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The Indian Power Sector Report

October 6, 2007

Tata Power: Tata Power management in its recent presentation in September 2007 stated that they expect power generation capacity to grow five times in the next five years. The company is already implementing projects of 5,763MW and another 4,700 MW is planned and therefore expect 10,313MW to be installed by FY13.

The stock has had a decent run of 50.4% appreciation over the last month and is now trading at 12.1x FY09e earnings, which is substantially lower than the Indian utilities average of 20.1x. It is attractive given its high growth potential compared with the Asian utilities universe. On the back of higher visibility of the implementation of its power projects, we forecast its net profit to grow at 58% CAGR over the next five years.

Given the higher visibility over the implementation of its power projects and backward integration in coal production, our cash flow estimates in FY12 and FY13 increase substantially. DCF valuation from INR871 to INR1559. As we move on from FY08 to FY09 as the base year for our sum-of the parts valuation, we raise our S-o-P valuation from INR817 to INR837 and raise the target price from Rs 843 to Rs 1,198.

Power Grid Corporation of India Ltd: The stock just had a fantastic listing on the bourses. It is a major customer to the following companies.

KEC International:
Compared to peers like Jyoti Structures and Kalpataru Power, KEC International has underperformed its peers and the Sensex, the merger announcement with its two group companies – RPG Transmission and National Information Technologies (NITL) – being the key reason. The order backlog consisting of 75-80% of international orders, which is the largest such percentage among its peers.

A combination of PE multiple and DCF approaches to determine the target price for KEC: the DCF model yields a value of INR730 and based on our September FY08e EPS forecast and assuming rolling one-year forward PE of 18x, our PE multiple approach yields a fair value of INR 810. The mid point – INR770 – of the two valuation approaches is the revised target price.

Kalpataru Power:
Kalpataru Power has a diversified business. Apart from power transmission line business it is also present in infrastructure and biomass power. The company has a strong order backlog of INR23bn in the transmission line business.

Kalpataru’s target price is the mid-point – INR1960 – of DCF fair value of INR 1,810 and PE multiple based value of INR1,836 and INR137 derived from investment in its subsidiary, JMC Projects.

Jyoti Structures:
The current order backlog of the company is INR23bn. Management has indicated that the company has a tie up for the Western Region System Strengthening. Based on current order backlog and buoyancy in the power transmission line sector, expect sales CAGR of 30% for the period of FY07-10e.

HSBC downgrades the stock to Neutral with a new target price of Rs 262 – is the mid-point of our DCF fair value INR210 and PE multiple based fair value of INR314, which is higher than our earlier target price of INR 254.

HSBC is overweight on BHEL.

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