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Reliance Power: The Sharp Elbows Discount - Upgrading to Market-Perform with Target Price of INR80:: Bernstein Research,

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If Reliance Power builds out its planned 24GW of coal-fired generation capacity over the next five years,
we believe the share price could triple.  Equally, Reliance Power may be merged with Reliance
Infrastructure at a discount to market value the same way that Reliance Natural Resources was merged
with Reliance Power in July 2010.  We have no way to assess the probability of the latter event.  But,
dismissing the best- and worst-case scenario, we cannot justify a valuation less than INR 80 given
operational and construction competence and an attractive portfolio. Upgrade to Market-Perform.
 If Reliance Power continues to evolve into a dull-but-steady power company, the stock could be worth
~INR240 per share. The company is building power stations on time and on budget in a market that
needs cheap electricity. Reliance Power operates its one existing power station at high utilization and has
secured low-cost fuel supply in a market where obtaining inexpensive coal is famously difficult. The
company's business model is based on becoming the low cost provider of electricity and assumes – or is
even driving - a low-priced electricity market in India.
 We like the sharp-elbowed style in dealings with third parties.  The company's decision to bid
aggressively for the Sasan UMPP and then use coal from Sasan to fuel other power stations - effectively
for free – has, to put it politely, real flair.  Similarly, the company's implicit threat to abandon its
Krishnapatnam UMPP unless it receives a tariff increase so that it can pay more to its wholly owned coal
mining subsidiary in Indonesia for its own coal – is, simultaneously, infuriatingly illogical… and
potentially highly accretive to shareholder value.
 The risk is that this approach carries over to dealings with minority shareholders.  The Anil Ambani
group's history with minority shareholders is poor.  In July 2010, Reliance Natural Resources was
merged into Reliance Power at a 31% discount to its share price.  Reliance ADA group controlled 54.8%
of RNRL stock and RNRL was, at the time of the merger, down over 40% from its high the previous
summer.  Today, Reliance ADA group controls 80.4% of Reliance Power and Reliance Power is down
45% over the past twelve months.  We have no way of quantifying the probability of an intra-group
merger occurring with Reliance Power at a discount to market value. But given the history in this group,
the risk is not zero.
 Discounting the worst- and the best-case scenarios, we estimate the stock is worth INR80 per share.
We are valuing the stock based on a liquidation value, using the company's to-date capital spending of
INR 150B, and assuming these assets could be sold at a P/B of ~1.5x (NTPC trades at 2x book).


Investment Conclusion
In our view, the Indian power generation sector is heading for an extended period of overcapacity. The
sector's moderate success in developing new projects (~12GW in the last year) is outstripping Coal India's
ability to produce coal, the Ministry of Railways's ability to transport the coal and the distribution sector's
ability to pay for all the electricity the generation sector could produce. The consequence is falling
utilization rates and falling merchant power prices.
Reliance Power is, to an extent, shielded from these risks as it has signed long term power purchase
agreements with customers, limiting exposure to merchant electricity prices and is developing its own coal
mining facilities both in Indonesia and in India. In our view, the stock is already pricing in risks from
uncertainty of fuel supply, execution of new projects, financial health of the State Electricity Boards, and
dilution of existing holders through future equity issuances.
Accordingly, we are upgrading the stock to Market-perform. We had previously valued the stock on a DCF
basis employing all of the company's guidance around capital spending, utilization and pricing.  We
believed, based on cash burn implied from that guidance, that it was likely that Reliance Power would seek
additional equity and calculated share price based on that assumption. Even using the company guidance,
we reached a valuation that – for most of the last fifteen months – implied an "Underperform" rating.
Given the sell-off in the stock since the end of July, we are now valuing the stock based on current
liquidation value and assuming a P/B of ~1.5x, which gives us a value of ~INR 80 per share and a Marketperform rating. We remain concerned about the AGA group companies' poor history with minority
shareholders. Therefore, notwithstanding the clear upside to valuation if the company executes its stated
expansion plan, we remain cautious on the stock.
We are lowering our FY2012 EPS estimate from INR 4.09 to INR 3.10, and lowering our FY2013 EPS
estimate from INR 14.36 to INR 10.81, based on the continued decline in merchant power pricing. We are
lowering our weighted average tariff to ~INR2.20 per kWh by December 2014 from the previous ~INR2.60
per kWh to reflect this deterioration in power pricing.
We are rate NTPC Market-perform with a target price INR 190. Given NTPC's regulated rate of return
business, we believe that the upside to current valuation is limited.

Indian Power: The Path from Nagpur to Ningbo - An Update After Seeing Butibori... & Hearing NTPC & Reliance Power ::Bernstein Research,

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Highlights
After a site visit to Reliance Power's Butibori power station in Maharashtra, a meeting with RPWR's CEO
JP Chalasani and attending NTPC's analyst day, we are more convinced of the ability of India's power
sector to add 15-20GW of new capacity both this year and next… and less convinced of the ability of the
Indian coal mining and distribution segments to provide fuel and pay for the power. The implications for
the power generation sector as a whole are poor.
 The Indian power generation sector is expanding installed capacity at a steady high-single digit
growth rate. The sector added 13GW last financial year and is on track to add at least as much this year.
We saw no indication of a slowdown: Reliance Power expressed the view that the single greatest
constraint to completing the Butibori project on time is availability of skilled labor, given the number of
similar projects currently ongoing in eastern Maharashtra. Installed capacity growth isn't the issue.
 The problem is a lack of domestic (cheap) coal production growth combined with an inability to pay
for (expensive) imported coal. Few market participants have any confidence in the ability of Coal India
to increase coal production at a rate faster than 4-5%. The only available source of fuel to make up the
difference in the medium term is imported coal. But, at current retail tariffs, State Electricity Boards
can't afford to pay for electricity generated from imported coal.
 Imported coal is – according to NTPC - 2.5x more expensive than domestic coal, after adjusted for
calorific value. NTPC's power stations are being backed down because State Electricity Boards don't
have cash to pay for electricity. Use of imported coal exacerbates pricing pressures and the risk of being
backed down. Even in NTPC's long range forecasts, imported coal makes up only 10% of total coal
supply (up from 7.7% today). This modest increase is a function of the fact that imported coal effectively
prices the power station using it out of the market.
 This is the fundamental wrinkle at the core of any bullish view on Indian power consumption growth.
NTPC expects real GDP growth of ~8% in coming years and power consumption growth at roughly the
same number. Yet, power consumption growth was 3.8% in FY2011 and has topped 8% in only one of
the last eight years. Since the power multiplier has been below 1.0x for the last nine years in India, and
given the coal supply constraints, maybe this lower multiplier qualifies as "normal".
 The solution is to increase retail tariffs and reform the distribution sector to reduce commercial and
technical losses. But this has always been the solution. We did not speak to anyone who was optimistic
about distribution sector reform in the near term. That means more installed capacity growth, lower
utilization… and limited opportunities for generation companies to surprise to the upside.


Investment Conclusion
We rate NTPC Market-perform (Target Price INR190). Given NTPC's regulated rate of return business,
we believe that the upside to current valuation is limited.
We rate Reliance Power Underperform (Target Price INR100). Reliance Power continues to target over
20GW of coal-fired capacity and coal investment in Indonesia. All this expansion requires cash. Reliance
Power raised INR135.5 billion in its IPO in January 2008. Reliance Power has stated that – through project
financing – it can lever its power stations 75%:25% debt-to-equity. This effectively quadruples the amount
of cash Reliance Power has to spend on building power stations to INR542 billion. To date, the company
has spent ~INR100 billion and therefore has – at the beginning of 2011 – an additional INR440 billion
remaining to spend.
In discussions with the company, management is clear that it recognizes cash flow deficiencies in its current
expansion plan but not until 2014 or 2015. The company maintains that it is planning to manage the roll-out
of projects to preserve cash. Of course, delays in capital spending also serve to delay earnings. We remain
cautious about the stock given its cash flow profile, the difficult pricing environment in which it is
operating and the challenging projects that it needs to complete successfully and on budget in order to start
generating meaningful cash flows.


Valuation Methodology
Our valuation for NTPC of INR 190 is based on a Price/Forward Earnings multiple and a DCF valuation.
On a Price/Forward Earnings basis, we assign the historical multiple of 15x to our FY2012 EPS of INR
12.72. Our DCF valuation assumes a WACC of 11.1% and a terminal growth rate of 4%.
Our valuation for Reliance Power of INR 100 is based on a DCF valuation, adjusted downward to reflect
concerns about the terms on which the company may raise additional equity. Our DCF valuation assumes a
WACC of 14.8% and a terminal growth rate of 4%. Reliance Power is still in the early stages of
commissioning its fleet of power plants. Earnings are currently dominated by interest and investment
income and accordingly provide little guide as the company's core business or sustainable long-term
earnings power.
Risks
The primary risk to our thesis on the India utilities is that electricity demand growth may be higher than we
anticipate or the level of newly commissioned power stations may be lower than anticipated. In other
words, the long-term demand-supply imbalance may continue indefinitely.
In addition, for NTPC significant changes in the regulation of the power sector, or a statutorily required
reduction in Government ownership in NTPC over a short timeframe, or a significant investment in foreign,
non- regulated, non-generation assets (all floated in India in the last six months) would have negative
implications for NTPC valuation, in our view.
The primary risk to our thesis on Reliance Power is that if the long-term demand-supply imbalance
continues indefinitely, Reliance Power's IPP fleet – once built – will operate at higher than anticipated
utilization levels and sell electricity at higher than anticipated prices. In that circumstance, commissioning
the fleet in full and on time with minimal additional equity and through the use of large amounts of
inexpensive debt financing would create value over the long term that is not currently reflected in our
valuation.

Reliance Industries: Reaching for the Inflection Point; Three Reasons Why Reliance Should Outperform from Here:: Bernstein Research,

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Reliance is trading at a 20% discount to its core asset value with further upside from development of its
30TCF resource base and exploration of its 200,000km
2
offshore acreage. Completion of the BP farm-in, a
turnaround in D6 production and follow-on KG basin exploration mark three near term catalysts which we
believe will start to improve sentiment and valuation.
 We expect the Indian government to give the green light to the BP farm-in to Reliance acreage over
the coming few weeks. The arrival of BP will bring renewed focus to exploration and development
offshore India. It will also help Reliance restore production at D6 through improved reservoir
management techniques. Moreover, Reliance has 30TCF (5bn boe) of undeveloped resources (in D6 and
NEC-25) and 200,000km
2
of deep water offshore acreage which is essentially unexplored. BP's deep
water expertise will help accelerate monetization of this resource base and exploration opportunities.
 D6 production to start to improve in the next quarter. Reliance will tie-back 2 additional wells over
the coming months and we expect the drilling of 3 additional wells in the second half of the year which
will take the total well count to 23 (+25%). This will offset natural decline and we expect this will bring
production to back over 50MMSCM/d by the end of this year.
 The recent discovery in deep water block D9 bodes well for continued exploration in the KG basin.
RIL announced the first discovery in the west of the KG-D9 block which proves that the gas play in the
northern part of D6 extends further to the south west and into the D9 block, opening up a much larger
prospective area in the basin. Further exploration will take place this year
 Reliance cash position may be more of an asset than a liability in the current environment. While
some fret over Reliance's growing cash pile, we believe in an increasingly credit constrained environment
this is more of an opportunity than a liability. We expect more spending on Indian E&P and the
possibility of international upstream acquisitions. With a 45% interest in the company, Mukesh Ambani
remains well aligned with shareholders on the efficient deployment of capital.
 At the current share price, investors are getting upstream growth for free. Our core value for
Reliance is INR 1,003, which is our estimate of the value of Reliance developed upstream and
downstream assets plus net cash. Our value for the 30TCF of discovered but undeveloped resources and
exploration acreage which has yet to be drilled is USD9bn, or INR 122 per share.


 To account for the decline in market multiples for refining and petrochemical assets we have
adjusted our target price to INR1125. Given the decline in EV/EBITDA multiples for refining and
petrochemical peers, we have reduced our target price to INR1125 from INR1250.
Investment Conclusion
We remain positive on the outlook for Reliance. While most investors would agree that Reliance is cheap,
the question is has the stock bottomed out yet and what are the catalysts to get Reliance moving again?
Despite the negative news flow in the first half of 2011 (CAG review, license issues), we expect a more
positive second half to the year. There are three catalysts in our view. The first catalyst is the BP deal to
close over the coming month which will lead to a new roadmap for exploration and development activity
offshore India. Secondly, the recently announced discovery in D9 confirms that the prospective area of the
D6 block is much larger than the northern part of the D6 block alone. Follow-on exploration later this year
will confirm this. Finally, we expect D6 production to bottom out in 1QFY12 and start to move higher as
new wells are brought on line. As production increases, so will the RIL stock price.
In our view the gas potential offshore India is enormous. Reliance has the best acreage position and over
time natural gas prices will move higher making developments more viable. While some investors fret over
the growing cash pile that Reliance is amassing, we feel there is no reason to assume that Mukesh Ambani
(who controls 45% of the company) will deploy capital in a way that is value dilutive to shareholders. On a
sum of the parts basis we believe that on the current share price, investors are getting undeveloped
resources and exploration for free. While it may yet take another quarter for some of our catalysts to play
out, we see little down side from here. Ultimately we believe that investors need to get ahead of the curve.
We rate Reliance as outperform with a target price of INR 1,125.
Details
Reliance has had a turbulent first half of 2011. In particular, after the announcement of the BP deal in
February 2011, the news flow surrounding the stock has been entirely negative. First, there were concerns
regarding the under-performing KG-D6 gas field in offshore India. RIL admitted technical difficulties and
hence its inability to hit previously announced gas production targets. We, however, believe that the major
reason for the lower production was the lesser number of wells drilled - more details can be found in our
call published on the 4
th
of May Reliance Industries: E&P Fears Overblown, Outperform.
The next storm of bad news to hit the stock was from the Petroleum ministry and the upstream regulator
(Directorate General of Hydrocarbons – DGH) in India. The press statements by the DGH regarding the
hiatus in drilling led to further pressure on RIL.
Over the last few weeks, the leak of the draft report submitted by the Comptroller and Auditor General
(CAG) of India has put additional pressure on the RIL stock. The media has reported extensively on the
allegations of the CAG that Reliance 'gold-plated' its costs for developing the KG-D6 field, and hence
causing a loss to the government. While we think that industry cost inflation (up 50% since start of D6
development) and general industry cost over-runs accounts for most of the difference, some parties intend
see this as a major issue. (For the sake of the Australian E&P industry we hope that the CAG auditors do
not extend their enquiries overseas!)
In spite of the beating the stock has taken on account of the negative news flow, we believe that the intrinsic
value of the company hasn’t changed and the stock is priced at a significant discount to its intrinsic value.
In this call we discuss the valuation of the company in detail. We believe there are three key catalysts for
the valuation of the company to come back to its intrinsic levels:


1) Approval of the BP deal by the government
2) Turn-around in D6 production. We expect the tie back of 2 wells plus drilling of 3 additional wells
to start turning round production. We believe that Phase 2 development (28 additional wells) will
happen, although this may remain linked to gas price.
3) Further exploration in the KG basin following on from the gas discovery in D9
The re-negotiation of the price of gas from KG-D6 block, for the whole or part of the production, before
FY14 is also another important catalyst though we believe it to be less likely in the short term. We believe
current price levels for the core sectors will remain in force till the end of life of the current price regime, in
March 2014. However, we believe we might see a re-negotiation of the gas price for the non-core sectors,
though we haven’t included this scenario in our valuation analysis.
How much gas is there in KG-D6?
The valuation of RIL has hinged around the valuation of the company's (and India's) largest gas reservoir –
the Dhirubhai or KG-D6 block. In the addendum to the Initial Development Plan (IDP), RIL had discussed
2P reserves of 11.3tcf for the D1 and D3 fields and 2P total in-place discovered resources of 42tcf (see
Exhibit 1). Furthermore, RIL also discussed a hydrocarbon potential of 39tcf of gas and 1.6bn bbl of oil
from 25 other potential prospects. RIL mentioned in the document that the total potential of the block was
estimated at around 50tcf.


It is important to note here that the addendum to the IDP discussed the development plan for only 11.3tcf of
gas from the D1 and D3 gas fields. The document was submitted to the Indian Government for approval in
2006 and much water has flown under the bridge since then. With the production problems being reported
from KG-D6, the market has been unsure of the resource potential of the block, and there have even been
doubts over the potential of the entire eastern Indian seaboard. We believe that the current problems are
temporary and with the technical expertise of BP and the drilling of additional wells, we will see an uptick
in production volumes.
In the latest reserves statement from RIL, total gas reserves were taken down by 2.7% , the
first such negative revision of gas reserves by the company, which was a cause of concern for the
investment community. Niko Resources also took down its India proved reserves by 20% . It
is very important to note that even after the negative revisions by Niko, the total 2P gas reserves of the KGD6 block remains at 11.2tcf, at the levels discussed in the addendum to the initial development plan

Cognizant: Pullback of Late Is an Over-Reaction; Multiple Reasons to Favor CTSH! : Bernstein

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Cognizant's stock has pulled back yesterday and today, and we are seeing a huge volume of questions about
this. We see two concerns, both of which we believe are substantially overblown: 1) concern about
Cognizant being suspended from Business Executive Program (BEP) of the US Embassy in India, a
program that enables expedited or "fast track" applications for US visas, and 2) concern about a call being
made by an analyst in India that CTSH's quarter is progressing somewhat poorly due to issues at Lloyds.
The visa-related concern is overblown because this should not be a material issue, and it seems prone
to get rectified soon:
 The suspension of Cognizant from the Business Executive Program does not impact the company's
ability to obtain US visas and to deploy needed employees to the US for customer projects. It simply
closes (likely only temporarily) Cognizant from the "fast track" application process for the time being.
Note: HCL, Accenture, IBM, and TCS were also suspended from this fast-track visa application
program, though IBM and TCS have now been reinstated.
 News about the BEP program is hitting the press today. But we think Cognizant's suspension from this
program occurred in March, so Cognizant management would have been aware of this situation prior to
issuing its last guidance.
 The reason for the suspensions appears to be paperwork discrepancies in visa applications. And, we
think Cognizant should be positioned to clarify such discrepancies and become reinstated to this BEP
visa program reasonably soon.
 We think some investors have equated Cognizant's BEP suspension with Infosys's visa-related subpoena.
But, we think Cognizant's BEP suspension is quite minor compared to Infosys' potential visa issue
(stemming from a whistle-blower case). Note: Infosys received a subpoena from a US court, following
allegations by a former Infosys employee that Infosys was systematically violating US visa regulations.

IT Services: Back Up Truck on Cognizant; Accenture Outlook Solid; Capgemini's Pipeline Comment Misunderstoo: Bernstein Research,

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IT Services: Back Up Truck on Cognizant; Accenture Outlook
Solid; Capgemini's Pipeline Comment Misunderstoo


Highlights
Today's piece summarizes findings from our latest channel checks on the consulting/systems integration
and offshore markets and from Capgemini's analyst day, including offline discussions with several
Capgemini executives.  In addition, we've further studied recent concerns hurting Cognizant's stock, and we
address basic questions facing Accenture ahead of its June 23
rd
earnings report.  Key conclusions include:
 Heightened concerns of late about Cognizant's Q2 are unfounded, and we think investors should take the
opportunity to aggressively buy Cognizant following its recent pullback.  We are reinstating Cognizant
as our best idea.
 Capgemini's Analyst Day comment about "a plateau in its systems integration pipeline" has been
misunderstood.  This comment should not be cause for concerns about a "double dip" in demand, with
our view on this front confirmed by our discussion with Capgemini's CFO.
 Following its pullback off of its all-time high stock price due to Cognizant / Capgemini related concerns
that we think are unfounded / misunderstood, Accenture's risk/reward now looks more attractive ahead of
its upcoming May quarter earnings report.
Findings from Capgemini's analyst day and from our broader industry checks on the consulting/
systems integration and offshore markets

Cognizant: Off the Tracks, or Temporary Setback? Bernstein Research,

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Highlights
This piece evaluates Cognizant's Q1:11 earnings report, concluding that Cognizant should be a sound buyon-
the-dip opportunity.
We're revising our CY11 EPS (to $2.82 from $2.84) and CY12 EPS (to $3.52 from $3.55) due to the
following factors: slightly lower revenue growth assumption for CY11, modestly higher non-GAAP
operating margin (due to upside reported in Q1:11), increased assumption for stock compensation expense,
and modest increase in tax rate. Also, we are slightly revising our CTSH target price of $88.00 (vs. prior of
$88.75), derived by applying a 25.0x multiple (unchanged) to our new CY12 EPS estimate of $3.52.
We are disappointed that Cognizant's Q1:11 revenue was below our expectation (i.e., achieved sequential
revenue growth of 4.6%, only in line with consensus and below buy-side expectation of 5.5-7.0%). But we
see six reasons that CTSH's stock should represent a good buy-on-the-dip opportunity:
 First, growth drag from Europe should not be lasting: We think Cognizant's less-than-stellar sequential
growth in Q1:11 was due to ramp-downs in post-merger-integration business in the UK. Looking
forward, we think this headwind is prone to subside between now and Q3:11, plus it seems that a strong
pipeline of deals are closing in Europe and should contribute to deal ramp-ups between now and Q3:11.
Meanwhile, it's clear that growth and demand trends in the US remain healthy.
 Second, we think Q2:11 (Cognizant's seasonally strongest quarter for sequential growth) is prone to
bring revenue upside: Cognizant's sequential growth guidance for Q2:11 calls for "at least" 5.7% (vs.
consensus of 4.9%), and we think this guidance could prove to be conservative, especially given that
Q2:11 should receive a boost from currency and potentially from pricing. Note that pricing improved
sequentially in Q1:11 by 2%, as new pricing terms likely kicked into gear during Q1:11, with some
incremental potential for continuation into Q2:11, in our view.
 Third, we do not think offshore demand is "broken": Investors are asking whether offshore demand is
running into meaningful barriers. We think INFY's weak recent growth results are largely attributable to


company-specific issues (e.g., leadership transition, transition challenges in trying to move up the food
chain), and CTSH's Q1:11 disappointment (vs. high expectations) was largely due to a growth drag from
merger-integration deal ramp-downs. We assert that the "structural" issue involved is that the offshore
market began its growth rebound quite early in the recovery cycle – i.e., in September 2009 – and is no
longer seeing incremental growth boosts now that we've moved into a later-cycle demand phase. Still,
offshore demand is quite healthy, and we think expectations for CTSH to achieve north of 30% revenue
growth in 2011 remain quite feasible (we are now forecasting 32.8% revenue growth for 2011). As an
additional encouraging data point (Exhibit 9), Cognizant's sequential headcount growth has been between
7% and 9% in each of the past three quarters.
 Fourth, Cognizant should be helped disproportionately by transformational services demand: Because
of CTSH's distinctive onshore client relationship capabilities and industry vertical focus (as explained in
our past research), we underscore that CTSH should benefit more than other Indian firms in this latercycle
demand phase (which we maintain is lined with strong demand for transformational services, as
opposed to the fast-payback deals that dominated earlier in the recovery cycle).
 Fifth, Cognizant's share-gaining prowess (which we think is being extended) is underestimated in
consensus numbers: As shown in our prior research, Cognizant's Y/Y revenue growth results exceeded
the tier-1 Indian firms (TCS, Infosys, and Wipro) as a group by an average of 17.1 percentage points
during 2003 to 2010. Yet, according to consensus estimates, Cognizant's revenue growth is expected to
beat these tier-1 Indian firms by only 5.1 percentage points in 2011, and Cognizant's consensus Y/Y
revenue growth for Q4:11 is only in line with that of the tier-1 Indian firms as a group. We strongly
think Cognizant is likely to achieve materially above-peer growth, thus beating consensus.

Reliance Industries: E&P Fears Overblown, Outperform::Bernstein Research,

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The underperforming KG-D6 gas field has dragged RIL down along with it. After the 4QFY11 results
announcement, with no further clarity on KG-D6 and consistent negative press surrounding the issue, RIL
stock has dropped a further 9%. Though, there have also been concerns on the sustainability of its margins
in its refining business, the issue dominating the discussion around RIL has been upstream performance.
While the gas reservoir may be more complex than anticipated, we believe they are resolvable and that
Reliance will be able to ramp up to planned output targets as additional wells are drilled.
 Reliance has significantly underperformed the Sensex over the past 12 months since production at
the KG-D6 (Dhirubhai) gas field started to decline and production targets were missed.
 Lower production output is primarily a function of the hiatus in development drilling. While it
seems likely that the reservoir is more complex than originally anticipated, performance on a per well
basis has not been too dissimilar to the original field development plan. Instead the lower number of
development wells drilled (18 vs. 26 planned) is primarily is the reason for the underperformance.
 Completion of the 1 drilling programme plus initiation of the Phase 2 drilling programme will
restore production growth. While additional surveillance data will help Reliance to better locate infill
wells (and possibly higher prices) we think it is only a matter of time before additional drilling kicks off
which will bring production up towards the target of 80MCM/d.
 The $7.5bn farm-in by BP to Reliance acreage gives us confidence that a turn-around in KG-D6
will be achieved. BP will have been aware of the production issues at D6 prior to farming-in. We expect
the arrival of a major IOC to not only bring world class reservoir management practices to KG-D6 but to
also accelerate exploration across east coast of India.
 While Reliance has disappointed upstream, downstream performance has been strong. Refining
margins have improved (c. $10/bbl) over the past 4 quarters in line with the Singapore benchmark
indicator. While spreads relative to Singapore have been a little weaker than expected, we expect refining
margins to remain firm for the remainder of 2011.
 Petrochemical performance also continues to be extremely robust with higher margins and
volumes. Reliance has been able to benefit from both strong volume growth and record margins as prices
have firmed on demand growth for plastics and polyester given the surge in cotton prices. We remain

positive on the petrochemical cycle and with further additional capacity planned we expect continued
growth in the petrochemical segment ahead.

IT Services: Does It Make Sense That IBM's Consulting & SI Growth Is So Much Weaker Than Accenture's? Yes! :: Bernstein Research,

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Highlights
IBM Global Services' results for Q1:11 were mixed, but disappointing overall. This piece explains IT
services industry implications from IBM's report and our follow-up discussion with management.
On the somewhat positive side, overall Global Services revenue growth improved from 2% in Q4:10 to 3%
in Q1:11, and we see indications that add-on work is helping outsourcing revenues.

Accenture: Should ACN Still Qualify as Best Idea, After Anticipating Next Set of Issues to Face the Stock?

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Accenture: Should ACN Still Qualify as Best Idea, After
Anticipating Next Set of Issues to Face the Stock?


Highlights
Our January 12th research piece featured Accenture as our best idea based on: 1) analysis of Accenture's
distinctive growth, FCF, and ROC attributes compared to tech stocks in general, and 2) our favorable
demand progression thesis emphasizing that a "transformational" services demand phase would drive
significant upside to consensus. This piece also asserted that our $57 target price was conservative after
accounting for Accenture's distinctive attributes (conveyed by evaluating metrics across tech stock
universe) and our expectation of upward revisions to Street estimates. Today, we are raising our target
price to $62.75. And, based on reasons explained herein, we are keeping Accenture on Bernstein's bestidea
list, while also recognizing that Accenture's stock is not as "best" of an idea today (compared to
January) due to its recently heightened valuation and due to other factors we anticipate will become
pertinent – i.e., factors, such as supply-side reasons to somewhat govern Accenture's growth, which could
cause incrementally more patience to be required for substantial additional stock appreciation.

Bernstein Research, IT Services: 7 Reasons Japan-Induced Pullback is Buying Opportunity on Accenture, Sapient, Cognizant :

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Highlights
We see more compelling buying opportunities for key stocks in our coverage in the wake of the Japanesenuclear-
fear-induced pullback in stocks (see Exhibit 1). We especially think Accenture's stock is very
compelling ahead of its March 24th earnings report. Sapient's recent pullback is very overblown, in our
view. Cognizant is attractive, with Accenture's upcoming report a likely positive catalyst for sector
sentiment. Infosys could offer a positive trading opportunity, ahead of its initial FY12 guidance in April.
In today's piece, we outline seven pertinent reasons to support this "buying opportunity" argument for these
stocks, particularly for Accenture, which we featured as our best idea in our January 12th research
(Accenture, Cognizant, Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN, INFY,
CTSH Targets) and reinforced in our March 3rd research piece after another round of industry checks (IT
Services: Updates on Our Favorable Demand Progression Thesis and Stance on Accenture as Top Idea):
 Reason #1 – Japan and Asia/Pacific are not big enough revenue sources for our covered stocks to
be a significant risk for them, as shown in Exhibits 2 & 3. We estimate only about 2-3% of
Accenture's and Visa's revenues are from Japan. And, Japan represents immaterial amounts of revenues
at Cognizant, Infosys, Sapient, ADP, Paychex, and MasterCard.
 Reason #2 – We maintain our stance that Accenture's upcoming report for the February quarter
should show significant upside to consensus revenue and bookings. And we think Accenture's FY11
revenue growth guidance of 8-11% (in local currency) is substantially beatable (note this guidance was
raised from 7-10% in the fiscal Q1 earnings report). That said, despite this room for upside we see to the
FY11 outlook, we think it may be prudent for Accenture to keep its official FY11 guidance in place for
now and hold off on raising its guidance until later this year (e.g., to avoid setting an expectation that it
will "beat and raise" every quarter, and to foster the healthy psychology of investors feeling comfortable
that there's room for upside to guidance). See Exhibit 4 for a comparison of our Accenture estimates
(which we think are conservative) to consensus.
 Reason #3 – Certain periods of fear in the past had relatively little impact on IT services demand,
and we anticipate the current fears about Japan's nuclear issues could have similarly low impact:

Outside of the global financial crisis of 2008-2009 (which shocked IT services clients into a mode of not
making decisions), we've witnessed other periods of fear in the past that have not rendered substantial
consequences to IT services demand. For example, past fears that had little impact on IT services
demand include: debt crisis in Greece in late 2009 and early 2010; swine (H1N1) flu in 2009; Avian
(bird) flu in Asia in 2003 and in Europe in 2005; and various terrorist attacks (excluding those in the US
on 9/11/01), such as the 7/7 London bombings in 2005 and the Madrid train bombings in 2004.
 Reason #4 – We reiterate that a transformational phase of IT services demand has begun and is
unlikely to be stopped anytime soon, given the multi-quarter nature of transformational services work.
For instance, systems integration initiatives (e.g., ERP software deployment) at large companies often
take over a year, and stoppages of such initiatives midstream generally do not occur, unless very negative
circumstances hit close to home. To elaborate on this topic from our prior research:
 How long will this phase of much-improved systems integration demand last? We see ingredients in
place for this phase of demand to last multiple quarters (e.g., more than one year), partly due to
substantial work that didn't get done during the financial crisis (i.e., pent-up demand). Also, we note
that large companies generally cannot implement systems and/or transform business processes in less
than 6 months (i.e., often takes a year or more). Moreover, we underscore our ongoing view that the
primary risk to systems integration demand is a major macro-shock to clients' decision making, while
periods of poor GDP growth (if it occurs without people being shocked by it) should not cause major
problems for the demand of top consulting / systems integration businesses.
 Reason #5 – Latest industry checks reveal no cause for worry about supply chain effects (or ripple
effects) that could stem from issues in Japan: After completing a big round of industry checks for our
March 3rd research piece, we have further revisited demand trends over the past couple of days to see if
we can find any signs of demand issues stemming from Japan-induced fears. We hear general worries
from some investors that issues in Japan could cause supply chain disruptions for companies around the
world (i.e., for clients of IT services firms). However, it does not appear that such supply chain issues
(e.g., delays in getting parts) are prone to cause any significant disruption to systems integration and
application development deals at firms like Accenture, Cognizant, and Infosys, nor should such issues
cause disruption to multi-channel commerce, web advertising, and trading/risk management deals at
firms like Sapient.
 Reason #6 – The systems integration and application development deals that are now being
initiated in this improved phase of demand are supported by a huge amount of planning work that
was completed in 2010, with this planning work evidenced by the major strength we saw throughout
2010 at several leading strategy consulting firms.
 Reason #7 – Large companies (i.e., key clients of top IT services firms) are showing willingness to
invest in more transformational deals, which generally seem unlikely to be eschewed by turmoil in
Japan. We reiterate that we see momentum building in consulting / systems integration demand: Recall
our research emphasis that high-end consulting demand was very strong throughout CY10, reflecting
clients' efforts to plan new initiatives after having been substantially stalled amidst the decision-making
shock during the 2 years of the global financial crisis. After this significant planning work that has been
completed, we see strong evidence today that clients have moved into a mode where they are much more
willing to invest in transformational initiatives (i.e., deal types that are key to Accenture), with
implementations now moving forward.


Investment Conclusion
Summary view on Accenture (Recap)
We rate Accenture outperform (and our top idea). We see demand patterns progressing in Accenture's
favor, as we think strong management consulting demand (in 2010) has now progressed into improved
demand for systems integration deals (including more "transformational" initiatives), along with decent
prospects for outsourcing bookings to be strong in the February 2011 quarter. As a result, we see further
upside to the Street's revenue and EPS expectations. We also think Accenture can achieve its FY11 margin
expansion target, despite starting FY11 with Y/Y margin contraction in fiscal Q1.
 Distinctive Accenture attributes against large tech stocks: Our January 12th research piece showed that
Accenture has distinctive attributes (revenue growth, ROIC) relative to other stocks that are trading at
high free cash flow yields, and we thus contend Accenture deserves a position high on investors' lists of
core tech stock holdings.
 Favorable demand progression pattern: We forecast 11.6% revenue growth for ACN in FY11 (a
forecast that we think is conservative), and we contend ACN is secularly capable of 8-10% revenue
growth, and with this growth much less reliant on economic trends than is perceived (as explained in our
research on IT services cyclicality). Also, we reiterate that strong management consulting demand
(which we witnessed throughout 2010) will likely now progress in upcoming months into improved
demand for ACN's systems integration and outsourcing services. Stated differently, we anticipate a
favorable demand progression from clients' planning efforts into implementation projects and operational
support, as clients' appetites to invest have improved.
 Above-consensus estimates: This favorable demand progression pattern is prone to enable Accenture to
achieve further upside to the Street's revenue expectations in FY11 (ending in August). As such, we
conservatively forecast FY11 revenue growth of 11.6%, which is 1.3% higher than consensus. And we
forecast FY11 EPS of $3.21, above consensus of $3.16 (which has nudged up recently from $3.14).
 Growth resiliency: Also, while some worry about Accenture's revenue growth and bookings outlook in
light of economic uncertainties, we reiterate our view that demand improvement in the IT services
industry does NOT require substantial GDP improvement, but rather the absence of shocks to clients’
decision making — likely making leading IT services firms (e.g., Accenture, Cognizant) more resilient
than other tech firms that are more wed to GDP trends.
 Margins fine: After reporting a Y/Y drop in operating margin in the November quarter, we think
Accenture will likely prove skeptics wrong by achieving its goal of 10-20 bps of margin expansion in
FY11.
Ratings across Computer Services stocks
We have outperform ratings on Sapient, Accenture, Cognizant, and ADP. We have market-perform ratings
on Visa, MasterCard, Paychex, and Infosys. And, we have an underperform rating on CSC.


Performance of Stocks Since Earthquake in Japan
Exhibit 1 shows the performance of Computer Services stocks (compared to the S&P 500 and Nasdaq)
from March 9 to March 16. Interestingly, since March 9, Accenture, Sapient, Cognizant, and Paychex
underperformed the S&P 500 by over 1%.
Especially for Accenture, Sapient, and Cognizant (the stocks we favor most due to prospects to report
fundamental upside), we see their recent pullbacks as compelling buying opportunities


Revenue Mix from Japan and Asia/Pacific
The exposure of Computer Services firms to Japan is quite low (see Exhibit 2), with a maximum revenue
exposure of 2-3% for Accenture (i.e., our estimate drawing from our Accenture FX model) and a similar
exposure of 2-3% for Visa (i.e., our estimate based on Nilson data).
Looking at exposure to the Asia/Pacific region (see Exhibit 3), though Accenture and Infosys have
meaningful exposure at 12.7% and ~10%, respectively, a significant portion of their Asia/Pacific revenue is
from Australia (rather than from Japan and surrounding areas).


Accenture: Our estimates versus consensus and guidance
Exhibit 4 conveys our Accenture estimates versus consensus and guidance.
Note: We maintain that our estimates for the February quarter and for FY11 are prone to be conservative.
February 2011 quarter
 For the February 2011 quarter, we are forecasting 12.5% Y/Y revenue growth, which is higher than
consensus of 10.6%. Accenture's revenue guidance calls for $5.60 to $5.80 billion, with the high end of
this range implying +12.0% Y/Y revenue growth and the low end implying 8.2% Y/Y revenue growth.
 We are forecasting February quarter EPS of $0.72, which is 1 cent higher than consensus of $0.71.
Fiscal year 2011 (ending August 2011)
 We are forecasting 11.6% FY11 revenue growth, versus consensus of 10.3% (which has been upwardly
revised by 0.2 percentage points since January 12). Accenture's FY11 guidance calls for 8-11% revenue
growth (in local currency).
 We are forecasting $3.21 in FY11 EPS, versus consensus of $3.16 (which has been upwardly revised by
2 cents since January 12). Accenture's FY11 EPS guidance range is $3.08-$3.16.
Fiscal year 2012 (ending August 2012)
 For FY12, we are somewhat conservatively forecasting revenue growth of 7.0% (on top of our aboveconsensus
revenues for FY11) and EPS of $3.61, versus consensus of $3.53.



Our Related Research and Summary Points
 Recent industry checks on Accenture and demand: Following an additional round of industry checks at
the end of Accenture's February quarter, our March 3rd research piece (IT Services: Updates on Our
Favorable Demand Progression Thesis and Stance on Accenture as Top Idea) underscored our favorable
demand progression thesis and positive stance on Accenture, as we think later-cycle systems integration
demand is kicking into gear. We see strong signs of demand momentum and believe Accenture has
moved into the "sweet spot" of its demand cycle, with clients now showing a propensity to invest in more
transformational systems integration deals (reflecting an important progression beyond the fast-payback
deals that were predominant earlier in the demand recovery cycle). And, barring a macro-shock to
clients' decision making, we see multiple reasons to expect that this strong phase for Accenture-type
systems integration demand should last multiple quarters. Other pertinent points from our March 3rd
piece:
 "Short-listed" services firms should get disproportionate revenue lift: As the demand recovery
progresses, top services firms that have effectively gained share within the budgets of existing clients
(i.e., as clients have consolidated their suppliers over the past couple of years) should be boosted to
elevated revenues from core clients. In other words, during the financial crisis, we think top firms like
Accenture and Cognizant garnered a higher percentage of spending at a number of large, existing
clients (i.e., at the expense of lower-tier firms). So, as these existing clients add to their spending,
Accenture and Cognizant should naturally derive disproportionate growth.
 BPO signings should be poised to show some improvement: We reiterate that Accenture's momentum
(over the last year) in the management/operational consulting arena has very likely positioned the
company to win certain types of outsourcing deals (e.g., industry-specific BPO deals). As a result,
Accenture's outsourcing business should achieve improved bookings in the February quarter.
 Cloud demand has further progressed, but not key to next-12-months growth in the consulting /
systems integration market. Cloud-related spending to date has largely focused on data center
initiatives (e.g., virtualization) and relatively small "discovery" projects to help clients evaluate/plan
for the cloud era. We now see more evidence of software-related cloud initiatives (e.g., clients
engaging consultants to help in piloting cloud software usage). But, we still think it's premature in the
near term to expect major spending on cloud software deployment and integration initiatives.
 HP's weakness should not be an issue: We think concerns in late February about Accenture, Cognizant,
Infosys, and Sapient stemming from HP's weak results were overblown. We think systems integration
demand is thriving; and we see no reason to alter our "favorable demand progression" thesis. And, we
think weakness in HP's services business is attributable to HP having a very different business mix and
company-specific issues, as we explained in our February 23rd research piece (Quick Take - Weakness at
HP Should Not Have Negative Implications for Accenture, Cognizant, Infosys, Sapient).
 Favorable demand progression; ACN as top idea: Our evaluation of Accenture against other tech
stocks suggests its distinctive attributes may be underappreciated, and our January 12th research piece
(Accenture, Cognizant, Infosys: Seeing Bullish Demand Progression; ACN Top Idea; Raising ACN,
INFY, CTSH Targets) featured Accenture as our top idea. Moreover, in this research piece, we
explained our "favorable demand progression" thesis.
 Leading indicators: As detailed in our November 12th research piece ("IT Services: Rebound Happened;
Cisco Brings Concerns; What Now? Still See Encouraging Leading Indicators for ACN, CTSH), we see
solid reasons to believe the leading indicators of discretionary services spending trends are still showing
generally positive signs; these reasons stem from our checks with key contacts in the consulting market
and our analysis of consulting bookings results, temp labor data, and staffing firms' growth trends.



 Cloud Computing: While some are concerned that cloud computing could hurt demand for systems
integration services, we reiterate our research conclusion that cloud computing should be a net
opportunity for Accenture. For details, here's the link to our 4/7/2010 research piece on this topic:
Accenture: What Impact Will Cloud Computing Have on ACN's Demand & Business Model? Views,
Info Ahead of Analyst Day.


Valuation Methodology
Our target prices for IT services stocks are derived by applying multiples to our forward estimates of
earnings and cash flows. Our target multiples are determined based on our assessments of historical priceto-
forward-earnings multiples, after considering each company’s growth prospects relative to historical
levels. Our target multiples are also influenced by the results of our DCF analyses across various financial
scenarios for each company.
More specifically, for IT services and offshore services firms, our target share prices are derived by
applying the following P/E multiples to our calendar 2012 EPS estimates: Accenture 15.3x, Sapient 22.4x,
CSC 6.4x, Infosys 20.2x, and Cognizant 24.0x.
For processing companies, our target share prices are derived by applying the following P/E multiples to
our calendar 2011 EPS estimates: MA 13.5x, Visa 15.3x, ADP 20.1x, and PAYX 20.3x.
As an alternative method of calculating our latest $14.75 target share price on Sapient, we apply a target
P/E multiple of 18.4x to our 2012 EPS estimate with a 28% normalized tax rate assumed (i.e., EPS of 71
cents), while also giving Sapient valuation credit for its $1.67 of cash per share. This target multiple is
supported by Sapient's takeover prospects, substantial room for margin expansion, and long-term growth
prospects in attractive segments like multi-channel commerce, Internet advertising, and trading/risk
management.
As alternative method of calculating our target share price on CSC, we apply an EDS-takeover multiple
(i.e., FCF multiple of 12.05x) to our estimate of CSC's "normalized" free cash flow (i.e., FY10 FCF
excluding the impact of lower DSO).
Also, note that, in addition to prospects for stock appreciation, Paychex, ADP, CSC, and Accenture offer
meaningful dividend yields.
Risks
The primary risk to consulting names (Accenture and Sapient) achieving our target share prices is the
potential for pressures on discretionary services spending. In addition, negative economic news flow can
weigh on the sentiment (and valuation multiples) of consulting stocks, and Accenture's stock has a tendency
to be pressured by appreciation of the US dollar (due to Accenture's substantial international exposure).
The primary risks to IT outsourcing companies’ (e.g., CSC, HP/EDS, Perot) fundamentals include contract
restructurings/terminations (a significant risk for CSC) and the shift of IT outsourcing work to offshore
labor centers (a threat to CSC). Further, our research shows the emergence of the offshore/remote
infrastructure outsourcing business, which will enable Indian firms to move into the core market segment of
CSC, and this trend will add pressure to CSC. It is prone to cause some cannibalization of CSC’s existing
infrastructure outsourcing revenues and some share loss to Indian and niche players moving aggressively
into the offshore/remote infrastructure outsourcing business. We also maintain a concern about CSC’s high
balance-sheet accruals. The risk to our underperform rating on CSC is that restructuring efforts and new
strategies could drive EPS improvement and share price appreciation.
Risks facing our target prices on Indian IT services stocks (e.g., Infosys and Cognizant): We still maintain
longer-term concerns about rupee appreciation (see our 10/22/07 research call for an analysis of factors that
could affect future moves in the Indian rupee), margin contraction (due partly to increasing needs,
especially for Infosys, to invest in onshore capabilities and industry-specific solutions), tax rate
normalization (i.e., tax rates for top Indian firms should jump to north of 20% when the STPI tax haven in
India expires), and meaningful hurdles related to supply and competition.


An underlying risk to achieving our target prices on Paychex and ADP is cross-selling leverage failing to
materialize, causing expectations of long-term earnings growth to be revised. In addition, weak U.S.
employment growth can hurt the stocks' valuations, present a challenge to their margins, and incrementally
pressure their revenue growth. Downward pressures on interest rates can mar sentiment and reduce ADP’s
investment income from both client funds (float) and corporate investments (note that the yield on
Paychex's float portfolio does not have material room for downside).
A number of risks could prevent our target prices on MA and V from being realized, including:
 We see a number of potential competitive threats, which could transpire over the long term, e.g.,
encroachment from mobile payments and alternative payment providers (e.g., PayPal), growth of
competitive international networks (e.g., China Union Pay), and some possibility of banks moving into
the card network business.
 Regulatory change (e.g., related to interchange) is an ongoing risk, and substantial litigation is pending
against MA and V, with MA more exposed to possible future litigation liabilities since V has an escrow
fund and bank shareholder stock buffering its earnings exposure.
 Weakness in consumer spending and any hiccups in the revolving credit market can hurt volume and
transactions growth.
 MA and V can lose revenues if a card issuing bank converts to different a debit card brand, or shifts
issuance of credit cards from one brand to another. They can also lose revenues if merchants succeed in
shifting more debit volume from signature debit to PIN debit.
 Obstacles to cross-border travel activity can hurt the cross-border revenues earned by MA and V.
 Besides being affected by general spending activity, MA's and V's growth rates are materially affected by
moves in gas prices in the United States. For MA and V, gas purchases account for about 6% and 10%,
respectively, of U.S. payment volume (and likely account for higher percentages of U.S. transactions.

Indian Utilities: Tepid, Bumpy & A Lot Less Crowded - Reducing RPWR Target to INR100: Bernstein Research

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Indian Utilities: Tepid, Bumpy & A Lot Less Crowded -
Reducing RPWR Target to INR100; Maintain Underperform


Highlights
The slowdown in Indian power consumption growth and declining merchant prices over the last year has
two broad implications for utilities: raising money to build new power stations will be more difficult and
political pressure to fix the "broken" distribution sector will increase. The first factor will play out
immediately; the second, over time. This places a premium on incumbency and a low cost structure. Among
the stocks we cover, the beneficiary should be NTPC. Implications for Reliance Power are less attractive.
 India continues to suffer from a shortage of electricity. The low level of power consumption growth
and declining merchant prices reflect problems with the distribution sector more than a deceleration in
underlying demand growth. In any case, power consumption was up 4.3% in 2010; installed capacity was
up 8.0%; and merchant pricing is trending down. The good old days for the IPPs may now be over.
 NTPC is the lowest cost provider of electricity in India. It is also the largest operator in India and has
almost all of its capacity locked up in long-term power purchase agreements with a regulated return on
equity of 15.5%. If power consumption growth in India is slowing (for whatever reason), NTPC stands to
benefit as (i) reduced investment in the sector will reduce competition for fuel and dispatch; (ii) the
company's regulated business is largely insensitive to merchant pricing.
 We are maintaining our target price on NTPC at INR190. NTPC is currently trading at the lower end of
its long term average on a P/E or P/B basis. If the company is able to adjust its tax expense this quarter
so as to escape MAT liability, earnings growth for FY2011 should be INR11.24, up 6.1% Y/Y.
 Reliance Power is stuck between a rock and a hard place. The company is rapidly developing its
projects yet – in our view - does not have the cash to execute its expansion plan into 2012 without
additional equity. Any sign that Reliance Power is slowing its development of new projects will be
interpreted as either a lack of confidence in the domestic power market or internal concern about the
company's finances (both clear negatives). In our view, the company is likely to raise more cash before
the end of 2011 – and, in some ways, the sooner the better given the deteriorating negotiation position
that a declining cash balance creates. However, the first half of 2011 looks like an unattractive time for
Indian companies generally and Reliance Power in particular to seek new equity.
 We are lowering our target price for Reliance Power to INR100. The lowered valuation reflects the
deteriorating pricing environment and the limited range of options: Reliance Power cannot suspend
construction to preserve cash without a negative response from investors. Conversely, given the long-lead
times, the company cannot accelerate construction to bring earnings forward

When NTPC Sneezes, Does the Indian Power Sector Catch a Cold? Bernstein Research

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Highlights
For an industry-leading, regulated utility in a market with a chronic electricity deficit, NTPC's third
quarter results (Q/E Dec 31) contained a lot of bad news. In this report, we detail why NTPC, the lowest
cost electricity provider in India, idled capacity in the third quarter because of lack of demand. We also
consider what is likely to change in 2011.
 NTPC backed down its power stations in the third quarter because State Electricity Boards that are
contracted to buy the electricity are currently too poor – or too illiquid - to pay. India suffers a chronic
electricity deficit and NTPC offers the cheapest electricity supply in India. If State Electricity Boards
cannot afford to pay the variable cost component of NTPC's electricity (less than Rs1.50/KWh by our
estimate), the long-term prospects for IPPs building power stations that will import coal and are assuming
payment of Rs3.50KWh (at a minimum) are bleak.
 NTPC's falling effective tax rate is, perversely, bad for earnings. The electricity regulation under which
NTPC calculates its permitted return on equity allows a gross-up for the applicable tax rate. As we
understand it, when the applicable tax rate for NTPC is the corporate tax rate of 33.99%, the company's
pre-tax return on equity is 23.5% even though its effective tax rate was less than the statutory rate. Use of
the MAT rate (which NTPC is now liable for) reduces this gross up and the delta between actual taxes
paid and the recovery of taxes that NTPC is permitted to embed in its power charges.
 NTPC is likely to miss its reduced commercialized capacity additions targets. The bull thesis on NTPC
is that it is able to invest at a guaranteed 15.5% return on equity practically in perpetuity. All the
company needs to do is build power stations. In the third quarter, NTPC reduced its target for the year
from 4,150MW to 3,150MW. And NTPC may not be "commercializing" all of the 3,150MW this year in
order to avoid triggering tax benefits that will exacerbate its MAT problem. The stations will still be
commissioned. Regardless, a target of 3,150MW for FY2011 is 50% below the run rate required to hit
the company's stated target of 75GW by 2017.
 The question is: which of these problems will persist into the fourth quarter and beyond. Arguably, the
bad news is all out. NTPC's earnings could surge in the fourth quarter if it can raise its effective tax rate.
The broader problem is the State Electricity Boards: NTPC has provided little comfort about why the
SEBs are instituting black-outs rather than buying the cheapest electricity in India. If this problem
persists, the long-term investment case for NTPC – and the sector – breaks down.