COAL INDIA: Challenges being addressed, operating performance strong:: Motilal Oswal

Key watch-outs: Share of market-linked revenue, possible regulatory
headwinds
 FY13 to be first year of volume bounceback
 FSA deadlock untangling, financial impact not material
 Washed coal, E-auction constitute 30% of sales, import parity discount provides cushion
 Maintain Buy; MMDR bill, scope of coal regulator need to be watched

1QFY13 Results: PTC India performance above estimate :: Motilal Oswal

1QFY13 Results: PTC India performance above estimate
Tolling income boost PAT
 1QFY13 performance below estimates but tolling income boost PAT: During 1QFY13
adjusted PAT stood at INR229m. However, the reported numbers include
contribution from tolling projects, not factored by us in standalone accounts. Tolling
project PBT stood at INR125m and thus adjusted PAT excluding tolling PAT
(~INR88m), stood at INR141m, vs our estimate of INR225m. This was partially led
by lower EBITDA, lower other income at INR26m vs our estimate of INR45m.
 Trading margin lower, tolling margins healthy and lower coal cost could further
aid tolling margins: Lower core PAT was led by lower trading margin at Paisa4.37/
unit (v/s est Paisa5.7). However EBITDA margin for tolling business was healthy at
INR1/unit where-in fixed cost for the project stood at INR1.6/unit and fuel cost
stood at INR3.35/unit. Revenues under tolling arrangement was INR6/unit.
Management however suggested that the higher fuel cost was owing to high cost
inventory usage, lined up on the basis of earlier expectation of project
commisisoning by 4QFY12. Going forward, the lower coal cost would be a key
delta for the tolling proejct profitabiilty.
 TN dues realised partly, hopeful of full receipt before 3QFY13; discussion with
UPDISCOMs on: During the quarter, PTC received INR1b from Tamil Nadu (TN) and
another tranche of INR750m from TN in July/Aug and thus outstanding from TN
stood lower at INR4.8b v/s INR7b earlier. Managment is hopeful of receiving
balance dues from TN by 3QFY13. It is also purusing with UP discoms for dues
recovery; improved visibility on receivables would be a key positive for the stock,
in our view.
 Maintain Buy: We expect PTC to report consolidated net profit of INR2.2b in FY13E
(up 9% YoY) and INR2.8b in FY14E (up 26% YoY). Stock trades at a consolidated PER
of 6x on FY14E basis. Buy with revised STOP based TP of INR73/sh, excluding value
of outstanding receivable of INR8b or INR27/sh.

1QFY13 Results: Reliance Infra performance above estimate Standalone performance boosted by higher EPC margins :: Motilal Oswal

1QFY13 Results: Reliance Infra performance above estimate
Standalone performance boosted by higher EPC margins
 Standalone performance boosted by higher EPC margins: Reliance Infra reported
1QFY13 standalone PAT of INR3.3b v/s our estimate of INR2.5b. PAT stood higher
led by higher EPC EBITDA margins at 17% v/s estimate of 7%. EPC division reported
revenues of INR17.9b (down 59% YoY) while EBITDA margin stood at 17% vs 20%
YoY and 11% QoQ. For FY13 RELI has given guidance for EPC revenue at INR90-100b
and margins at 8-10%.
 1QFY13 Consolidated PAT at INR4.1b (up 2% YoY): 1QFY13 consolidated revenues
stood at INR53.8b (up 4% YoY), EBITDA of INR6.7b (down 15% YoY), and PAT after
minority interest at INR4.1b (up 2% YoY). Infra segment (Road segment) revenue
stood at INR984m while EBIT stood at INR364m v/s loss of INR55m YoY. Positive
EBIT contribution from road segment is led by second year of operations for some
of the roads project.
 Infrastructure business witness traction: Reliance Infra's project portfolio
comprises of 24 infrastructure projects aggregating around INR356b, in segments
like Roads (11 projects with ~1,000kms, cost INR120b), Metro Rails (3 projects,
cost INR170b), Transmission (11 projects, cost INR66b), and Airports (5 regional
brownfield airports in Maharashtra). RELI has road portfolio of 11 projects wherein
7 are operational and another 3 will enter the revenue generation phase in
FY13. In its Metro vertical, Delhi Metro faced structural issues while operating and
thus project is not operational in 1QFY13 for restoration. For Mumbai Metro-1,
RELI has completed 95% civil work and is planning to start entire Metro by FY13.
RELI received viability gap funding of INR5b from MMRDA for Mumbai metro
project. RELI has entered into pact with MSRDC to cancel the sea-link project
(spent INR1b till date) facing issues with alignment and parallel road.
 Valuation and view: We have upgarded net profit of RELI to factor in higher other
income and higher revenue/margins in EPC segment during the quarter. Now we
we expect RELI to report net profit of INR11.6b in FY13E (down 41% YoY), INR13.3b
in FY14E (up 14% YoY). Buy.

1QFY13 Results: Tata Power performance below estimate :: Motilal Oswal

1QFY13 Results: Tata Power performance below estimate
Impacted by loss at Mundra, Maithon plants and lower profit at coal SPV
 Consolidated PAT below estimate: Adjusted consolidated PAT for the quarter stood
at INR3.1b (v/s estimate of INR4.9b), led by 1) Higher losses at Mundra UMPP
owing to take or pay for Port, shipping and coal (losses at INR1.6b), 2) Losses at
Maithon project at INR178m given equipment issues v/s our estimate of marginal
profits, 3) KPC/Arutmin mines EBIT stood at INR2.5b v/s estimate of INR5.2b and
INR5.1b QoQ. Standalone adjusted PAT for 1Q stood at INR4.1b v/s estimate of
INR1.8b due to higher other income at INR3.5b (v/s estimate of INR0.9b), given
dividend income of ~INR2b from coal SPV.
 Core profit of coal SPVs impacted: During 1QFY13, KPC/Arutmin mines sales
volumes stood at 00m tons (up/down 00% YoY) and realisation dipped to USD84/
ton, vs USD94/ton YoY. Production cash cost increased 21% YoY to USD49/ton, leaving
gross contribution at USD35/ton, down from USD45/ton QoQ and USD54/ton YoY.
Cash cost stood higher despite muted oil cost. This is due to take or pay charges on
Infra facility created for evacuation of coal.
 Subsidiaries performance likely to be muted going forward: For Maithon project,
both the units are now operating but fuel supply could be an issue given delays in
rail line for transportation of coal. On Mundra UMPP, management expects loss of
~INR400m/month for FY13E. Coal SPVs profitability has been impacted due to
pressure on realisation along with cost increase owing to infrastructure cost. BUMI
has guided for realisation of coal at USD90/ton for CY12 and cost savings of USD2-
4/ton, unlikely to be attained given recent trends.
 Valuations and view - Earnings cut by 5-6% for FY13/14E: We cut our consolidated
earnings for TPWR by 5-6% for FY13/14E and expect consolidated PAT at INR13b in
FY13E (down 36% YoY) and INR10b in FY14E (down 14% YoY). Neutral.

1QFY13 Results : NHPC performance above estimate :: Motilal Oswal

1QFY13 Results : NHPC performance above estimate
Incentive and other income boosted PAT
 1QFY13 Result better than expected: NHPC adjusted PAT for 1QFY13 stood at
INR6.5b v/s our estimate of INR5.7b. Higher PAT is led by 1) Higher incentive income
where-in UI income stood at INR440 (v/s INR330 m YoY) and PAF stood at INR630m
boosted by higher PAF at 94% v/s 90% YoY, 2) Higher Other Income at INR2.4b (v/s
our est of INR2.2b) and 3) Lower taxes at 21% v/s our est. of 25%, owing to tax
adjustment related to earlier years.
 Operational performance impacted: During 1QFY13, the generation for NHPC
(Standalone) stood at 6.1BUs, down 2% YoY. Out of its 12 power plant , NHPC
reported generation growth from only 3 plants. Average PLFs for the plants stood
at 74.5% v/s 76.2% YoY. Lower generation at its plants is led by lack of snow fed
water and delayed monsoon. During the quarter NHPC commissioned U-I of
Chamera, while it commissioned U-II and III during 1st week of July.
 Projects facing delays: NHPC has targeted to commission 1.2GW (Including 520MW
Parbatti-III) in FY13 and YTDFY13 it has commissioned 231MW Chamera.
Management highlighted Chutak and Nimo Bazgo ready for commissioning but
need to demonstrate full load, which is partly impacted due to transmission line
delays. We understand local agitation has impacted commissioning of Uri -II while
Kishanganga project is caught in controversy between India and Pakistan.
 Valuations and view: We marginally upgrade our earnings for FY13/14 by 5%/2%
respectively to factor in 1) Higher incentive income, 2) Higher other income during
the quarter. We expect to NHPC to report PAT of INR22.1b in FY13 (v/s INR21.1b
earlier) and INR24.7b in FY14 (v/s INR24.3b earlier). Re-iterate Neutral, despite 1x
P/BV valuations given Subdued RoE of 7-8% (a large part of net worth deployed in
cash/CWIP) and delayed capacity addition.

UTILITIES (June-12): ST Power volume record 2-digit growth:: Motilal Oswal

UTILITIES (June-12): ST Power volume record 2-digit growth
Prices firming up; Punjab/UP remains leading procurer
A] Short Term (ST) volume up 17% YoY
 As per CERC's Market Monitoring Cell Report for the month of June 2012, power
trading volumes stood at ~9.4BUs (up 17% YoY and 22% MoM). Power trading volume
for the month of June 2012 was higher, while 1QFY13 ST power volume growth
was muted at ~3% YoY. Power trading volume in FY12 grew by 16% YoY and 23% YoY
in FY11.
 Volumes in Power exchange and UI has grown by 31% and 44% YoY respectively
whereas bilateral volumes (~44% of ST trade) de-grown by 4% YoY. Bi-lateral
volumes have been lower even in the past month and thus down for 1QFY13 too.
 Trading as a percentage to sales for the month stood at 12.3% (v/s 11.4% YoY) and
10.6% (v/s 10.9% YoY) for 1QFY13. PTC India market share during the month stood
lower by 7ppt to 35%, however for 1QFY13 (monthly average) it was 36.8% v/s
32.1% YoY.

UTILITIES: July-12 Forward maintained at INR4/unit+ ::Motilal oswal

Positive for JSW Energy
Company /
Industry analysis
 CERC released forward curve date for Short term (ST) prices for July-12. Contracted
volume for the month stood at 636MUs, down 72% MoM. Average monthly
contracted volume for 1QFY13 and FY12 stood at 2.7BUs and 2.6BUs respectively.
Lower contracted volume in bilateral category could have been led by higher ST
tariff (INR4/unit+) in the market. However we understand ST tariff has seen
uptrend in all categories of ST power.
 During the month, 66% of total volume has been contracted at price more than
INR4/Unit v/s 36% MoM and an average of 25% in 1QFY13.
 We note that the tariff curve for the contacts executed in July-12 has maintained
at INR4/unit +. Bilateral power delivery in August/Sept has moved up marginally
by ~1-4paise per unit. Sustenance of tariff is led by muted monsoon, lower hydro
generation (source of peak power).
 For FY13, amongst our coverage universe, JSW Energy (Buy) and Adani Power
(Neutral) have the highest sensitivity to merchant prices and is expected to sell
~50% and ~25% of their generation at merchant tariffs respectively.
 Valuations and view: We have modeled merchant tariff rates of INR3.5/unit in
FY13; down from INR4.0/unit in FY12. For FY13, amongst our coverage universe,
JSW Energy (Buy) and Adani Power (Neutral) have the highest sensitivity to
merchant prices and are expected to sell 50% and 25% of their generation at
merchant tariffs respectively. JSW energy would remain key beneficiary of falling
coal prices and firm ST prices.

CAG report on Captive coal block: Negligence of MoC:: Motilal Oswal

A] Objective of the report and way forward
 Imports are increasing, power capacity is idling or operating at low rates, while
contribution envisaged owing to captive coal block allocation has been a clear let
down.
 "Selection process" for allocation of coal blocks on captive mines have been raised
in parliament and some allocation are also being "contested" in different courts
in the country. While the initiative of coal block allocation on competitive bidding
was first taken up in 2004, the framework of the same was not decided till February
2012 (MoC declared framework for coal block auction on 2nd February 2012) and
thus, coal block allocation continued under "captive dispensation" route.
 Audit objective is to ensure "objectivity" and "transparency" in the coal block
allocation and that the benefit of low coal cost is be passed on to the consumer.
Audit report submitted by CAG would be considered "final" once it is examined by
Parliament's Public Accounts Committee (PAC), constituted by leaders from several
political parties, for the auditing of the expenditure of the Government of India.
Currently, PAC is headed by Dr. Murli Manohar Joshi, a senior leader from Bhartiya
Janata Party (BJP). Chairman is appointed by the Speaker of Lok Sabha and chief
function of PAC is to examine the audit report of CAG after it is laid in the Parliament.
PAC is also working on 2G scam and had summoned to the various parties purported
to have benefited from the same last year, including eminent corporate leaders.
Thus, we would have to await clarification on the further course of action. Under
this, even CAG would be enquired on several claims/observation and if approved,
it would be forwarded to parliament for further debate/action.

Management Visit Update Grasim Industries Buy:: Centrum

Management Visit Update

Grasim Industries

Buy

Target Price: Rs3,541

CMP: Rs3,111

Upside: 13.8%

New capacities to aid volume growth, maintain Buy

We met with the management of Grasim Industries to get an update on the VSF and Cement businesses and progress on capital expenditure plans. The key takeaways are given below:

m  Price increase of ~3% in Q2FY13: The management indicated that VSF price has been increased by Rs4/kg in Q2FY13. Current VSF price is ~RS132/kg. Cotllook A index has recovered to ~85 cents/pound from the lows of 78cents/pound on June 2, 2012. In India, cotton price recovered from Rs93/kg in June ’12 to Rs98/kg as of now. International cotton price is at 84cents/pound against 82cents/pound in June ’12. Historically, VSF price has been at ~50% premium to cotton price over last 7 years and the premium stands at ~23% as of now. As per the management, VSF price should command a premium of ~30% to cotton price and hence, we do not foresee sharp volatility in VSF price in the near-term. As per the management, drought like conditions in the US, Brazil and other cotton producing belts led to improvement in prices and the crop in the next year will be the influencing factor for cotton prices. The management indicated that Chinese players are making losses at current utilization rate and VSF prices and hence, this would protect the fall in international VSF price.

m  New capacities in the VSF segment on schedule: The company is increasing its VSF production capacity by 156KTPA (~47% of current installed capacity of 334KTPA) by Q4FY13E. The expansion plans are on schedule and we believe production will commence from Q1FY14E from the expanded capacities. We believe VSF sales volume will grow by ~11% in FY14E and FY15E.  The company is also expanding Caustic Soda production volume by 182KTPA to support the increase in VSF capacity. The planned expenditure for VSF capacity augmentation was Rs37.4bn, of which Rs9.6bn was spent till FY12. Post-expansion, Grasim will have 15% market share in global VSF industry against 9% at present.

m  Cement demand in the country to grow at 8%; new capacity addition in the industry should be 20mt each over the next three years:  The management believes that cement demand in the country would grow at ~8% in FY13E. The key drivers of demand would be rural and semi-urban housing construction activities. Any improvement in infrastructure activities from the government side will further help demand growth. With the revival of monsoons, the management is hopeful that the industry will achieve its expected demand growth. It believes the industry will add 20mt of new capacity each year over the next three years.

m  New capacities in the cement business on track: The management indicated that the new capacities of 9.2mt (4.8mtpa at Raipur, Chattisgarh and 4.4mtpa at Malkhed, Karnataka) in the cement business were on track and should get commissioned by Q1FY14E. The capex in the cement business was Rs119.4bn, of which the company had spent Rs32.2bn till FY12. The management indicated that the target market from the Karnataka capacity would be Maharastra and Gujarat and hence, oversupply in the South region would not impact volume growth from this plant. We believe sales from new plants will start from Q4FY14E. We expect cement sales volume growth of 7% and 10% in FY14E and FY15E respectively.

m  Estimates revised upwards considering new capacity for VSF and higher VSF price:  We have revised our EPS estimates upwards by 10.4%/16.1% to Rs334.4/Rs386.1 for FY13E and FY14E respectively for the company considering volume growth from new plants and higher VSF prices.

m  Stock attractively valued, maintain Buy with a revised price target: At the CMP, the stock trades at 8x FY14E EPS, 4x EV/EBITDA and 1.4x P/BV. We believe that the company would turn free cash flow positive in FY14E after experiencing negative free cash flow in FY13E. RoCE of the company will improve to 14.2% by FY15E against 12% in FY12. Any revival in global economy will help the company gain market share for its expanded capacity in the VSF segment earlier than our expectation. We maintain Buy on the stock with a revised price target of Rs3,541 (earlier: Rs3,124), upside of 13.8% from its CMP.

Thanks & Regards,