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Electric Utilities
Tale of SEB defaults / losses
driving large tariff hikes!
„Delhi hikes power tariffs by 21% to avoid a Tamil Nadu!
Delhi regulators saved discoms from the brink of bankruptcy with a) an avg. tariff
hike of 21% (v/s 67.7% demanded), b) made tariffs dynamic – allowed fuel passthrough, and c) resolved to cover past dues of ~Rs75bn (FY08-11E) in the next
multi-year tariff period. This should be an example of how the mess created by
lack of tariff hikes, regulatory lapses and political interference can be cleaned by
regulators, when pushed to the wall (losses/bankruptcy). This should support
valuations of discom owners – R Infra (7% of SOTP, Buy, Rs437) and Tata Power
(5% of SOTP, Neutral, Rs1045). In the meantime, situation in Tamil Nadu (TN)
has worsened with defaults of Rs21bn in payments (not NPA yet) to many
commercial banks (not PFC/REC) and utilities (Neyveli – main genco’s debtor
days 187 v/s 30 days normal). We see a Delhi-like price hike as the only
alternative (esp. given poor collection track record of TN discoms), which though
may have to wait for Panchayat elections to get over.
DERC approve 21% tariff hike +FAC & promise past recovery
Delhi Electricity Regulatory Commission (DERC) has approved ~21% tariff hike
(see Table 2-5) @ 99.5% collection efficiency, applicable from Sep’11 yielding the
three discoms Rs12.1bn - BSES Rajdhani (BRPL) – Rs5.2bn, BSES Yamuna
(BYPL) – Rs2.9bn and NDPL - Rs4bn in FY12. The tariff hike preceded discoms
not only accumulated under-recovery (revenue gap) of Rs33bn till FY10 – BRPL
(16.8bn), BYPL (Rs5.1bn) and NDPL (11.1bn) but also >2x by FY11-end, wipingoff networth of discoms. Tariff hike is actually higher then 21%, when we add fuel
pass-through allowed v/s static tariff earlier. Also regulator has mentioned its
resolve to cover past dues (incl. carrying cost) of ~Rs75bn (FY08-11E) in the next
multi-year tariff period to fix the balance sheet.
TNEB default in repayment of Rs21bn to banks
TNEB defaulted on loan repayment of Rs21bn to banks. Therefore, now banks
are hesitant to lend the money. The Govt. is now initiating action to mobilize
Rs60bn through the TN Power Finance Corporation (TNPFC). TNEB is by its own
admission in tariff petition is likely to have under-recovery of Rs86bn in FY12E
without tariff revision on Rs305bn revenue.
Financial Institutions go slow on lending to SEBs
Several financial institutions have decided to stop disbursing short-term loans to
power distributors in five states where the losses of utilities have exceeded
Rs50bn each, raising fears of prolonged blackouts and weaker electricity demand
for IPPs. The affected states are TN, Haryana, Rajasthan, Uttar Pradesh and
Punjab, per the media. A power ministry official was quoted in media saying that
“while there have been no defaults yet, some distribution utilities have failed to
pay installments on time causing concern to lenders like Oriental Bank of
Commerce, Bank of Baroda, Corporation Bank and State Bank of India”.
Price objective basis & risk
Adani Power Ltd. (XADPF)
Our PO of Rs124 is based on a sum-of-the-parts valuation at CoE of 13.2-14.9%.
We have valued the Parent capacity of the 4620MW Mundra project at Rs44 per
share, based on DCF at CoE of 13.2-13.7%. We have valued the 100% stake in
the 3300MW Tiroda project at Rs72 per share on DCF basis at CoE of 14.9%.
The 100% stake in the 1320MW Kawai project is valued at Rs7 per share on DCF
basis at CoE of 14.8%. Risks: Project execution, financing, delivery of coal in line
with linkage letters of the Ministry of Coal, imported coal exposes it to potential
country, currency and freight risks, Chinese labour, denial of SEZ benefits, Infra
bottleneck and fall in power rates on the potential match of demand-supply of
power in India.
Gujarat Inds (GUJIF)
Our PO of Rs96 for GIPCL is based on 0.9x to P/BV of FY13 estimates, which is
in line with its current valuation, discount to the sector on peaked RoE in FY12E
and on re-investment risk on lack of investable project pipline. Risks are:
availability of gas and potential delay in planned expansion at Surat Power plant.
Jaiprakash Power Ventures Ltd. (XJSHF)
Our PO of Rs60 for JP Power is based on SOTP valuation. We have valued sum
of the parts based on DCF valuation at CoE of 11.8%-19.3%. We have valued 89-
100% stake in Hydro power plants at Baspa II at Rs5 per share (CoE 11.8%),
Vishnuprayag at Rs6 per share (CoE 11.8%), Karcham Wangtoo at Rs15 per
share (CoE 14.3%), Lower Siang at Rs6 per share (CoE 17.9%) and Hirong at
Rs1 per share (CoE 19.3%). We have valued the 100% stake in thermal power
stations at Bina Power at Rs7 per share (CoE 14.3%), Nigrie at Rs16 per share
(CoE 14.3%), Bara Ph-I Rs1 per share (CoE 12.8%) and Bara Ph-II Rs9 per
share (CoE 16.7%). The effective stake for Carbon credits is valued at Rs7 per
share (CoE 17.4%). The 74% stake in JP Power Grid is valued at Rs2 per share
(CoE 12.1%). This sum upto Rs76 per share. After deducting Rs22 per share for
parent debt of FY17E, we arrive pre-Treasury SOTP value of Rs54 per share. We
have valued 344mn treasury stock at Rs48 per share - 20% discount to our SOTP
value additing Rs6/share to SOTP. This sum upto Rs60 per share.
Downside risks: Hydrology, project funding, project execution and potential
narrowing of demand-supply of power in India leading to fall in power prices in
merchant market.
Lanco Infratech Ltd. (LNIFF)
We have used sum-of-the-parts (SOTP) to arrive at the PO of Rs/60sh is primarily
based on DCF, mutiples and holding company discount of 15%. It comprises:
1) Power assets - operating as well as construction - Rs42/sh (69%) valued using
DCF with varying CoE 14-16% and exit P/BV of 1.5x FY12 for regulated assets.
2) EPC business - Rs13/sh (21%) valued using exit P/E of 10x FY12E - in line
with other mid-cap construction companies
3) Coal mines in Australia - Rs 7/sh (11%) using DCF at CoE of 18%
4) Balance Rs9/sh consists of road BOT projects, power trading, realty and cash
at book value
Downside risks: significant delay in execution, sharp decline in short-term tariff,
regulatory risk, higher interest rate and worsening SEB financials.
Neyveli Lignite (NEYVF)
We have valued NLC at Rs100 based on 10 year average multiple of 1.3x of
FY13E book value. 1) Worsened balance sheet with FY11 debtor days 187days
(143 days) due to weak financials of its #1 customer, TNEB, 2) lack of catalysts
beyond FY13 on blurred visibility of capacity expansion leading to lack of growth
in its core power business (5% EPS CAGR over FY11-13E), 3) re-investment risk
and 4) a relatively expensive valuation of 12x FY13E EPS - 7% discount to NTPC
on NLC's 5% EPS CAGR vs NTPC's 12% and 340bps lower RoE vs NTPC are
the basis for the Underperform rating on stock.
Upside risk is speedy start of 12th plan project execution. Downside risks:
potential 26% mine tax, uncertain pricing of lignite, delay in project execution.
Macro risks are delay in power reforms & financial health of state distribution
companies / its key customer TNEB.
NTPC Ltd (NTHPF)
Our PO of Rs192 for NTPC is based on DCF valuation which assumes WACC of
10.4pct on a lower risk-free rate and a terminal growth rate of 1pct. It is led by
higher capacity, utilization rates & efficiency gains on the back of increased fuel
security. Risks to our price objective are: (a) Gas supply to existing/new plants,
(b) Likely end to the negotiated project allocation window from FY12E, (c)
Potential cut in RoE with likely improved demand-supply gap of power, (d)
Potential entry into unrelated businesses (boilers) and (e) Increased competition
from the private sector. Upside risks: A pick-up in capex and higher than 15.5%
RoE on gross-up of income tax / coal capex.
Reliance Infrastructure (RCTDF)
Our PO of Rs1081 is based on SOTP valuation. The parent business is valued at
Rs271/share based on DCF. We value the stake of 29-51pct in power projects of
Reliance Power at Rs475/share at 15% discount to DCF valuation, while we
value the stake of 49pct in Power distribution business at Rs72/share. Its 74-
100pct stake in Power Transmission business is valued at Rs22/share at 1.2x
book value and stakes of 69pct in the Mumbai Metro project, 95pct in Delhi Metro
Airport Express line and 100pct in road projects are valued based on DCF at
Rs145/share. A stake of 66pct in real estate business is valued at Rs25/share on
DCF basis. Other investments are valued at Rs75/per share on book value.
Based on this, we arrive at an SOTP value of Rs1086/share. Our PO translates
into 1.6x FY12E P/BV (Parent), which is below the utility sector leaders such as
NTPC 2x.
Risks to our PO are: ability to source quality power, viable gas supply,
discontinuity/delay of power sector reforms, delay in project execution, nonavailability of fuel, currency and freight risks, potential matching of demandsupply of power in India leading fall in power rates.
Tata Pwr. Co. (XTAWF)
Our PO of Rs1470 for Tata Power is based SOTP valuation. IPP business is
valued at Rs525 per share. The parent business is valued at Rs343 per share on
DCF basis at CoE of 13.2pct, 100% stake in Mundra UMPP at Rs71 per share on
DCF at cost of equity of 12.4pct, 74% stake in Maithon JV is valued at Rs56 per
share on DCF basis at CoE of 13.7pct and 74% stake IEL captive power plant is
valued Rs21 per share at 1.5x 1-year forward P/BV . Its Telecom investments
have been valued at Rs218 per share at current market BofAML PO / deal
valuations. Power and coal related investments valued at Rs711 per share on
DCF (Indonesian coal mines) or P/BV (NDPL, Powerlinkes) or PE (Tata BP Solar)
based methods. Other Investments are valued at Rs50 per share. Risks: project
execution challenges, mismatch in imported coal price hike for Mundra project vs.
rise in the coal index, availability of low price fuel for merchant power projects.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Electric Utilities
Tale of SEB defaults / losses
driving large tariff hikes!
„Delhi hikes power tariffs by 21% to avoid a Tamil Nadu!
Delhi regulators saved discoms from the brink of bankruptcy with a) an avg. tariff
hike of 21% (v/s 67.7% demanded), b) made tariffs dynamic – allowed fuel passthrough, and c) resolved to cover past dues of ~Rs75bn (FY08-11E) in the next
multi-year tariff period. This should be an example of how the mess created by
lack of tariff hikes, regulatory lapses and political interference can be cleaned by
regulators, when pushed to the wall (losses/bankruptcy). This should support
valuations of discom owners – R Infra (7% of SOTP, Buy, Rs437) and Tata Power
(5% of SOTP, Neutral, Rs1045). In the meantime, situation in Tamil Nadu (TN)
has worsened with defaults of Rs21bn in payments (not NPA yet) to many
commercial banks (not PFC/REC) and utilities (Neyveli – main genco’s debtor
days 187 v/s 30 days normal). We see a Delhi-like price hike as the only
alternative (esp. given poor collection track record of TN discoms), which though
may have to wait for Panchayat elections to get over.
DERC approve 21% tariff hike +FAC & promise past recovery
Delhi Electricity Regulatory Commission (DERC) has approved ~21% tariff hike
(see Table 2-5) @ 99.5% collection efficiency, applicable from Sep’11 yielding the
three discoms Rs12.1bn - BSES Rajdhani (BRPL) – Rs5.2bn, BSES Yamuna
(BYPL) – Rs2.9bn and NDPL - Rs4bn in FY12. The tariff hike preceded discoms
not only accumulated under-recovery (revenue gap) of Rs33bn till FY10 – BRPL
(16.8bn), BYPL (Rs5.1bn) and NDPL (11.1bn) but also >2x by FY11-end, wipingoff networth of discoms. Tariff hike is actually higher then 21%, when we add fuel
pass-through allowed v/s static tariff earlier. Also regulator has mentioned its
resolve to cover past dues (incl. carrying cost) of ~Rs75bn (FY08-11E) in the next
multi-year tariff period to fix the balance sheet.
TNEB default in repayment of Rs21bn to banks
TNEB defaulted on loan repayment of Rs21bn to banks. Therefore, now banks
are hesitant to lend the money. The Govt. is now initiating action to mobilize
Rs60bn through the TN Power Finance Corporation (TNPFC). TNEB is by its own
admission in tariff petition is likely to have under-recovery of Rs86bn in FY12E
without tariff revision on Rs305bn revenue.
Financial Institutions go slow on lending to SEBs
Several financial institutions have decided to stop disbursing short-term loans to
power distributors in five states where the losses of utilities have exceeded
Rs50bn each, raising fears of prolonged blackouts and weaker electricity demand
for IPPs. The affected states are TN, Haryana, Rajasthan, Uttar Pradesh and
Punjab, per the media. A power ministry official was quoted in media saying that
“while there have been no defaults yet, some distribution utilities have failed to
pay installments on time causing concern to lenders like Oriental Bank of
Commerce, Bank of Baroda, Corporation Bank and State Bank of India”.
Price objective basis & risk
Adani Power Ltd. (XADPF)
Our PO of Rs124 is based on a sum-of-the-parts valuation at CoE of 13.2-14.9%.
We have valued the Parent capacity of the 4620MW Mundra project at Rs44 per
share, based on DCF at CoE of 13.2-13.7%. We have valued the 100% stake in
the 3300MW Tiroda project at Rs72 per share on DCF basis at CoE of 14.9%.
The 100% stake in the 1320MW Kawai project is valued at Rs7 per share on DCF
basis at CoE of 14.8%. Risks: Project execution, financing, delivery of coal in line
with linkage letters of the Ministry of Coal, imported coal exposes it to potential
country, currency and freight risks, Chinese labour, denial of SEZ benefits, Infra
bottleneck and fall in power rates on the potential match of demand-supply of
power in India.
Gujarat Inds (GUJIF)
Our PO of Rs96 for GIPCL is based on 0.9x to P/BV of FY13 estimates, which is
in line with its current valuation, discount to the sector on peaked RoE in FY12E
and on re-investment risk on lack of investable project pipline. Risks are:
availability of gas and potential delay in planned expansion at Surat Power plant.
Jaiprakash Power Ventures Ltd. (XJSHF)
Our PO of Rs60 for JP Power is based on SOTP valuation. We have valued sum
of the parts based on DCF valuation at CoE of 11.8%-19.3%. We have valued 89-
100% stake in Hydro power plants at Baspa II at Rs5 per share (CoE 11.8%),
Vishnuprayag at Rs6 per share (CoE 11.8%), Karcham Wangtoo at Rs15 per
share (CoE 14.3%), Lower Siang at Rs6 per share (CoE 17.9%) and Hirong at
Rs1 per share (CoE 19.3%). We have valued the 100% stake in thermal power
stations at Bina Power at Rs7 per share (CoE 14.3%), Nigrie at Rs16 per share
(CoE 14.3%), Bara Ph-I Rs1 per share (CoE 12.8%) and Bara Ph-II Rs9 per
share (CoE 16.7%). The effective stake for Carbon credits is valued at Rs7 per
share (CoE 17.4%). The 74% stake in JP Power Grid is valued at Rs2 per share
(CoE 12.1%). This sum upto Rs76 per share. After deducting Rs22 per share for
parent debt of FY17E, we arrive pre-Treasury SOTP value of Rs54 per share. We
have valued 344mn treasury stock at Rs48 per share - 20% discount to our SOTP
value additing Rs6/share to SOTP. This sum upto Rs60 per share.
Downside risks: Hydrology, project funding, project execution and potential
narrowing of demand-supply of power in India leading to fall in power prices in
merchant market.
Lanco Infratech Ltd. (LNIFF)
We have used sum-of-the-parts (SOTP) to arrive at the PO of Rs/60sh is primarily
based on DCF, mutiples and holding company discount of 15%. It comprises:
1) Power assets - operating as well as construction - Rs42/sh (69%) valued using
DCF with varying CoE 14-16% and exit P/BV of 1.5x FY12 for regulated assets.
2) EPC business - Rs13/sh (21%) valued using exit P/E of 10x FY12E - in line
with other mid-cap construction companies
3) Coal mines in Australia - Rs 7/sh (11%) using DCF at CoE of 18%
4) Balance Rs9/sh consists of road BOT projects, power trading, realty and cash
at book value
Downside risks: significant delay in execution, sharp decline in short-term tariff,
regulatory risk, higher interest rate and worsening SEB financials.
Neyveli Lignite (NEYVF)
We have valued NLC at Rs100 based on 10 year average multiple of 1.3x of
FY13E book value. 1) Worsened balance sheet with FY11 debtor days 187days
(143 days) due to weak financials of its #1 customer, TNEB, 2) lack of catalysts
beyond FY13 on blurred visibility of capacity expansion leading to lack of growth
in its core power business (5% EPS CAGR over FY11-13E), 3) re-investment risk
and 4) a relatively expensive valuation of 12x FY13E EPS - 7% discount to NTPC
on NLC's 5% EPS CAGR vs NTPC's 12% and 340bps lower RoE vs NTPC are
the basis for the Underperform rating on stock.
Upside risk is speedy start of 12th plan project execution. Downside risks:
potential 26% mine tax, uncertain pricing of lignite, delay in project execution.
Macro risks are delay in power reforms & financial health of state distribution
companies / its key customer TNEB.
NTPC Ltd (NTHPF)
Our PO of Rs192 for NTPC is based on DCF valuation which assumes WACC of
10.4pct on a lower risk-free rate and a terminal growth rate of 1pct. It is led by
higher capacity, utilization rates & efficiency gains on the back of increased fuel
security. Risks to our price objective are: (a) Gas supply to existing/new plants,
(b) Likely end to the negotiated project allocation window from FY12E, (c)
Potential cut in RoE with likely improved demand-supply gap of power, (d)
Potential entry into unrelated businesses (boilers) and (e) Increased competition
from the private sector. Upside risks: A pick-up in capex and higher than 15.5%
RoE on gross-up of income tax / coal capex.
Reliance Infrastructure (RCTDF)
Our PO of Rs1081 is based on SOTP valuation. The parent business is valued at
Rs271/share based on DCF. We value the stake of 29-51pct in power projects of
Reliance Power at Rs475/share at 15% discount to DCF valuation, while we
value the stake of 49pct in Power distribution business at Rs72/share. Its 74-
100pct stake in Power Transmission business is valued at Rs22/share at 1.2x
book value and stakes of 69pct in the Mumbai Metro project, 95pct in Delhi Metro
Airport Express line and 100pct in road projects are valued based on DCF at
Rs145/share. A stake of 66pct in real estate business is valued at Rs25/share on
DCF basis. Other investments are valued at Rs75/per share on book value.
Based on this, we arrive at an SOTP value of Rs1086/share. Our PO translates
into 1.6x FY12E P/BV (Parent), which is below the utility sector leaders such as
NTPC 2x.
Risks to our PO are: ability to source quality power, viable gas supply,
discontinuity/delay of power sector reforms, delay in project execution, nonavailability of fuel, currency and freight risks, potential matching of demandsupply of power in India leading fall in power rates.
Tata Pwr. Co. (XTAWF)
Our PO of Rs1470 for Tata Power is based SOTP valuation. IPP business is
valued at Rs525 per share. The parent business is valued at Rs343 per share on
DCF basis at CoE of 13.2pct, 100% stake in Mundra UMPP at Rs71 per share on
DCF at cost of equity of 12.4pct, 74% stake in Maithon JV is valued at Rs56 per
share on DCF basis at CoE of 13.7pct and 74% stake IEL captive power plant is
valued Rs21 per share at 1.5x 1-year forward P/BV . Its Telecom investments
have been valued at Rs218 per share at current market BofAML PO / deal
valuations. Power and coal related investments valued at Rs711 per share on
DCF (Indonesian coal mines) or P/BV (NDPL, Powerlinkes) or PE (Tata BP Solar)
based methods. Other Investments are valued at Rs50 per share. Risks: project
execution challenges, mismatch in imported coal price hike for Mundra project vs.
rise in the coal index, availability of low price fuel for merchant power projects.
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