POWGRICO_20150318

Rating Remains BuyTarget price Increased from 150 INR 174

Closing price 17 March 2015 INR 148

Potential upside +17.8%

Anchor themesAs India's Central Transmission Utility, PWGR offers a 'hedged play' on the country's generation capacity addition pipeline and improvement in sector prospects. Though competitive intensity may rise gradually, PWGR's track record and execution focus puts it in a strong position to garner the largest share of transmission capex in India.

Nomura vs consensusOur FY15F/16F/17F EPS forecasts are in line with consensus.

Research analysts India Power & Utilities

Anirudh Gangahar - NFASL [email protected] +91 22 4037 4516

Archit Singhal - NFASL [email protected] +91 22 4037 4008

Key company data: See page 2 for company data and detailed price/index chart

Power Grid Corp of India PGRD.NS PWGR IN

EQUITY: POWER & UTILITIES

Delivering growth consistently; maintain Buy Chugging along; continuity of execution impetus under new leadership to come into focus Action/Catalyst: Growth prospects remain upbeat; TP raised to INR174 As transmission capacity startup goes into top gear and exceeds capex in FY16 and capex-commissioning remain in tandem thereafter, we believe PWGRs medium-term earnings outlook remains robust (FY15-17F EPS CAGR: 19%) and cash flows visibility is set to improve. We nudge our FY16F onwards EPS forecasts by 2-6% and raise our TP by 16% to INR174, implying 18% potential upside from current levels. PWGR remains our preferred stock pick amongst power utilities in India.

Earnings: Expect FY15-17F EPS CAGR at 19%; reported RoE at ~16% We raise our transmission capacity startup forecasts for FY15F/16F/17F by 12%/20%/9% to INR215bn/INR243bn/INR220bn implying 96%/113%/102% of core transmission capex (cash basis) in the respective years. We continue to assume zero returns on equity investments in SPVs housing bid tariff-based transmission projects and transmission JVs with state governments. Overall, we tweak FY15F/16F EPS by -2%/+2%; expect RoE to rise to ~16% in FY17.

Valuation: RI-model-based TP is INR174, implied FY17F P/B is 1.9x PWGR trades at 1.6x FY17F P/B (BVPS: INR92/sh) (3yr/5yr average of forward P/B multiples is 1.7x/1.8x); our implied FY17F P/B multiple is 1.9x. We expect the stock to continue to trade at a premium to peers on account of solid defensive growth prospects and sustainable competitive strength in the sector.

The next big test: Steadfast execution focus under a new leadership Over the past 3-4 years, PWGRs cohesive senior management, led by its Chairman (Mr Nayak), has instilled the DNA of unrelenting execution focus in the organisation, which is reflected in the robust y-y growth in earnings. As the GOI appoints a successor to Mr Nayak, who superannuates in Sep-2015, we believe that continuity of execution focus under the new leadership will be critical to gauge PWGRs ability to deliver growth in the longer term.

Year-end 31 Mar FY14 FY15F FY16F FY17FCurrency (INR) Actual Old New Old New Old New

Revenue (mn) 150,574 177,416 170,872 209,049 208,003 240,700

Reported net profit (mn) 43,933 51,237 50,297 59,890 61,196 71,835

Normalised net profit (mn) 43,933 51,237 50,297 59,890 61,196 71,835

FD normalised EPS 9.14 9.79 9.61 11.45 11.70 13.73

FD norm. EPS growth (%) 4.7 N/A 5.1 N/A 21.7 17.4

FD normalised P/E (x) 16.1 N/A 15.4 N/A 12.6 N/A 10.8

EV/EBITDA (x) 12.2 N/A 11.5 N/A 10.0 N/A 9.0

Price/book (x) 2.2 N/A 2.0 N/A 1.8 N/A 1.6

Dividend yield (%) 0.0 N/A 0.0 N/A 0.0 N/A 0.0

ROE (%) 14.5 14.2 13.9 15.0 15.2 15.9

Net debt/equity (%) 228.5 238.3 245.4 239.9 239.2 230.1Source: Company data, Nomura estimates

Global Markets Research 18 March 2015

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Power Grid Corp of India 18 March 2015

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Key data on Power Grid Corp of India Relative performance chart

Source: Thomson Reuters, Nomura research Notes:

Performance (%) 1M 3M 12MAbsolute (INR) -3.3 12.7 50.1 M cap (USDmn) 12,315.8Absolute (USD) -4.1 14.4 46.2 Free float (%) 42.1Rel to MSCI India -6.2 9.8 17.7 3-mth ADT (USDmn) 6.2 Income statement (INRmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17FRevenue 127,579 150,574 170,872 208,003 240,700Cost of goods sold -3,779 -4,746 -5,543 -6,641 -7,828Gross profit 123,800 145,829 165,329 201,362 232,872SG&A -39,738 -48,534 -56,999 -71,654 -80,979Employee share expense -8,864 -9,417 -10,023 -10,836 -15,070Operating profit 75,198 87,878 98,308 118,871 136,823EBITDA 109,379 127,835 148,654 179,551 207,838Depreciation -34,180 -39,957 -50,346 -60,680 -71,015Amortisation 0 0 0 0 0EBIT 75,198 87,878 98,308 118,871 136,823Net interest expense -19,782 -26,865 -33,907 -41,384 -45,443Associates & JCEs Other income -1,367 101 -1,514 -71 -415Earnings before tax 54,049 61,114 62,887 77,417 90,965Income tax -13,624 -17,181 -12,589 -16,220 -19,130Net profit after tax 40,424 43,933 50,297 61,196 71,835Minority interests Other items Preferred dividends Normalised NPAT 40,424 43,933 50,297 61,196 71,835Extraordinary items 0 0 0 0Reported NPAT 40,424 43,933 50,297 61,196 71,835Dividends -9 -8 -9 -12 -14Transfer to reserves 40,416 43,925 50,288 61,185 71,821Valuations and ratios Reported P/E (x) 16.9 16.1 15.4 12.6 10.8Normalised P/E (x) 16.9 16.1 15.4 12.6 10.8FD normalised P/E (x) 16.9 16.1 15.4 12.6 10.8Dividend yield (%) 0.0 0.0 0.0 0.0 0.0Price/cashflow (x) 8.3 6.5 8.6 5.1 4.8Price/book (x) 2.6 2.2 2.0 1.8 1.6EV/EBITDA (x) 13.1 12.2 11.5 10.0 9.0EV/EBIT (x) 19.1 17.8 17.4 15.1 13.7Gross margin (%) 97.0 96.8 96.8 96.8 96.7EBITDA margin (%) 85.7 84.9 87.0 86.3 86.3EBIT margin (%) 58.9 58.4 57.5 57.1 56.8Net margin (%) 31.7 29.2 29.4 29.4 29.8Effective tax rate (%) 25.2 28.1 20.0 21.0 21.0Dividend payout (%) 0.0 0.0 0.0 0.0 0.0ROE (%) 16.3 14.5 13.9 15.2 15.9ROA (pretax %) 7.5 7.2 6.8 7.3 7.7Growth (%) Revenue 31.5 18.0 13.5 21.7 15.7EBITDA 35.3 16.9 16.3 20.8 15.8Normalised EPS 23.5 4.7 5.1 21.7 17.4Normalised FDEPS 23.5 4.7 5.1 21.7 17.4Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Mar FY13 FY14 FY15F FY16F FY17FEBITDA 109,379 127,835 148,654 179,551 207,838Change in working capital 19,794 39,509 -8,913 28,793 16,596Other operating cashflow -47,016 -58,550 -49,714 -57,675 -64,988Cashflow from operations 82,157 108,793 90,027 150,669 159,446Capital expenditure -222,877 -268,839 -225,133 -215,750 -216,133Free cashflow -140,720 -160,046 -135,106 -65,081 -56,687Reduction in investments 1,370 1,488 462 -3,414 -5,450Net acquisitions Dec in other LT assets 0 0 0 0Inc in other LT liabilities 2,872 3,850 -1,035 -909 -882Adjustments -2,872 -3,850 1,035 909 882CF after investing acts -139,350 -158,557 -134,644 -68,495 -62,137Cash dividends -2,086 -2,267 858 -16 -867Equity issue 0 53,050 0 0 0Debt issue 147,860 149,820 126,412 98,387 87,155Convertible debt issue Others -13,173 -14,490 -14,014 -16,604 -19,193CF from financial acts 132,601 186,113 113,256 81,768 67,095Net cashflow -6,749 27,556 -21,388 13,273 4,958Beginning cash 23,369 16,620 44,175 22,787 36,060Ending cash 16,620 44,175 22,787 36,060 41,018Ending net debt 665,259 787,523 935,3241,020,4381,102,635 Balance sheet (INRmn) As at 31 Mar FY13 FY14 FY15F FY16F FY17FCash & equivalents 16,620 44,175 22,787 36,060 41,018Marketable securities 0 0 0 0 0Accounts receivable 31,920 31,872 30,429 37,042 42,864Inventories 5,515 7,124 7,732 9,402 11,049Other current assets 30,274 37,889 61,586 52,529 47,598Total current assets 84,329 121,060 122,535 135,033 142,529LT investments 11,475 9,987 9,525 12,939 18,389Fixed assets 1,015,5321,264,8441,439,6311,594,7011,739,819Goodwill 0 0 0 0Other intangible assets Other LT assets 0 0 0 0Total assets 1,111,3361,395,8911,571,6911,742,6731,900,736Short-term debt 0 0 0 0Accounts payable 30,595 53,918 41,686 44,645 46,481Other current liabilities 94,756 120,117 146,299 171,358 188,656Total current liabilities 125,351 174,035 187,985 216,003 235,136Long-term debt 681,879 831,699 958,1111,056,4981,143,653Convertible debt Other LT liabilities 41,712 45,561 44,526 43,616 42,734Total liabilities 848,9411,051,2941,190,6211,316,1171,421,524Minority interest Preferred stock 0 0 0 0Common stock 46,297 52,316 52,316 52,316 52,316Retained earnings 216,097 292,280 328,754 374,239 426,897Proposed dividends Other equity and reserves Total shareholders' equity 262,395 344,596 381,069 426,555 479,213Total equity & liabilities 1,111,3361,395,8911,571,6911,742,6731,900,736

Liquidity (x)Current ratio 0.67 0.70 0.65 0.63 0.61Interest cover 3.8 3.3 2.9 2.9 3.0LeverageNet debt/EBITDA (x) 6.08 6.16 6.29 5.68 5.31Net debt/equity (%) 253.5 228.5 245.4 239.2 230.1

Per shareReported EPS (INR) 8.73 9.14 9.61 11.70 13.73Norm EPS (INR) 8.73 9.14 9.61 11.70 13.73FD norm EPS (INR) 8.73 9.14 9.61 11.70 13.73BVPS (INR) 56.68 65.87 72.84 81.53 91.60DPS (INR) 0.00 0.00 0.00 0.00 0.00Activity (days)Days receivable 86.4 77.3 66.5 59.4 60.6Days inventory 479.0 486.1 489.2 472.2 476.8Days payable 2,312.1 3,250.1 3,148.0 2,379.0 2,124.4Cash cycle -1,746.7 -2,686.7 -2,592.3 -1,847.4 -1,587.1Source: Company data, Nomura estimates


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Investment summary: Maintain Buy; TP raised to INR174 Over the past 3-4 years, Power Grids (PWGRs) cohesive senior management, led by its Chairman & MD (Mr Nayak), has instilled the DNA of unrelenting execution focus in the organisation, which is reflected in the robust growth of the companys earnings and asset base. As the Government of India (GOI) identifies and appoints a successor to Mr Nayak, who superannuates in September 2015, we believe that continuity of execution focus under the new leadership will be critical to gauge PWGRs ability to stay steadfast on the growth path with the same vigour in the longer term.

Although management succession is admittedly more of a risk as opposed to a catalyst in the case of PWGR, we believe the core management team appears well entrenched to continue to deliver growth in the medium-term and PWGRs competitive strength in the transmission space will be sustainable. As transmission capacity startup peaks in FY16 and capex-commissioning remain in tandem (as was the status up to mid-February in the current financial year) at least in the medium term, the outlook for core earnings growth and cash flows continues to appear healthy. Accordingly, we continue to view PWGR as a robust defensive growth story and a hedged play on prospects of improving fuel security, electricity demand and regulatory/policy regime for power utilities in India; the stock remains our preferred pick in the sector.

We revisit our earnings forecasts for PWGR to factor in 9MFY15 financials + takeaways from the February investors meet and our subsequent interactions with management. While transmission capacity startup up to mid-February and management commentary on the outlook was more bullish than our forecast, our calculations suggest that the effective return on regulated equity (RoRE) for 9MFY15 was a bit below par (management has reiterated no under-recovery of fixed costs in the current tariff regime, but we hope to get further clarity on the same). Capturing the same, we raise our transmission capacity startup forecasts for FY15F/16F/17F by 12%/20%/9% to INR215bn/INR243bn/INR220bn and FY15F-17F core transmission capex (cash outgo) by ~5%. We continue to build in zero returns on the ~INR20bn equity investment (which we build into our earnings model for FY15F-18F) in transmission JVs with state governments and SPVs housing bid tariff-based transmission projects and as timelines/earnings profiles are still sketchy. Furthermore, while the outlook for its consultancy business seems sanguine, the uptick in contribution for 9MFY15 has been below our forecast; accordingly, we lower EBIT contribution from the non-core business by 36%/31% in FY15F/16F. Overall, our FY15F/16F EPS forecast for PWGR gets tweaked by -2%/+2% and FY15F-17F EBITDA/EPS CAGR remains robust at 18%/19%; we expect reported RoE to rise from 14% in FY15 to 16% in FY17.

Our revised TP of INR174 sum of fair value of operating assets using a Residual Income model (INR167) and FY16F book value of investments in JVs/subsidiaries and unrestricted financial assets (INR7) implies 18% potential upside (excluding 2% dividend yield) from current levels. Our valuation methodology is unchanged; the 16% rise in our TP emanates from our higher core earnings forecast in the medium-term, roll forward to FY17 (first year of discounting) and a 30bp reduction in cost of equity (drop in risk-free rate from 8.5% to 7.7%, partially offset by a marginally higher beta).

PWGR trades at 1.6x FY17F P/B (BVPS: INR92/sh) (3yr/5yr average of forward P/B multiples is 1.7x/1.8x); our implied FY17F P/B multiple is 1.9x. We expect the stock to continue to trade at a premium to peers on account of solid defensive growth prospects.

Fig. 1: PWGR 12-mth TP raised to INR174 (previously INR150) We roll forward to FY17F (first year of discounting) and take FY17-25F as the explicit period; terminal RoE at 14%

Note: We lower our cost of equity to 12.2% vs. 12.5% previously; however, maintain our terminal growth rate at 2%; RoRE = Return on Regulated Equity Source: Company data, Nomura estimates

INR/Share New Old Comments amd changes, if anyCore Book Value (FY16F) 43.3 33.8 Core BV = Netw orth less (Equity invested in CWIP, cash, investments)Explicit (FY17F-FY25F) 52.1 50.2 Effecitive RoRE at ~16% (unchanged)Terminal 71.6 60.0 Terminal RoE=14%, terminal Grow th=2% (unchanged)Value of Operating Assets (RI) 167.0 144.0 Unrestricted Cash + Inv. In JVs/Subs 7.4 6.1 At FY16F Book (vs. FY15F previously)Target Price (Rounded) 174.0 150.0


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Fig. 2: PWGR Nomura vs. Consensus Our FY16F/FY17F EBITDA/normalised PAT are in line with consensus

Note: Consensus = Bloomberg Mean | Source: Bloomberg, Nomura estimates

Fig. 3: PWGR Change in key financial estimates We change our FY15F/FY16F net profit forecasts by -2%/+2%

Source: Nomura estimates Fig. 4: PWGR Changes to our key assumptions Transmission assets capitalization raised by 12%/20% for FY15/FY16

Source: Company data, Nomura estimates

Fig. 5: PWGR Post-tax earnings build-up Regulated contribute ~90% of PWGR's PAT; RoRE to remain at ~16%


Fig. 6: PWGR Capex and capitalisation rate forecasts Transmission Capitalization to peak in FY16F (at INR243bn), capex-commissioning to remain in tandem thereafter

Capitalisation rate implies % of previous years CWIP capitalised in the current year. Reported capex is equal to cash outgo as provided by management. Source: Company data, Nomura estimates

(Rs mn) FY15F FY16F FY17FSalesNomura 170,872 208,003 240,700 Consensus 176,832 208,400 242,759 Nomura vs consensus (%) (3.4) (0.2) (0.8) EBITDANomura 148,654 179,551 207,838 Consensus 151,493 179,675 210,322 Nomura vs consensus (%) (1.9) (0.1) (1.2) Normalized Net profitNomura 50,297 61,196 71,835 Consensus 51,815 61,568 71,826 Nomura vs consensus (%) (2.9) (0.6) 0.0 Nomalized EPSNomura 9.61 11.70 13.73 Consensus 9.95 11.70 13.65 Nomura vs consensus (%) (3.4) 0.0 0.6

(Rs mn) FY15F FY16F FY17FSalesNew 170,872 208,003 240,700 Old 177,416 209,049 NA% change (3.7) (0.5) NAEBITDANew 148,654 179,551 207,838 Old 151,586 179,142 NA% change (1.9) 0.2 NANormalized Net profitNew 50,297 61,196 71,835 Old 51,237 59,890 NA% change (1.8) 2.2 NANormalized EPSNew 9.61 11.70 13.73 Old 9.79 11.45 NA% change (1.8) 2.2 NA

(Rs bn) FY15F FY16F FY17FTransmission CapexNew 223.8 214.4 215.7 Old 213.6 201.2 205.0 % change 4.8 6.5 5.2 Asset CapitalizationNew 214.6 242.6 219.7 Old 191.0 202.5 202.3 % change 12.4 19.8 8.6 Capitalization rateNew 40.5 45.0 43.0 Old 36.5 36.5 36.0 % change 11.0 23.3 19.4 EBIT (Ex. Core Transmission) New 2.8 3.3 3.7 Old 4.3 4.7 4.8 % change (35.6) (31.0) (22.3)

(INRmn) FY14 FY15F FY16F FY17FReturn on Regulated Equity 35,627 43,587 54,629 64,769 Incentives 3,586 1,865 2,265 2,624 Return on Core Assets 39,213 45,451 56,894 67,393 Effective RoRE 16.4% 15.6% 15.8% 15.7%Other Operating income 4,351 1,751 2,075 2,354 Others (including Rebate) 369 3,095 2,227 2,087 Normalized PAT 43,933 50,297 61,196 71,835 YoY 8.7% 14.5% 21.7% 17.4%Composition (%)Regulated Returns 81.1 86.7 89.3 90.2 Incentives 8.2 3.7 3.7 3.7 Other Operating income 9.9 3.5 3.4 3.3 Others 0.8 6.2 3.6 2.9

(Rs bn) FY11 FY12 FY13 FY14 FY15F FY16F FY17F FY18FTransmission Capex (Reported) 120.0 178.1 200.4 223.2 Transmission Capex (Calculated) 135.0 192.7 237.7 291.3 223.8 214.4 215.7 215.2 Capitalization rate (%) 35.8 48.4 51.8 39.8 40.5 45.0 43.0 41.5 Assets capitalized 72.2 128.1 170.5 157.7 214.6 242.6 219.7 210.4 Transmission CWIP 264.4 329.1 396.3 529.9 539.1 510.9 506.9 511.7 GFA 503.5 633.9 806.0 965.0 1,180.6 1,424.4 1,645.2 1,856.2


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Fig. 7: PWGR Tenure of completion of term / Superannuation of key directors Current Board has worked as a cohesive unit for the last 3-4 years

Note: [1] Additionally, the Board comprises of two directors nominated by GOI and five Independent Directors, [2] *As per a BSE Filing by PWGR (1st Sep, 2014), Ministry of Power via order dated 26th Aug conveyed extension of tenure of Mr. I.S Jha up to June 2019 (i.e. date of his superannuation) Source: Company data, Nomura research

Fig. 8: PWGR Capex vs. capitalization of assets (INRbn) YTD transmission asset capitalization in FY15 stood at INR173bn

Note: Capitalization figures for 2QFY14, 3QFY14, 4QFY14 and 3QFY15 include a component of f/x rate variation. Source: Company data, Nomura research

Fig. 9: PWGR Order placement trend (INRbn) 9MFY15 ordering at INR127bn vs. INR108bn in FY14

Source: Company data, Nomura research

Key risks to our investment thesis [1] Sub-par commissioning of transmission assets due to execution delays (scalability, vendor ramp-up, widespread pushback in generation capacity turnkey workforce, clearances) without commensurate cutback/recalibration in capex, leading to potential funding risk (need for raising equity); [2] visibility of earnings accretion from investments in JVs/SPVs housing bid-based projects does not improve, [3] under-recovery of fixed costs under the new tariff regulations, and [4] deterioration in receivables position and inability to implement regulation of power supply to recover dues.

FY15-17F EPS CAGR pegged at 19%; RoE to nudge up to 16% Transmission capacity start-up in FY15 seen at INR215bn (96% of capex) At INR173bn (including exchange-rate variation component of ~INR4bn), transmission capacity startup up to mid-February was in line with the INR177bn capex over this period. Notably, capacity startup (adjusted for exchange rate variation) was 5% higher than capex for 9MFY15. Our FY15F transmission asset capitalisation (capacity startup) of INR215bn is based on our understanding that the INR70-80bn Biswanath Chariyali-Agra element of the NE-NR/WR Interconnector would be commissioned in 1QFY16 (vs managements best-efforts target timeline of March 2015). Accordingly, we expect transmission capacity asset capitalisation to peak at INR243bn (113% of capex) in FY16.

Two-thirds of overall CWIP as of Dec-2014 being in installed state augurs well As INR359bn (two-thirds of the overall CWIP) is under various stages of 'installed state' and the typical gestation period for most elements of projects is 2.02.5 years, the signal is clear that the bulk of these assets should see commercial start-up potentially within the next 18 months.

Director Category Age Date of(yrs) Appointment Superannuation Tenure

CompletionMr. R.N. Nayak CMD 59 1-Sep-11 30-Sep-15 31-Aug-16Mr. R.T. Agarw al Director (Finance) 58 29-Jul-11 31-Aug-16 28-Jul-16Mr. I.S. Jha * Director (Projects) 55 1-Sep-09 30-Jun-19 30-Jun-19Mr. R.P. Sasmal Director (Operations) 56 1-Aug-12 28-Feb-18 31-Jul-17Mr. Ravi P. Singh Director (Personnel) 54 1-Apr-12 31-Jan-20 31-Mar-17

Date of

56 58 58

49 49

30

63

49 47

72

0

10

20

30

40

50

60

70

80

3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Capex Capitalization

0

50

100

150

200

250

FY10 FY11 FY12 FY13 FY14 9MFY15

Tower ConductorSubstation TransmissionSystem Package Others


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Non-transmission EBIT contribution lowered as ramp-up of consultancy business watered-down While income from consultancy services for 9MFY15 was up 20% y-y and management expects a similar growth rate in the medium-term, the ramp-up is below our forecast. Accordingly, while we believe that the outlook for consultancy business growth remains sanguine, we lower our FY15F/16F/17F revenue forecasts for this division by 42%/35%/30%; implied FY15F-17F CAGR in consultancy revenue is 18%. Overall, our forecast for non-transmission EBIT in FY15F/FY16F/FY17F is lower by 36%/31%/22%.

Fig. 10: PWGR Bid-based projects, JVs for infra-state projects and Green Energy Corridors We build in ~INR20bn equity investment (for FY15F-18F) in transmission JVs with state govts and bid tariff-based transmission projects

Note: [1] * As per newsflow (Business Standard, 27th Feb), the Gadarwara (A & B) projects have been won by PWGR, however, there has been no press release or exchange filing by Power Grid relating to the same. [2] In addition, PWGR secured the bid to construct transmission lines linked to the NCC power projects; however, the bidding was annulled and the project was assigned to PWGR on a cost-plus basis. [3] CoD = Date of Commercial Operations Source: Company data, REC, Government of India, Nomura research

Transmission Projects / Opportunity Expected PWGR 30% Equity Award(Figures in INRmn, unless stated otherwise) Capex Holding PWGR share Date Remarks / Levelized Tariff / CoDBid-based projectsVemagiri-Khammam-Hyderabad 14,000 100.0% 4,200 Apr'12 Project cost as per media reports

Levelized Tariff = INR1197.4mn/yrProject stands scrapped post CERC order

Nagapattinam-Salem-Madhugiri 11,000 100.0% 3,300 Feb'12 Project cost as per media reportsLevelized Tariff = INR987mn/yrAs per CERC Order (Apr'14), PWGR to implement the project in 30 months from date of grant of transmission license (20-6-2013)

Vizag Transmission NA 100.0% NA Aug'13 Variation b/w L1 and L2/L3 bids w as 10-11%Levelized Tariff = INR2311mn/yrScheduled CoD = Aug-2016

Unchahar Transmission NA 100.0% NA Mar'14 Levelized Tariff = INR167.7mn/yrScheduled CoD = Sep-2016

NRSS XXXI (A) NA 100.0% NA May'14 Levelized Tariff = INR594.3mn/yrScheduled CoD = Jul-2017

Vindhyachal-Jabalpur Transmission NA 100.0% NA Feb'15 Levelized Tariff = INR2110mn/yrScheduled CoD = June-2018

Gadarw ara-A and Gadarw ara-B 60,000 100.0% 18,000 Mar'15* Project cost and Levelized Tariff of INR2901mn/INR2568mn for Gadarw ara-A & B projects as per media reports

Joint VenturesBihar Grid Company 63,000 50.0% 9,450 Kalknga Bidyut Prasaran Nigam 25,000 50.0% 3,750 JV w ith RITES (Railw ays) 50.0% MoU inked; specif ics not definedGreen Energy CorridorsOverall Inter-state Opportunity 130,000 100.0% NA PWGR to implement

Projects linked to KfW's EUR500mn loanDesert Power India - 2050Phase-I opportunity 200,000 NA NA ~300GW transmission capacity planned

Phase-I investment opportunity by 2022


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Fig. 11: PWGR Projects to be completed imminently Projects are expected to be commissioned within FY15F as per PWGR's 3QFY15 Investor Presentation

Note: [1] Targeted date of completion and Remarks as per CEA's project status report (Jan-2015), [2] 'PS' = Pooling Station, 'ROW' = Right of Way Source: Power Grid Investor Presentation for 3QFY15, CEA

Fig. 12: PWGR Projects to be completed in near term These projects are expected to be commissioned in FY15F or early FY16F

Note: [1] Target as per CEA's project status report (Jan-2015), [2] 'NBWL' = National Board for Wildlife, 'WIP' = Work in progress, 'ROW' = Right of Way, NER = North-Eastern Region | Source: Power Grid Investor Presentation for 3QFY15, CEA

Fig. 13: PWGR Consultancy, Telecom business financials Together the businesses to contribute ~2.5% of FY16F/17F total EBIT

Note: Consultancy revenue excludes revenues on account of Sale of Products of INR0.9bn/2.9bn in FY13/FY14 respectively | Source: Company data, Nomura estimates

Project elements

Target Date

Remarks as per CEA's status report (Jan-2015)

Transmission linesAngul-Jharsuguda Dec-15 RoW problem Jaipur-Bhiw ani Feb-15 NASholapur-Pune Feb-15 Severe RoW problem Silchar-Imphal Feb-15 Severe RoW problem Vindhyachal-Satna Feb-15 Delay in Forest Clearance SubstationsPune (GIS) Mar-15 Delay in land acquisitionVindhyachal PS Mar-15 Delay in land acquisition and

encroachment

Project elements

Target Date

Remarks as per CEA's status report (Jan-2015)

Transmission linesBarh-Gorakhpur Jun-15 Forest Clearance aw aitedBisw anath Chariyali Mar-15 Expected by Mar'15, efforts

shall be made to complete earlier. Site w ork affected in NER critical

Dharmapuri-Somnahalli

Jun-15 Severe RoW problem

Gw alior-Jaipur Mar-15 NBWL approval aw aitedKanpur-Jhatikara Jun-15 Matching w ith Kanpur 765KV

substationMeerut-Moga Mar-15 RoW problemRaigarh-Champa Mar-15 Contract terminated; plug under

re-tenderSalem-Madhugiri Jun-15 Severe RoW problemSilchar-Purba-Kanchan Bari

Jan-15 Severe RoW problem in Assam portion (Tripura portion completed)

SubstationsAgra HVDC Mar-15 WIPBareilly Feb-15 Aw ard placed in Oct'11. Land

acquired in Dec'12Bisw anath Chariyali Sep-15 WIPChampa Mar-15 Aw ard placed in Oct'11. Delay

in land acquisition (Apr'13)Kanpur Jun-15 Aw ard placed in Jun'13Madhugiri Jun-15 WIPNew Melli (GIS) NA NANavi Mumbai (GIS) Mar-15 Commissioning matching w ith

associated lineSalem (Dharmapuri) NA NAVadodara (GIS) Feb-15 Aw ard placed in May'12. Land

acquired in Jun'13

(Rs m) FY13 FY14 FY15F FY16F FY17FCONSULTANCYRevenue 2,290 3,325 3,491 4,189 4,860

YoY -21.0% 45.2% 5.0% 20.0% 16.0%EBIT 1,333 2,787 1,916 2,254 2,563

Margin 48.2% 61.4% 54.9% 53.8% 52.7%Contribution to overall revenues 1.8% 2.2% 2.0% 2.0% 2.0%Contribution to overall EBIT 1.8% 3.2% 1.9% 1.9% 1.9%TELECOMRevenues 2,314 2,761 2,641 2,811 3,087

YoY 15.0% 19.3% -4.4% 6.4% 9.8%EBIT 761 937 516 614 672

Margin 32.9% 33.9% 19.5% 21.8% 21.8%Contribution to overall revenues 1.8% 1.8% 1.5% 1.4% 1.3%Contribution to overall EBIT 1.0% 1.1% 0.5% 0.5% 0.5%


8

Will PWGR need fresh equity funding in the next 2-3 years? The answer depends upon three factors: [1] Big ticket transmission capacity startup in FY16 (earlier the better) + managements flexibility towards potential moderation of capex (vs targets stated / committed to the GOI), if visibility on project commissioning reduces and/or cash flow availability is below expectations, [2] Progressive investment outlay in non-core transmission assets i.e. JVs with state governments, bid tariff-based projects housed in SPVs, Green Corridors and visibility of returns thereon, and [3] magnitude of uptick, if any, in capex outlay for the XIIIth Plan Period (FY18-22). Based on our base case earnings forecasts, PWGR would have sufficient equity to fund its planned capex at least up to FY2017. Fig. 14: PWGR Capex and cash flow from operations Gearing expected to be ~2.5x in FY15F/FY16F vs. most restrictive covenant allowing D/E of 3:1; sustained negative working capital cycle is critical


Stock merits premium multiple on high earnings visibility RI model-based TP pegged at INR174, implying 18% potential upside Our target price for PWGR is the sum of the value of its FY16F unencumbered financial assets and investments in JVs/subsidiaries (INR7/sh), and the value of its core operating assets using a residual income (RI) model (INR167/sh). While our valuation methodology is unchanged, the 16% rise in our TP for the stock emanates from higher core earnings forecast for PWGR in the medium-term, roll-forward to FY17 (first year of discounting) and a 30bp reduction in cost of equity to 12.2% (drop in risk-free rate from 8.5% to 7.7%, partially offset by a marginally higher beta). We continue to assume perpetual growth in PWGRs core-business income at 2% and terminal RoE at 14%.

Valuation multiples not inexpensive; relative premium to peers is merited At the current market price (CMP), PWGR trades at a 1-yr forward P/B of 1.8x (vs. 3-yr average 1-yr forward P/B of 1.7x and 5-yr average 1-yr forward P/B of 1.8x) and 1-yr forward P/E of 12.6x (vs. 3-yr average 1-yr forward P/E of 12.4x and 5-yr average 1-yr forward P/E of 13.3x) implying current multiples are in the vicinity of its historical

(INR mn) FY14 FY15F FY16F FY17FReported Net profit 44,974 48,694 61,196 71,835

Depreciation 39,957 50,346 60,680 71,015

Deferred tax & others 4,784 (100) - -

Operating Cash Flow (OCF) 89,715 98,940 121,876 142,850 Change in Working Capital 19,079 (8,913) 28,793 16,596

Cash Flow from Operations (CFO) 108,793 90,027 150,669 159,446 Debt repayment (31,977) (41,031) (51,680) (63,824)

Dividend Payment (15,765) (12,221) (15,710) (19,178)

Cash available for Investments 61,052 36,775 83,278 76,444 BoP Free Cash 8,738 37,644 12,287 25,560

Capex (Cash Outgo) on Core Business (268,839) (223,843) (214,383) (215,685)

Equity portion (30%) (80,652) (67,153) (64,315) (64,705)

Net Investment in JVs/SPVs (100% equity) 1,488 462 (3,414) (5,450)

Total Equity Required (Capex + Investments) (79,164) (66,691) (67,729) (70,155)

Figures as % of Equity RequiredOCF + Free Cash (BoP) post Debt Repayment 0.8 1.4 1.2 1.5

OCF + Free Cash (BoP) post Debt Repayment + Dividend 0.6 1.2 1.0 1.2

CFO + Free Cash (BoP) post Debt Repayment 1.1 1.3 1.6 1.7

CFO + Free Cash (BoP) post Debt Repayment + Dividend 0.9 1.1 1.4 1.5

Long-term Debt/Equity (%) 2.34 2.44 2.41 2.33 Total Debt/Equity (%) 2.41 2.51 2.48 2.39 Net Debt/Equity (%) 2.29 2.45 2.39 2.30


9

averages. In this context, our FY16F implied target P/B multiple of 1.9x and P/E multiple of 13.1x are the upper end of their respective historical ranges, but do not appear to be stretched. We believe that multiples are arguably fair considering the robust FY15-17F earnings growth outlook, transmission capacity startup appearing set to exceed capex in FY16, augmenting cash flow visibility and reported RoE moving up from ~14% in FY15F to ~16% in FY17F. Fig. 15: PWGR 1-year forward P/B band PWGR currently trades at 1yr fwd P/B of 1.8x (3yr avg at 1.7x)

Source: Bloomberg, Nomura research

Fig. 16: PWGR 1-year forward P/B band PWGR trades at its five-year avg fwd P/B

Source: Bloomberg, Nomura research Fig. 17: PWGR 1-year forward P/E band PWGR currently trades at 1yr fwd P/B of 12.6x (3yr avg at 12.4x)


Fig. 18: PWGR Premium of 1yr fwd P/B to NTPC PWGR currently trades at a ~27% premium to NTPC on 1yr fwd P/B basis

Source: Bloomberg, Nomura research Fig. 19: PWGR 1-year forward P/B vs. RoE P/B multiple has moved largely in sync with reported RoE prospects


Fig. 20: PWGR FY16F P/B vs. RoE PWGR has among the highest RoE in the utilities space

Source: Bloomberg, Nomura estimates

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NHPC

RPWR

KSK

JSPL

NTPCCESC

ADANI

PWGR JSW

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10

Fig. 21: PWGR Target price based on Residual Income model Rounded TP (INR174) = Value of core operating assets (INR167) + BV of unencumbered financial assets + FY16F investment in JVs/SPVs (INR7)

Non-operating financial assets exclude INR7bn restricted cash on books as of FY14, based on reported financials. Note: We lower our cost of equity to 12.2% vs. 12.5% previously; however, maintain our terminal growth rate at 2% | Source: Company data, Nomura estimates Fig. 22: PWGR Valuation comparison PWGR justifiably trades at a premium to private IPPs; expected ROE is the best in class

Note: Pricing of Mar 17, 2015; ROE calculation based on normalised net profit. Source: *Bloomberg consensus estimates for Adani Power and NR stocks; Nomura estimates for the remaining

FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY25E TerminalCore BVPS (Excl. Cash & Bonds) 25.6 36.2 43.3 52.8 63.1 74.8 87.8 170.5 200.6 Core EPS 8.2 9.5 11.6 13.5 15.5 17.5 19.4 28.8 Core EPS grow th -4.9% 15.1% 22.0% 17.1% 14.8% 12.8% 10.7% 6.9% 2.0%Payout Ratio 35.1% 31.4% 30.1% 29.9% 33.5% 33.1% 32.9% 34.6%Cost of Equity 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2% 12.2%Residual Income 5.1 6.3 7.1 8.2 9.1 9.8 10.3 10.3 Discounting Factor - 1.00 0.89 0.79 0.71 0.64 0.36 0.36 RI - Discounted Value - - 7.1 7.3 7.2 7.0 6.5 3.7 71.6

Rs per share Key Assumptions (%)Base BV (FY16E) 43.3 Cost of Equity (CoE) 12.2Explicit (FY17E-FY25E) 52.1 Terminal year RoE 14.0Terminal 71.6 Terminal grow th 2.0Value of Operating Assets (RI) 167.0 Unrestricted Cash + Inv. In JVs/Subs 7.4 Target Price (rounded) 174.0

FY15F FY16F FY17F FY15F FY16F FY17F FY15F FY16F FY17F FY15F FY16F FY17FCoveredAdani Pow er ADANI IN Reduce 2,310 50.5 35.0 NM NM 23.9 2.8 2.8 2.7 NM (1.6) 8.8 9.3 7.3 6.9 CESC CESC IN Buy 1,268 600.0 684.0 24.8 12.6 7.9 1.5 1.3 1.2 6.1 11.1 15.7 10.8 6.5 5.4 JSW Energy JSW IN Reduce 3,133 119.8 69.0 16.6 16.3 16.5 2.7 2.4 2.2 17.0 15.6 13.9 8.1 8.2 8.1 NTPC NTPC IN Buy 20,753 157.9 157.0 14.9 14.3 13.3 1.5 1.4 1.4 10.1 10.0 10.4 11.3 11.2 10.7 Pow er Grid PWGR IN Buy 12,317 147.7 174.0 15.4 12.6 10.8 2.0 1.8 1.6 13.9 15.2 15.9 11.5 10.0 9.0 Reliance Pow er RPWR IN Neutral 2,592 58.0 67.0 16.5 15.4 11.6 0.8 0.8 0.7 4.9 5.0 6.3 13.9 9.9 11.3 Average 17.6 14.2 14.0 1.9 1.8 1.6 10.4 9.2 11.8 10.8 8.8 8.6 Covered @ TP TP (INR) UpsideAdani Pow er 35.0 -31% NM NM 16.6 2.0 1.9 1.9 8.6 6.7 6.3 JSW Energy 69.0 -42% 9.6 9.4 9.5 1.5 1.4 1.3 5.6 5.5 5.3 NTPC 157.0 -1% 14.8 14.2 13.2 1.5 1.4 1.3 11.2 11.2 10.7 Pow er Grid 174.0 18% 18.1 14.9 12.7 2.4 2.1 1.9 12.4 10.8 9.7 Reliance Pow er 67.0 16% 19.1 17.8 13.5 0.9 0.9 0.8 14.7 10.4 11.8 CESC 684.0 14% 28.3 14.4 9.0 1.7 1.5 1.3 11.4 6.9 5.7 Non coveredJPVL JPVL IN NR 522 11.2 NM 30.3 10.1 0.5 0.5 0.5 0.5 1.2 7.1 18.1 7.1 5.5 JSPL JSP IN NR 2,538 174.0 8.5 12.6 9.1 0.7 0.7 0.7 8.7 5.4 7.8 9.7 7.3 6.5 KSK KSK IN NR 456 69.3 NM NM 27.7 0.9 0.8 0.8 (5.7) (9.7) 2.6 n.a n.a n.aNHPC NHPC IN NR 3,425 19.4 19.0 9.9 9.2 0.8 0.7 0.7 4.2 7.5 7.6 7.9 6.8 6.8 Tata Pow er TPWR IN NR 3,474 80.6 NM 27.5 15.0 1.7 1.6 1.5 (3.2) 5.4 9.5 7.5 7.2 6.6 Torrent Pow er TPW IN NR 1,204 159.8 NM 19.7 16.3 1.2 n.a n.a 1.7 6.0 7.1 n.a n.a n.aAverage 13.7 20.0 14.6 1.0 0.9 0.8 1.0 2.6 6.9 10.8 7.1 6.4 Overall average 16.2 17.4 14.3 1.4 1.3 1.2 4.9 5.7 9.2 10.8 8.1 7.6

Company Ticker RatingEV/EBITDAROE (%)P/BP/EMkt Cap

(US$ mn)Price

(Local)Target

Price


11

Fig. 23: PWGR Price performance vs. peers and BSE Sensex Power Grid Is up 45% in last 12 months (38% in CY2014) vs. Sensex at 30%, outperforming majority of its peers in the Utilities space

Note: Pricing of March 17, 2015 | Source: Bloomberg, Nomura estimates

B'berg Market CurrentCompany Ticker Cap ($mn) Ratings Price (INR) 1m 3m 6m 12m YTD CY2013 CY2014BSE SENSEX SENSEX NA NA 28,736 (1.4) 7.3 8.5 31.6 4.5 9.0 29.9 Private IPPsAdani Pow er ADANI IN 2,310 Reduce 50.5 (0.1) 25.5 3.8 21.1 13.9 (36.9) 13.7 CESC CESC IN 1,268 Buy 600.0 (1.8) (4.6) (21.5) 28.6 (10.5) 46.6 43.9 Indiabulls Pow er IBPOW IN 450 NR 9.6 (1.5) (5.0) (14.0) 34.5 (4.0) (43.4) 21.3 JPVL JPVL IN 522 NR 11.2 1.4 (3.9) (18.9) (14.6) (7.5) (49.6) (36.2) JSPL JSP IN 2,538 NR 174.0 14.4 31.9 (20.3) (33.3) 14.6 (41.7) (41.8) JSW Energy JSW IN 3,133 Reduce 119.8 6.7 32.7 60.2 124.1 16.6 (17.0) 82.0 Lanco Infratech LANCI IN 216 Suspended 5.5 (7.6) (2.7) (31.7) (16.0) (9.1) (43.5) (20.9) Reliance Pow er RPWR IN 2,592 Neutral 58.0 (3.4) (2.9) (19.3) (10.8) (6.2) (21.6) (15.6) Tata Pow er TPWR IN 3,474 NR 80.6 (4.2) 0.9 (3.6) (0.5) (1.9) (14.2) (10.1) Torrent Pow er TPW IN 1,204 NR 159.8 (6.9) 3.4 2.8 101.0 0.7 (38.0) 32.3 KSK Energy KSK IN 456 NR 69.3 (20.8) (1.1) (19.9) 19.4 0.1 11.3 2.6 PSUsNHPC NHPC IN 3,425 NR 19.4 (6.1) 4.6 (3.2) 8.1 2.9 (23.2) (3.6) NTPC NTPC IN 20,753 Buy 157.9 9.6 23.0 19.4 33.9 9.6 (12.4) 5.1 Power Grid PWGR IN 12,317 Buy 147.7 (3.3) 11.0 8.6 45.5 7.0 (12.9) 38.1 Satluj Jal SJVN IN 1,662 NR 25.2 (0.8) 9.6 10.3 22.9 2.6 0.2 14.7

Absolute price performance (%)


12

Appendix A-1

Analyst Certification I, Anirudh Gangahar, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures NTPC NTPC IN INR 158 17-Mar-2015 Buy N/A Power Grid Corp of India PWGR IN INR 147 17-Mar-2015 Buy N/A

Power Grid Corp of India (PWGR IN) INR 147 (17-Mar-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 20-Jun-14 150.00 132.30 24-Apr-14 125.00 105.60 05-Nov-13 129.00 95.15 19-Jul-13 142.00 111.35 31-Jul-12 140.00 118.95 26-Mar-12 135.00 105.95

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of INR174 is the sum of the value of FY15F non-encumbered financial assets (INR7/sh) and the value of operating assets using a residual income (RI) model (INR167/sh), wherein we assume a 12.2% cost of equity, 14% terminal ROE, and 2% perpetual growth in core-business income. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price Risks include: [1] Sub-par commissioning of transmission assets due to execution delays without commensurate cutback/recalibration in capex, leading to potential funding risk, [2] visibility of earnings accretion from investments in JVs/SPVs housing bid-based projects does not improve, [3] under-recovery of fixed costs under the new tariff regulations, and [4] deterioration in receivables position and inability to implement regulation of power supply to recover dues.


13

NTPC (NTPC IN) INR 158 (17-Mar-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 11-Aug-14 157.00 135.85 28-Jun-14 167.00 152.25 31-Mar-14 145.00 119.90 24-May-13 193.00 150.00 23-Nov-12 191.00 159.40 26-Mar-12 205.00 165.45

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of INR157 for NTPC is based on a sum of the fair value of its operating assets using a residual income (RI) model (INR126.6) + FY15F investment in JVs/subsidiaries (INR8.6) and non-operating financial assets (INR21.9). Our RI model assumes 12.5% cost of equity, 15.5% perpetual ROE (on regulated assets), and 2% perpetual growth in core business income. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price Key risks include 1) Material under-recovery for energy charges (fuel cost) and O&M expenses under FY15-19 tariff regulations, relative to our forecast; 2) persistent delays in CoD of under-construction projects and development of captive coal blocks; 3) deployment of cash to acquire generation assets which would yield less than assured regulated returns. Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 43% of companies with this rating are investment banking clients of the Nomura Group*. 43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 54% of companies with this rating are investment banking clients of the Nomura Group*. 8% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 26% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 December 2014. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013


14

The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analysts target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. 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