JM Financial - Initiating Coverage On Power Financiers.

9 December 2011
Power Financiers
India | Banking & Financial Services | Initiating Coverage
9 December 2011
Power Financiers
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 in the power sector as India scales-up infrastructure in generation, transmission and distribution. REC and POWF are best positioned to leverage on the massive investment opportunity given a) IFC status which gives exposure limits advantage, easier access to ECBs. IFCs have a competitive edge over banks given better asset-liability profile. Further, most banks are approaching their sectoral limits for infrastructure sector which should reduce competitive intensity for specialised power financiers like POWF and RECL. SEB default unlikely losses may have peaked, tariff hike trend encouraging: SEBs have been under financial distress due to non-revision of tariffs, non-payment of subsidies and high merchant power rates. However, recent measures offer hope that their finances will improve going ahead led by 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% of cash losses have already raised/proposed to raise tariff while UP will raise tariff post election early next year. b) APTEL facilitating suo-motu tariff increase by the regulator. c) Increasing pressure from lenders to improve finances by raising tariffs/improving efficiency. d) Declining power purchase costs which would provide much needed relief to SEBs. These measures are a step in the right direction and we believe financial position of SEBs will improve going forward, implying that default from SEBs for POWF and RECL is unlikely. Fuel availability - A key risk: Coal and gas availability, in our view, is a significant threat which could restrict power supplies and impact financial viability of projects. Coal supply has been severely hampered due to a) Coal India unable to achieve sufficient production growth, b) delayed environmental clearances, c) infrastructure bottlenecks, d) blending limitation in existing plants, e) pricing issues on imported coal from Indonesia and Australia. However, recent steps by government to scrap go and no-go policy and granting environment clearances to some delayed projects should reduce this concern over the medium term (3 years); though fuel availability remains a key near-term risk which could lead to restructuring of projects (especially IPPs in the capacity range of 50Mw-100mW) and result in some NPV loss for power financiers. Initiate coverage on POWF and RECL BUY with TP of `205 and `220 respectively - recent SEB/government measures and decline in wholesale rates should act as key catalysts: POWF and RECL have de-rated significantly over the past 12 months due to concerns over financial health of SEBs (POWF currently 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 believe recent SEB/government measures and decline in wholesale borrowing rates from 1QFY13 (which will impact spreads positively) should act as key catalysts for stock outperformance. We initiate coverage on POWF with Mar13 TP of `205 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 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 FY13E dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar14 ABV adjusted for bad and doubtful debt reserves).
JM Financial Institutional Securities Private Limited
Karan Uberoi, CFA,FRM [email protected] Tel: (91 22) 6630 3082 Amey Sathe, CFA [email protected] Tel: (91 22) 6630 3027 Puneet Gulati [email protected] Tel: (91 22) 6630 3072 Prashant Kumar [email protected] Tel: (91 22) 6630 3061
Ravi Singh [email protected] Tel: (91 22) 6630 3058
Summary Financials FY12E POWF Net Profit (` mn) Net Profit (YoY) (%) Loans (` bn) Loans (YoY) (%) ROA (%) ROE (%) EPS (`) EPS (YoY) (%) PE (x) BV (`) BV (YoY) (%) P/BV (x) RECL Net Profit (` mn) Net Profit (YoY) (%) Loans (` bn) Loans (YoY) (%) ROA (%) ROE (%) EPS (`) EPS (YoY) (%) PE (x) BV (`) BV (YoY) (%) P/BV (x) 27,687 7.7% 994 21.0% 2.9% 20.2% 28.0 7.7% 6.7 148.6 14.7% 1.26 33,558 21.2% 1,183 19.0% 2.9% 21.1% 34.0 21.2% 5.5 172.9 16.4% 1.08 40,069 19.4% 1,407 19.0% 2.9% 21.6% 40.6 19.4% 4.6 202.1 16.9% 0.93 26,021 -0.7% 1,215 22.0% 2.2% 14.4% 19.71 -13.6% 8.5 157.6 17.3% 1.06 37,367 43.6% 1,470 21.0% 2.6% 16.8% 28.31 43.6% 5.9 178.5 13.3% 0.94 44,663 19.5% 1,764 20.0% 2.6% 17.7% 33.84 19.5% 4.9 203.6 14.0% 0.82 FY13E FY14E
Source: Company, JM Financial.
JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters. Please see important disclosure at the end of the report
Power Financiers
9 December 2011
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

120 100 80 60 40 20 Dec-10 POWF - 1 Year Price Performance (%) BANKEX RECL - 1 Year Price Performance (%) 120 100 80 60 40 20 Dec-10 BANKEX
Feb-11
Apr-11
Jul-11
Sep-11
Nov -11
Feb-11
Apr-11
Jul-11
Sep-11
Nov -11
Source: Bloomberg, JM Financial.
However going ahead, we expect them to outperform given:
a)
Significant tariff hikes across SEBs which would improve cash flows
Absence 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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Power Financiers Exhibit 2. Recent tariff hikes for SEBs

State Punjab UP West Bengal HP Tamil Nadu Andhra Pradesh Maharashtra Haryana Karnataka West Bengal Orissa Punjab Bihar Madhya Pradesh Zharkhand Delhi Rajastan Maharashtra Tamil Nadu*
Source: JM Financial. * Proposed
9 December 2011
Date Apr-10 Apr-10 Apr-10 Jun-10 Aug-10 Aug-10 Sep-10 Sep-10 Dec-10 Mar-11 Apr-11 May-11 Jun-11 Jun-11 Aug-11 Aug-11 Aug-11 Oct -11 Nov-11
Hike 5-10% 13-15% 3-8% `0.30-0.50 `0.30-1.10 20% 5% 8% / 40-80% 2-10% 10% 20-40% 7-12% 19% 6% 18.5% 22% 19-27% 10% 36.5%
Applicability* Agri / Dom/ Ind Agri / Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom/ Ind Ind Dom/ Ind Dom / Comm/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom Dom/ Ind / Agri Agri / Dom/ Ind Agri / Dom/ Ind
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
400 320 240 160 80 0 Feb-07 POWF India - AAA - 5 Yr. 13.0 11.6 10.2 8.8 7.4 6.0 Nov -11 RECL 350 280 210 140 70 0 Mar-08 India - AAA - 5 Yr. 13.00 11.60 10.20 8.80 7.40 6.00 Dec-11
Dec-07
Sep-08
Jul-09
Apr-10
Feb-11
Oct-08
Jun-09
Jan-10
Sep-10
Apr-11
Source: Bloomberg, JM Financial.
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Power Financiers 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
9 December 2011
Exhibit 4. Quarterly trend in spread for POWF and RECL

POWF - Spreads (%) (Reported) 3.00% 2.80% 2.60% 2.40% 2.20% 2.00% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 2.75% 2.76% 2.76% 3.50% 2.49% 2.28% 2.26% 2.50% 2.00% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3.00% 4.00% 3.35% 3.44% 3.24% 3.20% 3.10% 3.21% RECL - Spreads (%) (Reported)
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Power Financiers
9 December 2011
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 normal energy 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)
100.0 80.0 60.0 40.0 20.0 0.0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 48.1 52.7 39.9 43.3
6% 3% 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
Energy Shortfall (bn units KWh) 86.0 66.1 73.3 84.0 73.1
15% 12% 8.8% 9% 7.1% 7.3%
Normal Deficit (%) 11.1%
8.4%
9.6%
9.9%
10.1% 8.5%
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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Power Financiers Exhibit 6. Annual per capita electricity consumption levels (2002-2009)
4,000 3,200 (KWh per year) 2,400 2373 1,600 800 0 World Average Middle East China Latin America Asia 3.0% 2.0% 1534 1208 3.0% 563 741 1884 5.1% 4.0% 1.3% 514 561 421 2730 2659 2002 11.9% 3278 2648 2009 CAGR:2002-09 (%)
9 December 2011
15.0% 12.0% 9.0% 6.0% 3.0% 597 0.0%
Africa
India
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)
1250 1000 750 GW 500 250 0 2003-04 2006-07 2011-12
Source: Planning commission, CSO, JM Financial.
8% GDP
9% GDP 960 685 575 778
325 260
8% GDP
9% GDP 275 197 203
195 GW 130 65 0 22 24 67 78 86 104 119
151
150
131131
153155
220233
306337
488 425
2016-17 2021-22
2026-27 2031-32
2006-07
2011-12
2016-17
2021-22
2026-27
2031-32
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Power Financiers 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.
9 December 2011
Exhibit 8. Trends in investment in electricity sector (LHS) and funding requirement in five year plans (` bn) (RHS)
Inves tment in Electricity (` bn) 2,500 2,000 1,500 1,000 535 500 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Source: Planning commission, CSO, JM Financial.
1,264 623 715 820 1,016
YoY Growth (%) 30% 1,986 25% 1,580 20% 15% 10% 5% 0%
Generation
12,500
Transmission
10,589
Distribution
11,351
R&M etc
10,000 3,091 7,500 1,400 5,000 5,917
181 4,001
2,400
570
2,500
4,951
0 XIth Plan XIIth Plan
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Power Financiers
9 December 2011
Share of private players to increase

Increasing share of private sector Share 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
Gov ernment Priv ate
The share of the private sector in capacity expansion has gone up substantially in the 11th Plan and it is expected that 33% of the total incremental capacity will come from the private sector. In the 12th Plan, this share is expected to increase further to c.50%. Source: 12th Five Year Plans Approach Paper
125% $60bn 100% 22% 75% 50% 78% 25% 0% 10th Plan
Source: Planning Commission, JM Financial
$133bn 28%
$171bn 35%
72%
65%
11th Plan
12th Plan
Exhibit 10. Expected capacity addition sector wise

(87 GW) State 18%
Priv ate 57% Central 25%
Source: CRISIL, JM Financial
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Power Financiers 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.
9 December 2011
Exhibit 11. Quarterly trends in loan mix (borrower wise) for POWF (LHS) and RECL
State Sector 100% 80% 60% 40% 20% 0% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 70% 69% 68% 66% 66% 65% 65% 65% 64% 6% 16% 6% 18% Central Sector 5% 19% 7% 19% 7% 19% Joint Sector 7% 19% 7% 20% Priv ate Sector 8% 20% 9% 19% 100% 80% 60% 40% 20% 0% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 84% 84% 84% 86% 86% 84% 83% 82% 82% State 7% 10% 6% 9% 6% 9% 7% 7% PSUs 7% 7% 9% 7% 10% 7% Priv ate 11% 7% 11% 7%
Exhibit 12. Quarterly trends in disbursements (LHS) and sanctions mix (sector wise) for POWF
State Sector 100% 80% 31% 60% 40% 20% 0% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 54% 57% 66% 5% 4% 29% Central Sector 3% 21% 23% 21% 77% 53% 11% 7% Joint Sector 9% 16% 5% 21% Priv ate Sector 100% 19% 7% 21% 9% 80% 60% 70% 68% 67% 66% 40% 20% 0% 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 54% 30% 83% 49% 79% 76% 91% 80% 90% 27% 46% State Sector Central Sector 17% 21% Joint Sector 24% 9% Priv ate Sector 16% 8%
34%
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Power Financiers
9 December 2011
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 (%) Banks* REC PFC IDFC Total
Source: RBI, JM Financial.
FY03 29.0% 30.8% 40.2% NA 100.0%
FY04 30.7% 30.6% 38.7% NA 100.0%
FY05 41.5% 23.5% 32.1% 2.9% 100.0%
FY06 49.7% 20.9% 29.4% 0.0% 100.0%
FY07 46.4% 20.4% 27.8% 5.4% 100.0%
FY08 47.9% 19.8% 26.0% 6.3% 100.0%
FY09 49.2% 20.3% 25.5% 4.9% 100.0%
FY10 53.6% 18.9% 22.7% 4.8% 100.0%
FY11 56.4% 17.2% 20.8% 5.6% 100.0%
1Q12 57.4% 16.9% 20.4% 5.3% 100.0%
2Q12 56.9% 17.1% 20.8% 5.1% 100.0%
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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Power Financiers 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 upto 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 large projects on its own.
9 December 2011
Exhibit 14. IFC vs Banks / NBFC

The maximum exposure ceilings Concentration of credit / investment Lending ceilings Lending to any single borrower Lending to any single group of borrowers Investing ceilings Investing in shares of a company Investing in shares of a single group of companies Loans and investment taken together Lending and investing to single party Lending and investing to single group of parties 25.0% 40.0% 30.0% 50.0% 30.0% 50.0% 15.0% 25.0% 20.0% 35.0% 15% ( +5*) 25% ( +10*) 15.0% 25.0% 20.0% 35.0% 25.0% 40.0% Loan company Normal Loans Infra Loans 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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Power Financiers 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.
9 December 2011
Exhibit 15. Trends in loan book and loan growth for POWF (LHS) and RECL
2,250 1,800 1,350 900 450 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 356 439 1,215
FY06-11 CAGR: 23% Loan Book (` bn) YoY Growth (%) FY11-14E CAGR: 21%
27% 25% 22% 20% 17% 15%
1,750 1,400 1,050 700 350 0 253
Loans (` bn)
YoY Growth (%) FY11-14E CAGR: 20%
35% 30% 25% 20% 15% 10%
1,764
1,407
1,470 996 799
1,183 994
FY06-11 CAGR: 27%
821 665
516
644
321
393
514
FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
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Power Financiers
9 December 2011
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) Nonrevision 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)
SEBs - Total Losses 0.0 -100.0 -200.0 -300.0 -400.0 -500.0 FY06
-88.3 -128.8 -166.1
-369.7 -444.0 FY07 FY08 FY09 FY10
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) Tamil Nadu Madhya Pradesh Rajasthan Uttar Pradesh Total losses of 4 States SEBs - Total Losses (%) Proportion Tamil Nadu Madhya Pradesh Rajasthan Uttar Pradesh Total
FY06 -5.4 -1.8 -5.1 -46.6 -58.9 -88.3 FY06 6.1% 2.0% 5.8% 52.8% 66.7%
FY07 -9.0 -13.0 -3.0 -48.8 -73.8 -128.8 FY07 7.0% 10.1% 2.3% 37.9% 57.3%
FY08 -31.1 -21.4 -31.1 -52.9 -136.4 -166.1 FY08 18.7% 12.9% 18.7% 31.8% 82.1%
FY09 -71.1 -42.4 -67.2 -55.9 -236.6 -369.7 FY09 19.2% 11.5% 18.2% 15.1% 64.0%
FY10 -97.9 -36.2 -109.8 -67.1 -311.0 -444.0 FY10 22.1% 8.2% 24.7% 15.1% 70.0%
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Power Financiers
9 December 2011
These 4 states also accounted for c.43% of SEBs borrowings as of FY10.

Exhibit 18. Trend in borrowings of SEBs from FIs/banks/bonds
SEB Borrowings (` bn) Loan from FIs/ Banks/ Bonds Top 4 loss making states Borrowings (` bn) Loan from FIs/ Banks/ Bonds Tamil Nadu Uttar Pradesh Rajasthan Madhya Pradesh Total Top 4 loss making states Borrowings (%) Loan from FIs/ Banks/ Bonds Tamil Nadu Uttar Pradesh Rajasthan Madhya Pradesh Total
Source: PFC, JM Financial
FY06 1,109
FY07 1,287
FY08 1,548
FY09 1,985
FY10 2,631
93 117 138 34 453
116 147 164 43 565
146 149 226 50 702
215 180 321 75 952
320 248 456 105 1,318
8.4% 10.5% 12.4% 3.0% 34.4%
9.0% 11.4% 12.7% 3.4% 36.6%
9.4% 9.6% 14.6% 3.2% 36.9%
10.8% 9.1% 16.2% 3.8% 39.8%
12.2% 9.4% 17.3% 4.0% 42.9%
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 tariff while 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.
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Power Financiers
9 December 2011
a) 5-40% tariff hikes across states over the last 18 months

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 hikes

State Punjab UP West Bengal HP Tamil Nadu Andhra Pradesh Maharashtra Haryana Karnataka West Bengal Orissa Punjab Bihar Madhya Pradesh Zharkhand Delhi Rajastan Maharashtra Tamil Nadu** Date Apr-10 Apr-10 Apr-10 Jun-10 Aug-10 Aug-10 Sep-10 Sep-10 Dec-10 Mar-11 Apr-11 May-11 Jun-11 Jun-11 Aug-11 Aug-11 Aug-11 Oct -11 Nov-11 Hike 5-10% 13-15% 3-8% `0.30-0.50 `0.30-1.10 20% 5% 8%/40-80% 2-10% 10% 20-40% 7-12% 19% 6% 18.5% 22% 19-27% 10% 36.5% Applicability* Agri / Dom/ Ind Agri / Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom/ Ind Ind Dom/ Ind Dom / Comm/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom Dom/ Ind / Agri Agri / Dom/ Ind Agri / Dom/ Ind Previous hikes Date Sep-09 FY10 Nov-09 Nov-09 Jul -10 2009-10 2009-10 2009-10 2009-10 2010-11 2010-11 Quantum 9-19% unknown 20-25% 8-25% 11% 30% 10% 5% 40% SME and BPL exempted After 7 years to flat tariffs SME and agri consumers exempted Opposed by industries BPL exempted Consistent increase twice an year Steep increase after >10 years Next hike in Summer of 2011 of c.12%; Higher increases for industry and heavy domestic users CESC proposes power tariff hike to West Bengal government in August11 After 9 years of flat tariffs NA Proposed increase in tariff rates of 65% with a hike in all categories of consumers NA Demanded for a 100% increase in tariff NA Hike done against election manifesto of not increasing tariffs for 5 years for agri Power surcharge of 9% instead of effecting a full-fledged tariff hike 42% to domestic users, 19% to industrial users and 589% to agricultural users. Remarks NA BPL exempted, but rural tariffs hiked
Source: SERC, JM Financial * Note: Dom Domestic; Ind Industrial; Agri Agricultural; Comm Commercial, ** Proposed
Page 15
Power Financiers
9 December 2011
b) Agricultural tariffs increasing

FY09 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 agriconsumers 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

130 122 114 106 98
Pre-election tariff drop
(p/kWh)
Agricultural tariffs have risen 18% over last 2 years
90 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-off

Recommendations from VK Shunglu
With 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).
Committee setup by PMO and CERC to improve SEB is due anytime
Page 16
Power Financiers Exhibit 21. DF circles under award

State UP AT&C Losses 40% Circle Kanpur Agra Bareily Meerut Varanasi Gorakhpur Moradabad Allahabad Aligarh Maharashtra 31% Nagpur Aurangabad Jalgaon Kalyan Dhule Bhiwandi Uttarakhand 35% Roorkee Rudrapur MP 61% Narsinghpur Guna Rajasthan Bihar 30% 59% Jaipur Patna Gaya Muzaffarpur Bhagalpur Meghalaya 43% Rural Areas Jul-10 CESC Sep-09 Jan-10 Torrent Power Jan-10 Jan-10 Apr-10 Spanco Jan-10 Jan-10 Jan-10 Jan-10 Award Torrent Power Torrent Power Sep-09 Sep-09 Sep-09 Sep-09 Sep-09 Sep-09 Sep-09 Date
9 December 2011
As per industry checks 14 states have released proposals for DF
Source: States, JM Financial
Impact of distribution reforms has been very positive with two prominent examples 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

NDPL - Delhi (AT&C Losses (%)) 70% 56% 42% 32.0% 28% 13% 14% 0% FY03 - Pre-reform
Torrent - Bhiw andi (T&D Losses (%)) 64.0% 49.0% 48.0%
53%
18.0% 16.0% 0.0% FY11 - Post-reform FY06 - Pre-reform FY11 - Post-reform
Page 17
Power Financiers
9 December 2011
d) Declining power purchase costs

With 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
7.3 8.0 % ST market (RHS) Power Exc hanges Bilateral trades 4.5 7.5 10 8 5.0 4.7 4.1 6 3.1 4 2 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12E
Most states are in-line with financial targets Recommendations by recent action of PMO recommended by 12th FC is due in Feb11 and CERC to improve SEBwith debt/GSDP reduction in last 5 years
5.6
5.3
6.0
Quality RTC power is available to Discoms at sub `4/kWh rate
4.0 2.4
2.0
0.0
Source: CEA, CERC, JM Financial
e) POWF categorisation signals improvement

PFC 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
C 100 90 80 70 60 50 40 30 20 10 0 B A A+
Though C rated SEBs ballooned in FY09, A+ rated SEBs have been increasing in last 2 years
3.2
10 33
3.7
20 29 20 21 FY10
26
5 30 16 5 FY07
6 30 18 4 FY08
31
25 20 FY09
28 10 FY11
Source: PFC, JM Financial
Page 18
Power Financiers
9 December 2011
f) APTEL judgement for revision of tariffs on Suo-motu basis

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 State Governments 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 the State 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 to GSDP (%)
Gross Fiscal Deficit (%) 5% 4% 3% 2% 1% 0% 199095* 199500* 200005* FY06 FY07 FY08 FY09 FY10 FY11E 3.4% 2.8% 2.4% 1.8% 1.5% 2.4% 4.0% 3.3% 2.5% 7.0% 5.6% 4.2% 2.8% 1.4% 0.0%
Maharashtra Rajasthan Karnataka WB Gujrat UP MP AP Haryana Punjab TN
2005-08*
FY09
FY10
FY11BE
Source: Company, JM Financial. * Average
Page 19
Power Financiers 2. Improvement in State financials may support subsidies
9 December 2011
In 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 financial distress 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 to GSDP (%)
2005-08* 60.0% 48.0% 36.0% 24.0% 12.0% 0.0%
Maharashtra Rajasthan Karnataka WB Gujrat UP AP MP Haryana Punjab TN
FY09
FY10
FY11BE
7.0% 5.6% 4.2% 2.8% 1.4% 0.0%
2005-08*
FY09
FY10
FY11BE
Maharashtra
Rajasthan
Karnataka
WB
Gujrat
UP
MP
AP
Source: Company, JM Financial. * Average
Exhibit 27. Trend in position of state finances debt to GSDP (%)

FY06 AP Gujarat Haryana Karnataka MP Maharashtra Punjab Rajasthan TN UP WB
Source: RBI, JM Financial
FY07 34 36 23 29 40 32 42 48 25 54 47
FY08 32 33 20 26 39 27 40 45 24 52 45
FY09 29 33 18 24 35 27 37 42 25 47 43
FY10 30 32 19 24 34 25 35 41 26 43 43
FY11E 31 31 19 25 37 27 34 41 25 46 41
Reduction in Debt/GSDP from FY06FY11E 4 7 6 2 6 6 13 11 2 10 9
35 38 25 27 43 33 47 52 27 56 50
Page 20
Haryana
Punjab
TN
Power Financiers
9 December 2011
What happened in FY01-03 when SEB dues were restructured?

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 of current 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, the benefit 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 Government of 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.
Page 21
Power Financiers
9 December 2011
State Power Ministers Conference on Distribution Sector Reforms: Actions will speak louder than words
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. The Conference 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 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. 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. Impact if timely and efficient implementation is ensured Will ensure better and timely data availability regarding financial position of SEBs
To increase visibility SEB's financial performance
3. The Annual Tariff Revision Petition would be filed before the SERC and states will To improve financial position of SEBs hence reducing funding requirements ensure that the difference between ARR and ACS is positive to generate internal of PFC, REC and banking sector surpluses. 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. 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. 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). 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. 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. 9. The state governments would take effective steps to reduce AT&C losses to less than 15%. 10. States would immediately initiate steps to appoint distribution franchises in urban areas through competitive bidding. 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. 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.
Lead to automatic passing on of increased cost, helping SEBs to maintain its profitability
To solve the problem of timely repayment and nullify risk of default by SEBs
May result in marginal reduction in AT&C losses
Equivalent of State Government's sovereign guarantee of loans
To improve D/E ratio of SEBs and consequently overall financial position of DISCOMs
To reduce AT&C losses if implemented properly To improve operating efficiency of SEBs To identify additional generation requirement; however there is already too much of demand supply gap in generation Another layer of administration may not benefit much
Page 22
Power Financiers
9 December 2011
Fuel availability: Key Risk

Domestic coal unavailability to restrict power supplies
a) Domestic coal availability uncertain: Coal supply has been severely hampered 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.
Domestic fuel unavailability remains the single biggest challenge
b) Infrastructure bottlenecks: Based on MoP estimates, 270mtpa of imported coal 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 that boilers 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.
Imported coal based power has limited acceptability
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 is constrained, IPPs have recently started acquiring unexplored resources internationally (Exhibit 43). Although associated development costs are high in most cases, fuel security is a must for larger capex back home for power projects. However international coal prices are rising post new laws in Indonesia and 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 in law 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. and increasing awareness of high purchase cost, we backing down of plants on lower offtake by SEBs renegotiation of competitively bid Power Purchase fuel price risk is not covered, cannot be ruled out.
f)
Given SEBs financial state have witnessed significant Therefore possibilities of Agreements (PPAs), where
Page 23
9 December 2011
Power Financiers
Price: `164 BUY Target: `205 (Mar13)
9 December 2011
Power Finance Corp.

Negatives priced in
| POWF IN
Karan Uberoi, CFA, FRM [email protected] Tel: (91 22) 6630 3082 Amey Sathe, CFA [email protected] Tel: (91 22) 6630 3027 Puneet Gulati [email protected] Tel: (91 22) 6630 3072 Prashant Kumar [email protected] Tel: (91 22) 6630 3061
Ravi Singh [email protected] Tel: (91 22) 6630 3067
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 (1.6x FY11 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 FY12FY14E (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 healthy with 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 significant de-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.
Key Data
Market cap (bn) Shares in issue (mn) Diluted share (mn) 3-mon avg daily val (mn) 52-week range Sensex/Nifty ``/US$ ` 234.1 / US$ 4.6 1319.9 1319.9 ` 603.0/US$ 11.8 ` 339.5/130.2 16,805/5,039 51.3
Daily Performance
400 320 240 160 80 0 Jan-10 Jan-11 Sep-10 Mar-10 Sep-11 Mar-11 Jul-10 Jul-11 Nov-10 May-10 May-11 Nov-11 Power Finance Corp. 40% 20% 0% -20% -40% -60%
P o wer Finance Co rp.
Relative to Sensex (RHS)
Absolute Relative* * To the BSE Sensex
1M 8.0 12.3
3M 21.3 20.8
12M -45.9 -30.0
Shareholding Pattern
Promoters FII DII Public/others 2Q FY11 89.78 3.76 2.99 3.47
(%)
2Q FY12 73.72 6.47 10.11 9.70
Exhibit 29. Financial Summary

Y/E March Net Profit Net Profit (YoY) (%) Assets (YoY) (%) ROA (%) ROE (%) EPS (`.) EPS (YoY) (%) PE (x) BV (`.) BV (YoY) (%) P/BV (x) FY10 23,573 19.7% 24.3% 3.08% 18.8% 20.5 19.7% 8.1 116.2 13.9% 1.44 FY11 26,196 11.1% 25.9% 2.73% 18.2% 22.8 11.1% 7.3 134.3 15.6% 1.24 FY12E 26,021 -0.7% 20.7% 2.21% 14.4% 19.7 -13.6% 8.5 157.6 17.3% 1.06 FY13E 37,367 43.6% 20.7% 2.63% 16.8% 28.3 43.6% 5.9 178.5 13.3% 0.94
(` mn)
FY14E 44,663 19.5% 19.8% 2.61% 17.7% 33.8 19.5% 4.9 203.6 14.0% 0.82
JM Financial Research is also available on: Bloomberg - JMFR <GO>,Thomson Publisher & Reuters. Please see important disclosure at the end of the report
Source: Company data, JM Financial. Note: Valuations as of 08/12/11.
Power Finance Corporation Exhibit 29. Key Financials

Key Parameters Balance sheet Borrowings (` bn) Loans (` bn) Total Assets (` bn) Assets Growth (%) Income statement NII (` bn) Operating profits (` bn) PAT (` bn) Profitability Interest Spread (%) NIM (%) ROA (%) ROE (%) Asset Quality Gross NPL (` mn) Gross NPL (%) Net NPL (` mn) Net NPL (%) Loan Loss Charge (` mn) Coverage (%) 910 0.26% 698 0.28% -31 23.3% 420 0.10% 260 0.11% -48 38.1% 132 0.03% 70 0.03% -102 46.8% 132 0.02% 60 0.02% 22 54.4% 132 0.02% 62 0.02% -6 52.6% 2,307 0.23% 1,946 0.26% 318 15.6% 3,336 0.27% 2,502 0.30% 935 25.0% 6,305 0.43% 4,414 0.47% 1,725 30.0% 9,441 0.53% 6,608 0.58% 2,202 30.0% 2.10% 3.74% 2.83% 13.3% 1.96% 3.57% 2.34% 10.9% 2.01% 3.72% 2.38% 11.6% 2.24% 3.92% 3.20% 17.5% 2.46% 3.91% 3.08% 18.8% 2.27% 3.64% 2.73% 18.2% 2.13% 3.68% 2.21% 14.4% 2.21% 3.80% 2.63% 16.8% 2.27% 3.78% 2.61% 17.7% 12.3 12.2 9.7 14.4 14.2 9.9 18.0 18.1 12.1 22.9 22.6 19.7 28.6 28.7 23.6 33.3 34.5 26.2 41.6 42.3 26.0 52.0 52.9 37.4 62.3 63.4 44.7 269 356 375 20.5% 336 439 467 24.5% 406 516 548 17.2% 522 644 683 24.7% 671 799 849 24.3% 856 996 1,068 25.9% 1,014 1,215 1,290 20.7% 1,241 1,470 1,556 20.7% 1,501 1,764 1,864 19.8% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
9 December 2011
CAGR (06-11)* 26.0% 22.9% 23.3%
CAGR (11-14)E* 20.6% 21.0% 20.4%
22.0% 23.0% 22.0%
23.2% 22.5% 19.5%
0.17% -0.11% -0.09% 4.88%
0.00% 0.14% -0.12% -0.51%
20.4% -0.02% 22.8% -0.02% NM -7.7%
60.0% 0.30% 50.3% 0.33% 163.2% 14.4%
Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.
Page 25
Power Finance Corporation
9 December 2011
Sanctions at 1.6x loan book size provide growth visibility over FY11-14E
Outstanding sanction at `1.7trn (1.6x of the loan book) provides strong growth 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

900 720 540 360 186 180 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 311 225
Sanctions (` bn) YoY Growth (%)
(`bn)
400 320 240 160 80 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 94 117 141 162 16% 8% 0% 211
Dis burs ements (` bn) YoY Growth (%)
695 570
752 655
130% 100% 70% 40% 10% -20%
341 258
40% 32% 24%
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.
Page 26
Power Finance Corporation Exhibit 31. POWF: Trend in loan book and disbursements
2,000 1,600 1,215 1,200 800 400 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
9 December 2011
(`bn)
650 520 390 260 130 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 117 141 162 211 258 20% 15% 10% 341
Dis burs ements (` bn) YoY Growth (%) 35% 551
Loan Book (` bn)
YoY Growth (%) 1,764 27%
1,470 996 516 644 799
25% 22% 20% 17% 15%
471 403
30% 25%
356
439
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 its portfolio 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
Distribution Others 4% 5% Transmission 8% Priv ate Sector Joint Sector 8% 9%
Generation 83%
Central Sector 19% State Sector 64%
Page 27
Power Finance Corporation Exhibit 33. POWF: Trends in discipline wise composition of loan book
Generation Transmission Distribution Others
9 December 2011
120% 100% 80% 60% 40% 60% 20% 0% FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q12 16% 14% 12% 11% 11% 12% 10% 8% 8% 8% 8%
62%
67%
72%
75%
77%
81%
84%
85%
85%
84%
Exhibit 34. POWF: Sanctions (LHS) and disbursements discipline (` mn) wise in last 16 quarters
Generation 325,000 260,000 195,000 130,000 65,000 0 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 Transmission Distribution Others Generation 130,000 104,000 78,000 52,000 26,000 0 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 Transmission Distribution Others
Page 28
Power Finance Corporation 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%.
9 December 2011
Exhibit 35. POWF: Trend in sanctions borrower wise (`bn) (LHS) and in % terms
State Sector 900 720 540 360 527 180 0 FY08
Central Sector
Joint Sector
Priv ate Sector 655
R-APDRP 752
695 52 115 570 79 181 297 FY09
62 158 85 327 22
137 167 25 423
State Sector Central Sector Joint Sector 100% 8% 14% 2% 17% 80% 60% 40% 20% 0% 76% 52% 32%
Priv ate Sector 10% 24% 13% 3%
R-APDRP 18% 22% 3%
50%
56%
FY10
FY11
FY08
FY09
FY10
FY11
Page 29
Power Finance Corporation Exhibit 36. POWF: Outstanding sanctions as on 30, Sept11
Outstanding Sanctions as on September 30, 2011 Doc. executed & disb. commenced Discipline-wise (Rs mn) Generation Transmission Distribution R-APDRP (Part A) R-APDRP (Part B) Others* Total Discipline-wise (%) Generation Transmission Distribution R-APDRP (Part A) R-APDRP (Part B) Others* Total Borrower-wise (Rs mn) State Sector Central Sector Joint Sector Private sector Total Borrower-wise (%) State Sector Central Sector Joint Sector Private sector Total
9 December 2011
Doc. executed but disb. not commenced 273,980 49,090 3180 620 0 2900 329,770
Doc. not executed
Total O/s Sanctions
501,330 109,650 49,770 41,460 71,260 6920 780,390
549,100 28,260 2850 1800 94,610 4270 680,890
1,324,410 187,000 55,800 43,880 165,870 14,090 1,791,050
28.0% 6.1% 2.8% 2.3% 4.0% 0.4% 43.6%
15.3% 2.7% 0.2% 0.0% 0.0% 0.2% 18.4%
30.7% 1.6% 0.2% 0.1% 5.3% 0.2% 38.0%
73.9% 10.4% 3.1% 2.4% 9.3% 0.8% 100.0%
533,240 73,630 13,700 159,810 780,380
214,350 20 59,000 56,390 329,760
494,820 26,790 0 159,280 680,890
1,242,410 100,440 72,700 375,480 1,791,030
29.8% 4.1% 0.8% 8.9% 43.6%
12.0% 0.0% 3.3% 3.1% 18.4%
27.6% 1.5% 0.0% 8.9% 38.0%
69.4% 5.6% 4.1% 21.0% 100.0%
Page 30
Power Finance Corporation 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 Rajasthan Uttar Pradesh Madhya Pradesh Tamil Nadu Jammu & Kashmir Total Other Sates Maharashtra Haryana Andhra Pradesh West Bengal Delhi Uttarakhand Gujarat Chattisgarh Jharkhand Himachal Pradesh Karnataka Others Total
9 December 2011
% Loan Exposure 8.8% 8.1% 7.4% 5.6% 1.3% 31.1% % Loan Exposure 12.8% 8.6% 8.5% 8.0% 6.9% 4.4% 4.1% 4.1% 3.1% 2.9% 2.4% 3.2% 68.9%
Page 31
9 December 2011
ECBs and infra bonds to make borrowings profile more 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 $1bn to set up a Medium Term Notes programme for raising ECBs. It also intends to raise money through infrastructure bonds (aims to raise `69bn in FY12, has already filed draft prospectus) and tax free bonds (to raise `50bn in FY12). However, we note that in FY11, POWF managed to garner only `2.35bn of infra bonds. Hence, we expect ECBs and tax free bonds to dominate incremental borrowings for the company, leading to more diversified borrowings profile.
Exhibit 38. POWF: Trend in borrowings composition (` bn) and duration of assets and liabilities
Bonds 1,000 800 600 400 200 0 281 47% 40% FY06 348 43% 47% FY07 417 36% 56% FY08 67% 68% 531 25% 65% ECB Term Loans CP WCDL / OD Infra Bonds Interest Subsidy 861 678 24% 24%
Loans (in y rs.) 8.00 6.80 5.64 5.60 4.40 3.20 2.00 4.15 5.97 4.78
Borrow ings (in y rs.) 6.35 5.18
6.32 5.46
228 47% 33% FY05
FY09
FY10
FY11
FY09
FY10
FY11
1Q12
Source: Company, JM Financial. WCDL = Working Capital Demand Loan, Duration is weighted average
Page 32
Power Finance Corporation Unhedged foreign borrowings could add volatility to earnings As of Sept11, POWF has foreign currency borrowings of c.`56 bn (6.1% of total borrowings) of which 48% were US$ 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.
9 December 2011
Exhibit 39. POWF: Trends in PBT before and after forex MTM (LHS) and forex MTM
40.0 32.0 24.0 16.0 8.0 0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11
PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)
2,000 1,000 0 -1,000 -2,000 -3,000 FY05 92
Forex (` mn) Gain / (Los s )
1,462
874 286
1,267
(389)
FY06
FY07
FY08
(2,664) FY09
FY10
FY11
Page 33
9 December 2011
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

Loan Assets 750 600 450 300 153 150 0 2012 2013 2014 2015 2016 86 79 105 87 90 87 52 90 110 567 Liabilities
(` bn)
346
Bey ond fiscal 2016
Source: Company, JM Financial. * As of March 31, 2011.
Exhibit 41. POWF: Trend in NII growth and margins

75.0 60.0 45.0 30.0 15.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
NII (` bn)
YoY Growth(%) 62.3 52.0 41.6 22.9 28.6 33.3
32%
5.0% 4.0% 3.7%
NIM (%) 3.6% 3.7% 3.9% 3.9%
Spread (%) 3.6% 3.7% 3.8% 3.8%
16%
3.0% 2.0% 2.1% 1.0% 2.0% 2.0% 2.5%
12.3
14.4
18.0
0%
2.2%
2.3%
2.1%
2.2%
2.3%
-16%
0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
Page 34
9 December 2011
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

0.8% 0.6% 0.5% 0.3% 0.2% 0.0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 0.3% 0.1% 0.0% 0.0% 0.0% 0.2%
Gross NPLs (%) Net NPLs (%)
0.7%
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-owned discoms 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 gencos

State Tamil Nadu Rajastan Uttar Pradesh Madhya Pradesh Jammu & Kashmir Total for all states Profit / (loss) of SEBs as of FY10* Discoms (` bn) (88.6) (105.3) (48.0) (30.4) (20.2) -348.08 Gencos (` bn) 0.0 (1.8) (16.8) (1.0) 6.8 59.78 PFC Exposure (%) 5.6% 8.8% 8.1% 7.4% 1.3%
Source: Company, JM Financial. * Cash Profit - Subsidy Received Basis
Page 35
Power Finance Corporation 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 was providing 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.
9 December 2011
Page 36
Power Finance Corporation Exhibit 44. POWF: Reserve for bad and doubtful debts and as % of O/s loans
Res erve for Bad and Doubtful Debts (` bn)
20.0 16.0 12.0 8.0 4.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 5.5 6.4 1.4% 1.3% 1.2% 1.1% 7.2 1.1% 8.5 9.8 1.0% 11.2
9 December 2011
% of O/s Loans 1.5%

15.6 13.2 1.3% 1.2% 0.9% 1.0% 0.9% 0.7%
4.8
0.9%
0.9%
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
Gross NPLs (%) 0.6% 0.5% 0.4% 0.2% 0.1% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
Net NPLs (%)
Cov erage (RHS) (%) 75% 0.5% 0.4% 0.3% 60% 45% 30%
20 15 10 5 1 0 (5) (1) FY06 (1) FY07 (2) FY08
LLP (bps)
13 8 4
14
0.3% 0.1% 0.0% 0.0% 0.0%
0.2%
15% 0%
(0) FY09 FY10 FY11 FY12E FY13E FY14E
Page 37
9 December 2011
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 benefits such 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

Tier I (%) Leverage
20.0% 18.0% 16.0% 14.0% 12.0% 10.0% FY08

7.5 17.2% 16.1% 14.7% 17.1% 16.7% 15.6% 14.9% 6.8 6.1 5.4 4.7 4.0 FY09 FY10 FY11 FY12E FY13E FY14E
Page 38
9 December 2011
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
40.0 32.0 24.0 16.0 8.0 0.0 FY05 FY06 FY07 FY08 FY09 FY10 FY11
PBT before Forex MTM (`bn) PBT after Forex MTM (`bn)
2,000 1,000 0 -1,000 -2,000 -3,000 FY05 92
Forex (` mn) Gain / (Los s )
1,462 874 286
1,267
-389
FY06
FY07
FY08
-2,664 FY09
FY10
FY11
Exhibit 48. POWF: Trends in return ratios

50.0 40.0 30.0 19.7 20.0 9.7 10.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
Net Profit (`bn)
YoY Growth (%) 84% 44.7

37.4 56% 23.6 26.2 26.0 28% 0% -28%
20.0% 17.0% 14.0% 11.0% 8.0% 5.0%
ROE (%) (LHS)
ROA (%)
3.5% 3.2% 2.9% 2.6% 2.3% 2.0%
9.9
12.1
Page 39
9 December 2011
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 in margin 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

120 100 80 60 40 20 Dec-10 POWF - 1 Year Price Performance (%) 120 100 80 60 40 20 Dec-10 POWF - 1 Year Price Performance (%) BANKEX
Feb-11
Apr-11
Jul-11
Sep-11
Nov -11
Feb-11
Apr-11
Jul-11
Sep-11
Nov -11
Source: Bloomberg, Company, JM Financial.
Exhibit 50. POWF: POWF vs India - AAA - 5 Year

400 320 240 160 80 0 Feb-07
POWF
India - AAA - 5 Yr.
13.0 11.6 10.2 8.8 7.4 6.0 Nov -11
Dec-07
Sep-08
Jul-09
Apr-10
Feb-11
Page 40
Power Finance Corporation 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 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). 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).
9 December 2011
Exhibit 51. POWF: One-year forward P/BV (x) and One-year forward P/E (x)
Fw d. P/BV (x ) SD+2 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar-08 Oct-08 Jun-09 Jan-10 Sep-10 Apr-11 Dec-11 4.0 0.0 Mar-08 Av erage SD-1 SD+1 SD-2 20.0 16.0 12.0 8.0 Fw d. PE (x ) SD+2 Av erage SD-1 SD+1 SD-2
Oct-08
Jun-09
Jan-10
Sep-10
Apr-11
Dec-11
Page 41
9 December 2011
POWF: ROE Tree

ROE of 18% in FY14E: We expect POWF to generate ROA of c.2.6% and ROE of c.18% by FY14E driven by robust NII growth (23% CAGR over FY11-14E) on the back of healthy loan growth (21% CAGR over FY11-14E).
Exhibit 52. POWF - ROE Tree (%)

FY08 Net Margin (as % of avg. IEA) NIM (as % of avg. Assets) Core Non-IR/Asset Core Non-IR/Revenues Core Revenue / Assets Cost/ Core Income Cost/Assets Core operating Profits LLP/Loans Loans/Assets Profits/Provisions on Sect. Pre-Tax Effective Tax Rate ROA Equity / Assets RoE
Source: Company, JM Financial
FY09 3.92% 3.73% 0.20% 5.2% 3.93% 6.5% 0.26% 3.67% 0.01% 94.3% 0.43% 3.24% 1.0% 3.20% 18.28% 17.5%
FY10 3.91% 3.73% 0.22% 5.5% 3.95% 5.2% 0.21% 3.74% 0.00% 94.2% -0.19% 3.94% 21.8% 3.08% 16.35% 18.8%
FY11E 3.64% 3.48% 0.29% 7.8% 3.77% 4.5% 0.17% 3.60% 0.04% 93.6% -0.13% 3.70% 26.1% 2.73% 15.00% 18.2%
FY12E 3.68% 3.53% 0.22% 5.8% 3.75% 4.1% 0.15% 3.59% 0.08% 93.7% 0.53% 2.98% 26.0% 2.21% 15.36% 14.4%
FY13E 3.80% 3.66% 0.21% 5.4% 3.87% 3.8% 0.15% 3.72% 0.13% 94.3% 0.00% 3.60% 27.0% 2.63% 15.59% 16.8%
FY14E 3.78% 3.64% 0.20% 5.3% 3.85% 3.7% 0.14% 3.71% 0.14% 94.5% 0.00% 3.58% 27.0% 2.61% 14.74% 17.7%
3.72% 3.55% 0.22% 5.7% 3.76% 5.1% 0.19% 3.57% -0.02% 94.1% 0.09% 3.50% 32.5% 2.36% 20.42% 11.6%
Page 42
9 December 2011
Key risks
Project delays in generation leading to slower growth: Project delays in generation sector due to a) lack of environmental clearances, b) lack of or unavailability of gas/coal linkages, and c) project becoming unattractive due to fall in merchant tariff prices may lead to slower loan growth as well as sharp increase in slippages. Higher than expected credit costs: Although we are conservative in our credit cost assumptions, higher than expected delinquencies emanating from SEBs poor financial health and private sector defaults remain a risk to our estimates. Regulatory risks: POWF and RECL are exempted from prudential exposure guidelines of RBI and provisioning norms applicable to other NBFCs. These exemptions are applicable till Mar12 and RBI will review whether to continue with the exemption post the deadline. Spike in interest rates: Being a wholesale funded institution, any sustained liquidity shock could impact spreads adversely and affect profitability.
Page 43
9 December 2011
Company background
A specialised development financial institution, POWF was set up in 1986 to fund projects in the domestic power sector. Held 73.72% by the GoI as on June 30, 2011, POWF provides loans for a range of power-sector activities, including generation, distribution, transmission, and plant renovation and maintenance. POWF finances State sector entities such as State Electricity Boards and State Generating Companies, as well as IPPs. In addition, the corporation has been appointed the nodal agency to develop 16 UMPPs in the country. As on June 30, 2011, POWFs gross NPLs stood at 0.23%. Recently it was granted the status of infrastructure financing company (IFC) that will support loan growth through easier exposure norms and better access to borrowing sources. POWF was listed in 2006 and had an FPO in 2011. POWF with its track record of 20 years in power financing, focuses exclusively on power generation sector (c.85% of 1Q12 loan book). The company works closely with Central and State governments and power sector utilities and other power sector intermediaries. It has been playing key role in development and implementation of various policies and structural and procedural reforms for the power sector in India. It is also involved in various GoI programs for the power sector such as acting as the nodal agency for the UMPP and the R-APDRP and as a bid process coordinator for the ITP scheme. Exhibit 53. POWF: Business strategy
Continue to grow in existing business
Broaden loan asset base and borrower profile
Maintaining Asset quality
Continue to encourage & promote reform in the power sector
Experienced & credible management team
Promote private equity investment in power projects
Page 44
Power Finance Corporation Enjoys operational flexibility to capitalise on both fundraising and lending opportunities: As a government-owned NBFC, loans given by POWF to Central and State entities in the power sector have been exempted from RBI's prudential lending (exposure) norms (applicable until 31 Mar12). In addition, POWF has been classified as an IFC which enables it to be operationally more flexible and effectively capitalise on available financing opportunities. Advantages of Infrastructure NBFC; POWF to benefit positively Less restrictive cap on bank lending; POWF to get larger 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 30% increase in lending capacity that POWF can access additionally. Risk weighted capital requirement as per the ratings assigned to result in lower cost of funding for POWF: Banks exposures to NBFC-IFCs will be risk weighted as per the ratings assigned to these NBFCs by the rating agencies as against current practice of charging 100% risk weight irrespective of credit rating. Higher the credit rating lower will be the capital requirement, hence lower will be the cost of funding. However, the impact of this will be very difficult to quantify. Higher exposure to group and single party borrowers: IFCs can have higher exposure to group (50% owned funds vs 35% earlier) and individual borrowers (30% vs 20%). This will benefit POWF as it will be in a position to underwrite large projects on its own.
9 December 2011
Exhibit 54. POWF: IFC vs banks/NBFC

The maximum exposure ceilings Concentration of credit / investment Lending ceilings Lending to any single borrower Lending to any single group of borrowers Investing ceilings Investing in shares of a company Investing in shares of a single group of companies Loans and investment taken together Lending and investing to single party Lending and investing to single group of parties 25.0% 40.0% 30.0% 50.0% 30.0% 50.0% 15.0% 25.0% 20.0% 35.0% 15% ( +5*) 25% ( +10*) 15.0% 25.0% 20.0% 35.0% 25.0% 40.0% Loan company Normal Loans Infra Loans IFC
Source: Company, JM Financial. * Additional exposure applicable in case the same is on account of infrastructure loan and/or investment.
Liberalisation of ECB policy for infra-NBFC: 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.
Page 45
9 December 2011
Financial Tables (Standalone)

Profit & Loss
Y/E March Net Interest Income (NII) Non-Interest Income Total Income Operating Expenses Pre-provisioning Profits Loan Loss Provisions Provision for Investments Other Provisions Total Provisions PBT before forex Forex PBT before prior period items Prior period adjustments PBT Tax PAT (Pre-Extra ordinaries) Extra ordinaries (Net of Tax) Reported Profits Dividend Retained Profits Source: Company, JM Financial FY10 28,572 1,613 30,185 1,534 28,651 -6 -15 0 -21 28,672 -1,462 30,134 -1 30,135 6,562 23,573 0 23,573 6,043 17,530 FY11 33,310 2,790 36,100 1,607 34,493 318 -1 0 317 34,175 -1,267 35,442 1 35,441 9,246 26,196 0 26,196 6,986 19,210 FY12E 41,589 2,560 44,149 1,800 42,349 935 0 0 935 41,414 6,250 35,164 0 35,164 9,143 26,021 0 26,021 6,505 19,516 FY13E 52,017 2,971 54,988 2,075 52,913 1,725 0 0 1,725 51,188 0 51,188 0 51,188 13,821 37,367 0 37,367 9,715 27,652
(` mn)
FY14E 62,339 3,450 65,789 2,405 63,384 2,202 0 0 2,202 61,182 0 61,182 0 61,182 16,519 44,663 0 44,663 11,612 33,051
Balance Sheet
Y/E March Capital Reserves and Surplus Reserve for Bad and Doubtful Debts Share holders equity Borrowed Funds Deferred Tax Liability Interest Subsidy Fund Current Liabilities and Provisions Total Liabilities Loans Investments Cash & Bank Loans & Advances CA Other Current Assets Fixed Assets Deferred Tax Asset Total Assets Source: Company, JM Financial FY10 11,478 113,389 8,451 133,318 671,084 469 6,635 37,116 848,622 798,558 314 13,943 18,952 16,108 747 0 848,622 FY11 11,478 132,792 9,849 154,118 855,986 830 4,519 52,707 1,068,159 995,707 539 23,503 28,223 19,421 767 0 1,068,159 FY12E 13,199 183,543 11,228 207,971 1,014,343 788 4,293 62,351 1,289,746 1,214,763 657 24,295 27,940 21,293 797 0 1,289,746
(` mn)
FY13E 13,199 209,215 13,208 235,622 1,240,542 749 4,078 75,234 1,556,224 1,469,863 795 29,397 30,867 24,339 962 0 1,556,224 FY14E 13,199 239,898 15,576 268,673 1,501,055 711 3,874 90,135 1,864,448 1,763,836 954 35,277 35,277 27,952 1,153 0 1,864,448
Key ratios
Y/E March Borrowed Funds Loans Total Assets NII Non-Interest Income Operating Expenses Operating Profits Provisions Reported PAT Yields / Margins (%) Interest Spread (%) NIM (%) Profitability (%) ROA (%) ROE (%) Cost to Income (%) Assets Quality (%) Gross NPAs (%) LLP (%) Capital Adequacy (%) CAR (%) Source: Company, JM Financial 18.27% 15.71% 17.59% 16.48% 0.02% 0.00% 0.23% 0.03% 0.27% 0.36% 0.43% 0.18% 3.08% 18.83% 5.1% 2.73% 18.23% 4.5% 2.21% 14.37% 4.1% 2.63% 16.85% 3.8% 2.46% 3.91% 2.27% 3.64% 2.13% 3.68% 2.21% 3.80% FY10 28.7% 23.9% 24.3% 24.6% 30.6% -2.0% 26.7% -157.1% 19.7% FY11 27.6% 24.7% 25.9% 16.6% 73.0% 4.8% 20.4% NM 11.1% FY12E 18.5% 22.0% 20.7% 24.9% -8.2% 12.0% 22.8% 194.6% -0.7% FY13E 22.3% 21.0% 20.7% 25.1% 16.1% 15.3% 24.9% 84.5% 43.6%
(%)
FY14E 21.0% 20.0% 19.8% 19.8% 16.1% 15.9% 19.8% 27.6% 19.5% 2.27% 3.78% 2.61% 17.71% 3.7% 0.53% 0.18% 15.64%
DuPont Analysis
Y/E March NII / Assets (%) Other income / Assets (%) Total Income / Assets (%) Cost to Assets (%) PPP / Assets (%) Provisions / Assets (%) PBT / Assets (%) Tax Rate (%) ROA (%) Leverage (%) ROE (%) Source: Company, JM Financial FY10 3.73% 0.21% 3.94% 0.11% 3.74% 0.00% 3.94% 21.78% 3.08% 6.1 18.83% FY11 3.48% 0.29% 3.77% 0.10% 3.60% 0.03% 3.70% 26.09% 2.73% 6.7 18.23% FY12E 3.53% 0.22% 3.74% 0.09% 3.59% 0.08% 2.98% 26.00% 2.21% 6.5 14.37% FY13E 3.66% 0.21% 3.86% 0.09% 3.72% 0.12% 3.60% 27.00% 2.63% 6.4 16.85%
(%)
FY14E 3.64% 0.20% 3.85% 0.09% 3.71% 0.13% 3.58% 27.00% 2.61% 6.8 17.71%
Valuations
Y/E March Shares in issue (mn) EPS (`.) EPS (YoY) (%) PE (x) BV (`) BV (YoY) (%) P/BV (x) DPS (`) Div. yield (%) Source: Company, JM Financial FY10 177.0 20.5 19.7% 8.6 116 13.9% 1.52 5.3 3.0% FY11 177.0 22.8 11.1% 7.8 134 15.6% 1.32 6.1 3.4% FY12E 177.0 19.7 -13.6% 9.0 158 17.3% 1.12 4.9 2.8% FY13E 177.0 28.3 43.6% 6.3 179 13.3% 0.99 7.4 4.2% FY14E 177.0 33.8 19.5% 5.2 204 14.0% 0.87 8.8 5.0%
Page 46
9 December 2011
Price: `187 BUY Target: `220 (Mar13)
9 December 2011
Rural Electrification Corp.
| RECL IN
Karan Uberoi, CFA, FRM [email protected] Tel: (91 22) 6630 3082 Amey Sathe, CFA [email protected] Tel: (91 22) 6630 3027 Puneet Gulati [email protected] Tel: (91 22) 6630 3072 Prashant Kumar [email protected] Tel: (91 22) 6630 3061 Ravi Singh [email protected] Tel: (91 22) 6630 3058
Correction provides attractive entry opportunity

Loan book to register 20% CAGR for FY11-14E: RECL has delivered robust loan book CAGR of 25% over FY05-11. Given outstanding sanction of `1.5trn (1.8x FY11 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/FY14E, leading to loan book CAGR of c.20% for FY11-14E. Margins to moderate by 17bps over FY11-14E: We expect 30bps and 17bps decline in spreads and margins for RECL over FY11-14E driven by a) increase in borrowing cost by c.90bps over FY11-13E, b) unfavourable ALM profile wherein RECL has negative mismatch of `7bn in FY12E and `23bn in FY13E. Thus we expect RECLs spreads to decline by 35bps to 2.6% by FY12E and improve marginally to 2.7% in FY13E. For FY14, we factor c.8bps improvement in spread over FY13E level. Margins are expected to compress by 17bps, implying 19% CAGR in NII over FY11-14E. Credit losses on SEB exposure unlikely; however, we conservatively factor credit costs of c.12bps: Given higher exposure to discoms which are incurring significant losses currently, there has been perception of significant asset quality pressure on RECL. However, we believe actual credit losses would not be significant given a) escrow account mechanism and state level guarantees on these exposure, b) recent tariff hikes which should ease the burden for SEBs, c) In FY01-03, RECL had restructured SEB loans but without taking any significant loss on NPV basis. However, given risks on private sector exposure, we conservatively factor credit costs of 10bps each for FY12/FY13E and 12bps for FY14E. Further, RECL maintains reserve for bad debts (c.0.8% of loan book) which should act as buffer in case of any restructuring/NPLs. Earnings CAGR of c.16% over FY11-14E with ROE of c.21%: We forecast net profit to witness c.16% CAGR over FY11E14E driven by 19% CAGR in NII on the back of robust 20% loan book CAGR. However, we have modeled elevated credit costs (12bps in FY14E vs nil in FY11) and margin decline of 17bps over FY11-14E .RECL is expected to report healthy return ratios with ROA and ROE of c.2.9% and c.21% respectively over FY12-14E.. Correction provides attractive entry point, initiate coverage with BUY and `220 TP: RECL has witnessed significant de-rating from peak multiple of 2.9x 1yr fwd book to 1.1x currently. We believe current valuations are attractive at 1.1x FY13E book with dividend yield of c.5% (based on FY12E dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar13 target price of `220, upside of c.23%, including dividend 55.
Key Data
Market cap (bn) Shares in issue (mn) Diluted share (mn) 3-mon avg daily val (mn) 52-week range Sensex/Nifty `/US$ ` 198.8 / US$ 3.9 987.5 987.5 ` 469.0/US$ 9.1 ` 344.8/153.6 16,805/5,039 51.3
Daily Performance
500 400 300 200 100 0 Jan-10 Sep-10 Jan-11 Nov-10 Sep-11 Mar-10 Mar-11 Jul-10 Jul-11 May-10 May-11 Nov-11 Rural Electrification Corp. 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%
Rural Electrificatio n Co rp.
Relative to Sensex (RHS)
Absolute Relative* * To the BSE Sensex
1M 2.6 6.9
3M 18.8 18.2
12M -39.5 -23.7
Shareholding Pattern
Promoters FII DII Public/others 2Q FY11 66.80 20.40 5.09 7.71
(%)
2Q FY12 66.80 18.52 6.62 8.06
Exhibit 1. Financial Summary

Y/E March Net Profit Net Profit (YoY) (%) Assets (YoY) (%) ROA (%) ROE (%) EPS (`.) EPS (YoY) (%) PE (x) BV (`.) BV (YoY) (%) P/BV (x) FY10 20,014 44.5% 26.7% 3.22% 23.2% 20.3 25.7% 9.2 112.2 55.7% 1.67 FY11 25,699 28.4% 24.4% 3.29% 21.5% 26.0 28.4% 7.2 129.5 15.4% 1.44 FY12E 27,687 7.7% 20.0% 2.91% 20.2% 28.0 7.7% 6.7 148.6 14.7% 1.26 FY13E 33,558 21.2% 19.3% 2.95% 21.1% 34.0 21.2% 5.5 172.9 16.4% 1.08
(` mn)
FY14E 40,069 19.4% 19.4% 2.95% 21.6% 40.6 19.4% 4.6 202.1 16.9% 0.93
JM Financial Research is also available on: Bloomberg - JMFR <GO>,Thomson Publisher & Reuters. Please see important disclosure at the end of the report
Source: Company data, JM Financial. Note: Valuations as of 08/12/11.
Rural Electrification Corporation Exhibit 56. Key Financials

Key Parameters Balance sheet Borrowings (` bn) 240 303 343 449 559 700 842 1,010 1,210 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
9 December 2011
CAGR (06-11)* 23.8%
CAGR (11-14)E* 20.0%
Loans (` bn)
253
321
393
514
665
821
994
1,183
1,407
26.5%
19.7%
Total Assets (` bn) Assets Growth (%)
300 21.2%
363 20.9%
430 18.6%
549 27.6%
695 26.7%
865 24.4%
1,038 20.0%
1,239 19.3%
1,479 19.4%
23.6%
19.6%
Income statement NII (` bn) Operating profits (` bn) PAT (` bn) 8.9 8.3 6.5 10.8 10.3 8.0 14.6 13.6 9.6 19.0 19.1 13.8 26.3 26.5 20.0 33.9 33.9 25.7 39.5 39.0 27.7 47.3 46.8 33.6 56.7 55.9 40.1 30.7% 32.6% 31.8% 18.7% 18.1% 16.0%
Profitability Interest Spread (%) NIM (%) ROA (%) ROE (%) 2.37% 3.40% 2.36% 16.2% 2.40% 3.38% 2.41% 17.7% 2.74% 3.79% 2.42% 17.3% 2.69% 3.96% 2.83% 22.2% 2.89% 4.28% 3.22% 23.2% 2.97% 4.39% 3.29% 21.5% 2.62% 4.18% 2.91% 20.2% 2.67% 4.20% 2.95% 21.1% 2.75% 4.22% 2.95% 21.6% 0.60% 0.98% 0.93% 5.36% -0.22% -0.17% -0.35% 0.11%
Asset Quality Gross NPL (` mn) Gross NPL (%) Net NPL (` mn) Net NPL (%) Loan Loss Charge (` mn) Coverage (%) 4,261 1.68% 4,054 1.60% 0 4.9% 6,197 1.93% 5,779 1.80% 210 6.7% 3,161 0.80% 2,344 0.60% 400 25.8% 689 0.13% 209 0.04% 24 69.7% 195 0.03% 20 0.00% 2 89.8% 195 0.02% 20 0.00% 2 89.8% 1,339 0.13% 402 0.04% 782 70.0% 2,723 0.23% 817 0.07% 1,103 70.0% 4,080 0.29% 1,224 0.09% 1,494 70.0% -46.0% -1.66% -65.4% -1.60% NM 84.9% 175.4% 0.27% 294.1% 0.08% NM -19.8%
Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.
Page 48
Rural Electrification Corporation
9 December 2011
Loan book to register 20% CAGR for FY11-14E

Outstanding sanction at `1.5tn (1.8x of the loan book) provides strong growth visibility The robust demand for power financing has been reflected in strong sanctions and disbursement pipeline for RECL. Sanctions witnessed 26% CAGR and disbursements 24% CAGR over FY05-11 while net outstanding sanctions as of 1Q12 were at `1.5tn, which would be typically utilised over next 3-4 years period. Given the size of outstanding sanctions at almost 1.8x the loan book, we believe growth outlook for RECL is robust over the medium term. Exhibit 57. RECL: Trend in sanctions and disbursements (` bn)
750 600 450 300 163 150 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 286 166
Sanctions (` bn)
YoY Growth (%) 80% 664

468 60% 407 454 40% 20% 0% -20%
350 280 210
Dis burs ements (` bn)
223 137 163
YoY Growth (%) 50% 285 271 40%

30% 20% 10% 0%
140 70 0
79
80
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Loan book to register 20% CAGR over FY11-14E RECL has delivered robust loan book CAGR of 25% over FY05-11. We expect 20% CAGR in loan book over the next three years driven mainly by a) As of 1Q12, the company had sanctions of `1.5trn which is 1.8x FY11 loan book, b) massive investment and funding requirements of power sector in excess of `11trn as per 11th and 12th five year plan, c) being a nodal agency for UMPP, RECL intends to fund UMPPs that have financing requirements in excess of `150bn each. These factors give us confidence on near term growth outlook of RECL. We have modeled 18%/17%/17% disbursement growth in FY12/FY13/FY14E, leading to loan book CAGR of c.20% for FY11-14E.
Page 49
Rural Electrification Corporation Exhibit 58. RECL: Trend in loan book and disbursements (`bn)
1,750 1,400 1,050 700 350 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
9 December 2011
Loans (` bn)
YoY Growth (%)

1,407 1,183 994 821 665
35% 30% 25% 20% 15% 10%
600 480 360 240 120 0 80
Dis burs ements (` bn)
YoY Growth (%) 75%

461 394 337 60% 45% 30% 15% 0%
253
321
393
514
223 137 163
271
285
FY06 FY07 FY08 FY09
FY10 FY11 FY12E FY13E FY14E
Balanced loan mix

Proportion of T&D has been coming down Initially RECL focused on lending to transmission and distribution (T&D); T&D accounted for c.74% of total loan book in FY05. Over the last few years, GoI increasingly focused on the power supply shortage in India which has led to increased investment in power generation. Thus generation sector has offered more financing opportunities; resulting in RECL witnessing a rise in proportion of generation sector in its loan mix to 44% in 2Q12 from just c.7% in FY05.This has also resulted in RECL having a more diversified loan mix.
Exhibit 59. RECL: Trend in loan book composition

1,750 1,400
FY06-11 CAGR: 27%
Loans (` bn)
YoY Growth (%)

FY11-14E CAGR: 20%
35% 30% 25% 20% 15% 10%
Transmission and Distribution 100% 80% 60% 40% 20% 0% FY06 FY07 FY08 FY09 20% 13% 24% 23% 18% 26% 11% 36%
Generation 7% 36% 8% 42% 7% 43%
Others 6% 44%
1,407
1,183 994 821
1,050 700 350 0 253 321 665 393 514
74%
63%
58%
63%
57%
56%
51%
50%

FY10
FY11
1Q12
2Q12
Page 50
Rural Electrification Corporation Going ahead, we expect some increase in proportion of generation and private sector exposure given a) generation sector offers massive investment opportunities, b) reforms in the distribution sector to reduce fund requirement of T&D sector (although this will happen gradually over the medium term), c) considering the sanction and disbursement composition in the last few years, we expect proportion of private exposure to rise going ahead.
9 December 2011
Exhibit 60. RECL: Loan mix by discipline (LHS) and borrower wise as of 2Q12
Others 6% Central PSUs 7% Priv ate 11%
Generation 44% T&D 50%
State 82%
Exhibit 61. RECL: Trend in loan mix composition customer wise (%)
100% 80% 60% 98% 40% 20% 0% FY06
Public sector 2%
2%
Joint sector 6% 4% 6% 2% 9%
Priv ate sector 10% 7% 11% 7% 11% 7%
98%
96%
92%
84%
83%
82%
82%
FY07
FY08
FY09
FY10
FY11
1Q12
2Q12
Page 51
Rural Electrification Corporation Troubled states account for c.34% of loan book RECLs 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 34% of the loan book. Exhibit 62. RECL: Segment wise composition of loan book*
Troubled States Tamil Nadu Rajasthan Uttar Pradesh Madhya Pradesh Jammu & Kashmir Total Other Sates Maharashtra Andhra Pradesh Haryana Punjab West Bengal Uttaranchal Chattisgarh Karnataka Others Total
Source: Company, JM Financial. * As of August 31, 2011
9 December 2011
% Loan Exposure 13.0% 10.4% 8.3% 1.3% 0.7% 33.7% % Loan Exposure 15.5% 9.3% 7.7% 7.0% 6.0% 2.7% 1.4% 1.4% 15.3% 66.3%
Page 52
9 December 2011
Borrowings profile getting diversified

Borrowings profile getting diversified with increasing reliance on bonds Domestic bonds continue to constitute bulk of the borrowings (c.64% in 2Q12) while bank loans formed c.8% in 2Q12. Proportion of bonds in total borrowings has increased to 65% in FY11 from 33% in FY05. Reliance on 54 EC bonds has reduced from 46% in FY07 to 16% in FY11 (since restriction limit of `5mn on these bonds from FY08 onwards).
Exhibit 63. RECL: Trend in composition of borrowings

54 EC Capital Gains Bond 100% 11% 15% 80% 60% 40% 20% 0% FY05
Bonds 3% 14% 12% 25%
LIC 3% 16% 10% 27%
Banks/ Institutions 3% 3% 14% 7% 41%
ECB 6% 4% 12% 6%
18%
15%
Others 3% 11% 9% 4%
31%
40%
55%
57%
38%
46% 29%
43%
32%
18% FY10
16% FY11
FY06
FY07
FY08
FY09
Enjoyed very low effective cost of funds due to various tax concessions; however, GOI is withdrawing those benefits gradually Certain tax concessions (e.g. SLR bonds and tax-free bonds) and guarantees of GoI enabled RECL to price its borrowings at a lower rate of interest than other players. Thus, historically RECL has enjoyed very low effective cost of funds. However, we believe this trend is unlikely to continue going forward as a) GoI has not allowed RECL to issue SLR bonds since FY99 and tax-free bonds since FY02, b) In addition, since January 2007, GoI has limited the amount of bonds that an individual investor can utilise to offset capital gains to `5mn, which has reduced attractiveness of such bonds offerings. As compared to peers (PFC and IDFC), RECL enjoys one of the lowest cost of borrowings as shown in Exhibit 66, although gap between them has been coming down.
Page 53
Rural Electrification Corporation Exhibit 64. RECL: Trend in cost of borrowings Peer comparison
RECL 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% FY05
9 December 2011
POWF
IDFC
FY06
FY07
FY08
FY09
FY10
FY11
Borrowings profile for RECL has been diversifying as the company is reducing its reliance on 54 EC bonds and intends to increase proportion of ECBs further. Due to `5mn cap on 54 EC bonds, demand for these bonds has gone down; consequently, their proportion in total borrowings was 16% in 2Q12 from 38% FY05. IFC status enables RECL to diversify its borrowings through the issuance of infrastructure bonds and to raise ECBs (under the automatic route) up to $500mn each fiscal year, not exceeding outstanding ECBs by 50% of owned funds. In FY12, RECL intends to borrow c.`300bn from the market and plans to raise $1.5bn through ECB. Till now, it has borrowed `130bn from the market, including $300mn through ECB, at an incremental cost of 8.25%.
Exhibit 65. RECL: Trends borrowings composition

FY08 Borrowings Profile ECB 3% Banks, FIs 27% Capital Gains 43% Banks, FIs 8% 2Q12 Borrowings Profile ECB 12% Capital Gains 16%
Bonds Bonds 27% 64%
Unhedged foreign borrowings As of Sept11, RECL had foreign currency borrowings of `91bn (c.12% of its total borrowings) out of which only $250mn remains unhedged.
Page 54
9 December 2011
Margins to moderate by 17bps over FY11-14E

Spreads to decline by 30bps on account of higher borrowing costs We expect 30bps and 17bps decline in spreads and margins for RECL over FY11-14E driven by a) increase in borrowing cost by c.90bps over FY11-14E, b) unfavourable ALM profile wherein RECL has negative mismatch of `7bn in FY12E and `23bn in FY13E (Exhibit 69). Thus we expect RECLs spreads to decline by 35bps to 2.6% by FY12E and improve marginally to 2.7% in FY13E. For FY14, we factor c.8bps improvement in spread over FY13E level. Margins which during FY11 reached historic high level of c.4.5% are expected to compress by 17bps, implying NII CAGR of 19% over FY11-14E.
Exhibit 66. RECL: Trend in NII (` bn) growth and margins

65.0 53.0 41.0 29.0 17.0 5.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
NII (` bn)
YoY Growth (%) 56.7

47.3 39.5 33.9 26.3 19.0
50% 35% 20% 5% -10% -25%
5.0% 4.4% 3.8% 3.2% 2.6% 2.0% FY06
NIM (%)
Spread (%)
4.3% 3.8% 3.4% 3.4% 4.0%
4.4%
4.2%
4.2%
4.2%
8.9
10.8
14.6
FY07
FY08
FY09
FY10
FY11 FY12E FY13E FY14E
Exhibit 67. RECL: Trend in ALM*

500 400 300 200 100 0 FY12 FY13 FY14 FY15 FY16 Bey ond FY16 82 89 80 103 86 As s ets (` bn) Liabilities (` bn) 419
230 123 78 48 77
107
Source: Company, JM Financial. * As of 31 March, 2011
Page 55
9 December 2011
Asset quality: Factoring credit cost of 12bps

So far asset quality trends remain strong Over the last 5 years (FY06-11), RECL 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%). Exhibit 68. RECL: Trends in asset quality from FY05-FY11
Gross NPLs (%) 4.00% 3.20% 2.40% 1.60% 0.80% 0.80% 0.00% FY05
Net NPLs (%)
2.99% 1.93%
1.68%
0.13% FY06 FY07 FY08 FY09
0.03% FY10
0.02% FY11
Proportion of rescheduled loans have stabilised Historically, state sector utilities have had a relatively weak financial position and in the past defaulted on their indebtedness. Consequently, RECL had to restructure loans sanctioned to certain SEBs, which resulted in rescheduling of their loans. However, management has indicated that in last 4-5 years, RECL has not rescheduled any loans given to SEBs and there have been recoveries from such reschedule loans. Consequently, quantum of restructured loans has gone down to `22.8bn in FY09 (4.4% of advances) from `24.3bn in FY05 (11.2% of advances). However, during the last 2 years, the same has witnessed substantial jump and now constitutes c.10% of loans (`82bn) Exhibit 69. RECL: Trend in rescheduled loans
100.0 80.0 60.0 40.0 20.0 0.0 FY05
Res cheduled As s ets (` bn)
% of O/s Loans
82.2
15.0% 12.0% 9.0% 6.0% 3.0% 0.0%
11.2%
9.6% 7.3% 5.9% 4.4%
10.5% 70.1
10.0%
24.3
24.3
23.4
23.4 22.8
FY06
FY07
FY08
FY09
FY10
FY11
Page 56
Rural Electrification Corporation Escrow mechanism with state utilities and state guarantees provides asset quality comfort RECL 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, RECL 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. Recent initiatives by RECL, rising proportion of secured loans, state guarantees and recent tariff hike should allay significant asset quality concerns Over last 12 months RECL has taken many pro-active initiatives such as a) it did not sanction any loan to projects that are supplying power on a merchant basis, b) it sanctioned loans only for those where at least 70% generation capacity will be sold under a PPA, on a long-term basis, to ensure repayment of loans, c) from Apr11 RECL has been insisting on a FSA and a PPA having been signed already, without which no disbursement has taken place, d) RECL is well protected till plant loan factor of c.60-65% for all its generation projects, e) it has also put restrictions on providing short-term loans to discoms, mainly in states like Haryana, Rajasthan, Tamil Nadu, Uttar Pradesh and Punjab, f) since June, RECL has not sanctioned short-term loans to these discoms, due to which Rajasthan has been forced to increase the tariff. Tamil Nadu is likely to increase tariffs by Dec/Jan. There has been 5-40% tariff hike across several SEBs over last 18 months (Exhibit 16).
9 December 2011
Page 57
Rural Electrification Corporation Exhibit 70. 5-40% tariff hikes across states in last 18 months
State Punjab UP West Bengal HP Tamil Nadu Andhra Pradesh Maharashtra Haryana Karnataka West Bengal Orissa Punjab Bihar Madhya Pradesh Zharkhand Delhi Rajastan Maharashtra Tamil Nadu** Date Apr-10 Apr-10 Apr-10 Jun-10 Aug-10 Aug-10 Sep-10 Sep-10 Dec-10 Mar-11 Apr-11 May-11 Jun-11 Jun-11 Aug-11 Aug-11 Aug-11 Oct -11 Nov-11 Hike 5-10% 13-15% 3-8% `0.30-0.50 `0.30-1.10 20% 5% 8% / 40-80% 2-10% 10% 20-40% 7-12% 19% 6% 18.5% 22% 19-27% 10% 36.5% Applicability* Agri / Dom/ Ind Agri / Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom/ Ind Ind Dom/ Ind Dom/ Comm/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Dom/ Ind Agri / Dom/ Ind Dom/ Ind Dom Dom/ Ind / Agri Agri / Dom/ Ind Agri / Dom/ Ind Previous hikes Date Sep-09 FY10 Nov-09 Nov-09 Jul -10 2009-10 2009-10 2009-10 2009-10 2010-11 2010-11 Quantum 9-19% unknown 20-25% 8-25% 11% 30% 10% 5% 40% SME and BPL exempted After 7 years to flat tariffs SME and agri consumers exempted Opposed by industries BPL exempted Consistent increase twice an year Steep increase after >10 years Remarks NA BPL exempted, but rural tariffs hiked
9 December 2011
Next hike in Summer of 2011 of c.12%; Higher increases for industry and heavy domestic users CESC proposes power tariff hike to West Bengal government in August11 After 9 years of flat tariffs NA Proposed increase in tariff rates of 65% with a hike in all categories of consumers NA Demanded for a 100% increase in tariff NA Hike done against election manifesto of not increasing tariffs for 5 years for agri Power surcharge of 9% instead of effecting a full-fledged tariff hike 42% to domestic users, 19% to industrial users and 589% to agricultural users.
Source: SERC, JM Financial * Note: Dom Domestic; Ind Industrial; Agri Agricultural; Comm Commercial, ** Proposed
Likewise proportion of secured loans (secured either by assets or a state government guarantee as collateral) has witnessed rising trend. Together it accounted of c.98% of loan book in FY11 vs c.93% in FY04. However, we note that share of loans backed by state government guarantees has seen a declining trend (from 77% in FY04 to 27% in FY11).
Exhibit 71. RECL: Trend in secure vs unsecured loans (%)

Secured* 100% 80% 60% 40% 20% 16% 0% FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 19% 23% 36% 45% 52% 63% 78% 73% 56% 49% 7% Unsecured but state Gurantee as collateral 3% 4% 9% 6% 7% 41% Unsecured 5% 32% 2% 27%
77%
71%
Source: Company, JM Financial. * Secured by charges on Assets.
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Rural Electrification Corporation Thus various measures from SEBs like tariff hikes etc, increasing proportion of secured loans along with facility of escrow mechanism makes us believe that actual credit losses from SEB exposure is unlikely. Modeling credit cost of 12bps; reserves for bad and doubtful debts (currently 0.8% of loans) should also act as a buffer Historically, RECL has been able to maintain healthy asset quality (FY06 gross NPLs of 1.7% vs 2bps in FY11). Given exposure to discoms which are incurring significant losses currently, there has been perception of significant asset quality pressure on RECL. However, we believe actual credit losses would not be significant given a) escrow account mechanism and state level guarantees on these exposures, b) recent tariff hikes which should ease the burden for SEBs, c) in FY01-03, RECL had restructured SEB loans but without taking any significant loss on NPV basis. However, given risks on private sector exposure, we conservatively factor 10bps of credit costs for FY12 /FY13E and 12bps for FY14E. Further, RECL maintains reserve for bad debts (c.0.8% of O/S loan book) which should act as a buffer in case of any restructuring/NPLs.
9 December 2011
Exhibit 72. RECL: Reserve for bad and doubtful debts and as % of O/s loans
12.5 10.0 7.5 7.5 5.0 2.5 0.0 FY06 0.7% 1.7 2.1 0.6% FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 2.6 0.7% 4.5 3.4 0.7% 0.7% 6.0 0.7% 0.8% 0.8%
Res erve for Bad and Doubtful Debts (` bn)
% of O/s Loans 0.9% 11.0

9.1 0.8% 0.8% 0.8% 0.7% 0.7% 0.6%
Exhibit 73. RECL: Trend in asset quality

Gross NPLs (%) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
Net NPLs (%)
Cov erage (RHS) (%) 100% 75% 50%
20 16 12 11 7
LLP (bps)
1.9% 1.7%
10
12
0.8% 0.1% 0.1% 0.2% 0.3%
8 25% 0% 4 0 FY06 0
0.0% 0.0%
1 FY07 FY08 FY09
0 FY10
0 FY11 FY12E FY13E FY14E
Page 59
9 December 2011
What RECL did in FY03-05 when SEB dues were restructured?

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 of current 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 allowed one-time settlement RECL was not included in the scheme but expert group allowed RECL one-time settlement. 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.
What RECL did in FY03-05 when SEBs dues were restructured? Overdues of Madhya Pradesh SEB were settled by a rescheduled package involving the issue of bonds of `14.15bn by the Government of MP, bearing 8% interest rate. 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 by cash payment of `1.7bn Overdues from Assam SEB and Bihar SEB were also re-scheduled during FY05. Further, RECL restructured/settled SEB loans but without taking any significant loss on NPV basis. This gives us confidence that in case of restructuring, RECL is not likely to incur any significant loss on principle/interest.
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9 December 2011
Earnings CAGR of 16% over FY11-14E with ROE of c.21%

We forecast net profit to witness c.16% CAGR over FY11E14E driven by 19% CAGR in NII on the back of robust loan book CAGR of 20% over FY11-14E. However, we have modeled elevated credit costs (12bps in FY14E vs nil in FY11) and margin decline of 17bps over FY11-14E to factor higher borrowing costs. RECL is expected to report healthy return ratios with ROA and ROE of c.2.9% and c.21% respectively by FY14E.
Exhibit 74. RECL: Trend in return ratios

50.0 40.0 30.0 20.0 20.0 10.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E 6.5 8.0 9.6 -10% -25% 13.8 5% 25.7 27.7 Net Profit (` bn) YoY Growth (%) 40.1 33.6 35% 20% 50%
25.0% 22.0% 19.0% 16.0% 13.0% 10.0%
ROE (%) (LHS)
ROA (%)
3.8% 3.4% 3.0% 2.6% 2.2% 1.8%
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9 December 2011
Recent correction provides attractive entry opportunity; initiate with BUY and TP of `220
Massive 1year and 6months underperformance to BSE Bankex; offers attractive entry points RECL 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 in margin and spread compression. RECL has witnessed a significant de-rating from peak multiple of 2.9x 1yr fwd book to 1.1x currently. Over last 1year, RECL has underperformed BSE Bankex by 16%. Exhibit 75. RECL: Stock performance visavis BSE Bankex
120 100 80 60 40 20 Dec-10 RECL - 1 Year Price Performance (%) RECL - 1 Year Price Performance (%) 120 100 80 60 40 20 Dec-10 BANKEX
Feb-11
Apr-11
Jul-11
Sep-11
Dec-11
Feb-11
Apr-11
Jul-11
Sep-11
Nov -11
Exhibit 76. RECL: RECL vs India AAA 5 Year

120 100 80 60 40 20 Nov -10
RECL - 1 Year Price Performance (%)
India - AAA - 5 Yr. 10.00 9.60 9.20 8.80 8.40 8.00 Nov -11
Feb-11
Apr-11
Jul-11
Sep-11
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Rural Electrification Corporation Attractive valuations at 1.1x 1yr fwd book (down from a peak of 2.9x), initiate coverage with BUY and `220 TP RECL has witnessed significant de-rating from peak multiple of 2.9x 1yr fwd book to 1.1x currently. We believe current valuations are attractive at 1.1x FY13E book with dividend yield of c.5% (based on FY12E dividend). We value the stock at 1.1x FY14P/B (at 1.15x Mar14 ABV; adjusted for reserves for bad and doubtful debt), implying Mar13 target price of `220, upside of c.23% (including dividend).
9 December 2011
Exhibit 77. RECL: One-year forward PE (x) and one-year forward P/BV (x)
Fw d. P/BV (x ) SD+2 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Mar-08 Oct-08 Jun-09 Jan-10 Sep-10 Apr-11 Dec-11 6.0 3.0 0.0 Mar-08 Av erage SD-1 SD+1 SD-2 15.0 12.0 9.0 Fw d. PE (x ) SD+2 Av erage SD-1 SD+1 SD-2
Oct-08
Jun-09
Jan-10
Sep-10
Apr-11
Dec-11
Page 63
9 December 2011
RECL: ROE Tree

Healthy return ratios: We expect RECL to generate healthy ROA of c.2.9% and ROE of c.21.0% by FY14E driven by robust NII growth (19% CAGR over FY1114E) on the back of healthy loan growth (20% CAGR over FY11-14E).
Exhibit 78. RECL ROE Tree (%)

FY08 Net Margin (as % of avg. IEA) NIM (as % of avg. Assets) Core Non-IR/Asset Core Non-IR/Revenues Core Revenue / Assets Cost/ Core Income Cost/Assets Core operating Profits LLP/Loans Loans/Assets Profits/Provisions on Sect. Pre-Tax Effective Tax Rate ROA Equity / Assets RoE
FY09 3.96% 3.89% 0.18% 4.5% 4.07% 6.1% 0.25% 3.82% 0.01% 92.7% -0.12% 3.94% 27.9% 2.84% 12.72% 22.3%
FY10 4.28% 4.23% 0.19% 4.2% 4.42% 5.9% 0.26% 4.16% 0.00% 94.7% -0.11% 4.27% 24.5% 3.22% 13.88% 23.2%
FY11 4.39% 4.34% 0.15% 3.3% 4.49% 5.2% 0.23% 4.26% 0.00% 95.2% -0.20% 4.46% 26.1% 3.30% 15.30% 21.6%
FY12E 4.18% 4.15% 0.13% 3.1% 4.28% 5.0% 0.21% 4.07% 0.09% 95.4% 0.05% 3.94% 26.0% 2.91% 14.43% 20.2%
FY13E 4.20% 4.16% 0.13% 2.9% 4.28% 4.8% 0.21% 4.08% 0.10% 95.6% -0.01% 3.99% 26.0% 2.95% 13.94% 21.2%
FY14E 4.22% 4.17% 0.12% 2.8% 4.29% 4.6% 0.20% 4.09% 0.12% 95.3% -0.01% 3.99% 26.0% 2.95% 13.62% 21.7%
3.79% 3.69% 0.05% 1.4% 3.74% 8.1% 0.30% 3.44% 0.11% 90.1% 0.02% 3.32% 27.0% 2.42% 13.96% 17.4%
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9 December 2011
Key risks
SEB losses a key risk: RECL has been able to maintain healthy asset quality despite having significant exposure to SEBs with stressed financials. However, despite massive losses, SEBs have fulfilled their payment obligations on time. Although SEBs have not defaulted since FY03, such mounting loss levels are not sustainable and timely tariff hikes/operational improvement are critical for SEBs. One time settlement package and possibility of RECL taking hair cut in restructuring of SEBs remains key risk. Spike in interest rates: Being a wholesale funded institution, any sustained liquidity shock could impact spreads adversely and affect profitability. Regulatory risks: POWF and RECL are exempted from prudential exposure guidelines of RBI and provisioning norms applicable to other NBFCs. These exemptions are applicable till Mar12 and RBI will review whether to continue with the exemption post the deadline. Higher than expected credit costs: Although we have been conservative in our credit cost assumptions, higher than expected delinquencies emanating from SEBs poor financial health and rising exposure to private sector remain a risk to our estimates.
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9 December 2011
Company background
RECL is a government owned (GOI owns 66.8%) institution that was initially involved in electrification of rural areas. The company provides long-term, short-term and working capital loans to power utilities (state, central and private sector) and power equipment manufacturers. It is a strategic player in financing of entire power infrastructure space which includes financing for generation, transmission, distribution and rural electrification projects, across the country without any limit. RECL continues to play an integral role in implementing the rural electrification strategy of the GOI through implementation of the Rajeev Gandhi Gramin Vidyutikaran Yojana (RGGVY). RECL through its two subsidiaries- RECL PDCL and RECL TPCL also provides third party monitoring, consultancy and bid process coordinating services respectively. RECL has also jointly promoted Energy Efficiency Services Ltd with other PSUs to play a key role in implementation of the National Mission on Enhanced Energy Efficiency under the Jawahar Lal Nehru National Solar Mission. RECL leverages its pan-India presence with a network of 18 zonal and project offices for development and conduct of business.
Uniquely positioned in power finance sector

Exclusively focuses on power financing RECL is set up exclusively for the financing of power sector i.e. transmission, distribution and generation projects throughout India. After focusing on developing the power infrastructure in rural areas initially, RECL has evolved to finance all segments of the power sector. It provides funding as well as assistance in formulating and implementing various types of power project related schemes. Has developed core expertise in power sector financing Being the first financial institution to exclusively focus on financing the power sector, RECL has developed extensive power sector knowledge on the back of four decades of operating experience. It has developed the capacity to appraise and extend financial assistance for a wide variety of projects. Off-late it gained special technical expertise in distribution systems. Such vast experience enables RECL to provide solutions to various problems facing different power sector utilities, state power departments, rural electricity cooperatives and power equipment manufacturers. Exhibit 79. RECL: Key relationships with the GoI
Name of Scheme Rajiv Gandhi Grameen Vidhyutikaran Yojana Accelerated Power Development and Reform Program GoI Tariff based Competitive Bidding Scheme Projects through International Cooperation and Development
Description - Launched for electrification of all villages and providing access to electricity to all rural households in the country - Launched to improve financial viability of state power utilities, reduce aggregate technical and commercial losses in power sector - Aims to promote competitive procurement of transmission services and encourage private investment in transmission lines - GoI and Unites States Agency for International Development have established Distribution Reforms Upgrades and Management Project (DRUM)
Role of RECL - RECL is the nodal agency for implementation of the scheme - RECL expects to provide counterpart funding for the projects sanctioned by GoI to the extent not covered by GoI grant and/or loan - RECL has been appointed as nodal agency to invite private sector investment in three transmission projects to be executed on BOO basis - RECL has been appointed by the MoP as one of the DRUM partner implementing agencies - RECL has Guarantees from Government of India for funding availed from Multilateral Agencies
Page 66
9 December 2011
Financial Tables (Standalone)

Profit & Loss
Y/E March Net Interest Income (NII) Non-Interest Income Total Income Operating Expenses Pre-provisioning Profits Loan Loss Provisions Provision for Investments Other Provisions Total Provisions PBT before forex Forex PBT before prior period items Prior period adjustments PBT Tax PAT (Pre-Extra ordinaries) Extra ordinaries (Net of Tax) Reported Profits Dividend Retained Profits Source: Company, JM Financial FY10 26,325 1,790 28,115 1,620 26,495 2 0 0 2 26,493 0 26,493 1 26,492 6,478 20,014 0 20,014 7,044 12,970 FY11 33,890 1,866 35,756 1,808 33,948 2 0 0 2 33,945 853 34,799 32 34,766 9,067 25,699 0 25,699 8,621 17,079 FY12E 39,463 1,570 41,034 2,037 38,996 782 0 0 782 38,215 -800 37,415 0 37,415 9,728 27,687 0 27,687 8,860 18,827 FY13E 47,326 1,760 49,086 2,334 46,752 1,103 0 0 1,103 45,649 -300 45,349 0 45,349 11,791 33,558 0 33,558 9,564 23,994
(` mn)
FY14E 56,701 1,948 58,649 2,708 55,942 1,494 0 0 1,494 54,447 -300 54,147 0 54,147 14,078 40,069 0 40,069 11,219 28,850
Balance Sheet
Y/E March Capital Reserves and Surplus Reserve for Bad and Doubtful Debts Share holders equity Borrowed Funds Deferred Tax Liabilities Current Liabilities and Provisions Total Liabilities Loans Investments Cash & Bank Balances Loans & Advances Other Current Assets Fixed Assets Deferred Tax Asset Total Assets FY10 9,875 96,416 4,513 110,803 559,482 0 25,149 695,435 664,526 9,099 13,903 1,141 5,793 899 74 695,435 FY11 9,875 112,058 5,954 127,886 700,038 0 36,976 864,900 821,321 8,124 28,319 736 5,393 881 128 864,900 FY12E 9,875 129,367 7,472 146,713 842,496 0 48,786 1,037,995 993,798 10,932 24,050 994 7,115 953 153 1,037,995
(` mn)
FY13E 9,875 151,741 9,092 170,707 1,009,731 0 58,217 1,238,656 1,182,620 13,009 30,748 1,183 9,900 1,013 183 1,238,656 FY14E 9,875 178,655 11,027 199,557 1,210,163 0 69,525 1,479,245 1,407,317 16,466 39,405 1,407 13,369 1,062 218 1,479,245
Key ratios
Y/E March Growth (YoY) (%) Borrowed Funds Loans Total Assets NII Non-Interest Income Operating Expenses Operating Profits Core Operating Profits Provisions Reported PAT Yields / Margins (%) Interest Spread (%) NIM (%) Profitability (%) ROA (%) ROE (%) Cost to Income (%) Assets Quality (%) Gross NPAs (%) LLP (%) Source: Company, JM Financial 0.03% 0.00% 0.02% 0.00% 0.13% 0.09% 0.23% 0.10% 3.22% 23.2% 5.8% 3.29% 21.5% 5.1% 2.91% 20.2% 5.0% 2.95% 21.1% 4.8% 2.89% 4.28% 2.97% 4.39% 2.62% 4.18% 2.67% 4.20% 24.5% 29.3% 26.7% 38.4% 37.0% 33.8% 38.6% 38.7% -93.5% 44.5% 25.1% 23.6% 24.4% 28.7% 4.2% 11.6% 28.1% 28.0% 0.0% 28.4% 20.4% 21.0% 20.0% 16.4% -15.8% 12.7% 14.9% 16.4% 35160.9 % 7.7% 19.9% 19.0% 19.3% 19.9% 12.1% 14.6% 19.9% 20.0% 41.1% 21.2% FY10 FY11 FY12E FY13E
(%)
FY14E
DuPont Analysis
Y/E March NII / Assets (%) Other income / Assets (%) Total Income / Assets (%) Cost to Assets (%) PPP / Assets (%) Provisions / Assets (%) PBT / Assets (%) Tax Rate (%) ROA (%) Leverage (%) ROE (%) Source: Company, JM Financial FY10 4.23% 0.29% 4.52% 0.26% 4.26% 0.00% 4.26% 24.45% 3.22% 7.2 23.18% FY11 4.34% 0.24% 4.58% 0.23% 4.35% 0.00% 4.46% 26.08% 3.29% 6.5 21.53% FY12E 4.15% 0.17% 4.31% 0.21% 4.10% 0.08% 3.93% 26.00% 2.91% 6.9 20.17% FY13E 4.16% 0.15% 4.31% 0.21% 4.11% 0.10% 3.98% 26.00% 2.95% 7.2 21.14%
(%)
FY14E 4.17% 0.14% 4.32% 0.20% 4.12% 0.11% 3.98% 26.00% 2.95% 7.3 21.64%
19.9% 19.0% 19.4% 19.8% 10.7% 16.0% 19.7% 19.8% 35.5% 19.4% 2.75% 4.22%
Valuations
2.95% 21.6% 4.6% 0.29% 0.12% Y/E March Shares in issue (mn) EPS (`.) EPS (YoY) (%) PE (x) BV (`) BV (YoY) (%) P/BV (x) DPS (`) Div. yield (%) Source: Company, JM Financial FY10 987.5 20.3 25.7% 9.9 112 55.7% 1.79 7.1 3.6% FY11 987.5 26.0 28.4% 7.7 130 15.4% 1.55 8.7 4.4% FY12E 987.5 28.0 7.7% 7.2 149 14.7% 1.35 9.0 4.5% FY13E 987.5 34.0 21.2% 5.9 173 16.4% 1.16 9.7 4.8% FY14E 987.5 40.6 19.4% 4.9 202 16.9% 0.99 11.4 5.7%
Page 67
POWF vs RECL
9 December 2011
We compare the various metrics of POWF with RECL below:

I. Market Share: Market share of banks has gone up significantly to 57% in 1Q12 from 29% in FY03. However, POWF and RECL have lost market share to banks during the period. We expect competitive intensity to moderate in coming quarters due to a) banks hitting their sectoral limits, b) ALM mismatch, and c) exposure norm ceilings. POWF and RECL currently have c.20% and 17% market share respectively.
Exhibit 80. POWF vs RECL: Trend in market share

Market Share (%) Bank exposure to Power Sector REC PFC IDFC Total FY03 29.0% 30.8% 40.2% NA 100.0% FY04 30.7% 30.6% 38.7% NA 100.0% FY05 41.5% 23.5% 32.1% 2.9% 100.0% FY06 49.7% 20.9% 29.4% 0.0% 100.0% FY07 46.4% 20.4% 27.8% 5.4% 100.0% FY08 47.9% 19.8% 26.0% 6.3% 100.0% FY09 49.2% 20.3% 25.5% 4.9% 100.0% FY10 53.6% 18.9% 22.7% 4.8% 100.0% FY11 56.4% 17.2% 20.8% 5.6% 100.0%
Source: Company, RBI, JM Financial. * Exposure of banks to power sector ** Excludes ECB for power sector
II. Loan book composition Discipline wise: POWF is more tilted towards generation sector (c.84% of 2Q12 loan book) while RECL has balanced exposure to generation (44% of 2Q12 loan book; T&D 50%). However, going forward we expect proportion of generation to rise in case of RECL (increased to 44% in 2Q12 from 7% in FY05) as a) the sector is likely to offer more funding opportunities, b) reforms in T&D sector are likely to reduce fund requirements over the medium term.
Exhibit 81. POWF (LHS) vs RECL: Trend in portfolio composition discipline wise
100% 80% 60% 40% 20% 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 1Q12 2Q12 67% 72% 75% 77% 81% 84% 85% 85% 84%
Generation Transmission Distribution Others
100% 80% 60% 40% 20% 0%
Transmission and Distribution 20% 7% 24% 13% 18% 23% 11% 26% 7% 36%
Generation 8% 36% 7% 42% 6%
12%
11%
11%
12%
10%
8%
8%
8%
8%
Others 6% 44%
43%
74%
63%
58%
63%
57%
56%
51%
50%
50%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
1Q12
2Q12
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POWF vs RECL III. Loan book composition Borrower wise: c.92% of POWFs loans are towards the public sector while private sector accounts for 8% (this proportion has remained stable over last 3 years). However, private sector accounted for 11% of RECLs 2Q12 loan book (up from 4% in FY08). Going forward, we expect both POWF and RECL to witness increased private sector exposure. Exhibit 82. POWF (LHS) vs RECL: Trend in portfolio composition discipline wise
Public sector 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 1Q12 2Q12 90% 87% 87% 85% 84% 83% 8% 2% 7% 7% Joint sector 5% 8% 7% 8% Priv ate sector 8% 8% 9% 8% 100% 80% 60% 40% 20% 0% FY08 FY09 FY10 FY11 96% 92% 84% 83% Public sector 4% 6% Joint sector 6% 9% 10% 7%
9 December 2011
Priv ate sector 11% 7% 11% 7%
82%
82%
1Q12
2Q12
IV. Exposure to troubled states: Exposure of POWF and RECL to troubled states (Tamil Nadu, Uttar Pradesh, Rajastan, Madhya Pradesh and Jammu & Kashmir that account for c.80% of total SEB cash losses) is 31% and 34% respectively. Exhibit 83. POWF* (LHS) vs RECL**: Exposure to troubled states
Troubled States Rajasthan Uttar Pradesh Madhya Pradesh Tamil Nadu Jammu & Kashmir Total Other Sates Maharashtra Haryana Andhra Pradesh West Bengal Delhi Uttarakhand Gujarat Chattisgarh Jharkhand Himacha Pradesh Karnataka Others Total % Loan Exposure 8.8% 8.1% 7.4% 5.6% 1.3% 31.1% % Loan Exposure 12.8% 8.6% 8.5% 8.0% 6.9% 4.4% 4.1% 4.1% 3.1% 2.9% 2.4% 3.2% 68.9% Troubled States Tamil Nadu Rajasthan Uttar Pradesh Madhya Pradesh Jammu & Kashmir Total Other Sates Maharashtra Andhra Pradesh Haryana Punjab West Bengal Uttaranchal Chattisgarh Karnataka Others Total % Loan Exposure 13.0% 10.4% 8.3% 1.3% 0.7% 33.7% % Loan Exposure 15.5% 9.3% 7.7% 7.0% 6.0% 2.7% 1.4% 1.4% 15.3% 66.3%
Source: Company, JM Financial. * As of December 31, 2010. ** As of August 31, 2011
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POWF vs RECL V. Borrowings profile: Only RECL is allowed to raise capital gain bonds, which accounted for c.16% of total borrowings in 2Q12. RECL has also resorted to higher ECB (11% of borrowings) while POWF has c.6% of borrowings from ECB. Going forward, we expect proportion of ECBs to go up in borrowings for POWF and RECL as they are a cheaper source of funding (even on fully hedged basis).
9 December 2011
Exhibit 84. POWF (LHS) vs RECL: Trend in borrowings composition

2Q12 Borrowings Profile Short Term Loans 2% Term Loans 22% Bonds 76% Bonds 64% Banks, FIs 8% 2Q12 Borrowings Profile ECB 12% Capital Gains 16%
VI. Cost of borrowings: RECL has always maintained its borrowing cost below that of POWF as it is allowed to raise capital gains bond under section 54 EC (constituted c.16% of total borrowings in 2Q12 vs 40% in FY05). However, in Jan07, GoI limited the amount of bonds an individual investor can utilise to offset capital gains to `5mn, which has limited the market for such bonds.
Exhibit 85. POWF (LHS) vs RECL: Trend in cost of borrowings

RECL POWF
9.0% 8.0% 7.0% 6.0% 5.0% FY05

FY06
FY07
FY08
FY09
FY10
FY11
Page 70
POWF vs RECL VII. Asset Quality: Over the last 5 years (FY06-11), both POWF and RECL enjoyed healthy asset quality. Their gross NPLs stood at 23bps and 31bps respectively as of 1Q12.
9 December 2011
Exhibit 86. POWF (LHS) vs RECL: Trend in asset quality

0.80% 0.64% 0.48% 0.32% 0.16% 0.00% FY05 FY06 FY07 FY08 FY09 FY10 FY11 0.26% 0.10% 0.03% 0.02% 0.02% 0.23%
Gross NPLs (%) Net NPLs (%)
Gross NPLs (%) 4.00% 3.20% 2.40% 1.60% 0.80% 0.80% 0.00% FY05 FY06 FY07 FY08 0.13% 2.99%
Net NPLs (%)
0.66%
1.68%
1.93%
0.03% FY10
0.02% FY11
FY09
VIII. Profitability: POWF and RECL have witnessed significantly improved profitability (measured by ROA and ROE) due to margin expansion, virtually zero credit cost and very low cost ratios. Consequently, POWF reported ROA and ROE of 2.7% and 18% while RECL witnessed ROA and ROE of 3.3% and 22% in FY11.
Exhibit 87. POWF (LHS) vs RECL: Trend in ROA and ROE (%)
20.0% 17.0% 14.0% 11.0% 8.0% 5.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
ROE (%) (LHS)
ROA (%)
3.5% 3.1% 2.7% 2.3% 1.9% 1.5%
25.0% 22.0% 19.0% 16.0% 13.0% 10.0%
ROE (%) (LHS)
ROA (%)
3.8% 3.4% 3.0% 2.6% 2.2% 1.8%
Page 71
POWF vs RECL IX. Valuation: POWF has witnessed significant de-rating from peak multiple of 2.9x 1yr fwd book to 0.95x currently (average multiple of 1.7x since IPO). Similarly, RECL also witnessed a considerable de-rating from peak multiple of 2.9x 1yr fwd book to 1.1x currently (average multiple of 1.5x since IPO).
9 December 2011
Exhibit 88. POWF (LHS) vs RECL: Trend in 1 year Forward P/ BV

Fw d. P/BV (x )
3.5 2.8 2.1 1.4 0.7 0.0 Feb-07
3.0 2.4 1.8 1.2 0.6 0.0 Mar-08
Fwd. P/BV (x)
Dec-07
Sep-08
Jul-09
May-10
Feb-11
Dec-11
Oct-08
Jun-09
Jan-10
Sep-10
Apr-11
Dec-11
X. Current government holding: Government owns 73.7% in POWF (stake down from 89.8% due to FPO in 1Q11) and 66.8% in RECL.
Exhibit 89. POWF (LHS) vs. RECL: Ownership as of 2Q12

Others 11% DII 9% FII 6% Gov ernment of India 74% DII 7% Others 8%
FII 19% Gov ernment of India 66%
Page 72
POWF vs RECL
9 December 2011

MEMBER, BOMBAY STOCK EXCHANGE LIMITED AND NATIONAL STOCK EXCHANGE OF INDIA LIMITED SEBI REGISTRATION NOS.: BSE - INB011296630 & INF011296630, NSE - INB231296634 & INF231296634 REGISTERED OFFICE: 141, MAKER CHAMBERS III, NARIMAN POINT, MUMBAI - 400 021, INDIA CORPORATE OFFICE: 51, MAKER CHAMBERS III, NARIMAN POINT, MUMBAI - 400 021, INDIA BOARD: +9122 6630 3030 | FAX: +91 22 6747 1825 | EMAIL: [email protected] | WWW.JMFINANCIAL.IN
Analyst Certification
The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that: All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Analyst(s) holding in the Stock: (Nil)
Other Disclosures
This research report has been prepared by JM Financial Institutional Securities Private Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated companies solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independently of the companies covered herein. JM Financial Institutional Securities and/or its affiliated entities are a multi-service, integrated investment banking, investment management and brokerage group. JM Financial Institutional Securities and/or its affiliated company(ies) might have lead managed or co-managed a public offering for the company(ies) covered herein in the preceding twelve months and might have received compensation for the same during this period for the services in respect of public offerings, corporate finance, investment banking, mergers & acquisitions or other advisory services in a specific transaction. JM Financial Institutional Securities and/or its affiliated company(ies) may receive compensation from the company(ies) mentioned in this report within a period of three to six months' time following the date of publication of this research report for rendering any of the above services. Research analysts and Sales Persons of JM Financial Institutional Securities may provide important inputs into the investment banking activities of its affiliated company(ies) or any other firm or company associated with it. While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not intended to be and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time. JM Financial Institutional Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have other potential conflict of interests with respect to any recommendation and other related information and opinions. This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction. This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.
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JM Financial - Initiating Coverage On Power Financiers.

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9 December 2011

Source: Company, JM Financial.

Catalysts for stock outperformance

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

Source: Bloomberg, JM Financial.

However going ahead, we expect them to outperform given:

JM Financial Institutional Securities Private Limited

Power Financiers Exhibit 2. Recent tariff hikes for SEBs

Source: Bloomberg, JM Financial.

JM Financial Institutional Securities Private Limited

Exhibit 4. Quarterly trend in spread for POWF and RECL

Source: Company, JM Financial.

JM Financial Institutional Securities Private Limited

Indian Power Sector

15% 12% 8.8% 9% 7.1% 7.3%

Normal Deficit (%) 11.1%

Source: CEA, JM Financial.

JM Financial Institutional Securities Private Limited

15.0% 12.0% 9.0% 6.0% 3.0% 597 0.0%

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

9% GDP 960 685 575 778

9% GDP 275 197 203

195 GW 130 65 0 22 24 67 78 86 104 119

JM Financial Institutional Securities Private Limited

1,264 623 715 820 1,016

10,000 3,091 7,500 1,400 5,000 5,917

0 XIth Plan XIIth Plan

JM Financial Institutional Securities Private Limited

Share of private players to increase

Exhibit 10. Expected capacity addition sector wise

Priv ate 57% Central 25%

Source: CRISIL, JM Financial

JM Financial Institutional Securities Private Limited

Source: Company, JM Financial.

Source: Company, JM Financial.

JM Financial Institutional Securities Private Limited

Power Financing Sector Competitive intensity to moderate

FY03 29.0% 30.8% 40.2% NA 100.0%

FY04 30.7% 30.6% 38.7% NA 100.0%

FY05 41.5% 23.5% 32.1% 2.9% 100.0%

FY06 49.7% 20.9% 29.4% 0.0% 100.0%

FY07 46.4% 20.4% 27.8% 5.4% 100.0%

FY08 47.9% 19.8% 26.0% 6.3% 100.0%

FY09 49.2% 20.3% 25.5% 4.9% 100.0%

FY10 53.6% 18.9% 22.7% 4.8% 100.0%

FY11 56.4% 17.2% 20.8% 5.6% 100.0%

1Q12 57.4% 16.9% 20.4% 5.3% 100.0%

2Q12 56.9% 17.1% 20.8% 5.1% 100.0%

JM Financial Institutional Securities Private Limited

Exhibit 14. IFC vs Banks / NBFC

JM Financial Institutional Securities Private Limited

27% 25% 22% 20% 17% 15%

1,750 1,400 1,050 700 350 0 253

YoY Growth (%) FY11-14E CAGR: 20%

35% 30% 25% 20% 15% 10%

1,470 996 799

FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E

Source: Company, JM Financial.

JM Financial Institutional Securities Private Limited