jm financial - initiating coverage on power financiers

8/3/2019 JM Financial - Initiating Coverage on Power Financiers.

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Power Financiers 9 December 20

JM Financial Institutional Securities Private Limited

Light at the end of the tunnel

POWF and RECL are best placed to leverage on the massive investment

opportunity: Over the next five years, c.$236bn is estimated to be invested inthe power sector as India scales-up infrastructure in generation, transmissionand distribution. REC and POWF are best positioned to leverage on themassive investment opportunity given a) IFC status which gives exposurelimits advantage, easier access to ECBs. IFCs have a competitive edge overbanks given better asset-liability profile. Further, most banks are approachingtheir sectoral limits for infrastructure sector which should reduce competitiveintensity for specialised power financiers like POWF and RECL.

SEB default unlikely losses may have peaked, tariff hike trendencouraging: SEBs have been under financial distress due to non-revision oftariffs, non-payment of subsidies and high merchant power rates. However,recent measures offer hope that their finances will improve going ahead ledby a) 5-40% tariff hike across states over the last 18 months (Exhibit 2).

Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70% ofcash losses have already raised/proposed to raise tariff while UP will raisetariff post election early next year. b) APTEL facilitating suo-motu tariffincrease by the regulator. c) Increasing pressure from lenders to improvefinances by raising tariffs/improving efficiency. d) Declining power purchasecosts which would provide much needed relief to SEBs. These measures are astep in the right direction and we believe financial position of SEBs willimprove going forward, implying that default from SEBs for POWF and RECL isunlikely.

Fuel availability - A key risk: Coal and gas availability, in our view, is asignificant threat which could restrict power supplies and impact financialviability of projects. Coal supply has been severely hampered due to a) CoalIndia unable to achieve sufficient production growth, b) delayed

environmental clearances, c) infrastructure bottlenecks, d) blending limitationin existing plants, e) pricing issues on imported coal from Indonesia andAustralia. However, recent steps by government to scrap go and no-go policyand granting environment clearances to some delayed projects should reducethis concern over the medium term (3 years); though fuel availability remainsa key near-term risk which could lead to restructuring of projects (especiallyIPPs in the capacity range of 50Mw-100mW) and result in some NPV loss forpower financiers.

Initiate coverage on POWF and RECL BUY with TP of`205 and `220

respectively - recent SEB/government measures and decline in wholesale ratesshould act as key catalysts: POWF and RECL have de-rated significantly overthe past 12 months due to concerns over financial health of SEBs (POWFcurrently trades at 0.95x 1yr fwd book, down from a peak of 2.9x; while RECL

at 1.1x 1yr fwd book, down from a peak of 2.9x. Going ahead, we believerecent SEB/government measures and decline in wholesale borrowing ratesfrom 1QFY13 (which will impact spreads positively) should act as keycatalysts for stock outperformance. We initiate coverage on POWF with Mar13TP of`205 current valuations are attractive at 0.9x FY13E book withdividend yield of c.5% (based on FY13E dividend). We value the stock at 1xFY14P/B (at 1.05x Mar14 ABV - adjusted for bad and doubtful debt reserves)Initiate coverage on RECL with Mar13 TP of`220 - current valuations are

attractive at 1x FY13E book with dividend yield of c.5% (based on FY13Edividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar14 ABV -adjusted for bad and doubtful debt reserves).

Power Financiers

9 December 2011

India | Banking & Financial Services | Initiating Coverage

Karan Uberoi, CFA,[email protected]

Tel: (91 22) 6630 308

Amey Sathe, [email protected]

Tel: (91 22) 6630 302

Puneet [email protected]

Tel: (91 22) 6630 307

Prashant [email protected]

Tel: (91 22) 6630 306

Ravi Singravi.singh@jmfinancial.

Tel: (91 22) 6630 305

Summary Financials

FY12E FY13E FY

POWF

Net Profit (` mn) 26,021 37,367 44,6Net Profit (YoY) (%) -0.7% 43.6% 19

Loans (` bn) 1,215 1,470 1,Loans (YoY) (%) 22.0% 21.0% 20

ROA (%) 2.2% 2.6% 2

ROE (%) 14.4% 16.8% 17

EPS (`) 19.71 28.31 33

EPS (YoY) (%) -13.6% 43.6% 19

PE (x) 8.5 5.9

BV (`) 157.6 178.5 20

BV (YoY) (%) 17.3% 13.3% 14

P/BV (x) 1.06 0.94 0

RECL

Net Profit (` mn) 27,687 33,558 40,Net Profit (YoY) (%) 7.7% 21.2% 19

Loans (` bn) 994 1,183 1,Loans (YoY) (%) 21.0% 19.0% 19

ROA (%) 2.9% 2.9% 2

ROE (%) 20.2% 21.1% 21

EPS (`) 28.0 34.0 4

EPS (YoY) (%) 7.7% 21.2% 19

PE (x) 6.7 5.5

BV (`) 148.6 172.9 20

BV (YoY) (%) 14.7% 16.4% 16

P/BV (x) 1.26 1.08 0

Source: Company, JM Financial.

JM Financial Research is also availableBloomberg - JMFR , Thomson Publisher & Reut

Please see important disclosure at the end of the re


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Catalysts for stock outperformance

Both POWF and RECL have been significant underperformers

Over the last 12 months, POWF and RECL have been significant

underperformers which can be attributed to: a) concerns over asset quality in

the light of mounting losses at SEBs, b) sharp increase in wholesale fund rates,

resulting in margin and spread compression, c) concerns over project

execution and coal availability for power projects.

Exhibit 1. POWF and RECL: Stock performance visavis BSE Bankex

20

40

60

80

100

120

Dec-10 Feb-11 Apr-11 Jul-11 Sep-11 Nov-11

POWF - 1 Year Price Performance (%) BANKEX

20

40

60

80

100

120


RECL - 1 Year Price Performance (%) BANKEX

Source: Bloomberg, JM Financial.

However going ahead, we expect them to outperform given:

a) Significant tariff hikes across SEBs which would improve cash flowsAbsence of tariff revision is one of the key reasons for the poor financial

health of SEBs. However significant tariff hikes over the last 18 months should

lead to improved financials going ahead. Further, 4 states - TN, UP, MP

Rajasthan account for c.70% of the cash losses. Out of these, 3 states have

already raised/proposed to raise tariff while UP will raise tariff post election

early next year.


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Exhibit 2. Recent tariff hikes for SEBsState Date Hike Applicability*

Punjab Apr-10 5-10% Agri / Dom/ Ind

UP Apr-10 13-15% Agri / Dom/ Ind

West Bengal Apr-10 3-8% Agri / Dom/ Ind

HP Jun-10 `0.30-0.50 Dom/ Ind

Tamil Nadu Aug-10 `0.30-1.10 Dom/ Ind

Andhra Pradesh Aug-10 20% IndMaharashtra Sep-10 5% Dom/ Ind

Haryana Sep-10 8% / 40-80% Dom / Comm/ Ind

Karnataka Dec-10 2-10% Dom/ Ind

West Bengal Mar-11 10% Dom/ Ind

Orissa Apr-11 20-40% Dom/ Ind

Punjab May-11 7-12% -

Bihar Jun-11 19% Dom/ Ind

Madhya Pradesh Jun-11 6% Agri / Dom/ Ind

Zharkhand Aug-11 18.5% Dom/ Ind

Delhi Aug-11 22% Dom

Rajastan Aug-11 19-27% Dom/ Ind / Agri

Maharashtra Oct -11 10% Agri / Dom/ Ind

Tamil Nadu* Nov-11 36.5% Agri / Dom/ Ind

Source: JM Financial. * Proposed

b) Decline in wholesale rates

Given our expectation of lower borrowing costs from 1QFY13, we expect these

stocks to outperform going ahead on the back of lower rates which should

improve spreads. As shown below, both POWF and RECL witnessed significant

underperformance since AAA 5 yr yields started increasing from Oct10. This

resulted in compression of spreads from 2.76% in 3Q11 to 2.26% in 2Q12 for

POWF and 3.44% to 3.21% for RECL during the same period.

Exhibit 3. POWF vs India - AAA - 5 Year (LHS) and RECL vs India AAA 5 Year

0

80

160

240

320

400

Feb-07 Dec-07 Sep-08 Jul-09 Apr-10 Feb-11 Nov-11

6.0

7.4

8.8

10.2

11.6

13.0POWF India - AAA - 5 Yr.

0

70

140

210

280

350

Mar-08 Oct-08 Jun-09 Jan-10 Sep-10 Apr-11 Dec-11

6.00

7.40

8.80

10.20

11.60

13.00

RECL India - AAA - 5 Yr.

Source: Bloomberg, JM Financial.


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As shown below, both POWF and RECL witnessed compression in spreads as

borrowing costs (proxy used is AAA 5 yr yield) started increasing from Oct10.

This resulted in compression of spreads from 2.76% in 3Q11 to 2.26% in 2Q12

for POWF and 3.44% to 3.21% for RECL during the same period

Exhibit 4. Quarterly trend in spread for POWF and RECL

2.75% 2.76% 2.76%

2.49%

2.28% 2.26%

2.00%

2.20%

2.40%

2.60%

2.80%

3.00%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

POWF - Spreads (%) (Reported)

3.35%3.24%

3.44%

3.20%3.10%

3.21%

2.00%

2.50%

3.00%

3.50%

4.00%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

RECL - Spreads (%) (Reported)



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Indian Power Sector

Demand Supply gap provides strong growth visibility

India continues to suffer from huge energy deficits

The Indian power sector has been characterised by shortage of supply vis--vis

demand. The deficit in power supply in terms of peak availability and total

energy availability rose continuously from FY04 to FY08. Since then the normalenergy shortage has been hovering between 7 to 9% with peak deficit in excess

of 12%, despite 33% increase in energy supply over the last 5 years. Energy

shortfall coupled with other problems of low factor productivity in generation,

poor management at SEBs, underinvestment in renovation, maintenance and

construction overruns are adding to the woes of Indias power sector.

Exhibit 5. Trends in energy shortfall (power deficit) (LHS) and power deficit rate (%) (RHS)

Energy Shortfall (bn units KWh)

48.139.9 43.3

52.7

66.1 73.3

86.0 84.0

73.1

0.0

20.0

40.0

60.0

80.0

100.0

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11

Normal Deficit (%)

8.8%

7.1% 7.3%8.4%

9.6% 9.9%

11.1%

10.1%8.5%

0%

3%

6%

9%

12%

15%


Source: CEA, JM Financial.

India has relatively low per capita energy consumption

The per capita energy consumption in India is extremely low in comparison to

rest of the world due to unreliable supply and inadequate distribution

networks. In FY09, India's per capita electricity consumption was 597 units

(KWh) per year vs 2,730 units/year world average, 1,884 units in LatAm

countries, 2,648 units in China, and 741 units in Asian countries. According to

Ministry of Power, per capita consumption of energy is projected to increase to

c.1,000 kWh/year by 2012 from current levels (FY09) of 597 KWh/year,

indicating massive scope for scaling up power consumption. The low per capita

consumption of electricity in India compared to world average presents

significant potential for sustainable growth in demand for electric power in

India.


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Exhibit 6. Annual per capita electricity consumption levels (2002-2009)

2373

2659

1208

1534

563 514 421

2730

3278

2648

1884

561 597741

4.0%

5.1%

1.3%2.0%3.0%

3.0%

11.9%

0

800

1,600

2,400

3,200

4,000

World Average Middle East China Latin America Asia Africa India

(KWhper

year)

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%2002 2009 CAGR:2002-09 (%)

Source: Key World Energy Statistics (2011), JM Financial.

Large power deficit to drive significant additional capacity requirement

It is evident that power deficit in India is a significant impediment to economys

development. In this context, bridging the gap in demand and supply has

become critical and consequently, large projects are being undertaken in

different segments of the sector.

Exhibit 7 shows projected installed and incremental capacity requirements in

next two decades. According to Planning Commission, in order to sustain a

GDP growth rate of 8-9%, India would require additional capacity of 67-78 GW

by 2012, 153-182 GW by 2017 and 272-333 GW by 2022 based on normative

power. However, during the last three five year plans (8th, 9th and 10th), India has

managed to achieve barely half of the capacity addition that was planned.

Exhibit 7. Trends in total installed capacity projected (LHS) and incremental capacity required (RHS)

131 153220

306

425

575

778

131 155233

337

488

685

960

0

250

500

750

1000

1250

2003-04 2006-07 2011-12 2016-17 2021-22 2026-27 2031-32

GW

8% GDP 9% GDP

22

6786

119

150

203

24

78104

151

197

275

0

65

130

195

260

325

2006-07 2011-12 2016-17 2021-22 2026-27 2031-32

GW

8% GDP 9% GDP

Source: Planning commission, CSO, JM Financial.


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Leading to huge investment opportunities across Generation and T&D

Generation: In order to match the increasing demand for power

within India, substantial increase in generation capacity along with

more improved transmission and distribution systems will be

required. This will result in significant investment needs which are

estimated at a whopping $236bn (`11.4trn) over FY12-17; of

which $103bn (`5.0trn) in FY12-17 is expected in Generation.

Transmission: The focus on increasing generation capacity over

the next 8-10 years will likely result in a corresponding increase in

investments in the transmission sector. The Ministry of Power

plans to establish an integrated National Power Grid in the country

by FY12 with close to 200,000 MW generation capacities and

37,700 MW of inter-regional power transfer capacity by FY13.

Investment requirement in transmission is estimated at c.`2.4trn

over FY12-17.

Distribution: Additional investment is needed to modernise the

existing capacity, strengthen distribution and MIS network and

improve efficiency of human resources. Investment requirement in

distribution is estimated at c.`4trn over FY12-17.

Exhibit 8. Trends in investment in electricity sector (LHS) and funding requirement in five year plans (` bn) (RHS)

535 570623 715

8201,016

1,264

1,580

1,986

0

500

1,000

1,500

2,000

2,500


0%

5%

10%

15%

20%

25%

30%

Investment in Electr icity (` bn) YoY Growth (%)

5,9174,951

1,4002,400

3,0914,001

10,589

11,351

181

0

2,500

5,000

7,500

10,000

12,500

XIth Plan XIIth Plan

Generation Transmission Distribution R&M etc

Source: Planning commission, CSO, JM Financial.


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Share of private players to increase

Increasing share of private sectorShare of private sector in the power industry is expected to rise given that

incremental investment is skewed towards private sector projects as shown

below.

Exhibit 9. Trends in investment in power sector sector wise

78% 72% 65%

22% 28% 35%

$60bn $133bn $171bn

0%

25%

50%

75%

100%

125%

10th Plan 11th Plan 12th Plan

Government Private

Source: Planning Commission, JM Financial

Exhibit 10. Expected capacity addition sector wise

(87 GW)State

18%

Central

25%

Private

57%

Source: CRISIL, JM Financial

The share of the private sector in capaci

expansion has gone up substantially in th

11th Plan and it is expected that 33% of th

total incremental capacity will come from th

private sector. In the 12th Plan, this share

expected to increase further to c.50%.

Source:12th Five Year Plans Approach Paper


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Private sector exposure for POWF and RECL to increase

Given increasing share of private sector projects, proportion of private sector

loans has increased for POWF from 6% in 2Q10 to 9% as of 2Q12 while that for

RECL from 7% in 2Q10 to 11% in 2Q12. We expect private sector exposure to

increase going ahead given the increasing share of private players in the

generation/distribution sector. However, the loan mix for POWF and RECL will

continue to be dominated by State/Central utilities.

Exhibit 11. Quarterly trends in loan mix (borrower wise) for POWF (LHS) and RECL

70% 69% 68% 66% 66% 65% 65% 65% 64%

16% 18% 19% 19% 19% 19% 20% 20% 19%

6% 6% 5% 7% 7% 7% 7% 8% 9%

0%

20%

40%

60%

80%

100%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

State Sector Central Sector Joint Sector Private Sector

84% 84% 84% 86% 86% 84% 83% 82% 82%

10% 9% 9% 7% 7% 7% 7% 7% 7%

7% 6% 6% 7% 7% 9% 10% 11% 11%

0%

20%

40%

60%

80%

100%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

State PSUs Private


Exhibit 12. Quarterly trends in disbursements (LHS) and sanctions mix (sector wise) for POWF

54% 57%66%

53%

77% 70% 68% 67% 66%

31% 29%23%

21%

7% 16% 21%7% 9%

5% 4% 3%

21%

11% 9% 5%19%

21%

0%

20%

40%

60%

80%

100%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12


30%

54%

83%

49%

79% 76%91%

80%90%

27%46%

17%

34% 21% 24%

9% 16% 8%

0%

20%

40%

60%

80%

100%

2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12




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Power Financing Sector

Competitive intensity to moderate

Power sector financing has been a highly competitive industry

Power financing NBFCs have been facing competition from large SOE banks

and private sector banks. Relatively better spreads, large ticket size loans and

secured nature of loans attracted a lot of competition from the banking sector.

Over FY05-3Q11, banking sector witnessed loan CAGR of c.38% to the power

sector vs 25% and 22% loan CAGR of RECL and PFC respectively. Consequently,

banking sector improved its market share from 41.5% in FY05 to 56.9% in

2Q12.

Exhibit 13. Trend in market share of RECL, PFC and banking sector

Market Share (%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q

Banks* 29.0% 30.7% 41.5% 49.7% 46.4% 47.9% 49.2% 53.6% 56.4% 57.4% 56.

REC 30.8% 30.6% 23.5% 20.9% 20.4% 19.8% 20.3% 18.9% 17.2% 16.9% 17.

PFC 40.2% 38.7% 32.1% 29.4% 27.8% 26.0% 25.5% 22.7% 20.8% 20.4% 20.

IDFC NA NA 2.9% 0.0% 5.4% 6.3% 4.9% 4.8% 5.6% 5.3% 5.

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0

Source: RBI, JM Financial.

Sectoral limits, ALM and exposure norms to reduce competitive intensity

Going forward, we expect competitive intensity of power financing sector to

moderate due to various constraints faced by the banking sector such as:

Sectoral limits: Generally banks have internal sectoral limits at

15-20% of gross advances for each sector, beyond which they

dont lend. Given the strong lending rate towards this sector, most

banks are nearing their sectoral limit. Consequently, banks are

likely to moderate their exposure towards the sector.

ALM mismatch:Banks have a typical liability profile of 2-3 years

whereas infrastructure financing is required for 10-15 years and

beyond. This creates ALM mismatch for banks and banks are

facing incremental problems in raising such resources. However,

certain recent initiatives directed towards take out financing (still

in nascent stage) and setting up of infrastructure debt fund will

likely ease the situation for banks. Exposure norms: Single and group exposure limits set by RBI

create problems for large projects as banks can lend only 20% and

35% of its capital funds to single and group borrowers. Most

banks are facing constraints to lend further as they have already

reached the maximum group exposure limit for such borrowers.


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RBI has classified POWF and RECL as Infrastructure Finance Company (IFC),

benefits of the same are as under:

Lower cost of borrowings: IFCs would benefit from a lower risk

weight on their bank borrowings (from a flat 100% to as low as

20% for AAA rated borrowers). So, cost of borrowings will come

down for AAA rated companies. Both, POWF and RECL are AAA

rated companies.

Higher borrowing limit from banks, IFC to get higher share of

funding: New guideline has allowed for less restrictive caps on

bank lending to NBFCs. Now for an infra-NBFC, banks can lend up-

to 20% of their net worth vs. 15% earlier. Hence, going forward,

there is a 33% increase in lending capacity that IFCs can access

additionally.

Easy access to ECB: IFCs are eligible to raise, under the automatic

route, ECBs up to $500mn each fiscal year, subject to the

aggregate outstanding ECBs not exceeding 50% of owned funds.

Higher exposure to single and group party borrowers (assets

side): IFCs can have higher exposure to group (50% owned funds

vs 35% earlier) and individual borrowers (30% vs 20%). This will

benefit POWF as then it will be in a position to underwrite largeprojects on its own.

Exhibit 14. IFC vs Banks / NBFC

Concentration of credit / investment

Normal Loans Infra Loans

Lending ceilings

Lending to any single borrower 15.0% 20.0% 25.0%

Lending to any single group of borrowers 25.0% 35.0% 40.0%

Investing ceilings

Investing in shares of a company 15.0% 20.0% 15% ( +5*)

Investing in shares of a single group of companies 25.0% 35.0% 25% ( +10*)

Loans and investment taken together

Lending and investing to single party 25.0% 30.0% 30.0%

Lending and investing to single group of parties 40.0% 50.0% 50.0%

Loan company

The maximum exposure ceilings

IFC

Source: RBI, JM Financial. * Additional exposure applicable in case the same is on account of infrastructure loan and/or investment.


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POWF and RECL to witness healthy 21% and 20% CAGR in loan book over

FY11-14E

Given the advantages IFCs like POWF, RECL enjoy over banks which are

restricted due to exposure limits, ALM mismatch, we expect POWF and RECL to

gain market share in power financing from banks. We expect POWF and RECL to

witness healthy 21% and 20% CAGR in loan book over FY11-14E on the back of

17% CAGR each (i.e. both POWF and RECL) in disbursements over FY11-14E.

Exhibit 15. Trends in loan book and loan growth for POWF (LHS) and RECL


356 439516

644799

996

1,215

1,470

1,764

0

450

900

1,350

1,800

2,250

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

15%

17%

20%

22%

25%

27%Loan Book (` bn) YoY Growth (%)

FY11-14E CAGR: 21%

FY06-11 CAGR: 23%

253321

393514

665

821

994

1,183

1,407

0

350

700

1,050

1,400

1,750


10%

15%

20%

25%

30%

35%Loans (` bn) YoY Growth (%)

FY11-14E CAGR: 20%

FY06-11 CAGR: 27%


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Asset quality: SEB default unlikely

Asset quality risks for POWF and RECL have increased given the deteriorating

financial health of SEBs. SEBs have been under financial distress due to a) Non-

revision of tariffs, b) Nonpayment of subsidies from State Governments, c) High

merchant power rates, d) High AT&C/distribution losses. Consequently, cash

losses (revenue and subsidy realised basis) for SEBs in FY10 were c.`444bn from

c.`88bn in FY06.

Exhibit 16. Trend in cash profit/losses on revenue and subsidy received basis

(` bn) (Discoms)

-88.3-128.8

-166.1

-369.7

-444.0-500.0

-400.0

-300.0

-200.0

-100.0

0.0

FY06 FY07 FY08 FY09 FY10

SEBs - Total Losses


4 states account for 70% of SEBs losses

4 states Tamil Nadu, Rajasthan, Uttar Pradesh and Madhya Pradesh account

for c.70% of the losses (revenue and subsidy realised basis). The total loss for

these 4 states was c.`311bn in FY10 while for all SEBs combined; it was

`444.0bn.

Exhibit 17. Trend in cash profit/losses on revenue and subsidy received basis

(` bn) (Discoms)(` bn) FY06 FY07 FY08 FY09 FY10Tamil Nadu -5.4 -9.0 -31.1 -71.1 -97.9

Madhya Pradesh -1.8 -13.0 -21.4 -42.4 -36.2

Rajasthan -5.1 -3.0 -31.1 -67.2 -109.8

Uttar Pradesh -46.6 -48.8 -52.9 -55.9 -67.1

Total losses of 4 States -58.9 -73.8 -136.4 -236.6 -311.0

SEBs - Total Losses -88.3 -128.8 -166.1 -369.7 -444.0

(%) Proportion FY06 FY07 FY08 FY09 FY10

Tamil Nadu 6.1% 7.0% 18.7% 19.2% 22.1%

Madhya Pradesh 2.0% 10.1% 12.9% 11.5% 8.2%

Rajasthan 5.8% 2.3% 18.7% 18.2% 24.7%

Uttar Pradesh 52.8% 37.9% 31.8% 15.1% 15.1%

Total 66.7% 57.3% 82.1% 64.0% 70.0%



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These 4 states also accounted for c.43% of SEBsborrowings as of FY10.

Exhibit 18. Trend in borrowings of SEBs from FIs/banks/bondsSEB Borrowings (` bn) FY06 FY07 FY08 FY09 FYLoan from FIs/ Banks/ Bonds 1,109 1,287 1,548 1,985 2,6

Top 4 loss making states Borrowings (` bn)

Loan from FIs/ Banks/ BondsTamil Nadu 93 116 146 215 3

Uttar Pradesh 117 147 149 180 2

Rajasthan 138 164 226 321 4

Madhya Pradesh 34 43 50 75 1

Total 453 565 702 952 1,3

Top 4 loss making states Borrowings (%)

Loan from FIs/ Banks/ Bonds

Tamil Nadu 8.4% 9.0% 9.4% 10.8% 12.

Uttar Pradesh 10.5% 11.4% 9.6% 9.1% 9.

Rajasthan 12.4% 12.7% 14.6% 16.2% 17.

Madhya Pradesh 3.0% 3.4% 3.2% 3.8% 4.

Total 34.4% 36.6% 36.9% 39.8% 42.9

Source: PFC, JM Financial

SEBs: Financial performance to improve going ahead

Discoms: Tariff hikes to lead to improvement in financial health

Absence of tariff revision is one of the key reasons for the poor financial health of

SEBs. Mounting losses at SEBs notwithstanding, we feel their financials will

improve going ahead given a) 5-40% tariff hike across states in last 18 months

(Exhibit 19). Further, 4 states - TN, UP, MP Rajasthan account for c.70% of the

cash losses. Out of these, 3 states have already raised/proposed to raise tariffwhile UP will raise tariff post election early next year. b) Agriculture tariffs have

been rising post elections in 2009 (Exhibit 14); decline in agriculture tariff was a

key contributor to the under recoveries of distribution companies (Discoms). c)

APTEL facilitating suo-motu tariff increase by the regulator. d) Declining power

purchase costs. e) POWF categorisation signals improvement. f) Increasing

pressure from lenders to improve the finances by raising tariffs/improving

efficiency. These measures are a step in the positive direction and we believe SEB

finances will improve going ahead. Consequently, we do not expect any SEB

default for POWF and RECL, although there could be some restructuring without

any significant NPV loss.


15/73



a) 5-40% tariff hikes across states over the last 18months

Absence of tariff revision is one of the key reasons for the poor financial

health of SEBs. However, recently we saw tariff hikes across almost all SEBs

driven by increasing pressure from the lenders to improve the finances of

SEBs. Further, 3 of the 4 states (TN, UP, MP, Rajasthan) that account for c.70%

of cash losses have already raised/proposed to raise tariff while UP will raise

tariff post election early next year .This is a step in the right direction which

should help improve cash flows of SEBs.

Exhibit 19. Recent tariff hikesPrevious hikes

State Date Hike Applicability*Date Quantum

Remarks

Punjab Apr-10 5-10% Agri / Dom/ Ind Sep-09 9-19% NA

UP Apr-10 13-15% Agri / Dom/ Ind FY10 unknown BPL exempted, but rural tariffs hiked

West Bengal Apr-10 3-8% Agri / Dom/ Ind Nov-09 20-25%

HP Jun-10 `0.30-0.50 Dom/ Ind - - SME and BPL exempted

Tamil Nadu Aug-10 `0.30-1.10 Dom/ Ind - - After 7 years to flat tariffsSME and agri consumers exempted

Andhra Pradesh Aug-10 20% Ind - - Opposed by industries

Maharashtra Sep-10 5% Dom/ Ind - -BPL exemptedConsistent increase twice an year

Haryana Sep-10 8%/40-80% Dom / Comm/ Ind - - Steep increase after >10 years

Karnataka Dec-10 2-10% Dom/ Ind Nov-09 8-25%Next hike in Summer of 2011 of c.12%; Higincreases for industry and heavy domesticusers

West Bengal Mar-11 10% Dom/ Ind Jul -10 11%CESC proposes power tariff hike to WestBengal government in August11

Orissa Apr-11 20-40% Dom/ Ind 2009-10 30% After 9 years of flat tariffs

Punjab May-11 7-12% - - - NA

Bihar Jun-11 19% Dom/ Ind 2009-10 - Proposed increase in tariff rates of 65% withhike in all categories of consumers

Madhya Pradesh Jun-11 6% Agri / Dom/ Ind 2009-10 10% NA

Zharkhand Aug-11 18.5% Dom/ Ind 2009-10 - Demanded for a 100% increase in tariff

Delhi Aug-11 22% Dom - - NA

Rajastan Aug-11 19-27% Dom/ Ind / Agri - -Hike done against election manifesto of notincreasing tariffs for 5 years for agri

Maharashtra Oct -11 10% Agri / Dom/ Ind 2010-11 5%Power surcharge of 9% instead of effecting full-fledged tariff hike

Tamil Nadu** Nov-11 36.5% Agri / Dom/ Ind 2010-11 40%42% to domestic users, 19% to industrial usand 589% to agricultural users.

Source: SERC, JM Financial * Note: Dom Domestic; Ind Industrial; Agri Agricultural; Comm Commercial, ** Proposed


16/73



b) Agricultural tariffs increasingFY09 financials were impacted by pre-election spending largesse (Exhibit 14)

wherein agricultural tariffs dipped from Mar-Aug09. We believe this could

have been a key contributor to the under recoveries of Discoms as agri-

consumers account for a large chunk of vote-bank. Since then, agricultural

tariffs have gone up by c.16%. Recently TANGEDCO, the Tamil Nadu power

distribution company, submitted a petition to raise power tariff by 589% to

agricultural users.

Exhibit 20. Agriculture tariffs trend* upwards (p/kWh)

90

98

106

114

122

130

Apr'05 Oct'05 Apr'06 Oct'06 Apr'07 Oct'07 Apr'08 Oct'08 Apr'09 Oct'09 Apr'10 Oct'10 Apr'11

Source: Ministry of Commerce & Industry, JM Financial * Base: Apr04

c) Distribution reforms finally kicked-offWith mounting SEB losses, government bodies have realised the importance

of further reforms in last-mile connectivity. GoI is planning VGF (viability gap

funding) based schemes for incentivising privatisation in distribution and

providing loans (convertible to grants) for reducing T&D losses via R-APDRP.

PMO has setup VK Shunglu committee and CERC ordered studies on financial

viability of SEBs (CRISIL recommending c.20% increase in tariffs in many

states).

Forum of Regulator (FoR) has standardised distribution franchisee (DF) model

bidding documents and as many as 14 states have floated tenders for DF

circles after successful experience at Bhiwandi. UP has awarded DF for Kanpur

and Agra, while Nagpur, Maharashtra and Patna, Bihar were recently awarded.

Few states like MP and Rajasthan are also progressing with DF (Exhibit 21).

Agricultural tariffs have risen 18% over la

2 years

Recommendations from VK Shunglu

Committee setup by PMO and CERC to

improve SEB is due anytime

Pre-election tariff drop


17/73



Exhibit 21. DF circles under awardState AT&C Losses Circle Award Date

UP 40% Kanpur Torrent Power

Agra Torrent Power

Bareily Sep-09

Meerut Sep-09

Varanasi Sep-09

Gorakhpur Sep-09Moradabad Sep-09

Allahabad Sep-09

Aligarh Sep-09

Maharashtra 31% Nagpur Spanco

Aurangabad Jan-10

Jalgaon Jan-10

Kalyan Jan-10

Dhule Jan-10

Bhiwandi Torrent Power

Uttarakhand 35% Roorkee Jan-10

Rudrapur Jan-10

MP 61% Narsinghpur Apr-10

Guna

Rajasthan 30% Jaipur Sep-09

Bihar 59% Patna CESC Jan-10

Gaya

Muzaffarpur

Bhagalpur

Meghalaya 43% Rural Areas Jul-10

Source: States, JM Financial

Impact of distribution reforms has been very positive with two prominentexamples of NDPL in Delhi and Torrent in Bhiwandi. Since privatisation, the

AT&C losses in NDPL areas have declined to record lows of 13.2% in FY11 as

against 53% in FY03. Similarly in Bhiwandi, Torrent has been able to bring

down T&D losses to 18.0% in FY11 from 49% in FY06.

Exhibit 22. Impact of distribution reforms in Delhi and Bhiwandi

53%

13%

0%

14%

28%

42%

56%

70%

FY03 - Pre-reform FY11 - Post-reform

NDPL - Delhi (AT&C Losses (%))

49.0%

18.0%

0.0%

16.0%

32.0%

48.0%

64.0%

FY06 - Pre-reform FY11 - Post-reform

Torrent - Bhiwandi (T&D Losses (%))


As per industry checks 14 states have

released proposals for DF


18/73



d) Declining power purchase costsWith merchant tariffs coming down significantly and introduction of

competitive bidding regime for power purchase, the cost for State Discoms is

likely to come down. At present UP, Rajasthan, Punjab and Haryana buy >10%

of their power share from ST market. With average rate declining from over

`7/unit to `3.5-4.0/unit, state discoms are likely to benefit in the

short/medium term.

Exhibit 23. ST Market contribution

2.

43.

2

4.

5

5.

6

5.

3

4.

7

4.

1

7.

5

5.

0

3.

7

3.

1

7.

3

0.0

2.0

4.0

6.0

8.0

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12E0

2

4

6

8

10% ST market (RHS)

Power Exchanges

Bilateral trades

Source: CEA, CERC, JM Financial

e) POWF categorisation signals improvementPFC rating of SEBs signals significant improvement in FY10 as Power utilities

in best rated category (A+) doubled with only one addition to the lowest

rating category (Exhibit 19). This trend, we believe, points to the impact of

marginal reforms (including tariff increases) and optimisation of purchase

costs kicking in the system.

Exhibit 24. State power utilities categorisation by PFC

Source: PFC, JM Financial

Most states are in-line with financial targe

recommended by 12th FC with debt/GSDP

reduction in last 5 years

Recommendations by recent action of PMO

and CERC to improve SEB is due in Feb11

Quality RTC power is available to Discoms

at sub`4/kWh rate

Though C rated SEBs ballooned in FY09, A

rated SEBs have been increasing in last 2

years

5 420 21

1016 18

25 20

28

30 30

3329 315 6

10 20 26

0

1020

30

40

50

60

70

80

90

100

FY07 FY08 FY09 FY10 FY11

C B A A+


19/73



f) APTEL judgement for revision of tariffs on Suo-motubasis

Appellate Tribunal for Electricity (ATE) recently ruled that state electricity

regulators indeed have the power to initiate tariff revision on a suo motu basis

if discoms do not file annual revenue requirement petition within the

stipulated time. With this regulators will be held responsible for delay in tariff

revision if discoms do not file petition to raise tariffs. If implemented, this will

help improve the financial health of SEBs.

Improving fiscal health of State Finances

1. Significant turnaround is expected in fiscal position of StateGovernments

Over the past two years, the consolidated fiscal position of the States

deteriorated significantly. Key fiscal indicators suffered a setback in FY09

and FY10 as States implemented the recommendations of the Sixth

Central/State(s) Pay Commissions and also undertook various

discretionary fiscal measures to moderate the impact of the overall

macroeconomic slowdown. The progress in terms of fiscal consolidation

till FY08 had created a space for the expansionary fiscal stance at theState level. Further, additional market borrowings up to 0.5% of States

GSDP each in FY09 and FY10 were allowed by the Centre.

However, a significant turnaround is anticipated in the fiscal position of

State governments FY11 onwards as a) Improvement in the revenue

account would mainly come through lower growth in revenue

expenditure. b) Committed expenditure as a ratio to revenue receipts is

expected to decline. c) Lower growth in capital outlay. d) Absence of

oneoff expenditure such as sixth pay commission and discretionary

fiscal measures.

Exhibit 25. consolidated position of state finances (%) (LHS) and trend in position of state finances fiscal deficit

GSDP (%)

2.8%

3.4%

4.0%

2.4%

1.8%1.5%

2.4%

3.3%

2.5%

0%

1%

2%

3%

4%

5%

1990-

95*

1995-

00*

2000-

05*

FY06 FY07 FY08 FY09 FY10 FY11E

Gross Fiscal Deficit (%)

0.0%

1.4%

2.8%

4.2%

5.6%

7.0%

UP

Rajasthan W

B

Punjab

MP

AP

Gujrat

Ma

harashtra

Karnataka T

N

Haryana

2005-08* FY09 FY10 FY11BE

Source: Company, JM Financial. * Average


20/73



2. Improvement in State financials may support subsidiesIn order to gauge risks of future payables and power subsidisation, we have

analysed fiscal position and debt burden of key states. UP, WB, Rajasthan and

Punjab have high debt levels vs 12th Finance Commission (FC) target of 30.8%

(Exhibit 26). However, compared to historical levels, debt/GSDP improved for

most states during 2006-10 (Exhibit 27). In terms of fiscal deficit almost all

states are below the 12th FC target levels (3%) except UP and Punjab. The

deficit, in our view, is yet to reach an alarming proportion to predict financialdistress in the near-term and hence, power subsidies may continue to fund

losses/free power in the meantime. Having said that, we believe immediate

steps need to be taken to reduce the subsidy burden in states like Rajasthan

(>17% of total state expenditure).

Exhibit 26. Consolidated position of state finances (%) (LHS) and trend in position of state finances Fiscal deficit

GSDP (%)

0.0%

12.0%

24.0%

36.0%

48.0%

60.0%

UP

Rajasthan W

B

Punjab

MP

AP

Gujrat

Maharashtra

Karnataka T

N

Haryana

2005-08* FY09 FY10 FY11BE

0.0%

1.4%

2.8%

4.2%

5.6%

7.0%

UP

Rajasthan W

B

Punjab

MP

AP

Gujrat

Maharashtra

Karnataka T

N

Haryana

2005-08* FY09 FY10 FY11BE

Source: Company, JM Financial. * Average

Exhibit 27. Trend in position of state finances debt to GSDP (%)

FY06 FY07 FY08 FY09 FY10 FY11EReduction in Debt/GSDP

from FY06FY11E

AP 35 34 32 29 30 31 4

Gujarat 38 36 33 33 32 31 7

Haryana 25 23 20 18 19 19 6

Karnataka 27 29 26 24 24 25 2

MP 43 40 39 35 34 37 6

Maharashtra 33 32 27 27 25 27 6

Punjab 47 42 40 37 35 34 13

Rajasthan 52 48 45 42 41 41 11

TN 27 25 24 25 26 25 2UP 56 54 52 47 43 46 10

WB 50 47 45 43 43 41 9

Source: RBI, JM Financial


21/73



What happened in FY01-03 when SEB dues wererestructured?

In March 2001, government appointed an expert group headed by Mr. Montek

Singh Ahluwalia to examine various issues in the power sector. The group came

up with two reports one on settling the outstanding dues of the state electricity

boards and one on restructuring these SEBs. It proposed a scheme for settlement

of outstanding dues of SEBs, linked to a mechanism that would ensure payment ofcurrent dues in future. The groups recommendations included a package of

incentives and disincentives linked to commercial discipline and initiation of a

process of reforms. At that time SEBs had accumulated dues of `415bn,

consisting of`257bn of principal and`157bn of interest/surcharge.

RECL was not included in the scheme of things RECL and POWF were not

included in the scheme because dues to these organisations were on capital

account. As a matter of principle, group felt that scheme should not go into

the recovery or rescheduling of loans given by financial institutions. These

must be left to the respective lenders and borrowers.

However, RECL was allowed one-time settlement The group felt that

having regard to the predominantly social orientation of RECL lending, thebenefit of one-time settlement could also be extended to the outstanding dues

of RECL. The Group recommended that the Ministry of Power, which is the

administrative Ministry responsible for RECL, may consider advising RECL to

settle its dues on a similar basis as the scheme proposed by the Group. The

Ministry of Power could also take a view whether the States owing overdues to

RECL should be required to settle with RECL before the benefit of this scheme

is extended to them.

What RECL did?

In FY03FY05:

Overdues of Madhya Pradesh SEB were settled by a rescheduled

package involving the issue of bonds of`14.15bn by the Governmentof MP, bearing 8% interest rates. In FY04, RECL had (calculated) yield

on loans of 10.7%. Balance of`3.35bn was payable by MP SEB in

installments as per MOU.

Overdues from Jharkhand SEB were fully settled through cash

payment of`1.7bn.

Overdues from Assam SEB and Bihar SEB were also re-scheduled

during FY05.


22/73



State Power Ministers Conference on DistributionSector Reforms: Actions will speak louder thanwords

The State Power Ministers Conference on Distribution Sector Reforms underlined

the need for urgent steps to arrest and reverse the growing losses in power

distribution. State governments unanimously decided to bring down commercial

losses and ensure financial sustainability of discoms and state utilities. TheConference agreed upon a set of measures to bring down the distribution losses.

We analyse impact of the same on power financing sector if timely and efficient

implementation is ensured.

Exhibit 28. Resolutions passed in State Power Ministers Conference on Distribution Sector Reforms

Adopted Resolution Impact if timely and efficient implementation is ensured

1. The state governments to ensure audited accounts of SEBs up to the FY10

- Also ensure that the accounts for a year are audited by September of the next

financial year and computerization of accounts would be undertaken on priority.

Will ensure better and timely data availability regarding financial position

of SEBs

2. The states would ensure that the distribution utilities file their Annual Tariff

Revision Petition every year, by December January of the preceding financial year

to the State Regulators as stipulated by the National Tariff policy.

To increase visibility SEB's financial performance

3. The Annual Tariff Revision Petition would be filed before the SERC and states will

ensure that the difference between ARR and ACS is positive to generate internal

surpluses.

To improve financial position of SEBs hence reducing funding requirement

of PFC, REC and banking sector

4. The state governments would ensure automatic pass through in tariff for any

increase in fuel cost by incorporating the same in the regulations, as provided in

Section 62(4) of Electricity Act, 2003.

Lead to automatic passing on of increased cost, helping SEBs to maintain

profitability

5. The state governments would not only clear all the outstanding subsidies to the

utilities, but ensure advance payment of subsidy as per the Section 65 of the

Electricity Act, 2003 in future.

To solve the problem of timely repayment and nullify risk of default by SE

6. The eligibility criteria for inclusion of towns under R-APDRP assistance with

population of 30,000 (10,000 for special category states) should be reduced to

15,000 (5,000 for special category states).

May result in marginal reduction in AT&C losses

7. The state governments would ensure payment of all outstanding dues from

various departments of state government and institutions to the distribution

utilities or release payments from the State budget directly.

Equivalent of State Government's sovereign guarantee of loans

8. The state governments would consider converting loans due from the state

governments to the distribution utilities as state government equity to ensure

capital infusion and improvement in net worth of utility.

To improve D/E ratio of SEBs and consequently overall financial position o

DISCOMs

9. The state governments would take effective steps to reduce AT&C losses to less

than 15%.To reduce AT&C losses if implemented properly

10. States would immediately initiate steps to appoint distribution franchises in

urban areas through competitive bidding.To improve operating efficiency of SEBs

11. States would immediately invite bids for meeting the uncovered generation

capacity gap viz- a -viz the requirement in their States by the end of 12th Plan. The

process will be completed by March, 2012.

To identify additional generation requirement; however there is already to

much of demand supply gap in generation

12. States would create a unit in their states for integrated planning of generation,transmission and distribution to meet the future requirement of their states.

Another layer of administration may not benefit much



23/73



Fuel availability: Key Risk

Domestic coal unavailability to restrict power supplies

a) Domestic coal availability uncertain: Coal supply has been severelyhampered as new mine projects face delays in environmental clearance.

Although, CEA has taken up the issue with MoP and planning commission, the

authority has mentioned non availability of additional coal for thermal units

commissioned/expected to be commissioned during 2010-11 and 2011-12.

Based on the analysis of coal linkages and expansion projects of CIL, SCCL we

have extremely limited visibility of when domestic coal supply is likely to

come through. CIL has already revised its production target for FY11-12 from

480mnT/521mnT to 440mnT/447mnT. While domestic coal availability is

increasing by a muted 3-4%, power generation capacity addition is growing at

8-9% p.a.

b) Infrastructure bottlenecks: Based on MoP estimates, 270mtpa of importedcoal will be required to meet 12th plan targets (215GW of coal based capacity).

However, lack of logistics infrastructure (port issues, wagon shortage, railway

infrastructure issues) does not give us confidence of such scale of imports in

India.

c) Blending limitation in existing plants: Our channel checks indicate thatboilers of existing coal-based stations are not designed to consume imported

coal in more than 10-15% blending and hence, imported coal cannot be relied

upon to make for domestic shortfalls.

d) Inflationary concerns to discourage high-cost imported coal blending:10% blending leads to c.`0.40/unit increase in costs for discoms. Given

inflationary concerns and limited ability of bleeding discoms to pass higher

power purchase cost to customers, we expect much lesser coal imports to

materialise (JMFe c.80mtpa vs CEA estimates 270mtpa by FY17).

e) leading to international acquisition spree: As domestic fuel availability isconstrained, IPPs have recently started acquiring unexplored resourcesinternationally (Exhibit 43). Although associated development costs are high

in most cases, fuel security is a must for larger capex back home for power

projects.

f) However international coal prices are rising post new laws in Indonesiaand Australia: Indonesia (the largest coal supplier) has said it would not

allow exporting companies to sell coal at prices below notified rates after

September 23, 2011 i.e. annual alignment of coal prices with international

rates. Australia also issued a draft mining law to impose levy on coal and iron

ore projects from next year (FY12) as miners in Australia would like to pass

on the increase in levies to consumers. Indonesia and Australia contribute

c.55% of India's coal imports. The current contractual framework does not

protect power companies from coal price changes triggered by any change inlaw in the exporting country. As mentioned earlier, reliance on imported coal

will be going up in coming years but prices of imported coal also have been

rising putting significant upward pressure on the cost of power generation.

Given SEBs financial state and increasing awareness of high purchase cost, we

have witnessed significant backing down of plants on lower offtake by SEBs

Therefore possibilities of renegotiation of competitively bid Power Purchase

Agreements (PPAs), where fuel price risk is not covered, cannot be ruled out.

Domestic fuel unavailability remains the

single biggest challenge

Imported coal based power has limited

acceptability


24/73



Negatives priced in

Loan book to register 21% CAGR for FY11-14E: POWF delivered robust loan

book CAGR of 23% for FY05-11. Given outstanding sanction of`1.7trn (1.6xFY11 loan book) and investment pick-up in FY12 (being the last fiscal of the

11th five year plan), we expect 18%/17%/17% disbursement growth in

FY12/FY13/FY14, leading to loan book CAGR of c.21% for FY11-14E.

Equity issuance to lead to stable margins in FY12E:We expect 14bps decline

in spreads for POWF in FY12E and stable spreads over FY11-14E given a)

increase in borrowing cost by 65bps over FY11-14E, b) company has a

marginally negative repricing schedule of`30bn i.e. excess of loan liabilities

(`230bn up for re-pricing) over loan assets (`200bn). Thus we expect POWFs

spreads to decline by 14bps to 2.1% in FY12E and improve to 2.27% over FY12-

FY14E (on lower borrowing costs). We expect margins to remain stable over

FY11-14E, leading to 23% CAGR in NII over FY11-14E.

Higher exposure to generation is comforting factor, conservatively model

14bps of credit costs; reserves for bad debts (1% of loans) should act as

buffer: POWF has c.84% of the loans towards generation companies which are

much better financially positioned than distribution and transmission

companies which form c.13% of POWFs book. However, given risks gencos face

from poor financial health of state-owned discoms, we conservatively factor

14bps of credit costs for FY13E and 14E. Further, POWF maintains reserve for

bad debts (c.1% of O/S loan book) which should act as a buffer in case of any

restructuring/NPLs.

Solid 20% net profit CAGR over FY11-14E with ROE of c.18%: We expect

earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on the back of

robust loan book CAGR of 21%; however, we have modeled elevated credit

costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain healthywith ROA of 2.6% and ROE of 18% in FY14E.

Current valuations at 0.95x 1yr fwd book (down from a peak of 2.9x);initiate coverage with BUY and TP of `205: POWF has witnessed significantde-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently. We

believe current valuations are attractive at 0.9x FY13E book with dividend yield

of c.5% (based on FY13E dividend). We value the stock at 1x FY14P/B (at 1.05x

Mar14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar13

target price of`205, upside of c.30%, including dividend.

Karan Uberoi, CFA, [email protected]

Tel: (91 22) 6630 3082

Amey Sathe, [email protected]

Tel: (91 22) 6630 3027

Puneet [email protected]

Tel: (91 22) 6630 3072

Prashant [email protected]

Tel: (91 22) 6630 306

Ravi [email protected]

Tel: (91 22) 6630 306

Key Data

Market cap (bn) `234.1 / US$ 4.

Shares in issue (mn) 1319.

Diluted share (mn) 1319.

3-mon avg daily val (mn) `603.0/US$ 11.

52-week range `339.5/130.

Sensex/Nifty 16,805/5,03

``/US$ 51.

Daily Performance

Power Finance Corp.

0

80

160

240

320

400

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

-60%

-40%

-20%

0%

20%

40%

P ower F inanc e C orp. R elat iv e t o Sens ex (R HS)

1M 3M 12M

Absolute 8.0 21.3 -45.

Relative* 12.3 20.8 -30.

* To the BSE Sensex

Shareholding Pattern (%

2Q FY11 2Q FY1

Promoters 89.78 73.7

FII 3.76 6.4

DII 2.99 10.1

Public/others 3.47 9.7

Power Finance Corp. | POWF IN

India | Banking & Financial Services | Initiating Coverage

Price:`164

BUY

Target:`205 (Mar13)

JM Financial Research is also available oBloomberg - JMFR ,Thomson Publisher & Reuter

Please see important disclosure at the end of the repo

9 December 2011

Exhibit 29. Financial Summary (` mn)Y/E March FY10 FY11 FY12E FY13E FY14ENet Profit 23,573 26,196 26,021 37,367 44,663

Net Profit (YoY) (%) 19.7% 11.1% -0.7% 43.6% 19.5%

Assets (YoY) (%) 24.3% 25.9% 20.7% 20.7% 19.8%

ROA (%) 3.08% 2.73% 2.21% 2.63% 2.61%

ROE (%) 18.8% 18.2% 14.4% 16.8% 17.7%

EPS (`.) 20.5 22.8 19.7 28.3 33.8

EPS (YoY) (%) 19.7% 11.1% -13.6% 43.6% 19.5%

PE (x) 8.1 7.3 8.5 5.9 4.9

BV (`.) 116.2 134.3 157.6 178.5 203.6

BV (YoY) (%) 13.9% 15.6% 17.3% 13.3% 14.0%

P/BV (x) 1.44 1.24 1.06 0.94 0.82

Source: Company data, JM Financial. Note: Valuations as of 08/12/11.


25/73

Power Finance Corporation


Exhibit 29. Key Financials

Key Parameters FY06 FY07 FY08 FY09 FY10 FY11 FY12E

Balance sheet

Borrowings (`bn) 269 336 406 522 671 856 1,014

Loans (`bn) 356 439 516 644 799 996 1,215

Total Assets (` bn) 375 467 548 683 849 1,068 1,290 Assets Growth (%) 20.5% 24.5% 17.2% 24.7% 24.3% 25.9% 20.7%

Income statement

NII (`bn) 12.3 14.4 18.0 22.9 28.6 33.3 41.6

Operating profits (`bn) 12.2 14.2 18.1 22.6 28.7 34.5 42.3

PAT (`bn) 9.7 9.9 12.1 19.7 23.6 26.2 26.0

Profitability

Interest Spread (%) 2.10% 1.96% 2.01% 2.24% 2.46% 2.27% 2.13%

NIM (%) 3.74% 3.57% 3.72% 3.92% 3.91% 3.64% 3.68%

ROA (%) 2.83% 2.34% 2.38% 3.20% 3.08% 2.73% 2.21%

ROE (%) 13.3% 10.9% 11.6% 17.5% 18.8% 18.2% 14.4%

Asset Quality

Gross NPL (`mn) 910 420 132 132 132 2,307 3,336

Gross NPL (%) 0.26% 0.10% 0.03% 0.02% 0.02% 0.23% 0.27%

Net NPL (`mn) 698 260 70 60 62 1,946 2,502

Net NPL (%) 0.28% 0.11% 0.03% 0.02% 0.02% 0.26% 0.30%

Loan Loss Charge (`mn) -31 -48 -102 22 -6 318 935

Coverage (%) 23.3% 38.1% 46.8% 54.4% 52.6% 15.6% 25.0%

Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.


26/73

Power Finance Corporation 9 December 201


Sanctions at 1.6x loan book size provide growthvisibility over FY11-14E

Outstanding sanction at `1.7trn (1.6x of the loan book) provides stronggrowth visibility

The robust demand for power financing has been reflected in strong sanctions

and disbursement pipeline for POWF. Sanctions witnessed 26% CAGR and

disbursements 24% CAGR over FY05-11 while net outstanding sanctions as of

2Q12 were at`1,791bn, which would be typically utilised over next 3-4 years.

Given the size of outstanding sanctions at almost 1.6x the loan book, we

believe growth outlook for POWF is robust over the medium term.

Exhibit 30. POWF: Trend in sanctions and disbursements (`b

186225

311

695

570

655

752

0

180

360

540

720

900

FY05 FY06 FY07 FY08 FY09 FY10 FY11

-20%

10%

40%

70%

100%

130%Sanctions (` bn) YoY Growth (%)

94117

141162

211

258

341

0

80

160

240

320

400


0

8

16

24

32

40Disbursements(` bn) YoY Growth (%)


Loan book to register 21% CAGR over FY11-14E

POWF has delivered robust loan book CAGR of 23% over FY05-11. As of 2Q12,

it had sanctions of`1.8trn and has already commenced disbursements for

projects having outstanding sanctions of`810bn (47% of total sanctions). This

is likely to support near-term loan book growth. Additionally, POWF has

executed agreements for`253bn (15% of the sanctions) though disbursements

are yet to begin. All these factors do give us confidence on the growth outlook

for POWF over the next three years. We have modeled in 18%/17%/17%

disbursement growth in FY12/FY13/FY14E respectively leading to c.21% loan

CAGR over FY11-14E.


27/73



Exhibit 31. POWF: Trend in loan book and disbursements (`b

356439

516 644

799

996

1,215

1,470

1,764

0

400

800

1,200

1,600

2,000


15%

17%

20%

22%

25%

27%Loan Book (` bn) YoY Growth (%)

117 141162 211

258

341

403

471

551

0

130

260

390

520

650


10

15

20

25

30

35Disbursements(` bn) YoY Growth (%)


Generation will continue to dominate the loan mix

POWF has historically focused on financing of generation projects, share of

which has continuously increased over last few years (constituted 84% of loan

book in 2Q12 vs 60% in FY03). Over the years, POWF has diversified itsportfolio through participation in large power sector projects such as R-APDRP,

independent transmission projects, non-conventional energy sources,

distribution reforms (DRUM), consortium lending etc. However, considering

sanctions and disbursements in the last 15-18 quarters (Exhibit 6), we believe

generation will continue to dominate the loan mix for POWF.

POWF has limited exposure to state distribution and transmission companies

(at 13% as of 2QFY12) while exposure to private players forms 9% of the loan

book. Generation companies (which form c.14% of POWFs book) are much

better financially positioned than distribution and transmission companies.

Exhibit 32. POWF: Loan mix discipline (LHS) and borrower wise as of 2Q12

Generation

83%

Transmission

8%

Others

4%Distribution

5%

State Sector

64%

Central Sector

19%

Joint Sector

8%

Private Sector

9%



28/73



Exhibit 33. POWF: Trends in discipline wise composition of loan book

60% 62% 67%72% 75% 77%

81% 84% 85% 85% 84%

16% 14%12% 11%

11% 12%10% 8% 8% 8% 8%

0%

20%

40%

60%

80%

100%

120%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q12

Generation Transmission Distribution Others


Exhibit 34. POWF: Sanctions (LHS) and disbursements discipline (` mn) wise in last 16 quarters

0

65,000

130,000

195,000

260,000

325,000

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12


0

26,000

52,000

78,000

104,000

130,000

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2 Q 1 2




29/73



Private sector share to increase going ahead

Government sector has accounted for majority of the loan book with state

electricity boards and state utilities (e.g. NTPC, NHPC) being major customers.

However, various government initiatives and guidelines (such as Electricity Act,

2003, unbundling of SEBs) have encouraged private sector to enter generation

and transmission businesses. Of 87GW capacity addition, private sector will

account for c.57%. Naturally, we expect private sector share to increase from

current level of c.9%.

Exhibit 35. POWF: Trend in sanctions borrower wise (`bn) (LHS) and in % terms

527297 327

423

115

181

52

79 158 167

62137

695

570

655

752

25

2285

0

180

360

540

720

900

FY08 FY09 FY10 FY11

State Sector Central Sector Joint Sector Private Sector R-APDRP

76%

52% 50% 56%

17%

32%

8% 14%

24%22%

10%18%

33%

2%

13%

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11

State Sector Central Sector Joint Sector Private Sector R-APDR



30/73



Exhibit 36. POWF: Outstanding sanctions as on 30, Sept11Outstanding Sanctions as on September 30, 2011

Doc. executed & disb.commenced

Doc. executed but disb.not commenced

Doc. not executed Total O/s Sanction

Discipline-wise (Rs mn)

Generation 501,330 273,980 549,100 1,324,41

Transmission 109,650 49,090 28,260 187,0

Distribution 49,770 3180 2850 55,8

R-APDRP (Part A) 41,460 620 1800 43,88

R-APDRP (Part B) 71,260 0 94,610 165,87

Others* 6920 2900 4270 14,0

Total 780,390 329,770 680,890 1,791,0

Discipline-wise (%)

Generation 28.0% 15.3% 30.7% 73.9

Transmission 6.1% 2.7% 1.6% 10.4

Distribution 2.8% 0.2% 0.2% 3.

R-APDRP (Part A) 2.3% 0.0% 0.1% 2.4

R-APDRP (Part B) 4.0% 0.0% 5.3% 9.3

Others* 0.4% 0.2% 0.2% 0.8

Total 43.6% 18.4% 38.0% 100.0

Borrower-wise (Rs mn)

State Sector 533,240 214,350 494,820 1,242,4

Central Sector 73,630 20 26,790 100,44

Joint Sector 13,700 59,000 0

Private sector 159,810 56,390 159,280 375,48

Total 780,380 329,760 680,890 1,791,03

Borrower-wise (%)

State Sector 29.8% 12.0% 27.6% 69.4

Central Sector 4.1% 0.0% 1.5% 5.6

Joint Sector 0.8% 3.3% 0.0%4.1

Private sector 8.9% 3.1% 8.9% 21.0

Total 43.6% 18.4% 38.0% 100.0



31/73



Troubled states account for 31% of loan book

POWFs exposure to troubled states (Tamil Nadu, Uttar Pradesh, Rajasthan,

Madhya Pradesh and Jammu & Kashmir which account for c.80% of total SEB

cash losses) is 31% of the loan book.

Exhibit 37. POWF: Segment wise composition of loan book as of 2Q1

Troubled States % Loan Exposure

Rajasthan 8.8%

Uttar Pradesh 8.1%

Madhya Pradesh 7.4%

Tamil Nadu 5.6%

Jammu & Kashmir 1.3%

Total 31.1%

Other Sates % Loan Exposure

Maharashtra 12.8%

Haryana 8.6%

Andhra Pradesh 8.5%

West Bengal 8.0%

Delhi 6.9%

Uttarakhand 4.4%

Gujarat 4.1%

Chattisgarh 4.1%

Jharkhand

Himachal Pradesh 2.9%

Karnataka 2.4%

Others 3.2%

Total 68.9%



32/73



ECBs and infra bonds to make borrowings profilemore diverisified

ECBs to bring down reliance on domestic borrowings

POWF funds its assets through market borrowings of various maturities and

subordinated debt. Domestic bonds continue to constitute bulk of the

borrowings (c.76% in 2Q12) while bank loans formed c.22% in 2Q12.

Proportion of bonds in total borrowings has increased to 65% in FY11 from

33% in FY05.

However, post IFC status, POWF has been using ECB option aggressively and

currently (as of 2Q12) has c.`56bn (6.1% of total borrowings) of ECBs. It had

approached RBI for in-principle approval of $1bn to set up a Medium Term

Notes programme for raising ECBs.

It also intends to raise money through infrastructure bonds (aims to raise

`69bn in FY12, has already filed draft prospectus) and tax free bonds (to raise

`50bn in FY12). However, we note that in FY11, POWF managed to garner only

`2.35bn of infra bonds. Hence, we expect ECBs and tax free bonds to

dominate incremental borrowings for the company, leading to more diversified

borrowings profile.

Exhibit 38. POWF: Trend in borrowings composition (` bn) and duration of assets and liabilities

228

281348

417

531

678

861

65%68%

67%56%

47%40%33%

24%

24%

25%

36%43%47%

47%

0

200

400

600

800

1,000


Bonds ECB Term Loans CP WCDL / OD Infra Bonds Interest Subsidy

5.645.97

6.35 6.32

4.15

4.785.18

5.46

2.00

3.20

4.40

5.60

6.80

8.00

FY09 FY10 FY11 1Q12

Loans (in yrs.) Borrowings (in yrs.)

Source: Company, JM Financial. WCDL = Working Capital Demand Loan, Duration is weighted average


33/73



Unhedged foreign borrowings could add volatility to earnings

As of Sept11, POWF has foreign currency borrowings of c.`56 bn (6.1% of total

borrowings) of which 48% were US$ denominated, 49% were JPY and balance

were in euros. Only c.14% of POWFs foreign borrowings have been hedged,

leaving it exposed to currency movement. POWF booked MTM loss of`5.3bn

during 2QFY12. However, losses are notional and since these borrowings are

long term in nature (due FY15 onwards), MTM losses could reverse with

strengthening of the rupee going ahead.

Exhibit 39. POWF: Trends in PBT before and after forex MTM (LHS) and forex MTM

0.0

8.0

16.0

24.0

32.0

40.0


PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)

92286

874

(389)

1,4621,26

(2,664)-3,000

-2,000

-1,000

0

1,000

2,000


Forex (` mn) Gain / (Loss)



34/73



Equity issuance in FY12 to lead to stable margins

Spreads to decline by 14bps in FY12E due to higher borrowing costs

We expect 14bps decline in spreads for POWF in FY12E and stable spreads

over FY11-14E driven by a) increase in borrowing cost of 65bps over FY11-14E.

POWF intends to borrow c.`300bn in FY12E from a mix of instruments (infra

bonds, tax free bonds, ECBs and other domestic borrowings). This will help in

keeping the blended cost of funds under check, limiting downside to spreads.b) it has a negative repricing schedule of`30bn i.e. excess of loan liabilities

(`230bn up for re-pricing) over loan assets (`200bn). On ALM front, mismatch

is even wider with`67bn of negative re-pricing in FY12E and `26bn in FY13E.

Thus we expect POWFs spreads to decline by 14bps to 2.1% in FY12E and

improve to 2.27% over FY12E-FY14E driven by lower borrowing costs. We

expect margins to remain stable over FY11-14E, leading to NII CAGR of 23%

over FY11-14E.

Exhibit 40. POWF: Maturity pattern of loans assets and liabilities (` bn)

86 79 87 87 90

567

153105 90

52110

346

0

150

300

450

600

750

2012 2013 2014 2015 2016 Beyond fiscal

2016

Loan Assets Liabilities

Source: Company, JM Financial. * As of March 31, 2011.

Exhibit 41. POWF: Trend in NII growth and margins

12.3 14.418.0

22.9

28.633.3

41.6

52.0

62.3

0.0

15.0

30.0

45.0

60.0

75.0


-16%

0%

16%

32%NII (` bn) YoY Growth(%)

3.6% 3.7%3.9% 3.9%

3.7% 3.8%

2.1% 2.0% 2.0%2.2%

2.5%2.3% 2.1% 2.2% 2.3

3.7% 3.6% 3.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY1

NIM (%) Spread (%)



35/73



Asset quality: Factoring credit cost of 14bps

So far asset quality trends remain strong

Over the last 5 years (FY06-11) POWF has enjoyed benign asset quality and

virtually zero credit costs. Asset quality remained impressive with gross NPLs

of 0.23% in FY11 and 0.02% in FY10 (FY07: 0.10%). This clearly demonstrates

that POWF through its two decade of operation in power financing has

developed extensive sector knowledge and strong credit appraisal skills.

Exhibit 42. POWF: Trends in asset quality from FY05-FY11

0.7%

0.3%

0.1%

0.0% 0.0% 0.0%

0.2%

0.0%

0.2%

0.3%

0.5%

0.6%

0.8%


Gross NPLs (%) Net NPLs (%)

Source: Company, JM Financial. * As of March 31, 2011.

Higher exposure to generation companies which are financially better

positioned than distribution companies is a comforting factor

POWF has 84% of lending to the generation sector which is performing much

better financially than the state-owned distribution sector (POWFs exposure is

13%). However, POWF does face risks from poor financial health of state-owneddiscoms indirectly as it leads to delay in payments for generation companies;

consequently, we factor 13/14bps of credit costs for FY13E/14E. Further,

POWF maintains reserve for bad debts (c.1% of O/S loan book) which should

act as a buffer in case of any restructuring/NPLs.

Exhibit 43. POWF: Financials of discoms vs gencosProfit / (loss) of SEBs as of FY10*State

Discoms (` bn) Gencos (` bn) PFC Exposure (%)Tamil Nadu (88.6) 0.0 5.6%

Rajastan (105.3) (1.8) 8.8%

Uttar Pradesh (48.0) (16.8) 8.1%

Madhya Pradesh (30.4) (1.0) 7.4%

Jammu & Kashmir (20.2) 6.8 1.3%

Total for all states -348.08 59.78

Source: Company, JM Financial. * Cash Profit - Subsidy Received Basis


36/73



Escrow mechanism with state utilities and state guarantees provides

asset quality comfort

POWF also has an escrow account mechanism in place with the utilities, which

acts a credit enhancement mechanism. Under this, revenue of SEBs flows into

the escrow account and is available to the SEBs. In case of any default, POWF

would have the first right to claim the money on demand. This mechanism

would ensure timely payment of all the dues to the company.

As of 31 Mar11, 81% of its outstanding loans to State and Central sector

borrowers involved such escrow account mechanism. However, we note that,

in the event that end users do not make payments to their SEBs, the escrow

account mechanism and the trust and retention account arrangements will not

be effective.

In the past, POWF has invoked escrow mechanism twice (1997 Andhra

Pradesh and 2001 Madhya Pradesh) and both times it worked successfully.

Smaller private sector power projects may face problems due to

unavailability of fuel (coal)

According to POWF, as of now, it does not expect any significant risk to private

players due to coal linkage problems. According to POWF, Coal India wasproviding private players c.60% of the total coal requirement; though, as per

revised agreement, it is now providing only 50% of the requirement. POWF

expects the shortfall of 10% to get easily fulfilled through coal import. As a

precaution, since 11 April, POWF is not sanctioning/disbursing loans to

projects which are without Fuel Supply Agreement (FSA) and Power Purchase

Agreement (PPA).

According to POWF, it has also done an indepth stresstest analysis on all

power projects it has lent till now. The analysis reveals that c.700MW of power

projects (less than 0.5% of loan book) are currently under stress. The company

has not witnessed any defaults from SEBs and even loss making SEBs (Tamil

Nadu, Rajasthan, Uttar Pradesh) are making payments on time.

Having said that, we do expect small private sector power projects (50-100MW)

to face problems due unavailability of coal as these projects have very limited

financial ability to sustain business losses.

Modeling credit cost of 14bps and reserves for bad and doubtful debts

(currently 1% of loans) should also act as a buffer

Over the last 5 years (FY06-11) POWF enjoyed benign asset quality and

virtually zero credit costs. Asset quality remained impressive with gross NPLs

of 0.23% in FY11 and 0.02% in FY10 (FY07: 0.10%).

However going forward, we expect some hiccups in asset quality especially

from private generation sector. We assume zero default probability of SEBs but

higher slippages from private sector exposure.

While risks exist, we believe it has taken steps to ensure timely repayment,

including conservative assumptions on project profitability, adequate fuel

linkage and on cash flows and assets.

We have built higher slippages over next 2 years mainly emanating from

private sector, and consequently higher credit costs. We conservatively factor

credit costs of 13/14bps over FY13E/14E. Further, POWF maintains reserve for

bad and doubtful debts (currently 1% of O/S loan book) which should act as a

buffer in case of any restructuring/NPLs.


37/73



Exhibit 44. POWF: Reserve for bad and doubtful debts and as % of O/s loans

4.85.5

6.47.2

8.59.8

11.2

13.2

15.61.3% 1.2%

1.1%

1.4%

1.1%

1.0% 0.9%0.9% 0.9%

0.0

4.0

8.0

12.0

16.0

20.0


0.7%

0.9%

1.0%

1.2%

1.3%

1.5%Reserve for Bad and Doubtful Debts (` bn) % of O/s Loans


We expect gross NPLs of c.0.5% and net NPLs of 0.4% by FY14E and higher

credit costs of 14bps in FY14E from 4bps in FY11.

Exhibit 45. POWF: Trend in asset quality

0.3%

0.1%

0.0% 0.0% 0.0%

0.2%0.3%

0.4%

0.5%

0.0%

0.1%

0.2%

0.4%

0.5%

0.6%


0%

15%

30%

45%

60%

75%

Gross NPLs (%) Net NPLs (%) Coverage (RHS) (%)

(1) (0)

4

8

13

(1) (2)

1

14

(5)

0

5

10

15

20

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY1

LLP (bps)



38/73



Sufficiently capitalised post FPO

Sufficiently capitalised with CAR of 16.6% by FY13E

In May 2011, POWF came up with a Follow on Public Offer (FPO) where it raised

c.`47bn. Post FPO, CAR for the company improved to 18.2% in 2Q12 vs 15.7%

in 4Q11. POWF is sufficiently capitalised for growth over the next 3 years.

However, we note that as a government company POWF enjoys several benefitssuch as exemption from prudential exposure norms in respect of lending to

Central and State government entities in the power sector until 31 Mar12.

POWF is required to submit a roadmap to RBI for achieving adherence to the

prudential regulations prescribed by RBI, including further capitalisation. If

such exemptions are removed, capital requirement of POWF may increase

significantly.

Exhibit 46. POWF: Trend in tier I capital and leverage

17.2%

16.1%

17.1%

14.7%

15.6%14.9%

16.7%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

FY08 FY09 FY10 FY11 FY12E FY13E FY14E

4.0

4.7

5.4

6.1

6.8

7.5

Tier I (%) Leverage



39/73



Return ratios to remain healthy

Solid 20% net profit CAGR over FY11-14E with ROE of c.18%

We expect earnings CAGR of 20% over FY11-14E driven by 23% CAGR in NII on

the back of robust 21% loan book CAGR; however, we have modeled elevated

credit costs (14bps in FY14E vs 4bps in FY11). Return ratios should remain

healthy with ROA of 2.6% and ROE of 18% in FY14E. However, unhedged

foreign borrowings could add volatility to earnings.

Exhibit 47. POWF: Trends in PBT before and after forex MTM (LHS) and Forex MTM

0.0

8.0

16.0

24.0

32.0

40.0


PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)

92286

874

-389

1,4621,26

-2,664-3,000

-2,000

-1,000

0

1,000

2,000


Forex (` mn) Gain / (Loss)


Exhibit 48. POWF: Trends in return ratios

9.7 9.912.1

19.723.6

26.2 26.0

37.4

44.7

0.0

10.0

20.0

30.0

40.0

50.0


-28%

0%

28%

56%

84%Net Profit (`bn) YoY Growth (%)

5.0%

8.0%

11.0%

14.0%

17.0%

20.0%

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13EFY14E

2.

2.

2.

2.

3.

3.

ROE (%) (LHS) ROA (%)



40/73



Negatives priced in; initiate with BUY and `205 TP Significant underperformance to BSE Bankex; CMP offers attractive entry

point

POWF has been a significant underperformer over the last 12 months which

can be attributed to: a) concerns over project execution and coal availability

for power projects, b) concerns over asset quality in the light of mounting

losses at the SEBs, and c) sharp increase in wholesale fund rates resulting inmargin and spread compression.

Over the last 1year, POWF has corrected by c.44% and underperformed BSE

Bankex by 21%: POWF has witnessed a significant de-rating from peak multiple

of 2.9x 1 yr fwd book to 0.95x currently. We believe current valuations are

attractive at 0.9x FY13E book with dividend yield of c.5% (based on FY13E

dividend).

Exhibit 49. POWF: Stock performance visavis BSE Bankex

20

40

60

80

100

120


POWF - 1 Year Price Performance (%)

20

40

60

80

100

120

Dec-10 Feb-11 A

jm financial - initiating coverage on power financiers

Documents