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Equipment ordering for the 11th Plan

completed; focus turns to executionWe examine the status of current

projects; firms with operating experience

and financial stability emerge as winnersReiterate OW(V) on CESC and Tata

Power, N(V) on Lanco; downgrade NTPC

to UW(V) from N(V)Focus to shift on execution. Equipment ordering is now

complete for the 11th Plan, achieving a critical milestone in

project execution. Now, the focus will shift towards project

developers in terms of project completion. We have looked at

the status of projects under construction for stocks we cover.

We prefer developers with operating experience, financial

stability and projects that have achieved financial closure.

CESC: OW(V), TP = INR345. We like CESC primarily

because of its gradual capacity addition plan, which prevents

it from spreading itself too thin. We ascribe no value to the

real estate and retail businesses and retain our estimates,target price, and rating.

Tata Power: OW(V), TP = INR1,000. Its 5.6GW of capacity

addition is supported by fuel sourcing and funding strategy. We

reduce our FY10e profit estimates by 21% to incorporate lower

coal realisation; we lower our target price to INR1,000.

Lanco Infratech: N(V), TP = INR132. 3.9GW of power

projects are in advanced stages of execution, with 600MW to be

operational by FY10e. However, real estate and infrastructure

development continue to drag. We reduce our FY10e estimates

by 18% and lower the target price to INR132.

NTPC: UW(V), TP = INR142. NTPC enjoys the best

positioning in terms of access to funds and fuels, but the market

is ignoring delays in project execution (HSBC estimates

11.9GW vs companys guidance of 22GW). Maintain our

estimates and target, but downgade to UW(V).

Natural Resources & Energy

Indian Utilities

Indian UtilitiesFocus on project execution

14 January 2009

Sumeet Agrawal*

Analyst

HSBC Securities and Capital Markets (India) Private Limited

+91 22 2268 1243 [email protected]

Sumit Agarwal*

Associate

Bangalore

View HSBC Global Research at: http://www.research.hsbc.com*Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to NYSE and/or NASDregulations

Issuer of report: HSBC Securities and Capital Markets (India)Private Limited

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it

Valuation summary (INR)

Name Curr.

price

Ticker New

rating

Sales

(bn)

EBITDA

(bn)

PAT

(bn)

New

TP

Old

TP

Potl

Return

CESC 242 CESC OW(V) 30.50 7.03 3.53 345 345 45%Lanco 111 LANCI N(V) 34.01 7.54 4.09 132 335 19%NTPC 171 NATP UW(V) 418.19 131.41 82.10 142 142 -15%Tata Power 727 TPWR OW(V) 146.19 38.52 20.97 1,000 1,244 41%

Source: HSBC estimates
http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/http://www.research.hsbc.com/


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Focus turns to execution 3From orders to execution 3

Potential winners 3

BHEL to benefit from capacity addition 5

NTPC capacity addition plan 5

We prefer Tata Power among private-sector utilities 7

CESC Ltd (CESC) 12Key triggers 13

Valuation 14

Risks 14

Financials & valuation 15

Lanco Infratech (LANCI) 16De-risking the power portfolio 16

Valuation 18

Risks 19


NTPC Ltd (NATP) 21Strong project pipeline, but poor execution 21

Should continue to trade at a premium 22

Valuation 22

Risks 23


Tata Power (TPWR) 25Best-placed Indian utility 25

Fuel and funds well tied up 26

Valuation 27

Risks 28


Annexure 30Hectic equipment ordering in 2008 30

Why were targets not met? 30

Disclosure appendix 32

Disclaimer 36

Contents


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From orders to execution

The size of power equipment orders formed a

large part of news flow in 2008 for Indian utilities

equipment for power projects worth 15GW wasordered during the year. The Ministry of Power

pushed for power projects financial closure to

achieve the 11th Five-Year Plan (2007-2012)

target (c79GW power projects).

The order flow is over; it is now time to get down to

brass tacks and focus on execution. We contend that

this will be the big driver over the next three years.

We examine the order flows of utilities companies

under our coverage and maintain that the winners

will be those with operating experience, financial

stability, and projects that have achieved

financial closure.

Potential winners

Central utilities to dominate capacity

addition

We remain positive in terms of capacity addition

by central utilities. We expect central utilities to

dominate capacity addition with c21.7GW (45%

of total capacity). Central utilities like NTPC and

Damodar Valley Corporation should be front-

runners in terms of this capacity addition.

Private sector: who will win?

The exuberance in the power sector resulted in a

host of announcements by private players in terms

of capacity addition plan. c150GW of new

capacity addition, almost equivalent to Indias

current installed base, was announced by different

private-sector entities.

We remain cautious in terms of these capacities

finally coming on stream over the next decade.

We maintain that it is difficult for the entire

c150GW to be operational, given the funding

requirement as well as execution risk. After our

ground reality check, we believe only 17GW of

the expected 20GW of the 11th Plan private-

sector capacity addition has achieved financial

closure.

Key projects awaiting financial closure

600MW Reliance Power Rosa II

3960MW Reliance Power Sasan UMPP (2

units of 660MW each, expected for

commissioning in the 11th Plan)

540MW Goindwal Sahib by GVK Power(equipment order placed)

2400MW Sterlite Energy power project

Focus turns to execution

With the crucial milestone of equipment ordering for the 11th Plan

complete, the focus will now shift of project execution

Delays likely unavoidable due to on-the-ground issues, which will

result in demand outstripping supply

We expect central and state utilities to dominate capacity addition

as the private sector scales back its capacity addition


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Private power projects in the 11th Plan (MW)

Plant name State Agency Ultimatecapacity

Capacity in11th Plan

Coal linkagestatus

Equipment vendor Financialclosure

Expected dateof commission

Thermal coalAmarkantak Pathadi (Lanco) U2 Chattisgarh Lanco 300 300 Linkage Zelan, Malaysia Achieved 2009-10Amarkantak Pathadi (Lanco) U1 Chattisgarh Lanco 300 300 Linkage Zelan, Malaysia Achieved 2008-09Anpara C Uttar Pr Lanco 1,000 1,000 Linkage Dong Fang, China Achieved 2011-12Budge Budge Ext. West Bengal CESC 250 250 Block BHEL Achieved 2009-10Goindwal Sahib Punjab GVK 540 540 Block BHEL Not achieved 2011-12Jalipa/ Kapurdi-Lignite Rajasthan IPP 1,080 1,080 Shanghai Electric, China Achieved 2009-11JSW Ratnagiri Maharashtra JSW 1,200 1,200 Imported coal Shanghai Electric, China Achieved 2010-12Trombay TPS Maharashtra Tata Power 250 250 Imported coal BHEL Achieved 2008-09Sasan UMPP U1,2 Madhya Pr Reliance Energy 3,960 1,320 Block REL (main equipment by

Shanghai Electric, China)Not achieved 2011-12

Lanco-Nagarjuna Karnataka Lanco 1,015 1,015 Imported coal Dongfang, China Achieved 2010-11Maithan Jharkhand Tata Power 1,050 1,050 Linkage BHEL Achieved 2010-12Mundra TPP Adani Gujarat Adani 1,320 1,320 Imported coal Sepco III, China Achieved 2011-12Mundra TPP Adani Gujarat Adani 1,320 1,320 Imported coal SCMEC, China Achieved 2009-11Raigarh Chatt isgarh Jin. Power 750 750 Block BHEL Achieved 2007-08Raigarh Chatt isgarh Jin. Power 250 250 Block BHEL Achieved 2008-09Rosa St I Uttar Pr Reliance Power 600 600 Linkage Shanghai Electric, China Achieved 2010-11Rosa ST II Uttar Pradesh Reliance Power 600 600 Linkage Shanghai Electric, China Not achieved 2011-12Sterlite Energy Orissa Sterlite 2,400 600 SEPCO, China Not achieved 2009-10Mundra UMPP Gujarat IPP 4,000 1,600 Imported coal Doosan, Korea + Toshiba Achieved 2011-12Torangallu Karnataka JSW 600 600 Imported coal China Achieved 2008-10

Thermal Gas/LNGGautami Andhra Pr Gautami Power 464 464 Alstom Achieved 2008-09Konaseema Andhra Pr Oakwell 445 445 Larsen & Toubro Achieved 2008-09Kondapall i CCPP II Andhra Pr Lanco 366 366 Gas/LNG GE Achieved 2009-10Rithala CCPP Delhi NDPL 108 108 Gas/LNG China Not achieved 2009-10

Sugen Torrent Gujarat Torrent 1,128 1,128 Siemens Achieved 2008-10HydroAllain Duhangan Himachal Pr RSWML 192 192 BHEL Achieved 2009-10Budhi l Himachal Pr Lanco 70 70 Dongfang, China Achieved 2009-10Chujachen Sikkim Gati 99 99 Alstom Achieved 2009-10Karcham Wangtoo Himachal Pr JPKHCL 1,000 1,000 Voith Siemens Achieved 2011-12Maheshwar Madhya Pr IPP 400 400 BHEL Achieved 2011-12Malana II Himachal Pr Everest Power Co 100 100 Dongfang, Hong

Kong+Aviera IndiaAchieved 2009-10

Sorang Himachal Pr Sorand PowerCo

100 100 Voith Siemens Not achieved 2011-12

Srinagar Uttarakhand GVK 330 330 BHEL Achieved 2011-12Teesta III Sikkim Teesta Urja 1,200 1,200 Consortium including SEW

& ABIRAchieved 2011-12

Notes: SEW=SEW Infrastructure Limited; ABIR: ABIR I nfrastructure Private Limited; SEPCO=Shandong Electric Power Construction Corp.; RSWML=Rajasthan Spinning and Weaving Mills Limited; JPKHCL=Jaiprakash KarchamWangtoo Hydroelectric Project; NDPL=North Delhi Power Project Limited

TPP=thermal power projects; CCPP=combined cycle power projects; IPP=independent power producerSource: CEA, HSBC


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Impact of credit crisisGiven the current credit crisis, we expect debt

financing to private-sector projects based on

merchant or aggressive competitive tariff will be

difficult. Lending institutions have also been

reluctant to lend at 80:20 debt to equity. We

expect debt to equity to be 70:30.

We believe the recent credit crisis will be

beneficial to the private sector in long term. Non-

availability of funds has forced the private sectorto bid for projects at a more reasonable tariff. In

recent bidding invited by the Punjab State

Electricity Board, a sole private developer quoted

a levelised tariff of cINR3.38 per unit. This is

somewhat higher than bids of less than cINR2.0

per unit for earlier thermal power projects. Thus,

aggressive bidding by the private sector has taken

a back seat, and projects are bid for at prices that

make economic sense.

We believe this financial crunch will help

companies with strong balance sheets and the

ability to raise funds emerge as the clear winners.

We prefer such companies.

Developers with projects in advanced

stages of development

We maintain a positive view on projects that have

achieved financial closure and significant progress

in terms of execution.

In this scenario, private utilities will be a mixed

bag; developers like Tata Power and CESC should

be better placed in term of achieving their

capacity addition target.

BHEL to benefit from capacityaddition

BHEL was a major beneficiary of this rush toward

equipment order placement. Quality concerns of

imported equipment as well as currencymovement helped BHEL to secure c60% market

share for projects awarded for 11th Plan.

BHELs success in term of maintaining its

leadership position has put to rest concerns of

global competition. In the recent past, BHEL has

been able to gain some of its lost ground in

private-sector utilities. It has been able to secure

equipment orders from developers like Jindal

Power (2,400MW, INR50bn) and Jaiprakash

Power (500MW, INR11.75bn).

Equipment vendors for thermal based power projects (MW)

FY08a FY09e FY10e FY11e FY12e TotalCentral BHEL 1,250 1,750 1,990 5,765 5,501 16,256Central Others 740 0 1,320 1,260 1,920 5,240State BHEL 2,680 870 4,192 5,202 5,291 18,235State Others 1,200 392 374 1,200 600 3,766Private BHEL 750 500 250 0 540 2,040Private Others 0 2,261 3,520 3,145 6,440 15,366Total BHEL 4,680 3,120 6,432 10,967 11,332 36,531

Others 1,940 2,653 5,214 5,605 8,960 24,372Total Overall 6,620 5,773 11,646 16,572 20,292 60,903

Source: CEA, HSBC estimates

NTPC capacity addition plan

NTPC has targeted for 22GW of capacity additionplan. However, some projects are facing

significant delays. Central Electricity Authority

(CEA), in its recent report, has indicated

c15.4GW of capacity addition by NTPC in the

11th Plan.

NTPCs capacity addition status

Status MW

Capacity commissioned 2,740Under implementation 15,930

Yet to be awarded 3,760Source: Company, HSBC estimates

We do not think there is concern regarding

funding at NTPC, which has cINR170bn in cash

on its balance sheet and a cINR150bn line of

credit. Its debt-to-equity ratio of c0.5:1 provides

scope for future domestic bond issuances, or even

raising ECBs after a few months, once the global

credit scenario improves.


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Key reason for delays

c3.76 GW of capacity from 11th Plan projects

yet to be awarded to equipment vendors

Ongoing negotiation between its international

vendor, Technoprom Exports (TPE) and

Power Machines of Russia for increase in

project cost for 1320MW Bahr project

Delay in deployment of EPC contractors by

BHEL and other equipment manufacturers

Hydro power project affected due to non-

availability of regulatory clearance

To mitigate any delays/lapses in capacity addition,

NTPC has identified c3GW of brown field

capacity addition and is looking at awarding these

projects by FY09-10e.

NTPC additional capacity addition plan

Project/Location Capacity

Vindhyachal 1,000Rihand 1,000Vallur 500Muzaffarpur 500

Source: Company, HSBC

Despite all these efforts, we expect NTPCscapacity addition to fall short of the plan. We

expect NTPCs capacity addition to lag behind its

NTPCs generation capacity addition plans

Plant Name Ultimatecapacity

Capacity to beoperational in 11thPlan

Ordered to Expected date ofcommissioning

Status

Thermal ProjectsBarh-I 1,980 1,320 Technoprom,

Russia2011-12 Various units likely to be commissioned by June 11, Dec 11 and March

12. Civil and structural work for main plant in progressVallur Ennore JV 1,000 1,000 BHEL 2011-12 Scheduled for commissioning in November 2010Bhilai JV 500 BHEL 2008-09 U 1 commissioned. U 2 synchronisation of turbine expected,

synchronisation on designated fuel due in Jan 09. Coal handling plantcompleted & ash handling plant to be ready by Jan 09

Bongaigaon 750 750 BHEL 2010-12 Units expected to go on steam in October 2010 and November 2010.Boiler piling is in progress

Dadri Ext. 980 980 BHEL 2009-11 U 5 scheduled for commissioning in Sep 09. Turbine generator (TG)erection under way. TG deck testing for U 6 also done. Hydro testcompleted in Nov 08. Unit 6 boiler erection in progress

Farakka Stage-III 500 500 BHEL 2010-11 Commissioning likely August 2010. Work on the steam generator (SG) inprogress; Boiler erection in progress

Kahalgaon II Units (U) 6 & 7 1,000 1,000 BHEL 2007-09 Expected to slip to the 4Q09 vs 3Q09 earlier. Coal firing already complete;delay as coal bunker to be ready only by Jan 09

Indira Gandhi TPP (Jhajjar)JV

1,500 1,500 BHEL 2010-11

Korba III 500 500 BHEL 2010-11 Anticipated date of commissioning Feb 10. Unit hydro test likely in Feb09; TG deck casting complete

Nabinagar 1,000 750 BHEL 2011-12Ratnagiri (Dhobol) JV 740 740 GE 2007-08Simhadri-Ext. U 3 & 4 1,000 1,000 BHEL 2011-12 U 3 scheduled for commissioning in Nov 10. SG work in progressSipat I 1,980 1,980 Doosan,

Korea+PowerMachines,

Russia

2009-11 Under implementation. Anticipated dates of commissioning the two units:Sep 09 and Mar 10 slipped to FY10, against its original target of 3Q09

Sipat II U 4 & 5 1,000 1,000 BHEL 2007-09 Original target 1Q09; now scheduled for 3Q09Hydro ProjectsKol Dam 800 800 BHEL 2009-10 Various units anticipated to be commissioned in Dec 10, Jan 11, Feb 11

and Mar 11. Dam filling work in progressLohari Nagpala 600 600 2011-12 3x150MW units targeted for commissioning in 2012-13. Work on head

race tunnel (HRT), barrage, desilting chambers and power house underway

Tapovan Vishnugarh 520 520 2011-12 All 4 units targeted for commissioning during 2011-12. Work related toHRT, barrage, desilting chambers and power house in progress

Source: Industry, HSBC


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plan and expect it to add c11.9GW of new

capacity between FY08 and FY13e. We have

extended the project execution timeline for c10

GW projects and expect these to be operational

during the 12th Plan.

We believe there is a significant risk in terms of

NTPC achieving its capacity target, given the fact

that 63% of expected capacity is scheduled for

commissioning in FY11-12.

We prefer Tata Power amongprivate-sector utilities

We expect Tata Power to be well placed with its

5.6GW capacity under construction on track.

Funding tie-up

Tata Power has completed financing for two of its

largest power plants under construction i.e., the

1050MW Maithon project, for which the debt

component of cINR30bn is being funded by a

consortium led by the State Bank of India. For its

Mundra project, the company has tied up to raise

USD1.8bn in foreign exchange loans and

USD1.4bn in INR loans with several multilateral

and domestic financial institutions. With these

two big projects, most of the groups funding for

plants under construction has been tied up.

Funding for remaining smaller projects, such as

captive projects at Jojbera and Jamshedpur, is at

advanced stages of reaching financial closure. Of

the total funding requirement of INR240bn during

the next four years, Tata Power proposes to raise

the amount through its own contribution and debt

(INR180bn), a large portion of which is already

tied up (INR60bn).

Equity funding of INR66bnTata Power requires INR60bn of equity funds for

its projects under construction. Sources to meet its

own funding requirement have been identified as

INR29bn from internal accruals, with INR12bn to

be obtained through sales of investments in

various group companies. Any shortfall should be

met through short-term borrowing in the interim.

We expect that given the weak equity market

scenario, fund raising through sales ofinvestments and warrants will be a challenge. The

warrant conversion price was cINR1,357 per

share, which was above the prevailing market

price. Hence, Tata Powers management had not

subscribed to the warrant.

We expect Tata Power to raise short-term debt to

fund balance equity. However, we do not expect

this to affect its capacity addition. It has already

invested cINR20bn of its equity contribution in

projects. We expect that, given the credit rating

and developer support, raising short-term debt

will not be an issue, and that Tata Power can raise

sufficient funds for its expansion plan. Hence, we

maintain that there is no significant risk to its

5.6GW of projects under construction.


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However, we expect the projects in the pipeline to

be delayed, given the equity fund constraints.

Hence, we believe this will put projects under

pipeline at risk. Hence, there can be uncertainty

around 5.7GW of power capacity addition plan.

The NPV of these five projects (Dehrand, Naraj

IPP, Naraj CPP, Tubed IPP, Jharkhand CPP)

based on Tata Powers ownership is cINR15.6bn,translating into INR71 per share. We assign no

value to these projects, as against 50% earlier.

CESC: Gradual capacity addition a

positive

What we like about CESC is its gradual

generation capacity addition plan, which prevents

it from spreading itself too thin.

It has an installed capacity base of 975MW,

including the 100MW New Cossipore Generating

Station, which is to be decommissioned in the

next two years. The company expects to add

Tata Powers generation capacity addition plans

Project Capacity(MW)

Projectcost(INRbn)

Debttoequity

Debt(INRbn)

Equity(INRbn)

Developerstake (%)

Developerequity (INRbn)

Status of fundingclosure

Fuel type Fuel source

UnderconstructionMundra 4,000 170.00 75:25 127.5 42.5 100% 42.5 Done, with USD1.8bn

forex loan andUSD1.4bn rupee loan

Imported coal 10mtpa offtake agreement withKPC*/Arutmin, pricing part fixedand part linked to CERC Index

Maithon (74%stake)

1,050 44.50 70:30 31.2 13.4 74% 9.9 Done; funded byState Bank of India

Domestic coal Fuel linkage from Bharat CokingCoal mines

Jamshedpur andJojobera

240 11.10 70:30 7.8 3.3 74% 2.5 In advanced stage ofcompletion

Tollingarrangement

Coke oven gases of Tata Steel,and linkage from West Bokaroand Mahanadi coal fields

Trombay Expansion 250 10.66 70:30 7.5 3.2 100% 3.2 In advanced stage ofcompletion

Imported coal Imported coal, cost pass-through

Haldia 120 6.05 70:30 4.2 1.8 100% 1.8 In advanced stage ofcompletion

Tollingarrangement

Hot flue gases from HooglyMetcoke

Sub-total 5,660 242 178 64 60In the pipelineCoastalMaharashtra

2,400 101 70:30 75.6 25.2 100% 25.2 Imported Coal Coal from Bumi Resourcesofftake

Naraj MarthapurIPP

1,000 42.0 70:30 29.4 12.6 100% 12.6 Domestic coal Mandakini Coal Block

Naraj MarthapurCPP

1,270 53.3 70:30 37.3 16.0 74% 11.8 Tollingarrangement

Supply by procurers

Tubed IPP 500 21.0 70:30 14.7 6.3 100% 6.3 Domestic coal Captive coal blockJharkhand CPP 500 21.0 70:30 14.7 6.3 74% 4.7 Tolling

arrangementSupply by Tata Steel

Sub-total 5,670 238 172 66.4 60.6Total 11,330 480 350 131 120

* KPC= Kaltim Prima CoalSource: Company, HSBC estimates

CESCs generation capacity addition plans

Location Businessmodel

Size Cost (INRbn) COD Remarks

Budge Budge Regulated 250 12 2009-10 Under implementation, commissioning in September 2009Haldia I Regulated 600 26 2010-11 70% land acquired, long-term coal linkage obtained, evacuation and railways

feasibility study completed, no-objection certificate obtained for water drawalDhumka, Jharkhand Merchant 1,000 40 2012-13 110m tonnes coal block allocated, memorandum of understanding (MoU) signed

with Jharkhand Govt., land acquisition process initiated

Dhenkanal, Orissa Merchant 1,000 40 2013-14 MoU signed, land acquisition process initiated, coal allocation being pursued

Thermal/hydel power plantsin West Bengal/other states

Merchant 1,300-1,500MW 60 2013-14 Cabinet approval received for 1800 MW power plant at Pirpainti, Bihar

Source: Company, HSBC estimates


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c1.85GW capacity by FY12-13e and an additional

2.3GW by FY14-15e, thus increasing its existing

capacity by 5x. It has already secured fuel for the

new 1.8GW power generation capacity and has

achieved financial closure for 50% of the new

projects, thus providing good visibility and

reducing execution risk. However, we have not

factored into our valuation the 2.3GW of capacity

to come by FY14-15e, as not much action has

been taken yet.

The status of the 1.85GW capacity under

development is as follows:

250MW Budge Budge expansion under

construction; to be operational by FY10

600MW Haldia phase I: Land acquisition in

progress. Received coal linkage from

Mahanadi coal mine, looking at awarding the

equipment contract; project cost cINR26bn

1000MW Dumka, Jharkhand to be a merchant

power plant. Received coal linkage from

Mahugadi coal block; land acquisition in

progress

We have extended project execution timelines for

CESCs Haldia and Dumka projects. We expect

Haldia to be commissioned in FY13. We have not

considered Dumka for valuation purposes.

Lanco InfratechLanco has undertaken an aggressive capacity

addition plan. It has a pipeline of c4GW of

capacity under construction and another c4GW in

the pipeline.

Financial closure has been achieved for projects

under construction, and execution activity started.

It has incurred INR50bn capex on these projects

so far, including INR22bn equity contribution.

We expect 600MW of Amarkantak I and II

thermal power plants to be operational by

1HFY10. In terms of other capacity, 1015MW

Nagarjuna Power project and Anpara C are major

contributors and we expect them to be operational

by April 2012 and January 2012 respectively.

Hence, we believe the risk to these capacity

additions is not significant.

However, we expect delay in capacity addition of

3.9GW projects in the pipeline (2.64GW Babandhand 1.3GW Amarkantak). We expect them to be

extended beyond FY12e and hence have not

factored in these in our estimates.


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Lancos generation capacity addition plans

Projects Location Fuel Capacity(MW)

Est. projectcost (USDm)

Holding(%)

PPA(years)

Powerofftaker

Capexspent so

far (INRm)

Est.COD

Status

Projects under executionAmarkantak I Chhattisgarh Coal 300 284 76% 25 PTC India 20,118 Feb-09 Boiler hydro test completed Dec 07, switchyard

charged, switchyard connected to gridAmarkantak I I Chhat tisgarh Coal 300 296 76% 25 PTC India Sep-09 Boi ler drum l if ting completed Dec07, hydro testing

completed, turbine generator (TG) erectedVamshiHydro

HimachalPradesh

Hydro 10 12 91% 35 PunjabSEB

1,234 Dec-09 Under commissioning

VamshiIndustrial

HimachalPradesh

Hydro 10 12 91% 35 PunjabSEB

Dec-09

Lanco Green HimachalPradesh

Hydro 70 92 90% 35 PTC India 1,992 Apr-11 River divers ion completed in Oct 07, river bedexcavation of dam completed. Commissioningexpected in Dec 09 by company

Kondpalli-II AndhraPradesh

Gas 400 300 59% Merchant NA 904 Apr-10 Piling completed, erection of columns in ECB started

Udupi(Nagarjuna)

Karnataka Imported Coal

1,015 955 74% 25 KarnatakaSEB

14,534 Apr-12 Boiler drum lifting, TG casting done. TG erection tostart soon. For U 2, boiler erection completed

Lanco Energy Sikkim Hydro 500 660 74% 35 PTC Ind ia 5,704 Jul-12 Civ il work for tunnel in progressLancoUttaranchal

Uttarakhand Hydro 152 220 90% Merchant NA 577 Apr-12 Techno-economic clearance received, infrastructuredevelopment under way

Anpara C U ttar Pradesh Coal 1,200 1,100 100% 29 UttarPradesh

SEB

5,411 Jan-12 U 1: Boiler foundation done, boiler erection to begin.U 2: construction of boiler foundation in progress

Total 3,957 3,931 50,474

Power projects under developmentBabandh Orissa Coal

(partly

owned)

2,640 2,970 100% 25 yearsand

Merchant

MP, Orissaand

HaryanaSEBs

Apr-14 Captive mine allocated, land acquisition initiated,PPAs secured. Financial closure in process

AmarkantakIII & IV

Chatt isgarh Coal 1,320 1,300 76% Merchant NA Apr-13 Financial c losure process under way

Total 3,960 4,270



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Company profiles CESC Lanco Infratech

NTPC

Tata Power


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CESC is an integrated utility player under the

flagship of RPG Enterprises. With installed

capacity of 975MW and a customer base of 2m, the

company accounts for c13% of installed generation

in the state of West Bengal and c90% share of

installed capacity by the private sector in the state.

Gradual capacity addition plans

What we like about CESC is its gradual generation

capacity addition plan, which prevents it from

spreading itself too thin. It has an installed capacity

base of 975MW, including the 100MW New

Cossipore Generating Station, which is to be

decommissioned in the next two years. The

company expects to add c1.85GW capacity by

FY12-13e and an additional 2.3GW plant by FY14-

15e, thus increasing its existing capacity by 5x. It

has already secured fuel for the new 1.8GW and has

achieved financial closure for 50% of the new

projects, thus providing good visibility and reducing

execution risk. However, we have not factored into

our valuation the 2.3GW of capacity to come by

FY14-15e, as not much action has been taken yet.

Excellent operating performance at

existing generation plants

During the year ended March 2008 (FY08), all

three power plant stations achieved a combined

PLF of c97%, the highest levels ever recorded by

those stations. These projects also featured in the

list of top generating stations with highest

capacity utilisation factors in the country.

CESC Ltd (CESC)

Integrated utilities player with gradual capacity addition plans

Current market cap 1.36x of regulated equity base, indicating little

value ascribed by the market for upcoming projects, retail and real

estate businesses

Reiterate Overweight (V) and INR345 target. Catalysts include

turnaround of retail business and financial closure on some projects

CESCs generation capacity addition plans

Location Purpose Size Cost(INRbn)

COD Remark

Budge Budge Regulated 250 12 2009-10 Under implementation, commissioning in September 2009

Haldia I Regulated 600 26 2010-11 70% land acquired, long-term coal linkage obtained, evacuation & railways feasibility studycompleted, no-objection certificate obtained for water drawal

Dhumka, Jharkhand Merchant 1000 40 2012-13 110m tonnes coal block allocated, memorandum of understanding (MoU) signed withJharkhand Govt., land acquisition process initiated

Dhenkanal, Orissa Merchant 1000 40 2013-14 MoU signed, land acquisition process initiated, coal allocation being pursued

Thermal/hydel power plantin West Bengal/other states

Merchant 1300-1500MW 60 2013-14 Cabinet approval received for 1800 MW power plant at Pirpainti, Bihar



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The Budge Budge plant, with a PLF of 100.4%, had

the second highest thermal power plant PLF in India

during FY08. It has also received INR115m of

carbon credit this year, for the last four years

performance. The steady performance of all the

generation units helped the company achieve a

combined PLF of 93.4% for FY08, which was

better than the national average of 78.6% and the

private-sector average of 90.8%.

In the T&D division, it has considerably reducedlosses through reduction of pilferage and better

collection efficiency.

Fuel tied up, financial closures

awaited

Capex plan for future projects


Projectcost

(INRbn)

Debt/equity

Debt(INRbn)

Equity(INRbn)

Haldia I 600 26 70:30 18.2 7.8Dumka Jharkhand 1,000 40 70:30 32 12

Sub-total 1,600 66 46.2 19.8

Capex in T&D (fornext three years)

13.5 70:30 9.45 4.05

Fund for SpencersRetail (till FY10e)

4.5 70:30 3.15 1.35

Sub-total 84 58.8 25.2

Dhenkanal Orissa 1,000 40 70:30 28 12Haldia II 1,800 60 70:30 42 18Total 184 129 55.2


CESC has already tied up the fuel requirement for

these projects. It has achieved financial closure for

the 250MW Budge Budge expansion and is

looking at financial closure for its projects at

Haldia (West Bengal) and Dumka (Jharkhand). We

expect financial closure for Haldia soon because (a)

land acquisition is at an advanced stage, (b) fuel

supply has been assured, and (c) Haldia is based on

a regulated model, thus ensuring its ROE.

We expect CESC to fund the equity contribution

(cINR21.2bn) through (a) INR10bn cash and cash

equivalents, including INR5.8bn in qualifiedinstitutional placement (QIP) money, and (b)

internal accrual of INR10bn. We expect CESC to

be able to fund its Haldia project once required

land acquisition and approval is received.

However, it will require an additional INR30bn

for projects in the pipeline. Funding will be an

issue for these projects (2.8GW) which are at an

initial stage of development e.g., Dhenkanal and

others. We havent considered any of these

projects into our valuation, given uncertainty

attached to these projects.

Current market cap vs regulatedequity base attractive valuation

The current market cap of INR29.3bn is at only

36% premium to the approved regulated equity

base of INR21.5bn for FY10e after incorporating

the Budge Budge capacity expansion, of 250 MW.

Based on regulated return of 14% RoE, and an

allowed depreciation charge of INR1.68bn and

INR2.04bn for FY09 and FY10 respectively, we

expect that the company generates minimum cashprofits of INR4bn and INR4.8bn in the next two

years. This profit does not assume any incentives

and rental income that CESC has been historically

receiving due to its efficient operation. Hence,

even considering minimum cash profit level, it is

trading at only 6x FY10e cash profit.

Efficient operations achieved by its operating

plants help CESC generate higher RoE over the

assured 14%. As CESC exports power at a higher

rate and is allowed to keep 40% of profit from

export sales, it adds to the profitability over and

above the prescribed return.

All of the above indicates that the market is ascribing

little value to the companys capacities under

construction, and its retail and real estate businesses.

Key triggers

Financial closure of power projects

600MW Haldia power project. This is at an

advanced stage; CESC expects it to be completed

soon, and has acquired c75% of the land and


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obtained coal linkage. It has received

environmental and water consumption clearance.

1000 MW Dhenkanal Power Project. CESC

expects to achieve financial closure for this

project by the end of this year. However, we have

not considered this in our projection.

Turnaround of the retail business

CESC has moderated its retail business rollout plan

with 1.7msq ft of retail space by FY09e. This

amounts to only a 0.55m sq ft addition, down from

1m sq ft planned previously. It is focusing on large

formats for growth, as well as closing unviable and

unprofitable outlets. Management expects the

business to see turnaround by FY10-11.

Value unlocking in the Spencers

Retail business

Spencers Retail, 95% owned by CESC, is using

cash generated from the CESC power business.

However, if CESC is able to unlock value from

Spencers by getting a strategic investor, this

would add a valuation benchmark. We assign no

value to Spencers Retail.

HSBC vs consensus

HSBC vs consensus (INRbn)

____Sales___ ____ PAT ___ EPS ( INR/share) _INRbn FY09e FY10e FY09e FY10e FY09e FY10e

HSBCestimates

30.50 32.39 3.53 3.77 28.1 30.0

Consensusestimates

30.46 33.43 3.63 4.08 29.0 32.5

% difference 0% -3% -3% -7% -3% -8%

Source: HSBC, Reuters

Valuation

We maintain our CESC estimates and our 12-

month target price to INR345, an average of the

following three methods.

Discounted cash flow

Discounting the future cash flows of the company

assuming WACC at 12.8% and a terminal growth

of 3%, we value the company at INR234 per

share.

Sum of the parts

We value the present capacity installed at the

replacement cost multiple of 46.5x and value the

investments of the company to its book value. We

assign no value to the retail business because it is

unprofitable, and there has been significant

correction in the retail peer valuation. We value it

at INR375 per share on SOTP basis.

Price to book

We have valued CESC at INR426.5, using a

multiple of 0.97x book value for FY10e.

Based on the average of all the three methods, we

derive a target price of INR345, and retain our

estimates.

Target price derivation

INR per shareSOTP 375DCF 234PB 426.5Target price 345


Under our research model, for stocks with a

volatility indicator, the Neutral band is 10

percentage points above and below the hurdle rate

for Indian stocks of 11%. For CESC, this

translates into a Neutral band of 1-21% around the

current share price. Our target price of INR345 for

CESC shares implies a total return (including

dividend yield) of 44.7%, which is above the

Neutral band; thus, we have an Overweight (V)

rating on CESC stock.

Risks

Downside risks, we believe, include deeper-than-

expected losses in the retail business and cost

overruns from delayed execution.


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Financials & valuation: CESC Ltd Overweight (V)Financial statements

Year to 03/2008a 03/2009e 03/2010e 03/2011e

Profit & loss summary (INRm)

Revenue 35,428 30,498 32,392 34,383EBITDA 3,977 7,028 7,780 8,489Depreciation & amortisation -1,962 -2,913 -3,141 -3,688Operating profit/EBIT 2,015 4,114 4,639 4,801Net interest -1,480 -2,068 -2,315 -2,539PBT 2,496 4,008 4,287 4,224HSBC PBT 2,496 4,008 4,287 4,224Taxation 131 -481 -514 -507Net profit 2,674 3,527 3,772 3,717HSBC net profit 2,674 3,527 3,772 3,717

Cash flow summary (INRm)

Cash flow from operations 6,356 4,328 7,105 7,777Capex -8,937 -16,218 -14,900 -12,300Cash flow from investment -8,937 -16,218 -14,900 -12,300Dividends -343 -743 -794 -783Change in net debt -155 12,633 8,590 5,306FCF equity -4,544 -13,852 -9,757 -6,485

Balance sheet summary (INRm)

Intangible fixed assets 0 0 0 0Tangible fixed assets 62,371 75,676 87,435 96,047Current assets 21,168 19,704 20,024 20,227Cash & others 10,170 10,170 10,170 10,170

Total assets 89,546 101,386 113,466 122,280Operating liabilities 23,490 19,914 20,425 21,000Gross debt 20,683 33,316 41,906 47,211Net debt 10,513 23,146 31,736 37,041Shareholders funds 45,362 52,204 55,182 58,117Invested capital 49,879 65,296 76,864 85,104

Ratio, growth and per share analysis

Year to 03/2008a 03/2009e 03/2010e 03/2011e

Y-o-y % change

Revenue 42.6 -13.9 6.2 6.1EBITDA -31.2 76.7 10.7 9.1Operating profit -52.0 104.2 12.8 3.5

PBT -26.7 60.5 7.0 -1.5HSBC EPS -37.5 24.2 7.0 -1.5

Ratios (%)

Revenue/IC (x) 0.7 0.5 0.5 0.4ROIC 4.4 6.3 5.7 5.2ROE 6.4 7.2 7.0 6.6ROA 5.1 5.6 5.4 5.0EBITDA margin 11.2 23.0 24.0 24.7Operating profit margin 5.7 13.5 14.3 14.0EBITDA/net interest (x) 2.7 3.4 3.4 3.3Net debt/equity 23.2 44.3 57.5 63.7Net debt/EBITDA (x) 2.6 3.3 4.1 4.4CF from operations/net debt 60.5 18.7 22.4 21.0

Per share data (INR)

EPS Rep (diluted) 22.62 28.08 30.04 29.60HSBC EPS (diluted) 22.62 28.08 30.04 29.60DPS 4.00 5.05 5.41 5.33Book value 383.62 415.67 439.38 462.74

Valuation data

Year to 03/2008a 03/2009e 03/2010e 03/2011e

EV/sales 1.0 1.6 1.7 1.8EV/EBITDA 8.9 6.8 7.3 7.3EV/IC 0.7 0.7 0.7 0.7PE* 10.7 8.6 8.1 8.2Price to book value 0.6 0.6 0.6 0.5FCF yield (%) -18.2 -55.5 -39.1 -26.0Dividend yield (%) 1.7 2.1 2.2 2.2

Note: * = B ased on HSBC EPS (diluted)

Issuer information

Share price (INR) 242.00 Target price (INR) 345.00 Potentl tot rtn (%) 44.7

Reuters (Equity) CESC.BO Bloomberg (Equity) CESC INMarket cap (USDm) 619 Market cap (INRm) 30,243Free float (%) 84 Enterprise value (INRm) 48,090Country India Sector Electric UtilitiesAnalyst Sumeet Agrawal Contact 91 22 2268 1243

Price relative

108

208

308

408

508

608

708

2007 2008 2009 2010

108

208

308

408

508

608

708

Cesc Ltd Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC

Note: price at close of 12 Jan 2009


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3.9GW of projects in advancedstages of execution

Lancos aggressive capacity expansion is

supported by the financial closure of c3.9GW of

projects. The projects are to be funded through a

mix of debt and equity. The financial closure of

some of these projects provides us with comfort in

terms of their execution.

These projects are in advanced stages of execution

with the first 300MW of Amarkantak to be

operational by end-FY09. The other 300MW of

Amarkantak II is likely to be commissioned by

September 2009. Other projects are in advanced

stages of execution. We expect c620GW of

capacity to be operational by FY10e, almost 2x

the current installed base.

Lanco has already spent cINR50.5bn in the above

projects and requires an additional cINR124bn.

We believe the capacity addition of 3.9GW over

the next five years is not at risk.

However, we believe the equity contribution

should be a big challenge on the existing balance

sheet. Lanco is already leveraged at 2.7x with net

debt of cINR11bn. The equity contribution of

INR61bn, including INR35bn of equity

investment for projects in its pipeline, is an issue.

However, we do not expect any significant issue

in terms of equity investment of INR26.4bn for

projects under execution. Internal accruals over

the next five years should address the shortfall.

We have not factored in any capacity addition

from project under development (Babanth and

Amarkantak III and IV).

Fuel supply for projects

Lanco has already met most of its coal requirements

through coal linkages, which reduces fuel risk. For

the Nagarjuna Power project, though, it has entered

into a long-term (12-year) fuel supply agreement.

As the project is based on a regulatory model, the

fuel cost is passed through to the end user, so Lanco

is not exposed to the fuel cost risk.

Status of Lancos projects under execution

Projects Location Fuel Capacity(MW)

Est. projectcost

(INRm)

Holding(%)

Capexspentso far

(INRm)

HSBCest.

COD

Status

Amarkantak I Chhattisgarh Coal 300 12,900 76% 20,118 Feb-09 Boiler hydro test completed in Dec 07, switchyard charged, switchyard

connected to gridAmarkantak II Chhattisgarh Coal 300 13,400 76% Sep-09 Boiler drum lifting completed in Dec07, hydro testing completed, turbine

generator erected

Vamshi Hydro HimachalPradesh

Hydro 10 1,490 91% 1,234 Dec-09 Under commissioning

VamshiIndustrial

HimachalPradesh

Hydro 10 91% Dec-09

Lanco Green HimachalPradesh

Hydro 70 4,200 90% 1,992 Apr-11 River diversion completed in Oct 07, River bed excavation of dam completed.commissioning expected in Dec 09 by company

Kondpalli-II AndhraPradesh

Gas 400 11,880 59% 904 Apr-10 Piling completed, erection of columns in ECB started

Udupi(Nagarjuna)

Karnataka ImportedCoal

1,015 43,400 74% 14,534 Apr-12 Boiler drum lifting and TG casting done; TG erection to start soon. For U 2,boiler erection completed

Lanco Energy Sikkim Hydro 500 30,000 74% 5,704 Jul-12 Civil work for tunnel in progressLancoUttaranchal

Uttarakhand Hydro 152 9,500 90% 577 Apr-12 Techno-economic clearance received, infrastructure development under way

Anpara C Uttar Pradesh Coal 1,200 48,000 100% 5,411 Jan-12 U 1: boiler foundation done, boiler erection to get started; U 2 : construction ofboiler foundation in progress

Total 3,957 74,770 50,474



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Taking care of fuel requirement

Project Fuel type Status of fuel source

Under constructionKondapalli II AP Gas From KG BasinAmarkantak I Chattisgarh Domestic Coal Coal linkages (SECL)Amarkantak II Chattisgarh Domestic Coal Coal linkages(SECL)Nagarjuna Karnataka Imported Coal Long term FSA from

Indonesia (12 years)Anpara C UP Domestic Coal Coal linkages (NCL)Lanco Green HP Hydro HydroVamshi Industrial HP Hydro HydroVamshi Hydro HP Hydro HydroLanco Energy TeestaSikkim

Hydro Hydro

Lanco Hydro Uttarakhand Hydro HydroUnder pipelineBabanth I Orissa Domestic Coal 1000 MW Captive

balance from Coallinkages

Babanth II Orissa Domestic Coal Coal linkagesAmarkantak III & IV Chattisgarh

Domestic Coal In process

*SECL: South Eastern Coalfields Limited, 100% subsidiary of Coal India LtdSource: Company, HSBC

Change in forecasts

We have factored in delays in few of its project

under construction. We now expect Amarkantak I

to be operational in 4QFY09e and Amarkantak II

in 2QFY10e, as against earlier target of 3QFY09e

and company guidance of FY09e. We have also

extended project completion for Anpara C to

4QFY12e vs company guidance of FY11e.

Apart from power execution delays, we have also

changed our estimates for the EPC business by

forecasting a 10% and 4% decline for FY09 and

FY10 respectively. We have also reduced EBITDA

margin estimates to 18% from 20% for FY09e.

Summary of forecast changes

____New____ ____ Old______ __Change (%) __INRbnFY09e FY10e FY09e FY10e FY09e FY10e

Sales 34.01 50.27 37.50 52.00 -9% -3%PAT 4.09 6.73 5.00 7.20 -18% -6%EPS (INR) 18.38 30.29 22.44 32.46 -18% -7%


HSBC vs consensusHSBC vs consensus (INRbn)

___ Sales __ ___ PAT ___ _ EPS (INR/share) _INRbn FY09e FY10e FY09e FY10e FY09e FY10e

HSBCestimates

34.01 50.27 4.09 6.73 18.4 30.3

Consensusestimates

56.97 81.76 4.32 6.13 19.5 27.7

% difference -40% -39% -5% 10% -6% 10%

Source: HSBC, Reuters

Valuation

Based on this, we have reduced our FY09e profit

estimates by 6%, driven by 3% decline in revenue

and lower EPC margin. We have also extended

execution time frame for EPC business, given the

delays in power projects.

Real estate valuation

We have value the real estate separately and used

a discount rate of 15%. We have assumed the

entire Hyderabad real estate to be developed in

the next eight years. Based on this, we derive an

NAV of INR10.3bn. However, we have also

removed the value of real estate (INR37 per share

earlier) from our valuation, given the current

slowdown in the real estate sector. We expect that

any upturn in the real estate business to provide an

upside to the stock.


We have used the discounted cash flow method to

value generation, and other businesses. We haveused a discount rate of 13.1% (12.8% earlier) to

incorporate higher cost of debt (14% vs 12%

earlier). Based on this, we derive a fair value of

INR140 per share (INR297 per share earlier).

Price to book value

We have used a price-to-book multiple of 1.2x (2x

earlier), a 33% discount to NTPCs target PB.

Based on this, we derive a fair value of INR149

per share (INR312 earlier).


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Financials & valuation: Lanco Infratech Neutral (V)Financial statements

Year to 03/2008a 03/2009e 03/2010e 03/2011e


Revenue 32,413 34,015 50,274 77,368EBITDA 6,905 7,538 12,600 20,128Depreciation & amortisation -776 -1,235 -2,361 -3,715Operating profit/EBIT 6,129 6,302 10,238 16,413Net interest -832 -1,160 -1,578 -2,064PBT 6,175 6,191 9,813 15,617HSBC PBT 6,175 6,191 9,813 15,617Taxation -1,405 -1,391 -2,205 -3,509Net profit 3,542 4,088 6,735 10,989HSBC net profit 3,542 4,088 6,735 10,989


Cash flow from operations 9,419 6,407 13,745 22,113Capex -8,520 -16,589 -15,391 -38,731Cash flow from investment -8,520 -16,589 -15,391 -38,731Dividends 0 0 0 0Change in net debt -899 9,264 462 15,236FCF equity -54 -11,230 -2,800 -17,886





Year to 03/2008a 03/2009e 03/2010e 03/2011e

Y-o-y % change

Revenue 101.9 4.9 47.8 53.9EBITDA 64.5 9.2 67.2 59.7Operating profit 73.0 2.8 62.5 60.3

PBT 96.7 0.3 58.5 59.1HSBC EPS 61.6 15.4 64.7 63.2

Ratios (%)




Valuation data

Year to 03/2008a 03/2009e 03/2010e 03/2011e


Note: * = Based on HSBC EPS (diluted)

Issuer information


Reuters (Equity) LAIN.BO Bloomberg (Equity) LANCI INMarket cap (USDm) 505 Market cap (INRm) 24,649Free float (%) 21 Enterprise value (INRm) 45,654Country India Sector Electric UtilitiesAnalyst Sumeet Agrawal Contact 91 22 2268 1243

Price relative

0

100

200

300

400500

600

700

800

900

2007 2008 2009 2010

0

100

200

300

400500

600

700

800

900

Lanco Infratech Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC



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Strong project pipeline, butpoor execution

NTPC has a strong project pipeline with capacity

addition target of 22GW by 2012e to increase itsinstalled base to 50GW.

We expect NTPC to miss its capacity addition

target despite strong project execution capabilities

and fund availability. NTPC saw execution delays

due in the past too, from delay in land acquisition,

regulatory approvals, and by equipment vendors.

The Central Electricity Authority has also taken

cognisance of delays in execution, and expects

NTPC to commission only 15.4GW in the 11thPlan. We are more conservative, and expect it to

commission 11.9GW of capacity by 2012.

Capacity addition plan

NTPC plans to add 20GW by FY12 to its current

installed base of 29GW. We expect the projects

under tendering (3.8GW) will not come on stream

by FY12, leading to an overall shortfall of 10GW

against planned capacity by the end of the 11th

Plan period.

Delay in coal mining a concern

NTPC has huge coal requirement annually. In

2008, it consumed c124mt, 2.6mt of which was

imported. Globally, there is a shortage of coal,

and coal prices are on the rise. Coal India Limited

is the principal supplier of coal to NTPC.

To meet its coal requirements on an ongoing basis,

NTPC is developing seven coal mines, which have

total reserves of 3.6bn tonnes, with an annual

estimated capacity of 56m tonnes per annum

(mtpa). Of the total approved advance expenditure

of INR5.4bn to develop these mines, INR0.8bn was

already spent as at end of the last financial year.

NTPCs coal reserves

Project Est.reserves

(m tonnes)

Mine life(in years)

Est.capacity

(mtpa)

Projectdevmt

yearexpected

Pakri Barwadih 1,436 50 15 FY10Chatti Bariatu 243 30 7 FY11Chatti Bariatu II 354 30 5 FY11Kerandari 229 25 6 FY12Dulanga 260 30 5 FY11Talaipalli 965 30 15 FY13Chhatrasal 150 30 3Total Own 3,637 56JV with Coal India Limited

Brahminni 1,900 25 25Chichro Patsimal 356 NA 5Total 5,893 86


NTPC Ltd (NATP)

NTPC enjoys the best positioning in terms of access to funds and

fuel, but market ignoring delays in project execution

NTPC continues to trade at a premium valuation, defying risk of

delays and reduction in RoE in FY09e

Downgrade to Underweight (V) from Neutral (V) on valuation

trading (1.78x FY10e PB); retain our target of INR142


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Discounted cash flowBased on our DCF approach, we derive a value of

INR123.

Sum of the parts

We have valued NTPC on SOTP value of

INR165. We have valued the existing generation

business at an EV/MW of INR46.5m, based on

expected replacement cost and a premium for the

existing business. We have not valued the captive

coal mining business, as the mine development

operator has yet to be appointed and there is not

much clarity on the transfer pricing between the

mine and the generating station. In addition, we

have valued NTPCs investment in various JVs

(other than power generating JVs) at 1.5x the

book value of the investments, since they are at

very early stages of development.

Price to book

We have valued NTPC using a multiple of 1.8xFY10e book value. Based on this, we derive a fair

value of INR138 per share.

NTPCs SOTP

Business Unit Capacity Multiple Value INR pershare

Generation MW 30,807 46.50x 1,432,523 174Investments Premium to

book101,883 50.0% 152,825 19

Total 1,585,347 192Less Net debt 221,950 27Equity value 1,363,397 165

Source: HSBC

Based on the average of these three values, we

derive a target price of INR142, suggesting

17% downside.


INR per share

SOTP 165DCF 123PB 138Target price 142


Under our research model, for stocks with a

volatility indicator, the Neutral band is 10


for Indian stocks of 11%. For NTPC, this


current share price. Our target price of INR142 for

NTPC shares implies a total return (including

dividend yield) of -14.6%, which is below the

Neutral band; thus, we have an Underweight (V)

rating on the NTPC stock.

Risks

Business risks includes fuel supply concerns,

delays in project execution, and an impact from

higher costs on merchant power. Also, regulatory

risks include a reduction in RoE due to higher

efficiency norms to be set by the regulator. Upside

risks to our rating include faster execution, higher

efficiency norms, and the ability to raise funds at

lower cost and to address the fuel issue.


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Financials & valuation: NTPC Underweight (V)Financial statements

Year to 03/2008a 03/2009e 03/2010e 03/2011e


Revenue 386,823 418,192 467,204 518,285EBITDA 117,352 131,412 144,773 156,979Depreciation & amortisation -22,060 -21,213 -23,306 -25,735Operating profit/EBIT 95,292 110,199 121,468 131,244Net interest -18,581 -20,910 -23,998 -26,860PBT 103,510 112,502 119,941 126,154HSBC PBT 103,510 112,502 119,941 126,154Taxation -28,811 -30,404 -33,057 -35,342Net profit 74,699 82,098 86,884 90,812HSBC net profit 74,699 82,098 86,884 90,812


Cash flow from operations 97,822 99,202 119,943 137,619Capex -99,442 -82,556 -127,945 -206,790Cash flow from investment -82,505 -66,041 -111,430 -190,275Dividends -28,932 -29,605 -33,581 -35,221Change in net debt 16,328 1,027 30,105 93,161FCF equity -46,404 -8,414 -31,898 -92,411



Total assets 935,533 1,021,970 1,118,644 1,250,018Operating liabilities 77,030 85,788 107,959 141,737Gross debt 303,147 341,530 367,031 413,523Net debt 149,542 150,569 180,674 273,836Shareholders funds 528,629 573,647 621,290 671,087Invested capital 570,428 627,266 722,888 883,668


Year to 03/2008a 03/2009e 03/2010e 03/2011e

Y-o-y % change

Revenue 14.2 8.1 11.7 10.9EBITDA 15.4 12.0 10.2 8.4Operating profit 18.1 15.6 10.2 8.0

PBT 15.5 8.7 6.6 5.2HSBC EPS 8.3 9.9 5.8 4.5

Ratios (%)




Valuation data

Year to 03/2008a 03/2009e 03/2010e 03/2011e



Issuer information

Share price (INR) 170.90 Target price (INR) 142.00 Potentl tot rtn (%) -14.6

Reuters (Equity) NTPC.BO Bloomberg (Equity) NATP INMarket cap (USDm) 28,849 Market cap (INRm) 1,409,150Free float (%) 11 Enterprise value (INRm) 1,441,764Country India Sector Electric UtilitiesAnalyst Sumeet Agrawal Contact 91 22 2268 1243

Price relative

105125145165185205

225245265285305

2007 2008 2009 2010

105125145165185205

225245265285305

NTPC Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC



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Best-placed Indian utility

Building on existing experience and

presence

Tata Power has established itself as a credible

player in the Indian power sector by leveraging its

experience of operating the largest installed base

within the private sector and operating

distribution circles in Mumbai and Delhi. It is the

first private player to set up and operate a high-

voltage transmission line in a JV with PGCIL,

which completed its first year of operations in

March 2008. It is now expanding its fleet of

power plants across India; these are at various

stages of construction and development. The

success of the company is shown by its ability to

achieve financial closure and source fuel linkages

for most of its projects both through captive mine

allocation and acquiring coal mines in Indonesia.

Well-diversified generating portfolio

Tata Power has a well-diversified generating

portfolio in terms of both fuel mix and selling

arrangements i.e., regulated versus tariff based,

captive and merchant based power plant. It has a

well-defined capacity addition plan, with

2,400MW already under operation, 5,660MW

under construction, and c5,670MW in the

pipeline. Its generation portfolio consists of a

diverse fuel mix, with thermal, hydro and

alternative fuels accounting for 75%, 20%, and

3% respectively.

Tata Power (TPWR)

Building a well-diversified generation portfolio supported by fuel

sourcing and funding strategy

Acquisition of overseas coal blocks proving to be a well-crafted

strategy for security fuel; lower FY10 profit estimates 21% to

incorporate lower coal realisation

Reiterate Overweight (V), lower target to INR1,000 from INR1,244

Tata Power generation portfolio

Regulated Tariff based Captive power / IPP Merchant Renewable

Developed1330MW Trombay thermal 428MW Jojobera 79MW Wind447MW Hydro power Station 81MW BelgaumUnder construction250MW Trombay extension 4000MW Mundra UMPP 120MW Jamshedpur 124MW Wind Power1050MW Maithon thermal 120MW Jojobera thermal 3MW Solar PV120MW Haldia thermalUnder pipeline

1000MW Naraj Marthapur IPP 2400MW Coastal Maharashtra1270MW Naraj Marthapur CPP500MW Tubed IPP

500MW Jharkhand (Tata Steel)



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Within alternative energy sources, Tata Power

plans to expand its wind capacity from 78MW

now to 200MW over the next year. It has plans to

further explore opportunities in the wind energy

space, which we believe will help the company to

manage its obligation under the renewable energy

target imposed on distributors in Maharashtra.

We believe Tata Powers ability to create a well-

diversified power plant portfolio, i.e., selling in

both the regulated and the free markets will

enable it to mitigate fuel and offtake risks.

Fuel and funds well tied up

Visible success in acquiring fuel to

power its plants

Tata Power is well positioned to meet its fuel

obligations, in our view, as it has made significantarrangements for most of its plants under

construction either by way of captive mine

allocation or through fuel offtake agreement for

coal supply from Indonesia. For example, it has

been allocated two coal mines for its projects. It

received allocation of the 189mt coal block in

Jharkhand in JV with Hindalco and the 290mt

Mandakini coal block in Orissa along with Jindal

Photo and Monnet Ispat. It has picked up a 30%

stake in KPC and Arutmin from PT BumiResources in Indonesia, which allows it to draw

10mt of coal supplies over the long term, which is

capable of fuelling almost the entire Mundra

plant. For Maithon projects, Tata Power has tied

up fuel from Bharat Coking Coal mines, which

reflects its ability to obtain fuel linkages for large

projects.

Successful in achieving financial

closure for large projects

Tata Power has completed financing for two of its

largest power plants under construction i.e., the

Tata Powers generation capacity addition plans


Projectcost

(INRbn)

Debtto

equity

Debt(INRbn)

Equity(INRbn)

Developerstake (%)

Developerequity

(INRbn)

Status of fundingclosure

Fuel type Fuel source

UnderconstructionMundra 4,000 170.00 75:25 127.5 42.5 100% 42.5 Done, with USD1.8bn

forex loan and USD1.4bnrupee loan

Imported coal 10mtpa offtake agreement withKPC*/Arutmin, pricing part fixedand part linked to CERC Index

Maithon (74%stake)

1,050 44.50 70:30 31.2 13.4 74% 9.9 Done; funded by StateBank of India

Domestic coal Fuel linkage from Bharat CokingCoal mines

Jamshedpur andJojobera

240 11.10 70:30 7.8 3.3 74% 2.5 In advanced stage ofcompletion

Tollingarrangement

Coke oven gases of Tata Steel,and linkage from West Bokaroand Mahanadi coal fields

Trombay Expansion 250 10.66 70:30 7.5 3.2 100% 3.2 In advanced s tage ofcompletion

Imported coal Imported coal, cost pass-through

Haldia 120 6.05 70:30 4.2 1.8 100% 1.8 In advanced stage ofcompletion

Tollingarrangement

Hot flue gases from HooglyMetcoke

Sub-total 5,660 242 178 64 60

In the pipelineCoastalMaharashtra

2,400 101 70:30 75.6 25.2 100% 25.2 Imported Coal Coal f rom Bumi Resourcesofftake

Naraj MarthapurIPP

1,000 42.0 70:30 29.4 12.6 100% 12.6 Domestic coal Mandakin i Coal Block

Naraj MarthapurCPP

1,270 53.3 70:30 37.3 16.0 74% 11.8 Tollingarrangement

Supply by procurers

Tubed IPP 500 21.0 70:30 14.7 6.3 100% 6.3 Domest ic coal Capt ive coal blockJharkhand CPP 500 21.0 70:30 14.7 6.3 74% 4.7 Tolling

arrangementSupply by Tata Steel

Sub-total 5,670 238 172 66.4 60.6Total 11,330 480 350 131 120

* KPC=Kaltim Prima CoalSource: Company, HSBC estimates


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1050MW Maithon project, for which the debt

component of cINR30bn is being funded by a

consortium led by State Bank of India. For its

Mundra project, the company has tied up to raise

USD1.8bn in foreign exchange loans and

USD1.4bn in INR loans with several multilateral

and domestic financial institutions. With these

two big projects, most of the groups funding for

plants under construction has been tied up.

Funding for remaining smaller projects, such as

captive projects at Jojobera and Jamshedpur, are

at advanced stages of reaching financial closure.

Tata Power proposes to raise the total funding

requirement of INR240bn during the next four

years through its own contribution (INR60bn) and

through debt (INR180bn), a large portion of

which is already tied up.

Change in forecasts

We have reduced our contribution from the coal

mine business, given the declining coal prices. Weexpect average realisation of coal to fall to

cUSD48 per tonne, a decrease of 30% from the

previous year in contrast to our earlier estimate of

10% decline. Also we have decreased the coal

production forecast now to 4% annual increase

from earlier estimates of 7% for FY09 and 5%

thereafter. Also in our estimates, we now provide

for 20% provision for taxation from earlier

estimates of 12.4%.

Summary of changes in forecasts

_____ New ___ ____ Old______ __Change (%)__(INRbn)FY09e FY10e FY09e FY10e FY09e FY10e

Sales 146.19 142.82 149.11 151.99 -2% -6%PAT 20.97 24.11 21.29 30.42 -1% -21%EPS (INR) 95.05 109.26 96.49 137.82 -1% -21%


HSBC vs consensusHSBC vs consensus (INRbn)

___ Sales _ ___ ___ PAT ____ _ EPS (INR) __INRbn FY09e FY10e FY09e FY10e FY09e FY10e

HSBCestimates

146.2 142.8 20.9 24.1 95.0 109.3

Consensusestimates

150.4 169.7 18.9 26.7 84.4 116.1

% difference -3% -16% 11% -10% 13% -6%

Source: HSBC, DataStream

Valuation

Combination of valuation approaches

We value Tata Power using the methods below

and derive a target price of INR1,000.


We use the discounted cash flow method to value

the entire generation as well as other business. We

used a discount rate of 12% (13.5% cost of equity

and 6.6% cost of debt). Based on this, we derive a

fair value of INR1,243 per share.

Price to book value

We value Tata Power at PB multiple of 2.0x (a

slight premium of 15% to global utilities),

deriving a value of INR986 per share.

Sum of the parts

We value the existing generation business at an

EV/MW of INR46.5m, based on expected

replacement cost. We value NDPL based on 2x

price-to-book, given that it is able to generate a

16% ROE and is growing at c15% CAGR over

FY08-10e. We have not considered the value

derived from projects under development. Based

on the SOTP approach, we value the company at

INR770 per share.


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INR per share

SOTP 770DCF 1243PB 986Target price 1,000


Under our research model, for stocks with avolatility indicator, the Neutral band is 10


for Indian stocks of 11%. For Tata Power, this


current share price. Our target price of INR1,000

for Tata Power shares implies a total return

(including dividend yield) of 40.7%, which is

above the Neutral band; thus, we have an

Overweight (V) rating on the Tata Power stock.

RisksBusiness risks include equity funding for the

5.6GW under pipeline, delays in project

execution, interest rate risk, and regulatory risk.

Tata Powers SOTP

Business Unit Particulars Multiple Value (INRm) INR per share

Generation MW 3,019 46.50x 140,373 636.1NDPL Equity investment 2,009 2.00x 4,019 18.2Transmission lines Book Value 2,380 2.00x 2,428 11.0License area distribution assets Book Value 5,033 2.00x 10,067 45.6Tata BP Solar 8xFY08 EV/Sales 8,500 1.76x 14,946 67.7Mundra Power Project NPV to Equity 7,802 35.430% stake in Bumi Resources NPV to Equity 38,768 175.7Value of projects under construction NPV to Equity 9,492 1.00x 9,492 43.0Investments Premium to book 26,398 50% 39,597 179.4Value of projects in pipeline 0% 0 0.0Total 267,490 1212Less Net debt -97,488 -442Equity value 170,002 770No. of shares 220.68

Source: HSBC


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Financials & valuation: Tata Power Overweight (V)Financial statements

Year to 03/2008a 03/2009e 03/2010e 03/2011e


Revenue 108,891 146,189 142,816 178,753EBITDA 21,203 38,517 43,359 46,493Depreciation & amortisation -5,593 -7,109 -8,230 -9,085Operating profit/EBIT 15,611 31,407 35,129 37,408Net interest -4,881 -6,841 -6,937 -7,735PBT 15,485 29,611 33,489 35,234HSBC PBT 15,485 29,611 33,489 35,234Taxation -3,765 -8,302 -8,835 -8,898Net profit 9,965 20,975 24,112 24,848HSBC net profit 9,965 20,975 24,112 24,848


Cash flow from operations 13,152 23,268 23,688 42,559Capex -25,527 -17,827 -25,447 -36,717Cash flow from investment -69,956 -17,827 -25,447 -36,717Dividends -2,365 -5,944 -6,833 -7,042Change in net debt 47,753 1,198 9,981 2,241FCF equity -17,073 397 -7,056 281





Year to 03/2008a 03/2009e 03/2010e 03/2011e

Y-o-y % change

Revenue 68.1 34.3 -2.3 25.2EBITDA 94.3 81.7 12.6 7.2Operating profit 130.8 101.2 11.8 6.5

PBT 127.9 91.2 13.1 5.2HSBC EPS 21.3 110.5 15.0 3.1

Ratios (%)




Valuation data

Year to 03/2008a 03/2009e 03/2010e 03/2011e

EV/sales 2.1 1.5 1.6 1.3EV/EBITDA 10.5 5.8 5.4 5.1EV/IC 1.5 1.3 1.2 1.1PE* 16.1 7.7 6.7 6.5Price to book value 2.1 1.8 1.5 1.3FCF yield (%) -12.4 0.3 -5.2 0.2Dividend yield (%) 1.5 3.2 3.6 3.8


Issuer information


Reuters (Equity) TTPW.BO Bloomberg (Equity) TPWR INMarket cap (USDm) 3,296 Market cap (INRm) 161,004Free float (%) 67 Enterprise value (INRm) 224,164Country India Sector Electric UtilitiesAnalyst Sumeet Agrawal Contact 91 22 2268 1243

Price relative

350

550

750

9501150

1350

1550

1750

2007 2008 2009 2010

350

550

750

9501150

1350

1550

1750

Tata Power Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC



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Hectic equipment ordering in2008

2008 was a momentous year, with 15GW ordered

for various equipment manufacturers this was

because of the push towards achieving 78GW of

the governments capacity addition target. The

Ministry of Power pushed to achieve financial

closure, and equipment ordering led to significant

news flow in 2008.

11th Plan: capacity addition plan (MW)

Central State Pr ivate Total %

Thermal 21,496 22,001 17,406 60,903 76%Hydro 8,654 3,362 3,491 15,507 19%Nuc lear 3,380 0 0 3,380 4%Total 33,530 25,363 20,897 79,790% 42% 32% 26%


Why were targets not met?

India has a poor record in achieving its power

capacity addition targets. The 10th Plan achieved

only 52% of the proposed installed base. Failure to

achieve financial closure and delays from

equipment vendors and regulators were key reasons

why capacity addition targets were not met.

Why 10th Five-Year Plan capacity addition targets were not met

Major reasons for slippage Total

Delay in supplies/erection by suppliers/ contractors 24%Delay in tie-up super critical technology 14%Non-availability of gas 11%Delay in award of works, mainly in state sector/NLC 9%Projects not taken up/escrow cover not given/financialclosure not achieved/funds not tied up

19%

Delay in clearance/investment decisions (hydro projects) 8%Hydro projects: delay in environmental clearance,geological surprises, natural calamities, relocation andrehabilitation issues, delay in signing of MoU, court cases

11%

Law & order problems 2%Nuclear projects included on best effort basis (otherwise

scheduled for 11th Plan)

4%

Adjustments due to change of size -3%

Source: CEA

Capacity addition: actual vs planned over five-year plans

-

10,000

20,000

30,000

40,000

50,000

I IV VII IX

30%40%

50%

60%

70%

80%

90%

100%

Capacity planned Capacity added %

Source: CEA

To mitigate the delays due to equipment shortage,

developers have already placed equipment orders

on vendors, providing sufficient time for project

execution this time around.

With equipment now ordered, we expect focus to

shift towards execution, over the next three years.

Annexure

2008 saw hectic equipment ordering

We analyse reasons why earlier plans were not achieved


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However, we still expect delays to hamper the

capacity addition plan and expect c48GW of

capacity addition over 2007-12e.

Generation capacity addition analysis (MW)

FY08 FY09e FY10e FY11e FY12e Total

Breakdown by technologyThermal 6620 5047 7795.2 6948 11901 38311Hydro 2423 232 499 1281 2211 6646Nuclear 220 440 220 1500 1000 3380Total 9263 5719 8514.2 9729 15112 48337

Breakdown by sectorCentra l 3240 2440 2250 4692 9051 21673State 5273 1494 3126.2 4028 3201 17122Private 750 1785 3138 1009 2860 9542Total 9263 5719 8514.2 9729 15112 48337


We expect the major reasons for slippage in capacity

addition will be delays from equipment vendors,

failure to receive regulatory clearances for hydro

projects, and the fact that most capacity addition is

back-ended (36% capacity to be commissioned in

FY12, as per recent CEA publications).


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Disclosure appendix

Analyst certification

The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject

security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no

part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained

in this research report: Sumeet Agrawal

Important disclosuresStock ratings and basis for financial analysis

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which

depend largely on individual circumstances such as the investors existing holdings, risk tolerance and other considerations.

Given these differences, HSBC has two principal aims in its equity research: (1) to identify long-term investment opportunities

based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;

and (2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,

technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.

HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when

HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at

www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of thiswebsite.

HSBC believes an investors decision to buy or sell a stock should depend on individual circumstances such as the investors

existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating

systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research

report. In addition, because research reports contain more complete information concerning the analysts views, investors

should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not

be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings

HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stocks domestic, or as appropriate,

regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents

the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a

stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the

next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the

stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10

percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any material change (initiation of coverage, change of

volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management

review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without

necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12

months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,


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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the pastmonths average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stocks status to change.

Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target

price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and

the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the

analysts valuation for a stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which

identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors

should take.

Prior to 15 November 2004, HSBCs ratings system was based upon a two-stage recommendation structure: a combination ofthe analysts view on the stock relative to its sector and the sector call relative to the market, together giving a view on the

stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts.

For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The

target price was the level the stock should have traded at if the market accepted the analysts view of the stock.

Rating distribution for long-term investment opportunities

As of 13 January 2009, the distribution of all ratings published is as follows:

Overweight (Buy) 43% (31% of these provided with Investment Banking Services)

Neutral (Hold) 37% (33% of these provided with Investment Banking Services)

Underweight (Sell) 20% (21% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities

Tata Power (TTPW.BO) share price performance INR vs HSBC rating history

Source: HSBC

Recommendation & price target history

From To Date

N/A Overweight 28 July 2006Overweight Underweight 07 November 2007Underweight Underweight (V) 17 March 2008Underweight (V) Overweight (V) 29 August 2008

Target Price Value Date

Price 1 679.10 28 July 2006Price 2 724.00 30 January 2007Price 3 714.00 20 April 2007Price 4 732.00 23 May 2007Price 5 843.00 26 July 2007Price 6 1198.

Documents

HSBC Power Utilities