valuation report of power generation company
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A model valuation report of a power generation company, complete with letter to management, valuation report and calculations for arriving at the valuation.Copyright: sharedGroup project undertaken with 4 others.TRANSCRIPT
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NTPC Limited Valuation Report August 2009 III case study by Group No. 3
Prepared By:
Lavesh Mola
Hiren Patadia
Nisha Bhuta
Mahadevan Shankar
Samuel George
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14 Aug 2009
NTPC Limited
NTPC Bhawan,
SCOPE Complex, Institutional Area, Lodhi Road,
New Delhi - 110003
For the Kind Attention of Mr. R. S. SHARMA, Chairman and Managing Director
VALUATION OF NTPC LIMITED
Dear Sir,
We refer to our Engagement Letter dated 28 June 2009 confirming our appointment for the valuation of
NTPC Limited (“NTPC” or “the Company”). As per the terms of the engagement, we are enclosing our
business valuation report of NTPC along with this letter.
We understand that the report is exclusively for your internal purposes and hence should not be used for
any statutory, regulatory, accounting purposes or for reporting in the annual report of the Company,
whether in whole or in part without our prior written consent, which consent will only be given after full
consideration of the circumstances at the time. Please note that all comments in our report must be read
in conjunction with the Caveats to the report, which are contained in Section 6.
Please feel free to contact us if you need any further information/clarifications.
Yours Sincerely,
LHNMS
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Letter of Engagement
Strictly Confidential
28 June 2009
NTPC Limited
NTPC Bhawan,
SCOPE Complex, Institutional Area, Lodhi Road,
New Delhi - 110003
For the Kind Attention of Mr. R. S. SHARMA, Chairman and Managing Director
Dear Sir,
This letter of engagement sets out the basis upon which „The LHNMS Group‟ („LHNMS‟ or „we‟ or „us‟),
will work with NTPC Ltd. („the Client‟ or „you‟ or „the Company‟) in relation to the valuation of the
Client / Client‟s Company.
Scope of Work/Services
Based on discussions with the Management, we understand that the Company is evaluating the value of
the Company and its shares, as a part of the Management endeavour to undertake a internal restructuring
exercise. In this context, you require our assistance to carry out the Valuation of the Company and its
value per share.
In this role we may required to perform all or some of following work.
1) Obtain a good understanding of Company, from its past & present operations, financial conditions,
expansion plans, Strategies, prospectus of company & business.
2) Prepare a Presentation detailing Key aspects of Business with different options of the pricing (Share
valuation) for the Management using methodologies like DCF / Price earnings Multiples etc.
Valuation of a company is not an exact science and ultimately depends upon what it is worth to a serious
investor or buyer who for his or her own reasons may be prepared to pay a substantial goodwill. Our
valuation is not adjusted for any „special‟ purchaser who has particular connections or relationships with
the company or business and can obtain benefits such as rationalization, synergy in operations etc.
Our assessment of the valuation of the Company will be on the basic assumption of a going concern
entity and would be based on some or all of the popular methodologies.
Valuation Date:
This valuation of the Company and the value per share will be computed as on 31st March 2009
(Valuation Date).
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Duration of Valuation Assignment:
Based on discussion with Management of NTPC Ltd & our Scope of Work detailed in this report we
expect to deliver our report in ………..days of commencement of our work.
Above timing however will be dependent on availability & promptness with which information is made
available to us.
Payment Terms:
Our fees will be based on quality & seniority of staff & time occupied for work.
It is excluding all taxes, Out of Pocket expenses & Outside Consultant Fees (If any appointed).
In case of any unforeseen event or circumstances arise which require us to do more work, it would be
charged in addition of above as may be decided in writing.
Our Fees will be paid 30% on acceptance of Engagement letter, 40% on submission of Draft Report &
Balance on submission of Final Report.
Distribution of Report & Other General Information:
We understand that the report is exclusively for your internal purposes and is confidential and has been
prepared exclusively for the Management of NTPC Ltd and it should not be used, reproduced or
circulated to any other person or for any purpose other than as mentioned above, in whole or in part,
without the prior written consent of LHNMS.
This report should not be used for any statutory, regulatory, accounting purposes or for reporting in the
annual report of the Company, whether in whole or in part without our prior written consent, which
consent will only be given after full consideration of the circumstances at the time. Please note that all
comments in our report must be read in conjunction with the Caveats to the report, which are contained
in Section 6.
Acceptance of Terms & Conditions:
We would be grateful if you would confirm our understanding of your instructions and your agreement to
the terms of this letter by signing and returning the enclosed copy of this letter.
We are keen to work with you and look forward to your confirmation. Meanwhile, please feel free to
contact us for any clarifications.
Please feel free to contact us if you need any further information/clarifications.
Yours Sincerely,
LHNMS
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Contents
Page
Abbreviations 6
Tables 7
Section 1: Context and Purpose 8
Section 2: Company Background and Financial Overview 9
Section 3: Financial Overview 12
Section 4: Indian Power Sector - Industry analysis 15
Section 5: Valuation Analysis 20
Section 6: Caveats 26
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Abbreviations
BSE SENSEX Bombay Stock Exchange index
CAGR Compounded Annual Growth Rate
CAPM Capital Asset Pricing Model
DCF Discounted Cash Flow
D/E Debt Equity
EBITDA Earnings before Interest, Tax, Depreciation & Amortisation
EEG Erneuerbare-Energien-Gesetz
EV Enterprise Value
FCFF Free Cash Flow to Firm
FCFE Free Cash Flow to Equity holders
FMV Fair Market Value
FV Fair Value
FY Financial Year ending 31 March
Rs. Rupees
NAV Net Asset Value
NSE National Stock Exchange
PAT Profit After Tax
Valuation Date 31 March 2009
WACC Weighted Average Cost of Capital
YoY Year on Year
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Tables
Page
Table 1.1: Capacity Addition Plan upto 2017 11
Table 1.2: Key Financial Information – P&L and Common Size Statement 12
Table 1.3: Key Financial Information – Balance Sheet 13
Table 1.4: Financial Projections 14
Table 1.5 GDP Growth Rate of Different Countries 15
Table 1.6 Demand & Power Supply in India 15
Table 1.7 Demand & Power Supply in India for Regions 16
Table 1.8 India‟s Energy Generation Capacity 18
Table 1.9 Additional Capacity requirement of India under different GDP growth rates 19
Table 1.10: Cash flow projections 22
Table 1.11: Sales, EBITDA & Installed Capacity multiples of comparable companies 24
Table 1.12: Final Value Summary 25
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1. Context and Purpose
NTPC, a Company in the business of power generation began its operations in the year 1975. The
Company‟s business model comprises of generation of power and sale of bulk power and has the
distinction of being India‟s largest power generator.
The Indian growth story has given a lot of impetus to basic infrastructure development, where power as a
sector was given the highest priority by the Dr. Manmohan Singh led UPA Government. The energy need
of India has increased manifold over the last few decades and certain vital developments like the nuclear
treaty between USA and India, emphasises the role of power sector to national econometrics. Some key
developments like initiation of Ultra Mega Power Projects (UMPP) of 4000 MW for the first time in India
to accelerate capacity addition and introducing bulk energy production using globally accepted energy
efficient technologies to India. Moreover the recent success of IPOs and financial closures has proved
that fund raising is not a constraint to the power sector.
The Management has been considering an internal evaluation of the value of the Company as a part of
an internal restructuring exercise. In this context the Company has requested LHNMS to carry out an
independent valuation of its shares.
We have carried out a valuation of the Company based on the financial information and accounting
estimates, provided to us by the Company, as of 31 March 2009 (“the Valuation Date”).
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2. Company Background and Financial Overview
2.1 Introduction and Background
NTPC is India‟s Largest Power Company. NTPC‟s principal business is generation and sale of bulk
power. Other business includes providing consultancy, project management and supervision, oil and gas
exploration and coal mining. The total installed capacity of the company as on 31 March 2009 is
30,144MW including that under joint ventures. NTPC commissioned a 500 MW Unit 7 of Kahalgaon
Super Thermal Power Project- Stage II on 30 June 2009, taking the total capacity to 30,644 MW. Of this,
24,709 MW is coal based capacity and the rest gas.
NTPC is India's largest power generator with 31GW of capacity (23% of installed capacity) and generates 206bu (29% of generation). NTPC contributes more than one-fourth of India‟s total power generation with less than one-fifth capacity. Its Capacity is spread across 21 locations with coal-based units (22.4GW), gas-based units (3.9GW) and JV projects (1.0GW). NTPC's output is contracted through long term PPAs (25 years for coal-based and 15 years for gas-based) with customers (SEBs 99% of its sales). All billing to SEBs is secured through letters of credit. It plans to double capacity by FY12E and triple capacity by FY17E. NTPC ranked 317th in the „2009, Forbes Global 2000‟ ranking. NTPC has been awarded No.1, Best Workplace in India for the year 2008, by the Great Places to Work Institute.
Milestones:
1975 - Incorporated with authorized capital of Rs. 1250 Million
1982 - First 200 MW unit at Singrauli was commissioned
1985 - GOI approved setting up of three gas based projects by NTPC at Kawas in Gujarat,
Auraiya in UP and Anta in Rajasthan
1987 - NTPC crossed 5000 MW installed capacity
1989 - NTPC‟s consultancy division was launched
1990 - NTPC crossed total installed capacity of 10000 MW
1994 – The Company crossed installed capacity of 15000 MW.
1997 - Identified by the GoI as one of the Navratna public sector undertakings and achieved 100
billion units generation in one year.
2002 - Crossed 20000 MW of installed capacity.
2004 - NTPC became a listed company.
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2.2 History & Nature of Various Business:
NTPC‟s quest for diversification started about a decade back with its foray into Hydro Power. It has, since then, been moving towards becoming a highly diversified company through backward, forward and lateral integration. The company is well on its way to becoming „An Integrated Power Major‟, having entered Hydro Power, Coal Mining, Power Trading, Equipment Manufacturing and Power Distribution. NTPC has made long strides in developing its Ash Utilization business. In its pursuit of diversification, NTPC has also developed strategic alliances and joint ventures with leading national and international companies.
Hydro Power: In order to give impetus to hydro power growth in the country and to have a balanced portfolio of power generation, NTPC entered hydro power business with the 800 MW Koldam hydro project in Himachal Pradesh. Two more projects have also been taken up in Uttarakhand. A wholly owned subsidiary, NTPC Hydro Ltd., is setting up hydro projects of capacities up to 250 MW.
Coal Mining: In a major backward integration move to create fuel security, NTPC has ventured into coal mining business with an aim to meet about 20% of its coal requirement from its captive mines by 2017. The Government of India has so far allotted 7 coal blocks to NTPC, including 2 blocks to be developed through joint venture route. Coal Production is likely to start in 2009-10.
Power Trading: 'NTPC Vidyut Vyapar Nigam Ltd.' (NVVN), a wholly owned subsidiary was created for trading power leading to optimal utilization of NTPC‟s assets. It is the second largest power trading company in the country. In order to facilitate power trading in the country, „National Power Exchange Ltd.‟, a JV between NTPC, NHPC, PFC and TCS has been formed for operating a Power Exchange.
Ash Business: NTPC has focused on the utilization of ash generated by its power stations to convert the challenge of ash disposal into an opportunity. Ash is being used as a raw material input for cement companies and brick manufacturers. NVVN is engaged in the business of Fly Ash export and sale to domestic customers. Joint ventures with cement companies are being planned to set up cement grinding units in the vicinity of NTPC stations.
Power Distribution: „NTPC Electric Supply Company Ltd.‟ (NESCL), a wholly owned subsidiary of NTPC, was set up for distribution of power. NESCL is actively engaged in „Rajiv Gandhi Gramin Vidyutikaran Yojana‟programme for rural electrification and also working as 'Advisor cum Consultant' for Ministry of Power for implementation of Accelerated Power Development and Reforms Programme(APDRP) launched by Government of India.
Equipment Manufacturing: Enormous growth in power sector necessitates augmentation of power equipment manufacturing capacity. NTPC has formed JVs with BHEL and Bharat Forge Ltd. for power plant equipment manufacturing. NTPC has also acquired stake in Transformers and Electricals Kerela Ltd. (TELK) for manufacturing and repair of transformers.
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NTPC has formulated a long term Corporate Plan upto 2017. In line with the Corporate Plan, the capacity addition under implementation stage is presented below:
Table 1.1 Capacity Addition Plan upto 2017
Project State Fuel MW
1. Sipat I (3 x 660) Chhattisgarh Coal 1980
2 Barh I (3 x 660) Bihar Coal 1980
3 Korba III ( 1 x 500) Chhattisgarh Coal 500
4. Farakka III ( 1 x 500)s West Bengal Coal 500
5. NCTPP II ( 2 x 490) Uttar Pradesh Coal 980
6. Simhadri II ( 2 x 500) Andhra Pradesh Coal 1000
7. Indira Gandhi STPP- JV with IPGCL & HPGCL ( 3 x 500) Haryana Coal 1500
8. Vallur I -JV with TNEB ( 2 x 500) Tamilnadu Coal 1000
9. Nabinagar TPP-JV with Railways (4 x 250) Bihar Coal 1000
10. Bongaigaon(3 x 250) Assam Coal 750
11. Koldam HEPP ( 4 x 200) Himachal Pradesh 800
12. Loharinag Pala HEPP ( 4x 150) Uttarakhand 600
13. Tapovan Vishnugad HEPP (4 x 130) Uttarakhand 520
14. Mauda ( 2 x 500) Maharashta Coal 1000
15. Barh II (2 X 660) Bihar Coal 1320
16. Vindhyachal-IV (2X500) Madhya Pradesh Coal 1000
17. Rihand III(2X500) Uttar Pradesh Coal 1000
Total 17430
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3. Financial Overview
3.1 Financial Information
Key financial indicators from NTPC‟s Profit and Loss (P&L) Account for the three years ended FY2007,
FY2008 and FY2009 are shown in Table 1.2. Also shown along side is the Common Size statement for
the Profit and Loss Account:
Table 1.2: Key Financial Information – P&L and Common Size Statement (Amount in Rs. Million)
FY2007 FY2008 FY2009 FY2007 FY2008 FY2009
Income
Net Operating Income 325,952 370,501 441,261 92% 93% 97%
Other Income 27,855 29,676 11,467 8% 7% 3%
Total Income 353,807 400,177 452,728 100% 100% 100%
Expenditure
Electricity and Fuel 198,181 220,202 271,107 56% 55% 60%
Employee Cost 11,632 18,960 24,631 3% 5% 5%
Other Expenses 15,681 16,355 19,521 4% 4% 4%
Total Expenditure 225,494 255,517 315,259 64% 64% 70%
EBITDA 128,313 144,660 137,469 36% 36% 30%
Interest 18,594 17,981 20,229 5% 4% 4%
Depreciation 20,754 21,385 23,646 6% 5% 5%
PBT 88,965 105,294 93,594 25% 26% 21%
Tax 20,427 28,401 11,581 6% 7% 3%
PAT 68,647 74,148 82,013 19% 19% 18%
Historical P&L Common size Particulars
Key financial indicators from Balance Sheet as at 31 March 2007, 31 March 2008 and 31 March 2009 are
shown in Table 1.3:
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Table 1.3: Key Financial Information – Balance Sheet (Amount in Rs. Million)
31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-07 31-Mar-08 31-Mar-09
SOURCES OF FUNDS :
Share Capital 82,455.00 82,455.00 82,455.00 11.2% 10.1% 9.3%
Reserves and Surplus 403,513.00 443,931.00 525,943.57 54.7% 54.5% 59.1%
Advance against Depreciation 6,567.00 13,734.00 13,734.00 0.9% 1.7% 1.5%
Secured Loans 68,229.00 73,147.00 85,126.60 9.3% 9.0% 9.6%
Unsecured Loans 176,615.00 198,759.00 180,327.00 24.0% 24.4% 20.3%
Deferred Foreign Currency Fluctuation - 2,554.00 2,554.00 0.0% 0.3% 0.3%
Deferred Tax Liability 1.00 1.00 1.00 0.0% 0.0% 0.0%
Total Sources of Funds 737,380.00 814,581.00 890,141.17 100% 100% 100%
APPLICATION OF FUNDS :
Fixed Assets
Gross Block 507,273.00 533,680.00 625,711.25 69% 66% 70%
Less: Accumulated Depreciation 250,792.00 272,743.00 296,334.25 34% 33% 33%
Net Block 256,481.00 260,937.00 329,377.00 35% 32% 37%
Capital Work in Progress 128,567.00 184,389.00 191,668.00 17% 23% 22%
Investments 160,943.00 152,672.00 152,672.00 22% 19% 17%
Current Assets, Loans and Advances
Inventories 25,102.00 26,757.00 30,467.57 3% 3% 3%
Sundry Debtors 12,523.00 29,827.00 35,697.24 2% 4% 4%
Cash and Bank 133,146.00 149,332.00 161,102.44 18% 18% 18%
Loans and Advances 40,476.00 40,354.00 40,354.00 5% 5% 5%
Total Current Assets 221,827.00 255,488.00 276,839.24 30% 31% 31%
Less:
Current Liabilities and Provisions 70,263.00 79,299.00 101,663.77 10% 10% 11%
Net Current Assets 151,564.00 176,189.00 175,175.47 21% 22% 20%
Total Application of Funds 737,380.00 814,581.00 890,141.17 100% 100% 100%
Historical Balance Sheet Commonsize StatementParticulars
3.2 Shareholding Pattern
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3.3 Financial Projections
The Management has provided us with the projections for Five financial years ended 2010, 2011,2012,
2013 and 2014. The projections and the common size statement are shown in the Table 1.4.
Table 1.4: Financial Projections
FY2010 FY2011 FY2012 FY2013 FY2014 FY2010 FY2011 FY2012 FY2013 FY2014
Income
Net Operating Income 540,412 621,649 727,297 847,641 1,006,046 99% 99% 99% 99% 99%
Other Income 5,404 6,216 7,273 8,476 10,060 1% 1% 1% 1% 1%
Total Income 545,816 627,865 734,570 856,118 1,016,106 100% 100% 100% 100% 100%
Expenditure
Electricity and Fuel 307,214 370,778 448,802 517,892 584,207 56% 59% 61% 60% 57%
Employee Cost 26,891 28,341 29,886 31,535 33,295 5% 5% 4% 4% 3%
Other Expenses 23,376 26,889 31,459 36,665 43,517 4% 4% 4% 4% 4%
Total Expenditure 357,480 426,008 510,148 586,092 661,018 65% 68% 69% 68% 65%
EBITDA 188,336 201,857 224,423 270,026 355,088 35% 32% 31% 32% 35%
Interest 23,738 34,470 43,849 50,398 55,407 4% 5% 6% 6% 5%
Depreciation 26,298 31,713 36,915 41,091 44,852 5% 5% 5% 5% 4%
PBT 138,300 135,675 143,659 178,537 254,828 25% 22% 20% 21% 25%
Tax 19,362 20,351 21,549 26,781 38,224 4% 3% 3% 3% 4%
PAT 118,938 115,323 122,110 151,756 216,604 22% 18% 17% 18% 21%
Particulars Projected P&L Common size (% of Net Sales)
The Management has projected an increase in Sales of 22%, 15%, 17%, 17% and 19% respectively over
the projected period FY2010, FY2011, FY2012, FY2013 and FY2014. The growth has been assumed
after taking into account the capacity expansion.
The Company is in an expansion phase with substantial amount of CAPEX planned for the next five
years. We have relied on these forecasts for the purpose of our analysis. Any changes in the revenue and
profitability estimates may have an impact on the resultant value of the equity shares of NTPC and the
impact may be material.
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4. Indian Power Sector - Industry analysis
Unless otherwise indicated, all financial and statistical data in the following discussion is derived from
websites of and publicly available documents from, various sources, including the website of the Ministry
of Power and Central Electricity Authority (“CEA”). The data may have been re-classified by us for the
purpose of presentation. Unless otherwise indicated, the data presented excludes captive capacity and
generation.
4.1 Overview of the Indian Economy
India is the fourth largest economy in the world after the United States of America, China and Japan in
purchasing power parity terms (Source: CIA World Factbook website). India is also amongst the fastest
growing economies globally and has grown at an average rate of 7.4% per annum during the last five
years. The following table presents a comparison of India‟s real GDP growth rate with the real GDP
growth rate of certain other countries (in percentages).
Table 1.5 GDP Growth Rate of Different Countries
Industry Demand-Supply Overview
The Indian power sector has historically been characterized by energy shortages which have been
increasing over the years. In the period from April 2008 to February 2009, peak energy deficit was
estimated to be at 13.8% and normative energy deficit was estimated to be 11.0%. The following table
sets forth the peak and normative shortages of power in India from 2003 to February 2009:
Table 1.6 Demand & Power Supply in India
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Regional Demand-Supply Scenario
The following table displays the peak and normative power shortages in India for the period from April
2008 – February 2009 across different regions in India:
Table 1.7 Demand & Power Supply in India for Regions
Energy deficit varies widely across India, with the western region having the highest peak and normative
energy shortages followed by the northern region. According to the 17th Electric Power Survey, India‟s
peak demand will reach approximately 152,746 MW with an energy requirement of approximately 968
billion units by fiscal year 2012. By the fiscal year 2017, peak demand is expected to reach 218,209 MW
with an energy requirement of 1,392 billion units.
Large Energy Deficit Results in Low Per Capita Consumption of Electricity
Due to inadequate supply and distribution infrastructure, the per capita consumption of energy in India is
extremely low in comparison to most other parts of the world. The following chart shows per capita
electricity consumption of energy in 2006 in various developed and developing countries.
Chart 1.1 Per Capita Electricity Consumption of Various countries
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4.2 Historical Capacity Additions
The energy deficit in India is a consequence of slow progress in the development of additional energy
capacity. The Indian economy is based on planning through successive five year plans (“Five-Year Plans”)
that set out targets for economic development in various sectors, including power sector. In the
implementation of the last three Five-Year Plans (the Eighth, Ninth, and Tenth Five-Year Plans, covering
fiscal years 1992 to 2006), less than 50% of the targeted additional energy capacity was added. India added
an average of approximately 20,000 MW to its energy capacity in each of the Ninth and Tenth Five-Year
Plan periods (fiscal years 1997 to 2001 and 2002 to 2006). (Source: White Paper on Strategy for Eleventh Plan,
prepared by CEA and Confederation of Indian Industry (the “White Paper”).
The following chart sets forth the targeted energy capacity addition for Five-Year Plans, the installed
capacity actually achieved at the end of those Five-Year Plans and the installed capacity actually achieved
as a percentage of the targeted capacity additions for each of those Five-Year Plans:
Chart 1.2 Targeted, Installed & Achieved capacity additions of five year plans
The total capacity addition during the past 25 years between the VIth and the Xth Five-Year Plans was
approximately 91,000 MW. A total capacity addition of 78,577 MW is planned for the XIth Five-Year
Plan (2007-12) which should result in substantial investments in the power generation sector.
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4.3 Installed Generation Capacity by Sector and Fuel
The following table and diagrams set forth a summary of India‟s energy generation capacity as of
February 28, 2009 in terms of fuel source and ownership:
Table 1.8 India‟s Energy Generation Capacity
The Central and State governments together own and operate over 85.0% of the installed power capacity
in India. The private sector has historically been reluctant to enter the market for power plants because of
onerous governmental regulations on the construction and operation of power plants and sourcing of fuel
for such plants. The participation of the private sector has however been increasing over time owing to
power sector reforms.
Thermal Power Generation
Thermal power plants account for over 63.0% of India‟s installed capacity, within which over 82.0% of
the capacity is accounted for by coal based plants, on total available thermal capacity, as of February 28,
2009.
(Source: CEA “Power Scenario at a Glance”, March 2009)
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4.4 Future Capacity Additions
According to the CEA Executive Summary, as on February 28, 2009, India has an installed generation
capacity of 147,715.4 MW that has increased at a compound annual growth rate (“CAGR”) of 5.4%
between 2003 and 2008.
A key risk to the continued growth of the Indian economy is inadequate infrastructure. Infrastructure
investment in India is on the rise, but growth may be constrained without further improvements. The
Government of India (the “Government”) has identified the power sector as a key sector of focus to
promote sustained industrial growth by embarking on an aggressive mission – “Power for All” by 2012
backed by extensive reforms to make the power sector more attractive for private sector investment.
According to the Integrated Energy Policy (“IEP”) report dated August 2006 issued by the Planning
Commission, India would require additional capacity of about 73-86 gigawatt (“GW”) by 2012, 159- 190
GW by 2017 and 278–341 GW by 2022, respectively, based on normative parameters in order to sustain a
8-9% GDP growth rate (Source: IEP, Expert Committee on Power). The following table sets forth the
additional capacity required by 2012, 2017 and 2022 under different GDP growth rate scenarios:
Table 1.9 Additional Capacity requirement of India under different GDP growth rates
The likely capacity addition during the 11th Five-Year Plan is 78,700 MW. (Source: CEA, “Power Scenario at
a Glance”, March 2009)
Given India‟s large coal reserves, coal is expected to continue to dominate as a source of fuel for power
plants in India. India has the fourth largest coal reserves in the world. However, in the past there were
restrictions on the entry of private sector players into coal mining, which had caused India‟s coal
production to remain low in comparison to its reserves. These restrictions have now been removed and
private participation is allowed in coal mining. The total coal production for the fiscal year 2005 was
377.27 million tonnes and for April-December 2005 was 282.43 million tonnes. The total geological coal
reserves of India have been estimated at 253.30 billion tonnes as of January 1, 2006. (Source: Ministry of
Coal)
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In 2004, the Government of India set up a committee on coal sector reforms that led to several new
initiatives being launched to encourage coal-based independent power plants in the country. These have
increased the prospects of coal blocks being allotted to various private sector entities. Coal is already the
key contributor to India‟s energy scenario with 55.0% of the current total commercial energy needs being
met by coal. Given India‟s large coal reserves and favourable policy outlook, coal is expected to continue
to be the dominant source of energy for India and play a major role in sustaining India‟s economic
growth.
5. Valuation Analysis
5.1 Valuation Methodology
The standard of value used in our Analysis is “Fair Value” which is often defined as the price, in terms of cash or equivalent, that a able and willing buyer could reasonably be expected to pay, and a able and willing seller could reasonably be expected to accept, if the business were offered for sale on the open market for a reasonable period of time, with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act.
Valuation of an enterprise or its equity shares is not an exact science and ultimately depends upon what it is worth to an able and willing investor who may be even prepared to pay goodwill. This goodwill maybe in the form of a premium on the valuation depending on the future benefits expected from the investment as well as the synergies arising from integrating the investee company into the investor group‟s operations. This exercise may be carried out using generally accepted valuation methodologies, the relative emphasis of each often varying with the factors such as:
Specific nature of the business
Whether the entity is listed on a stock exchange
Industry to which the Company belongs
Past track record of the business and the ease with which the growth rate in cash flows to perpetuity
can be estimated
Extent to which industry and comparable company information is available.
The results of this exercise could vary significantly depending upon the basis used, the specific
circumstances and professional judgment of the valuer. In respect of going concerns, certain valuation
techniques have evolved over time and are commonly in vogue. These can be broadly categorised as
follows:
a) Net Asset Value Method (NAV)
The value arrived at under this approach is based on the audited financial statements of the Company /
business and may be defined as Shareholders‟ Funds or Net Assets owned by the Company / business.
The balance sheet values are then adjusted for any contingent liabilities (if any) as disclosed in the
financial statements which are likely to materialize in future. The Net Asset Value is generally used as the
minimum break-up value for the Company / business. This methodology calculates NAV using historical
financial data. In view of nature of business, we have not considered the said method to estimate the
overall value of the company.
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b) Discounted Cash Flow Method (DCF)
The DCF method uses the future free cash flows of the firm / equity holders discounted by the cost of
capital to arrive at the present value. In general, the DCF method is a strong and widely accepted
valuation tool, as it concentrates on cash generation potential of a business. Considering that this method
is based on future potential and is widely accepted, we have included this approach in the valuation
exercise.
c) Market Multiplier Method
This is based on the premise that the market multiples of comparable listed companies on BSE Sensex
and NSE are a good benchmark to derive valuation. In this method, price multiples of comparable listed
companies are applied to key financials to arrive at the valuation. We have considered the following two
multiples for arriving at the value of the Company‟s equity.
1) Sales Multiple
2) EBITDA Multiple
3) Installed Capacity
d) Share Price Method
This valuation reflects the price that the market at a point in time is prepared to pay for the shares of the
company being valued. It is therefore influenced by the condition of the stock market, the concerns and
opportunities that are seen for the business in the sector or market in which it operates. The market price
also reflects the investor's view on the ability of management to deliver a return on the capital it is using.
For deriving value of NTPC Ltd under this method, we have considered the high-low average market
price of the equity share quoted on BSE for a period of 52 weeks.
5.2 Valuation Analysis
We have carried out the valuation analysis, based on the fundamental assumption of going concern for
the business under consideration. The detailed analysis and the assumptions made for these purposes are
given below:
Method 1: Discounted Cash Flow Method (DCF)
Estimating Free Cash Flows:
For the purpose of our analysis, we have used the financial projections provided by the Management of
NTPC for FY2010, FY2011,FY2012, FY 2013 & FY 2014. These include the projected profitability
statement giving the details such as funds generated from operations, working capital and capital
expenditure.
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The cash flow projections on a Free Cash Flow to the Firm (FCFF) basis are summarized in Table 1.5
below:
Table 1.10: Cash flow projections
(Amount in Rs. Million) Discounted Cash Flow
Analysis FY2010 FY2011 FY2012 FY2013 FY2014
Revenue 540,412 621,649 727,297 847,641 1,006,046
Less: Expenses 319,114 360,994 430,578 515,353 592,944
EBDITA 221,299 260,655 296,719 332,288 413,102
Less: Depreciation/Amortization 26,298 31,713 36,915 41,091 44,852
EBIT 195,000 228,942 259,804 291,197 368,249
Tax 19,362 20,351 21,549 26,781 38,224
Gross Cash Flow to Firm (FCFF)
175,638 208,591 238,255 264,417 330,025
Add: Depreciation/Amortization 26,298 31,713 36,915 41,091 44,852
Less: Changes in Working Capital 11,278 (13,906) 24,424 (5,886) 28,482
Less: Increase in Capital Expenditure
31,969 149,000 97,100 112,984 81,102
Less: Changes in Capital WIP 20,897 20,942 20,989 21,039 21,091
Net FCFF 137,793 84,267 132,657 177,372 244,203
Discounting Factor:
The discounting factor considered for arriving at the present value of the free cash flows to the firm is
WACC (Weighted Average Cost of Capital). The cost of equity is computed using the Capital Asset
Pricing Model (CAPM) using the formula Ke= Rf + β (Rm - Rf) where:
The following inputs have been used in the calculation of the Cost of Equity (Ke) and the WACC:
the Risk Free Rate of 7.00% based on the 10 years Government Bond rate as of the Valuation Date
the Equity Risk Premium (i.e. (Rm - Rf)) of 8.11% based on Market Risk Premium.
the Debt Equity (D/E) ratio of 70:30 as on 31 March 2009
the beta of 1.00 is based on the asset betas of the comparable companies
the Company Specific Risk Premium is based on a qualitative analysis of the risk factors inherent in
the subject Company as discussed below compared to other comparable companies considered as
benchmark:
– Risk with respect to the small size of the Company
– Possible risk of project shifts on the part of customers
the cost of debt of 6.68% based on the prevailing lending rates (post tax) and management perception
of the Company
After considering appropriate risk premiums, the Cost of Equity calculated is approximately 12.96% and
the WACC is approximately 12%.
Ke= Cost of Equity Rf = Risk Free Rate
Rm= Market Rate of Return Β (beta)= Measure of Market Risk
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Terminal Value:
The terminal value refers to the present value of the business as a going concern beyond the period of
projections upto perpetuity. This value is estimated taking into consideration the past growth rates of the
product / service, economic life cycle of the product / service, expected growth rates in future, capital
investments made in the business as well the estimated growth rate of the industry and economy.
Considering the industry growth and projected growth of Indian economy, as well as the specific risks
associated with the business and the industry, we have assumed a terminal growth rate of 2% for NTPC‟s
business beyond the projection period.
Valuation based on DCF
Using this method, we have discounted the free cash flows using WACC to arrive at the total value of
equity. Accordingly, the value for total equity of NTPC considering this approach is estimated at Rs
16,15,355 million. Considering the total outstanding equity shares on valuation date is 8245 million, the
value of each equity share is estimated at Rs.196 per share.
Method 2: Market Multiplier Method
This method applies the most appropriate and reasonable multiple to the relevant operating performance
metrics of the Company being valued to estimate its Equity Value. The most appropriate and relevant
multiple is derived from reference to market based conditions of quoted companies. The methodology is
considered appropriate to use for an established business with an identifiable stream of continuing
earnings that are considered maintainable.
The Equity Value is estimated from the Enterprise Value (EV) in the following manner:
apply an appropriate and reasonable multiple to the relevant operating performance metric of the
Company
adjust the amount derived for surplus assets or excess/ unrecorded liabilities and other relevant
factors to derive an EV for the Company
adjust the EV for debt, cash, and surplus assets and contingent liabilities (if any), to identify the
equity value of the Company.
We have identified and analyzed companies engaged in the Power generation business to determine the
industry average of the relevant market multiple. For the current valuation exercise we have considered
the Enterprise Value to Sales multiple, Enterprise Value to EBITDA multiple and Enterprise value to
installed capacity as appropriate to determine the EV of the Company. Further, as discussed above, the
EV has been adjusted for debt and cash to determine the EV of the Company.
Based on the financial information available for the selected companies, the EV/ Sales, EV/ EBITDA
and EV/Installed capacity multiples respectively were calculated for each of the comparable
companies. The mean of EV/ Sales, EV/ EBITDA and EV/Installed capacity multiples for all the
comparable companies arrived at 3.36x, 9.51x and 57.54x respectively, which has been applied to the
estimated sales and EBITDA for the FY2009 to arrive at EV of the Company. The EV thus arrived
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has been further adjusted for cash, and outstanding debt and contingent liabilities to arrive at the
Equity Value and the Price per Share of the Company.
Table 1.11: Sales, EBITDA & Installed Capacity multiples of comparable companies (Amount in Rs. Million)
Sales 441,261 Installed Capacity 30,144 EBIDTA 137,469
Average Multiple
Enterprise Value
Add: Cash Balance
Add: Investments
Less: Debt
Less: Contingent Liabilities (50%)
Equity Value
No. of shares
Weights 35.00% 35.00% 30.00%
Value Per Share
188 Rs. Per share total value
Particulars
64 75 49
152,672
8,245
265,454
18,033
1,337,083
8,245
18,033
1,764,920
265,454
8,245
1,306,794
161,102
152,672
1,734,632
161,102
18,033
1,511,381
EV/Installed Capacity EV/EBIDTA
3.36 9.51 57.54
EV/Sales
1,481,093
161,102
152,672
265,454
Valuation based on Market Multiplier method
Based on the average of the above mentioned multiple equity values, the value of the equity shares NTPC
has been estimated at Rs.188 per share.
Method 3: Share Price Method
We have carried out the valuation under this method on the basis of high-low average market price of the
equity share quoted on BSE for a period of 52 weeks. Accordingly, the value for total equity of NTPC
considering this approach is estimated at Rs 14,26,465 million. Considering the total outstanding equity
shares on valuation date is 8245 million, the value of each equity share is estimated at Rs.173 per share.
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5.3 Valuation Summary
We have considered the approaches discussed above and assigned possible weights to each of these
methods based on the relevance of each approach given the nature of the business and the industry. The
DCF method is a strong and widely accepted valuation tool, as it focuses on the cash generation potential
of a business.
Considering the wider acceptability of this method, we have assigned a higher weight to this approach to
arrive at the value of equity of NTPC. A summary of this and the value thus arrived at is shown in Table
1.9.
Table 1.12: Final Value Summary
Value Per Share
Particulars Equity Value (Rs. Million)
Weights Product (Rs. Million)
Discounting Cash Flow 1,615,355 70% 1,130,749
Share Price Multiple 1,426,465 15% 213,970
Market Multiple 1,547,830 15% 232,175
Total 4,589,651 1,576,893
No. of Shares in million 8,245
Value Per Share (Rs.) 191
We therefore estimate the values for the equity shares of NTPC Limited to be Rs.
191 per share based on our analysis and subject to the assumptions and limitations
described in this report and our engagement letter
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6. Caveats
6.1 General
Provision of valuation recommendations and considerations of the issues described herein are areas of our regular corporate advisory practice. The services do not represent accounting, audit, financial due diligence review, consulting, transfer pricing or domestic / international tax-related services that may otherwise be provided.
Our analysis and review of NTPC Limited. (including its historical and projected financial statements) does not constitute an audit in accordance with Auditing Standards and does not include the vetting of financial projections provided by the Management. We have solely relied on explanations and information provided by the Management of NTPC and accepted the information provided to us as consistent and accurate on an “as is” basis. Although, we have reviewed such data for consistency and reasonableness, we have not independently investigated or otherwise verified the data provided. Nothing has come to our attention to indicate that the information provided had material mis-statements or would not afford reasonable grounds upon which to base the Report.
We did not have access to the full annual accounting or any other due diligence documents and hence have assumed that the liabilities are only those which were made available to us in the summary balance sheet provided to us and that there are no other contingent liabilities or claims against the Company, other than the those considered for the purpose of valuation, which would have an impact on the value of the Company. Our valuation is primarily from a business perspective and has not taken into account various legal and other corporate structures beyond the limited information made available to us.
The responsibility for forecasts and the assumptions on which they are based is solely that of the Management of NTPC and we provide no confirmation or assurance on the achievability of these projections. It must be emphasized that profit forecasts necessarily depend upon subjective judgment. They are to a greater or lesser extent, according to the nature of the business and the period covered by the forecasts, subject to substantial inherent uncertainties. In consequence, they are not capable of being audited or substantiated in the same way as financial statements, which present the results of completed periods. Similarly, we have relied on data from external sources. These sources are considered to be reliable and therefore, we assume no liability for the accuracy of the data. We have assumed that the business continues normally without any disruptions due to statutory or other external/internal occurrences. We have also assumed that the transaction proceeds as envisaged without any delays or disruptions and is consummated immediately.
The scope of our work has been limited both in terms of the areas of the business and operations which we have reviewed and the extent to which we have reviewed them. There may be matters, other than those noted in this report, which might be relevant in the context of the transaction and which a wider scope might uncover. It may be noted that Valuation is not an exact science and ultimately depends upon what the business is worth to a serious investor or buyer who may be prepared to pay a substantial goodwill. The valuation exercise is carried out using generally accepted valuation methodologies, the relative emphasis of each often varying based on several specific factors. The results of this exercise could vary significantly depending upon the basis used, the specific circumstances and professional judgment of the valuer. In respect of going concerns, certain valuation techniques have evolved over time and are commonly in use which we have applied in this exercise.
This Report is issued on the understanding that Management of NTPC has drawn our attention to all matters of which they are aware concerning the financial position of the businesses, which may have an impact on our report up to the date of issue. We have no responsibility to update this report for events and circumstances occurring after the date of this Report.
We have no present or planned future interest in NTPC or any of its subsidiaries and the fee for this report is not contingent upon the values reported herein. Our Valuation Analysis should not be construed as investment advice; specifically, we do not express any opinion on the suitability or otherwise of entering into any transaction with NTPC.
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6.2 Distribution of report
This Valuation Analysis is confidential and has been prepared exclusively for the Management of NTPC. We understand that the report is to be used exclusively for internal purposes. Hence, it should not be used, reproduced or circulated to any other person or for any purpose other than as mentioned above, in whole or in part, without the prior written consent of LHNMS. Such consent will only be given after full consideration of the circumstances at the time.
6.3 Sources of Information
The Valuation Analysis is based on a review of historical and projected financial information relating to NTPC provided by the Management and information of comparable companies as available in the public domain. The sources of information include:
Business information and profile as provided by NTPC Management
Past financial statements and projections of NTPC that were provided to us by NTPC Management
Other industry related information from various sources
Information from Capitaline Database, National Stock Exchange website
Discussions with NTPC Management
Website of NTPC Ltd.
In addition to the above, we have also obtained such other information and explanations which were considered relevant for the purpose of our analysis.