTKM.BO, RIO.L) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (India) Private Limited ................................................................................ Ashish Gupta ; Kush Shah ; Prashant Kumar

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

21 October 2015

House of Debt 57

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who-we-are This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse International, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities (Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Board of India as Research Analyst (registration no. INH 000001030) and as Stock Broker (registration no. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or Market Counterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any other person. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2015 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

BK2014_NEW.doc

https://www.credit-suisse.com/who-we-are

Documents

House of Debt - Credit Suisse