>KSK ENERGY VENTURES LIMITED: High Project Visibility coupled with Attractive Valuations (EQUIRUS)

We expect KSK Energy Ventures Limited (KSKEVL) to commission a total of 4644 MW by FY16 comprising operational capacity of 601 MW, capacity of 313 MW which is expected to be commissioned by FY11 and further capacity under construction of 3730 MW. KSKEVL has pioneered the group captive business model along with a focus on long term off take agreements and fuel security which lead to lower volatility in the tariffs and fuel costs. This provides higher visibility and scalability to its power generation capacity. We see 35% upside in KSKEVL by 30th Sep, 2011 and initiate coverage recommending LONG position and suggest an overweight within the power sector. Our FCFE based DCF Target Price (TP) of ` 242 is based on projections till FY17 and 20 years of growth.

■ Existing Capacity of 601 MW to be ramped up to 914 MW by FY11 and 4644 MW by
FY15 leading to 75% Revenue CAGR and 51% EPS CAGR from FY10 to FY15: KSKEVL has commissioned 601 MW across multiple locations in India including the first two units of
135 MW at the 540 (4*135) MW Warora plant. The further expansion of 313 MW includes 2
remaining units of the Warora Plant and a 43 MW expansion of Arasmeta Phase II. KSKEVL
has also achieved substantial progress on the 3600 MW KSK Mahanadi Project at
Chhatisgarh in terms of placement of BTG orders, commencement of construction works
at the site and recent financial closure for the entire debt requirement. It has incurred a
Project Cost of ` 33 bn and has already infused equity of ` 21 bn. It has also received
equity commitment of ` 2500 mn by IFCI and expects to commission the first unit of 600
MW in Q1FY12 vis-à-vis our conservative assumption of Q2FY12.

■ Predictability of business model and innovative capital structuring enabling higher
financial leverage: KSKEVL has focused on fuel security in the form of long term fuel
supply agreements and has tied up most of its off-take on a long term basis which provide
higher predictability to its business model. It has also set up power plants on captive
basis where in it receives partial equity contributions from its equity partners. These
factors have enabled KSKEVL to finance its projects at higher leverage than its peers.

■ Overcoming the Lehman Hangover with High Investor Interest due to Improved
Visibility of Projects, Scalability of Business and Attractive Valuations: KSKEVL has
entered into a lock up agreement with Lehman Brothers Subsidiaries (LB Entities) to not
sell 12.2% of the shareholding till Oct 30, 2011 and has a right of first refusal over sale of
6.5% of the shareholding. This reduces the uncertainty on the sale LB entities and we
expect that several long term investors will be interested in KSKEVL due to improved
visibility of its projects, scalability of business model and its attractive valuations. This is
evident in the recent commitments of ` 3.5 bn by IFCI and L&T Infra.

■ Attractive Valuations and High Sensitivity to Project Cost Overruns: KSKEVL is
attractively priced on FY10 and FY11 Price/Book to Forward RoE. The advanced stages of
its projects provide assurance regarding the implementation of the projected capacity of
4644 MW within the estimated project costs.

To read the full report: KSKEVL