Sector Update | 21 November 2011
Utilities
Tamil Nadu DISCOMs tariff hike petition : a critical milestone
Steep tariff hike sought, recent State action - a key positive
Tamil Nadu Generation and Distribution Company (TANGEDCO) has filed a tariff petition with Tamil Nadu
Electricity Regulatory Commission (TNERC) after a gap of ~1.5 years (last tariff revision in August 2010,
after a gap of 7 years). Our channel checks suggests meaningful tariff increases for Agriculture (~7x), and
residential consumers (74-110%), etc. In our understanding, the proposed tariff hike would meet ~80% of
current under recoveries of INR100b, while balance could be contributed by State government in the
form of equity/subsidy.
The proposed tariff hike looks unprecedented, in our view, given political implications. While the tariff
hike will address recurring under-recoveries, the cumulative shortfall of ~INR500b+ remains a key challenge
to be addressed. Thus, this may call for possibility of debt recast. In 2QFY12, we witnessed Punjab National
Bank (PNB) converting short term loans to long term to address cashflow issues. As per the regulations,
we understand that the tariff finalization can occur in 120 days from filling and thus, we expect final order
in the matter to be available latest by March 2012. Most importantly, the State government's intent (as
indicated in the address to public) and action to raise prices of bus fare, milk price is key positive.
bringing about some discipline through two controlling
factors: Regulating flow of funds and adopting a non-
interference approach in commercial workings of CPSUs
(like NTPC, Coal India, PGCIL, etc). Financers like PFC,
etc have started insisting for incorporating clauses like
automatic pass through of fuel costs, filing tariff petitions
every year, etc. Appellate Tribunal of Electricity has also
facilitated measures for a suo moto tariff increase by the
regulator, in case of default by the discoms.
Fuel availability a key issue to be addressed now:
The key issue to be addressed now by the Central
government is fuel availability (to improve viability of power
sector). There have been several instances of
A landmark event:
The proposed tariff hike, in our view,
is a landmark event in the Indian Utilities space, more so
given the apprehensions on political will. Tamil Nadu was
the highest loss making State in FY09 and second highest
in FY10. Though the details are likely to flow in as regulator
will formally admit the tariff petition and put on website, the
intent is very positive. This also sets a practice of filing
tariff petitions every year.
Several factors contributing to improved viability of
DISCOMs:
During the past 18 months, 22 states have
raised tariffs including Rajasthan (tariff hike of 23%, highest
loss making state). While power distribution remains a state
subject, Central government has largely succeeded in
SEB Finances: FY12 to be tipping point
Detailed Sector Report
Just an eclipse ......
brighter days ahead!
SEB Finances:
Set to improve
FY12 to be tipping point
for SEB losses
SEB FY10 financial
analysis
Incremental losses
coming down
Meeting with
TANGEDCO/TNERC
Roadmap exists to
achieve financial viability
Rajasthan tariff hike
Up by 23%;
a progressive step
Nalin Bhatt
(NalinBhatt@MotilalOswal.com) +91 22 3982 5429
Satyam Agarwal
(AgarwalS@MotilalOswal.com)
/ Vishal Periwal
(Vishal.Periwal@MotilalOswal.com)

Utilities
accommodative policy stance recently (cabinet re-shuffle,
scrapping Go/No-Go areas, Easing CEPI embargo, granting
environment clearances for several delayed projects, Prime
Minister's insistence for a periodical status report, etc). This
is to counter the loss of coal production and a significant
regulatory / bureaucratic push can address the same. We
believe that COAL remains one of the most non-controversial
ways to boost domestic production and maintain our positive
view on Coal India.
PFC /REC important plays on the theme:
PFC and REC
have seen sizable de-rating given issues on health of
DISCOMs. Earlier, Rajasthan hiked tariff by 23% (Sept-11),
and TN has filed tariff petition suggesting sizable tariff hike
(both states together accounted for 35%+ of total commercial
losses). We continue to believe that FY12 will be the tipping
point (report attached in SEB finance in FY10) in terms of
the deterioration in SEB finances, and concern on PFC/
REC is likely to ease out with visibility of improved cashflows.
The deterioration in SEB finances over FY08 till FY11 was
driven by meaningful increases in power procurement costs
and limited tariff increases; now the improvement in FY12/
13 will be driven by limited increase in power purchase costs
and meaningful tariff increases. This is expected to be key
trigger for re-rating.
Similarly, PTC India has corrected by 30% in last week due
to issues of higher debtors, increased ST borrowings and
higher exposure to states like TN and UP. Management has
taken several steps to mitigate the impact, including
discontinuation of trade with these states, no counter-
guarantees, etc. Maintain
Buy.
Sector view re-instated; CPSUs remain preferred sectoral theme
#1. Capacity addition not an issue:
During YTDFY12, India has seen capacity addition of 7.5GW and expected to be
in the range of 10-12GW for FY12, indicating second year of 10GW+ installation. We believe that sizable capacity is
already under construction and thus, capacity addition is not an issue over next 2-3 years.
#2. "Self Correction":
We had referred in our sector report that system is going under a self correction mechanism with
DISCOMs putting their act in order through curtailment of high cost ST power, tariff increase, etc.
#3. Fuel supply an issue (only in near term), system not be starved of generation:
In our view, the capacity addition
from various sources of fuel (captive, imported coal, hydro/nuclear and limited contribution from linkage coal) could
add ~40GW of capacity over next 4 years and thus, system would not be starved of generation. Increase in domestic
coal production is inevitable and we have already seen several interventions by Ministries (including PMO's office) to
expedite the same and this, in our view, is next important leg of reforms.
#4. Focus on players with "robust" business model, post correction too, remain neutral on IPPs:
NTPC (favorably
placed on fuel front, strong capacity addition momentum), Powergrid (higher capitalization) and Coal India (non
controversial way to improve coal production in the system) have very robust business model and thus, are best
placed in the current environment. CPSUs remain our preferred sectoral theme. While several private IPPs stock have
seen corrections, we believe that rigid PPA structures, continued uncertainty on fuel availability, regulatory headwinds,
along with funding issues are likely to remain as key overhang on stock performance.
Comparative valuations
Rating
CPSUs
NTPC
PGCIL
Coal India *
Mkt Cap
(INR b)
1,287
457
2,065
280
228
CMP
(INR)
156
99
305
23
96
EPS (INR)
FY12
FY13
10.7
6.2
23.2
1.9
10.0
6.2
3.7
4.1
50.4
40.1
8.5
12.5
7.1
26.7
2.0
10.3
EPS Gr. (%)
FY12 FY13
10.5
13.5
33.9
14.0
35.3
17.3
14.2
15.2
5.4
3.6
63.4
36.6
11.5
32.6
4.4
17.5
RoE (%)
FY12
FY13
12.4
12.9
27.2
7.8
7.7
21.2
10.3
19.8
7.6
10.6
6.8
13.5
13.5
25.3
7.8
7.0
27.8
12.7
19.2
9.3
10.1
6.5
P/BV (x)
FY12 FY13
1.7
2.0
4.5
1.0
2.0
2.3
1.1
0.6
0.6
0.8
0.6
1.6
1.8
3.5
0.9
2.0
1.9
1.0
0.5
0.5
0.7
0.6
P/E (x)
EV/EBITDA (x)
FY12 FY13 FY12 FY13
14.6
15.9
13.2
11.9
9.6
12.1
11.0
3.0
8.0
7.0
5.6
12.5
13.9
11.4
11.3
9.3
7.4
8.0
2.7
6.1
6.7
4.8
10.2
11.5
8.3
8.8
16.6
10.2
10.5
6.4
8.9
16.2
Buy
Buy
Buy
NHPC
Neutral
Private Sector
Tata Power
Neutral
Adani Power Neutral
179
75
JSW Energy Neutral
67
41
Lanco Infra
Buy
29
12
Reliance Infra Buy
108
405
CESC
Buy
35
251
PTC
Buy
14
48
* RoE adjusted for OB reserves provisions
10.1 162.3
5.1 -27.8
4.5
48.6
66.8
24.7
41.9
3.2
10.0
50.4
16.6
8.0
7.4
5.2
7.5
7.8
1.4
1.5
4.7
4.8
5.5
5.2
Source: MOSL
21 November 2011
2

Utilities
Article in The Indian Express
Prices of essential products & services in TN up sharply
Steep hike in bus fares and milk prices; power tariffs to follow
17th November, 2011 | CHENNAI:
The Tamil Nadu government today announced a
steep hike in bus fares and milk prices, besides indicating that power tariff would also go
up. Announcing the cabinet decisions in an address on Jaya TV, Chief Minister Jayalalithaa
said the hikes were 'unavoidable' as state public sector units were on the verge of collapse.
Tamil Nadu Electricity
Board was facing mounting
losses of INR53,000 crore.
She charged the Centre with meting out "step-motherly treatment" to non-Congress
ruled states and neglecting them. She said the state electricity regulatory authority
would soon decide about the power tariff as Tamil Nadu Electricity Board was facing
mounting losses of Rs 53,000 crore.
Bus fares were hiked 28 paise per km to 42 paise for moffussil services, 56 paise from
the present 32 paise for express bus services, 60 paise from the present 38 for semi
delux services and 70 paise from 52 paise for delux services. Milk prices have been
hiked by Rs 6.25 per litre from Rs 17.75 to Rs 24.
The decisions on the hike were taken at a cabinet meeting today, she said. Justifying
the hike in bus fares, Jayalalithaa said price of diesel and automobile spares like tyres
had increased manifold.
Announcing a hike in milk procurement prices by Rs two per litre, the Chief Minister said
the Tamil Nadu milk Producers co-operatives apex body Aavin could not procure more
than 22 lakh litres of the total of 150 lakh litres produced due to financial constraints.
People appealed to accept
hikes as it meant "providing
oxygen to the PSUs which
are on their death bed."
She appealed to the people to accept the hikes as it meant "providing oxygen to the
PSUs which are on their death bed." Quoting a Tamil proverb, she said a painting could
be done only if there was a wall. Similarly only there were funds could PSUs deliver
services to the people.
Jayalalithaa said West Bengal, ruled by a UPA ally, had received a special financial
package of Rs 21,614 crore while Tamil Nadu's request for a similar package has not yet
been accepted.
She recalled submitting a memorandum on the package last June to Prime Minister
Manmohan Singh, who forwarded it to Deputy Chairman of Planning Commission Montek
Singh Ahluwalia. However, till date there was no sign of any financial help, she said.
State's debt burden was
INR1,01,349 crore as on
March 31.
Charging the previous DMK regime with leading the state and public sector undertakings
into a debt trap, Jayalalithaa said the state's debt burden was Rs 1,01,349 crore as on
March 31. The state electricity board reported accumulated losses of Rs 53,000 crore
and state transport corporations a loss of Rs 6,150 crore, she said. Besides, RBI had
blacklisted the TNEB, preventing banks from extending loans to it, the chief minister
said.
Making out a case for increasing power tariff, she said the state's request for allocation
of additional 1000 MW from the central pool had been rejected forcing TNEB to purchase
power from the open market at a higher price. Hence, a hike in tariff was unavoidable,
she said.
3
RBI had blacklisted the
TNEB, preventing banks
from extending loans to it
21 November 2011

Utilities
Takeaways from August 2010 Tariff order by TNERC
TANGEDCO under recoveries to halve by FY13 even assuming current
tariffs
We also highlight few of the important workings covered in the tariff order (TO)
approved by TNERC in August 2010 covered in our earlier report on meeting with
TANGEDCO/TNERC in July 2011. TO indicate improvement in financial position,
purely on the back of lower power purchase cost. TO also expects TN DISCOMs to
have surplus power for sale in open market in FY13. Thus, under recoveries are
expected to halve from INR79b in FY11 to INR35b in FY13 without any additional
tariff hikes.
TNERC and TANGEDCO officials indicated that actual under recovery (of INR90b in
FY11) can be quite minimal in FY13, driven by possible ~INR35-40b of savings in power
purchase cost, INR25-30b from tariff increase (only ~15% increase, should not face
opposition) and INR30-35b additional subsidy from government. We believe that the
situation is manageable and the delayed capacity addition in past 1-2 years accentuated
the problems of TN DISCOMs. With 6GW of capacity addition over next 2-3 years, TN
DISCOMs look on track to achieve turnaround without much ado.
TN expects to be net exporter of power in FY13, vs largest buyer now (MUs)
FY11
FY12
74,453
2,000
76,453
33,113
43,885
(545)
2,250
4,545
FY13
78,196
2,000
80,196
38,414
52,834
(11,052)
2,000
15,052
Soucre: TNERC
TNERC/TNDISCOMs
working indicates possible
surplus power for state by
FY13
Energy input requirement
Energy required for Dd-Sy mismatch
Total energy required
Less: Net energy from own generation
Available from Central Sector, CPPs, etc
Net balance to be procured from open market
Actual open market purchases
Net saleable energy in open market
70,933
-
70,933
26,539
39,856
4,538
4,538
-
TNERC expects power purchase cost to decline over next 2 years, and ARR to remain flat
despite demand growth (INR b)
FY11
Power purchase cost
162
18
60
29
3
14
0
1
0
288
9
279
FY12
138
19
78
31
4
13
0
1
0
285
10
275
FY13
114
21
87
34
4
15
0
1
0
276
12
263
Soucre: TNERC
ARR is expected to decline,
despite demand growth
Remarks
Electricity purchase cost to come down
by ~Rs50b
Increase in-line with increase in own
gencos capacity
TO working indicates
reduction in purchase cost
and decline in ARR
requirement despite demand
growth
Transmission charges
Fuel cost /
Cost of own generation
O&M Expenses
Depreciation
Interest on Loan
Other debits
RoE
Demand side management
Total ARR
Less: Other operating receipts
Net ARR to be recovered
21 November 2011
4

Utilities
TNERC forecasted under recovery at INR80b in FY11, but to come down to INR35b in FY13
FY11
FY12
275
196
(78)
214
(61)
9.1
FY13
263
209
(54)
229
(35)
9.2
Soucre: TNERC
Revenues as per last revised tariff in 2003
Remarks
Tariff hike in Aug-10 was
mere ~9% (after a gap of ~7
year) and additional 15%
tariff hike could mean no
under recovery in FY13
Required revenues as per TO
279
Revenues as per prevailing tariff
(before Aug-10 hike)
184
Gap in the revenues
(96)
Revenues post tariff hike
(Aug-10 approved)
Gap in the revenues,
post tariff hike
Effective tariff hike (%)
200
(79)
9.0
Regulated asset in books, total
INR168b.
Subsidy payments by increased marginally since FY10
TNERC and TNDISCOMs are
looking to avail higher
subsidy from State
government as subsidy was
decided based on the earlier
cost structure (2001-02) and
thus, possibility of upwards
revision exists.
Category
Domestic
Agriculture
Huts
Public Worship
Powerloom consumers
Handloom weavers
Utilities
Lift Irrigation Co-op soc
Total
Petition by
TNGEDCO for FY12
16.6
2.9
0.2
0.1
0.6
0.1
0.6
0.0
21.0
FY12
16.3
2.9
0.2
0.1
0.6
0.1
0.6
0.0
20.7
Approved by TNERC
FY11
14.9
2.7
0.2
0.1
0.6
0.1
0.5
0.0
19.1
FY10
13.7
2.6
0.2
0.1
0.6
0.1
0.5
-
17.7
Soucre: TNERC
21 November 2011
5

CMYK
Motilal Oswal Utilities Research Gallery

Utilities
N O T E S
21 November 2011
7

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