sapm assignment power sector groupf

8/8/2019 SAPM Assignment Power Sector GroupF

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SAPM AssignmentIndustry Analysis of Power Sector

Submitted to

Dr. Shridhar Kumar DashProfessor, Accounting and Finance

XAVIERINSTITUTE OF MANAGEMENT,

BHUBANESWAR

Group-F

U109104 Amit Bikram Kar

U109106 Anindita Patnaik

U109109 Ashutosh Didwania

U109110 Binay Prasanna Jena

U109112 Chiranjit Mandhata

U109113 Deepak Jyoti Tripathy

U109116 Gunja Kapoor

U109118 Ketan Nanda

U109119 Luv Gandhi

U109120 Monodip Chakravarty

U109121 Pankaj Kumar Goinka


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Power Sector Analysis 2010

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Table of Contents1. Power Industry in India............................................................................................................................................. 4

1.1. Generation ....................................................................................................................................................... 4

1.2. Transmission..................................................................................................................................................... 4

1.3. Distribution....................................................................................................................................................... 4

2. Strategy for Growth in Energy in India ...................................................................................................................... 4

3. Policy & Regulatory Framework................................................................................................................................ 5

4. Challenges & Risks.................................................................................................................................................... 5

5. Industry Benchmarks................................................................................................................................................ 6

6. Why Invest in Power Sector? .................................................................................................................................... 6

6.1. Risks in Power Sector ........................................................................................................................................ 6

6.2. Invest or Not to Invest in Power Yes, Invest.................................................................................................... 6

7. Analysis of Companies.............................................................................................................................................. 7

7.1. National Thermal Power Corporation (NTPC) .................................................................................................... 7

7.2. National Hydroelectric Power Corporation (NHPC)............................................................................................ 8

7.3. Power Grid Corporation of India Limited (PGCIL)............................................................................................... 9

7.4. Tata Power ..................................................................................................................................................... 10

7.5. Calcutta Electric Supply Corporation (CESC) .................................................................................................... 11

7.6. Suzlon Energy ................................................................................................................................................. 12

7.7. Gujarat Industries Power Company Limited (GIPCL) ........................................................................................ 13

8. Which Company to Invest? ..................................................................................................................................... 14

9. Criticism of Dividend Discount Model ..................................................................................................................... 16

APPENDIX....................................................................................................................................................................... 17

Exhibit 1: Salient Features .......................................................................................................................................... 17

Exhibit 2: Plan Vs Achievement................................................................................................................................... 18

Exhibit 3: Major Reasons for Delay during 2002-07 (MW) ........................................................................................... 18

Exhibit 4: Requirement of Construction Equipments................................................................................................... 19

Exhibit 5: Capacity of Adani Power ............................................................................................................................. 19

Exhibit 6: Power Companies in India........................................................................................................................... 20

Exhibit 7: Fundamentals of NTPC ................................................................................................................................ 21

Exhibit 8: Leverage and Earnings of NTPC ................................................................................................................... 21

Exhibit 9: Fundamentals of NHPC ............................................................................................................................... 22


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Exhibit 10: Leverage and Earnings of NHPC................................................................................................................. 22

Exhibit 11: Fundamentals of PGCIL ............................................................................................................................. 23

Exhibit 12: Leverage and Earnings of PGCIL................................................................................................................. 23

Exhibit 13: Fundamentals of Tata Power..................................................................................................................... 24

Exhibit 14: Leverage and Earnings of Tata Power ........................................................................................................ 24

Exhibit 15: Fundamentals of CESC............................................................................................................................... 25

Exhibit 16: Leverage and Earnings of CESC .................................................................................................................. 25

Exhibit 17: Fundamentals of Suzlon ............................................................................................................................ 26

Exhibit 18: Leverage and Earnings of Suzlon ............................................................................................................... 26

Exhibit 19: Fundamentals of GIPCL ............................................................................................................................. 27

Exhibit 20: Leverage and Earnings of GIPCL................................................................................................................. 27

Exhibit 21: Operating Margin of Different Companies................................................................................................. 28

Exhibit 22: Gross Margin of Different Companies........................................................................................................ 28

Exhibit 23: Net Profit Margin of Different Companies ................................................................................................. 29

Exhibit 24: ROA of Different Companies...................................................................................................................... 29

Exhibit 25: ROE of Different Companies...................................................................................................................... 30

Exhibit 26: EPS of Different Companies....................................................................................................................... 30

Exhibit 27: DER of Different Companies ...................................................................................................................... 31

Exhibit 28: EVA of Different Companies ...................................................................................................................... 31

Exhibit 29: Comparison of stock prices by different methods...................................................................................... 32


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1. Power Industry in India

India is the fifth largest generator of power in the world having a total installed capacity of164 GW (as on 31st Jul, 10)

This is about 4% of the global power generation capacity. The average per capita consumption of electricity is at an

estimated value of 733 kWh. However, this is much below than those of the developed countries like US (15000 kWh

and emerging economies like China (1

800

kWh).

The global average stands at2300

kWh.

The government has set ambitious goals for power sector in the 11th Plan. It has been estimated that for providing

availability of at least 1000 kWh per capita electricity by year 2012, a total capacity addition of100 GW is required. This

massive plan will have spill-over effect on both the transmission as well as the distribution sectors.

1.1. Generation

The demand for power has consistently outstripped the pace of addition of generation capacity. A present peak defici

of about 12% and a total energy deficit of 8% show the poor progress in this direction. The majority of the share of this

capacity is controlled by the central and the state sectors. Power generation has recorded a growth of 5.83% during Apr

Jun, 2009-10. Thermal power generation grew by 9%, nuclear by 7% and hydroelectric fell by 9.46%.

During the 10th plan, private sector contributed 20%. The same is expected in the projected 11th year plan. The PLF

achieved by private companies is 95.1%, while that by government managed companies is 71.2%.

1.2. Transmission

The current transmission capacity in the country is about 13% of the total generation capacity. Globally, every dolla

invested in generation is followed by the same amount invested in transmission. But in India, the factor is half

Transmission lines in India are loaded to 90% capacity compared to 50-60% globally. This indicates heavy investment wil

be expected in future in transmission lines. PGCIL is the market leader in transmission, being the major transmitter o

power in the country. As the planned transmission is over 60GW by 2012, total addition of 25000 km of 400Kv and

15000

km of200

kv will move northwards.

More substations will obviously be required.

1.3. Distribution

Transmission and distribution losses hover at around 30% despite many measures taken by the central and state sectors

which have a combined control of over 95%. Both technical as well as commercial areas are responsible for the high

AT&C losses. Distribution Franchisee models have been adopted by many pioneering states with private-public

partnership and they are showing a lot of promise in the direction of revenue realization and reducing overa

distribution losses. There is a lot of scope for the private sector in investing in these areas.

2. Strategy for Growth in Energy in India

There is a 4 pronged strategy for growth in energy sector in India. It can be summarized as follows:


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3. Policy & Regulatory Framework

Being a regulated sector, the policies and regulations play a vital role in the development of this sector. The Electricity

Act, 2003 was a pivotal point towards the reform and paved the way for private sector participation in a big way by

supporting competitive bidding, de-licensing generation projects and a host of other measures (Exhibit 1). Further the

Central Electricity Regulatory Commission has notified several regulations concerning tariff, licensing of service provider

& traders and open access in transmission (Exhibit 2). The government has also introduced a Mega Power Policy and has

revised it continuously for boosting investment into the creation of mega power plants.

4. Challenges & Risks

Project Execution Delays:Historically, power sector in India has always failed to meet the target by a significant margin

despite so much growth opportunities (Exhibit 2). This has proved to be a major bottleneck in the growth of country as a

whole. The major reasons for the slippage of such projects from their deadlines are provided in the Exhibit 3.

Fuel Availability:Supply constraints for coal based power plants have become a major hurdle. Due to low quality and

unreliable supply, Indian companies have started looking towards importing coal.

Equipment & Manpower Shortage: The primary shortage is in the area of core components like BTG while other

components required for the balance of plant (BOP) are also facing supply issues (Exhibit 4). Two approaches have been

adopted to alleviate this: enhancing domestic manufacturing capability by setting up joint ventures with foreign

suppliers and procuring equipment from foreign markets. Again reliability and cost has to be considered for this. It is

now a general consensus that talent shortage has become a long term problem and the industry needs to improve itsel

to retain and attract talent.

Land Acquisition & Environment Clearance: The Land Acquisition Amendment bill, 2007 provides new guidelines foadopting best practices for this. Still there are a lot of local issues which need to be dealt before kick-starting any large

project. Again, environmental clearance procedures have become stringent and pose to be a difficult part to negotiate.

Other issues like delay inPPAs, financialclosuresandpowerevacuation issues are also posing hurdles in the path of

rapid project execution.

Completedevelopmentofthe hydropotentialinthecountryHydroPower

Domesticcoalistoremainasthemainstay forthe fuelresource. Emphasiswillbeputonsupercriticalplantsand

cleancoaltechnologies.

Domestic Coal

Useofgas,dependentonthepricesandavailability. Importingofgas from Western & Central Asiawillbedone.Natural Gas

Useofgas,dependentonthepricesandavailability. Importingofgas from Western & Central Asiawillbedone.Renewable Energy


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5. Industry Benchmarks

The following table shows the prevalent values for the various financial ratios related to power industry

Industry Benchmark Ratios

Debt Equity Ratio0.

7 Inventory Turnoverratio1

4.2

Longterm DER 0.73 Fixed Asset Turnover Ratio 0.47

Current Ratio 1.59 Interest Coverage Ratio 2.96

ROCE 8.79

6. Why Invest in Power Sector?

India is a growing economy, with a growth rate roaming around 10%. Unlike the last decade when growth was lead by

technology, this decade will be dominated by infrastructure and energy growth. The GoI has comprehended the

importance of infrastructure and energy and has thus invited private players as energy is acute for development.

India requires 100,000 MW of additional capacity by 2010. The critical gap between demand and supply and entry of

business stalwarts like Tata and Reliance speaks of the attraction this sector has for big players.

While private investors are on a spree, foreign collaborations are not ruled out. The foreign companies are eager to be a

part of the Indian bandwagon, and the capital, technology lures Indian companies for collaborations with them as well.

6.1. Risks in Power Sector

y Biggest risk the sector faces is that of politics. Since power is a central as well as a state subject, inter-stateoperations cannot be seamless. The government has a monopoly over the sector and the subsidies given to

farmers are sometimes not backed by government funding.

This puts companies at the receiving end.

y Raw material crisis has hit the sector time and again. There is high level of corruption at the coal supply level.Gas supply is also controlled by the government. Pipelines for gas supply do not exist across the country

Thus companies have to build their own infrastructure.

y With so many regulations and multiple levels of corruption, companies maintain high buffer stock just in casethere is disruption in supplies.

6.2. Invest or Not to Invest in Power Yes, Invest

We support our call to invest with the following reasons:

y Economic reforms are being executed with great aggression on development sectory India is a power deficit country, and expansion of capacity is imperativey More power players are entering the industry, which will mean increased competition and better services to

consumers

y Power sector will see high expansion and thus creation of wealth in the times to come


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7. Analysis of CompaniesThe companies considered for analysis are given in Exhibit 6. The table shows a mix of generation, transmission &

distribution companies representing the 3 sectors inside the industry. Further, classification in terms of energy source

has been taken care of. The thermal power companies selected constitute about 50% of the total thermal installed

capacity.

NHPC is the major player in the hydroelectric power generation sector.

PGCIL is the government ownedTransmission Company having the majority of transmission capacity. Torrent Power has links into all the three sectors. It

also has forayed into the distribution sector through the Distribution Franchisee Model. Suzlon is the sole entry in this

list representing renewable energy development.

It can also be noted that, going forward all these companies are planning huge capacity addition . As the Indian economy

grows at a fast pace of 8.5%, these power generation capacity will easily be sucked by the industrial demand. These

companies have huge opportunity to grow and should see considerable interest from the investors.

7.1. National Thermal Power Corporation (NTPC)

Profile

NTPC is the largest power generating company in India. Its installed capacity is 32,194MW. NTPC has concentrated on

value chain integration, which will help it emerge as the largest Integrated Power Major in the country. It is also

venturing into hydel projects, beginning with a run of the river hydro project in NE India. Its planned capacity is 3000Mw

and supported by Ministry of Power.

Business

NTPC is involved in generating and selling bulk power. NTPC is one of the few companies which generate power in more

than one ways. The companys business can be divided into 2 main dimensions:

Power Generation: It has power generation stations spread across India. The power stations are further classified into

Coal Based, Gas or Liquid fuel based and Hydro based stations.

Other business: This includes power consulting, exploring oil and gas, coal mining and supervising projects

NTPC parts with 0.5% of its net income for R&D and the remaining 0.5% for research related to climate change. The

company aims to grow by adding capacity through expansion, takeovers, JVs and Greenfield projects. NTPC provides

power to every 4th

home in India.

Growth Drivers

The major growth drivers for NTPC are:

y Existing gap between the demand and supply of energyy The current per capita consumption is low. This gives the company incentive to expand capacity of its stationsy Diversifying its operational portfolio by way of inorganic growth

Financials

y With increased use of imported coal, the coal situation improved in most plants. NTPC used 2.4 times moreimported coal in 2008-09.


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y The PLF of gas plants has improved over time. This was mainly because of the correction in price of gas globallylast year.

y The target P/E was19.5 while the actual P/E was 19.1.y The returns on equity have marginally dropped from 12.3% in 2008-09 to 12.7 in 2009-10.

Valuation

Valuation of NTPC took a hit, when there was a delay in implementing its capacity expansion plans. The projected

capacity addition of NTPC was 19700MW did not seem feasible in the next three years. This was also because in the pas

2 years, it had added only 2700MW.This also reduced the CAGR of earnings from 8.9% to 7.8%. This delay in capacity

expansion reduced the ratings of NTPC from PERFORMER to HOLD. At this juncture, the stock was trading at 20.7 and

19.1 price multiples of2008-09 and 2008-09 earnings. The fundamentals of NTPC are shown in Exhibit 7. The leverage

and earnings are shown in Exhibit 8.

7.2. National Hydroelectric Power Corporation (NHPC)

Profile

NHPCis one of the top ten companies in India in terms of investment. NHPC, since its inception in 1975, has grown into

one of the largest organizations in the field of hydro power development in the country and it has taken over al

activities of hydroelectric projects from concept to commissioning stage.

Business

The Company spent Rs.12565 crore in June 2010 on capex. NHPC is working in tandem with the Orissa government on 3

projects. The planned capacity of these 3 plants is 300MW at Sindol. In the first quarter of FY11, the projected

generation is 5661 MUs showing a YoY of3.8%

Growth Drivers:

Because of its expansion plan as per 11th Plan period, 2007-2012, NHPC has planned to add 5322 MW. It is already

engaged in the construction of11 projects combining to a total installed capacity of 4622 MW. There are 10 other

projects of 9981 MW are awaiting clearances/Govt. approval for their implementation.

Financials:

The leverage ratio for the firm in the last 5-6 years has ranged from 1.5 to 1.8. It lowered to 1.5 during recession and

increased to 1.8. Since the ROA was more than the interest rate, the company financed its operations through debt. The

plowback ratio of the firm is as high as 70% and the ROE is 5.58% over the past 5 years. The company is giving lowe

dividend and reinvesting heavily in its operations. The total Asset turnover ratio was stable at 0.13. The company has a

low fixed asset turnover and low inventory turnover. The gross profit, 46% was because of the low COGS.

ValuationNHPC was listed in BSE on 2nd Sept2009 with issue price of Rs 36. The price has continued to be in the range of30 to 34

only. Due to the delay in implementation at Chutak Plant and Nimoo Plant, the growth in earnings will be following a

plateau trend. The high capex in FY12 and FY13 gives positive signals regarding the growth of the industry. The

fundamentals of NHPC are shown in Exhibit 9. The leverage and earnings are shown in Exhibit 10.


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7.3. Power Grid Corporation ofIndia Limited (PGCIL)

Profile

POWERGRID, recognized as a navratna is playing a pivotal role in establishing and maintaining the power infrastructure

of the Indian Power Industry.It has been conferred as the Central Transmission Utility of the country. In accordance with

its responsibilities, it provides services w.r.t construction and maintenance of inter-state transmission systems and

regional grids.

Business

The main business of PGCIL is transmission of power. However, it has also forayed into Telecom and consultancy

assignments as well. It is working at national and global level to create wealth for its shareholders. It utilizes its budget in

the most efficient manner in the industry. It is recognized as the best managed firm and the largest transmission utility

in the world. Its operational efficiency exceeds 99% and its future ventures include enhancing the capacity of the

national grid.

Growth Drivers

The major growth drivers for PGCIL are:

y Increase in capitalization will drive its profits in the futurey The Open Access Policy, as per which any plant that has an installed capacity of more than 250MW and any

consumer who has a minimum load of100MW can seek interstate connectivity

y Since PGCIL is the CTU, (Central Transmission Utility), it is the nodal agency for processing requests for longterm open access to the inter-state transmission system

Financials

y GenerationPGCIL earns RoE on the assets capitalized and not on the Capital Work in Progress (CWIP). Thusquantum of capitalization becomes important

y The fixed assets went down from 37b in FY09 to 31b in FY10. This was mainly because of the delay in capacityadditions

y Since the transmission capex went down, the CWIP increased to 204b, inFY10. This was 47% of the gross assetsValuationPGCIL is foraying into the telecom sector. It has 150,000 towers. But, since most of them do not lie in a catchment area

and are present in remote forests, 15,000 to 20,000 can only be used for commercial purposes. It has appointed KPMG

for its valuation and business planning purposes. Since 30% of the capex is funded through equity, the regulated asse

base will increase by 70b. This will drive the medium term earnings growth. Since the expected CAGR growth of EPS is

12%, it is a lucrative Buy option. The fundamentals of PGCIL are shown in Exhibit 11. The leverage and earnings are

shown in Exhibit 12.


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7.4. Tata Power

Profile

TataPower is Indias largest and oldest private power generating company in India. It has an installed capacity of over

2977 MW. It has presence across areas catering to thermal, hydro, solar and wind power generation, transmission and

retail. It pioneered Indias first hydro-electric power plant in Khopoli (72 MW) in 1915, followed by hydro stations in

Bhivpuri and Bhira. Establishing thermal power stations in Trombay (Mumbai), Jamshedpur and Belgaum make it bigges

integrated power company in India thats privately owned.

Business

Tata Power has presence in all domains of Power - Thermal, Hydro, Wind, Solar Energy, Power Generation, and

Transmission & Distribution. Tata power is chief power supplier in Mumbai while it also caters to power generation in

Jharkhand and Karnataka. North Delhi Power Limited (NDPL), a Distribution joint venture of Tata Power with

Government of Delhi catering to energy consumption of 6900 MUs is yet another successful venture of Tata Power. Tata

Power Strategic Electronics Division (SED) is yet another of its ventures that services the domestic engineering space &

defense system requirements.

Growth Drivers:

y Reliable Networking - Tata Power's systems in Western India are interconnected with the State Electricity Boards ofMaharashtra, Madhya Pradesh, and Gujarat & Goa. The extensive network of grids ensures stable power generation

& transmission.

y Low Tariff Structure Regular up gradation to state-of-the-art technology along with its diverse areas of powegeneration enable it to gainsignificant cost-advantage in electricity production.

y Marketing Directly to consumers It supplies power directly to big clients like Central and Western RailwaysMumbai Port, refineries, as well as residential complexes thereby building a strong clientele base.

y Leader in Power Management - Accounting for 52% of the total private generating capacity and being first LoadDispatch center to get ISO certificate backed with prudent management and growth has enabled it to go ahead in

the competition.

Besides the company is majorly into further power expansion as well as keeping consumers interests at forefront

has made it the player it is today.

Financials:

y PAT increased by 52 crores from last year to net Rs 922.20 crore growing at 6%, a sign of healthy growth andcompany structure, while the consolidated PAT increased by 15.51% from 1055.07 crores to 1218.74 crores.

y Net PAT after statutory regulations increased19.25% to Rs 968.50 crores recording highest ever figures.y The Earning retention ratio of the company has steadily been declining as it seeks to increase dividend payou

ratio while the EPS has been rising constantly over the years.

ValuationGeneration capacity of 421 MW has been added to total 2785 MW, suggesting expansion strategy is on its course. But

such expansion will be at cost of equity dilution. Tata Power would need 55 billion to fund the expansion of which only

28 billion can be funded through internal sources while the rest has to be raised through equity dilution. The coa

segments strong performance in FY09 led to Tata Powers 61.48% leap in total income which is unlikely to continue


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given the dip in coal prices. The company is implementing various new projects that will ensure future growth and lead

to improved operating results. The fundamentals of Tata Power are shown in are shown in Exhibit 13. The leverage and

earnings are shown in Exhibit 14.7.5. Calcutta Electric Supply Corporation (CESC)

Profile:

Calcutta Electric Supply Corporation (CESC) Limited is the flagship company of India. It provides pwer to more than 5

million consumers in Kolkata and neighboring areas, sufficing almost 88% of the power needs of the region. It is Indias

first fully integrated electrical utility firm. Its customers range from industrial, commercial and domestic users.

Business:

CESC owns and operates four power plants generating 1225 MW of power. Transmission and distribution side ownership

is reflected with over 500 km of transmission lines, 85 distribution stations, over 4000 km of HT lines and over 10000 km

of LT lines. More than 50% of coal needs is sourced through captive mines. CESCs operational expansion plans with key

power stations coming up provides huge revenue potential considering the context of power deficient state of WesBengal.

Growth Drivers

y The current PLF of CESC is 92.16%, which is much higher than the national average. It is operationally efficientdie to its better technology, restructuring, monitoring and maintenance.

y The power crisis in West Bengal along with Indias power demand increasing at 7% annually will mean morebusiness for the firm.

y Multiple power plants with total capacity in excess of 4000 MW across Maharashtra, Orissa, Jharkhand andBihar, enhancement of power availability and load handling capacities with more substations along withownership across the power sector value chain, CESC stands to grow considerably in all aspects.

y CESCs plants are ageing, to a point beyond which shutting down or replacement will be inevitable. But with highcost of distribution in remote areas, it would result in conservative service delivery and profitability figures ove

the years.

Financials:

Operating profits of the company took a beating due to the increase in fuel costs. The EPS has risen in the past two

years. Similar to GIPCL, CESC has also paid back high debt and thus pulled down its interest expenses. Increase in

capacity will result in increase in ROE and EPS of the company. As the sector becomes more deregulated, dividends wi

also become attractive with time. But, expansion with push up the leverage exposure and induce pressure on thecompany in the short run. The expected cash flows will however, have a high DSCR and generate surplus cash as well.

Valuation

CESC trades at 10 price multiples, while its peers in the industry trade at 20. CESC is located in a region that has high

power deficit. Its power efficiency is high and its attractive dividends make CESC attractive scrip. The debt will have to be

serviced and the constant flow of cash has to be ensured for interest payments. This is a challenge that the company wil


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face in the close future. The fundamentals of CESC are shown in Exhibit 15. The leverage and earnings are shown in

Exhibit 16.

7.6. Suzlon Energy

Profile:

Suzlon Energy is a wind power company with a global footprint. It is the largest manufacturer of wind turbines in Asia

and has the highest net worth in the wind power sector. With an installed capacity of3718 MW, and a market share of

9.8%, the company is the third largest player in the sector.

Business:

Suzlon is involved with providing end to end solutions to wind power business, right from assembly, installation to

commissioning. The company has followed downward integration and provides consultation, operations and project

management, maintenance services. It also manufactures generators, blades, panels and gearboxes. It has partia

ownership in Hansen Transmissions and provides state-of-the-art turbines.

Suzlon has a JV with Elin EBG Motoren GmbH of Austria to manufacture slip ring generators for wind turbines.

Growth Drivers

The primary growth drivers for Suzlon are:

y Emergence of renewable energy as a major power sourcey Lack of competition in the wind energy segment. The company has enjoyed significant first movers advantage.y Vertical integration strategy which the company deploys to offer end-to-end wind power solutions thereby

giving it an exhaustive portfolio.

Financials:

y Loss on account of amortization of foreign exchange losses on all convertible bonds aggregating Rs.162.34 crorewhich includes Rs.120.06 crore being losses on Phase I bonds and Phase II bonds cancelled due to buy bac

and exchange.

y Mark-to-market losses aggregating in respect of foreign exchange contracts taken for hedging purposes.y Diminution, other than temporary, of the value of investments in certain subsidiaries aggregating Rs. 525.44

crore

ValuationValuation of Suzlon has taken a big jolt owing to its continued losses over the past couple of years

.

Improper handling oFOREX hedging coupled with rising debts has eroded investor confidence significantly. The only positive factor acting in

favor of Suzlon is the prospective growth of the Wind Energy sector for which Suzlon is in limelight owing to its wel

established end to end solutions. Over the past couple of years the stock price of the scrip has significantly come down

from Rs.243.8 to Rs. 51.5 on the current date. The scrip has significantly underperformed the market over the past one

year. The fundamentals of Suzlon are shown in Exhibit 17. The leverage and earnings are shown in Exhibit 18.


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7.7. GujaratIndustries Power Company Limited (GIPCL)

Profile:

Gujarat IndustriesPower Company Limited was conceived as a public company and promoted by the government o

Gujarat, Gujarat Alkalies, Gujarat State Fertilizers and Chemicals, and Petrofils Co-operatives (PCL). It has contributed to

the growth and development of the state and is listed as one of the Panchratnas (five jewels), in the State of Gujarat.

Business:

The main business of GIPCL is generating electricity. It is currently operating in three power plants in Gujarat. The tota

installed capacity of GIPCL is 805 MW.305 MW comes from the Vadodara plant, that work with naptha, 250MW from

lignite at Surat and the remaining 250MW from a new plant in phase3. The company has entered into a lease with the

Gujarat government. This has ensured that GIPCL has lignite for 1000 MW generation for the next 35 years.

Growth Drivers

y It plans to invest Rs.3000 cr in commercialization of SLPP II, and 3000cr on a Greenfield thermal power projectbased on CFBC technology

y GIPCL signed MOU with ONGC for Underground Lignite Gasification process and plans to complete thepilot project by the year 2010.

y If Pilot Studies are successful at this Site, this can become a process providing a vast alternative source in theForm of low Bgs Syn-gas from an un-minable lignite reserves.

y Constant endeavors are being made to improve the overall performance of the Stations and to improveefficiency by energy conservation measures. The result of all these investments will start reflecting in ROE and

EPS in the coming financial years.

Financials:

PAT declined from 182 crores in FY07 to 85 crores in FY10, but the fact that its operating profits are decliningconsistently is disturbing. The rise in fuel prices were the main reason for this decline. EPS fell to Rs 5.64 per share in

FY09 from 9.31 FY05.

The decline in the interest payable is encouraging as the debt has fallen due to repayment of debt. GIPCL is also

expected to post growth in its ROE and EPS going forward as it plans to build its capacity further. However the expansion

plans have started impacting its leverage ratios from FY07 onwards. Its debt to equity ratio increased to 0.85 in FY10

from 0.5 in FY07. This can lead to a short term pressure on GIPCLs balance sheet but all these projects are expected to

generate enough cash flows to service the debt many times over.

ValuationWith low interest payments and high PLF, the company can be valued at a higher number . The increase in profitabilitywill also result in higher payout of dividends. The public issue has also boosted the visibility of the company. However

GIPCL has planned its future ventures by way of debt than through retained earnings. Thus, P/E is a better measure than

Dividend discount model. With large scale expansion and improvement in efficiency, the company can post strong

figures in the coming quarters. The expansions indicate higher cash flows in future and improvement in operating profit

margins and net margins. The fundamentals of GIPCL are shown in Exhibit 19. The leverage and earnings are shown in

Exhibit 20.


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8. Which Company to Invest?Indeciding which stocks to buy or not the main focus once the value the company can create for its shareholders by

effectively carrying out its current operations and expansion plans and also how efficiently the company has financed its

operations and expansion. This superimposed on the macroeconomic condition of India and changes in the regulatory

framework is helpful in making the buying decision.

As the consolidated analysis in Exhibit 29 shows, the market capitalization is highest for NTPC at Rs.166846.96. While

Tata Power is trading at highest price multiples, 31.54, the PAT for NTPC is 9 times higher than Tata Power. Suzlon is

trading at negative price multiple, mainly because its PAT is negative. However, its current market price has been

consistently falling, due to the German investment blunder made by the management. CESC is trading at price multiples

below its peers. CESC has not added any additional capacity unlike other companies that have guzzling capex

The cross company analysis is as follows:

1. NTPCThough NTPC is far ahead of other companies in terms of market capitalization, it has seen a fall in its operating and

net profit margins and has negative EVA and much depends on the timely execution of its expansion plans. Refer to

Exhibit 21, 22,23 for the comparison of these parameters across companies. Though it Its P/B is higher than the

industry average, it has the best return on equity among all the players. Being the largest player it is also best poised

to take advantage of the reforms process. So it is still an attractive buying option.

2. NHPCNHPC is trading significantly below the industry P/E and P/BV and has seen both its operating profit margin and net

profit margin surge ahead. However it has the lowest ROTA, ROE and EPS among the given players. A comparison of

these parameters with other companies in the industry is given in Exhibits 24,25,26. Its growth plans have been

rather subdued by delays in commissioning. The main case for NHPC is that it has the highest EVA (Exhibit 28) among

all i.e it has created wealth for its shareholders. Also the rain shortfall this year has put doubts on its capacity

utilization.

3. PGCILPGCIL has seen very less variability in the operating and net profit margins and also its P/E and P/BV is very much

near the industry benchmark. Also its ROE is one of highest in the industry and also its EPS has grown . Also the

company has the highest DER (Exhibit 27) which makes it even more attractive for investors in a growing economy.

4. TataPowerThe stock has the highest EPS among all others making it an attractive proposition. Also it has an aggressive

expansion plan and being the largest private player involved in generation as well as transmission and distribution

makes it very attractive for investors. The point against Tata Power is that it has the highest P/E and P/BV well above

the industry average of22.65 and 2.64 respectively and thus has the lowest yield among all.

5. CESCCESC has also a good return on equity and it has the lowest P/E and P/BV among all which makes it an attractive

proposition. However the company has a subdued expansion plan which may affect its future earnings.


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15 SAPM Assignment

6. GIPCLGIPCL has a P/E of16.78 and a P/BV of1.44 which makes it a good buy for investors. Also the company has recently

seen a turnaround in its fortunes in FY10 and its new plant at surat has stabilized. The factor that most goes in its

favour is that gujurat is likely to see a surge in power demand as it takes a big chunk of indias growth story .

7. SUZLONSuzlon is one of the failure stories in the power generating sector after a promising start and all its profitability

indicators are in red after disastrous results in FOREX hedging. As a result it has eroded the value of its shareholders

It is a straight no buy.

Based on the above analysis and the Price value we calculated as given in Exhibit 29, the decision of buy is as

follows. The list is in the order of priority.

1. CESC2. GIPCL3. NHPC4. TATA Power5. NTPC

Dont buy Suzlon.


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16 SAPM Assignment

9. Criticism of Dividend Discount Model

We observe that the price that we get by dividend discount model is much less than the actual stock prices i.e. all stocks

seem overvalued according to the model. With due regards to dividend discount model, the issue with the model is tha

it is as good as the assumptions that we make while computing stock prices with this model. Some of the points are

discussed

y Dividend discount model assumes that the dividend is constant or it grows at a constant rate till perpetuity. Butin reality all companies that we have considered have seen their dividends fluctuate over the years. So to apply

the model we have assumed that the average dividend that the company has given for the last five years is the

expected dividend i.e D1 which is used for calculating the price. This assumption may not hold completely in the

power sector context which is experiencing rapid growth of Capex and widespread reforms which are no

accounted for.

y In calculating the price we have assumed that the companies finance their future growth delivering assetthrough ploughing back of the earnings. But here we see that the companies have funded future growth by

taking debt. This can be seen in the increase in the debt equity ratios of all companies throughout the powe

sector. The dividend discount model is not able to capture this.

y The present value of growth opportunities (PVGO) is very sensitive to the rate of return on equity. Even smalchanges in the risk free rate and the market returns can change the value of PVGO and hence the price of the

stock. So figuring the appropriate discount rate becomes a problem.

y The DDM is not able to factor in a turnaround achieved in the near future. For example GIPCL has seen a sharpturnaround in FY2010 mainly because of reducing fuel expenses and also because its new plant in Sura

stabilized only from August and increased its PLF (plant load factor).

y DDM is unable to account for the widespread power sector reforms that are taking place in India and theregulatory changes for which the market is upbeat for the sector. The reason is because the increased revenue

or savings are difficult to account for. For e.g. future reduction in generation and transmission losses and

smoothening of fuel supplies in the new regulatory environment is difficult to estimate. On the other hand

investors have long been weary of the sectors bureaucracy and regulatory complexity. Therefore incorporating

all these dynamics in the cash flows becomes problematic.

y The analysis is also dependent on the window that we are using. For example markets have seen much volatilityand upswings in the recent years with high growth in 2002-2007 and then crash in 2008 and then again a revivalHence the market returns are susceptible to the window taken. Also in such volatile markets the assumption of

constant dividend or constant growth of dividends becomes even more infeasible.


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17 SAPM Assignment

APPENDIX

Exhibit1: Salient Features


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18 SAPM Assignment

Exhibit2: Plan Vs Achievement

Exhibit 3: Major Reasons for Delay during 2002-07 (MW)


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19 SAPM Assignment

Exhibit 4: Requirement of Construction Equipments

Exhibit5: Capacity ofAdani Power


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20 SAPM Assignment

Exhibit6: Power Companies in India

Dataasof March,2010 (India'stotalinstalledcapacity:159 GW)

Company Type Category

Total

Installed

Capacity(

in MW)

Future

Capacity

Expansion(

in MW) by

2015

%age of

total

installed

capacity in

India

NTPC Generation Thermal 31704 75000 19.89%

NHPC Generation Hydroelectric 5175 9500 3.25%

Adani

Power Generation Thermal 6600 16500 4.14%

Reliance


CESC Generation Thermal 1250 5000 0.78%

Torrent


Suzlon

Energy Generation Wind 4900 14300 3.07%

Tata Power Generation Thermal 3104 25000 1.95%

GIPCL Generation Thermal 4400 10000 2.76%

Company Type

Total

Transformation

Capacity (MVA)

PGCIL Transmission 77217

Torrent

Power

Transmission

&

Distribution 3300


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21 SAPM Assignment

Exhibit7: Fundamentals ofNTPC

Exhibit8: Leverage and Earnings ofNTPC

0

10

20

30

40

50

60

70

80

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10

NTPC

Operating margin Gross Margin Net Profit Margin ROA ROE

0.460.52 0.5

0.59 0.61

7.06

8.33 8.99

9.9510.59

0

2

4

6

8

10

12

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


NTPC

DER EPS


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22 SAPM Assignment

Exhibit9: Fundamentals ofNHPC

Exhibit10: Leverage and Earnings ofNHPC

0

10

20

30

40

50

60

7080

90


NHPC


0.45 0.45

0.58

0.68

0.56

0.730.83

0.90.96

1.7

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


NHPC

DER EPS


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23 SAPM Assignment

Exhibit11: Fundamentals of PGCIL

Exhibit12: Leverage and Earnings of PGCIL

0

10

20

30

40

50

60

70

80

90

100


PGCIL


1.51

1.771.62

2.1

2.31

2.8146

3.253.44

4.02

4.85

0

1

2

3

4

5

6

0

0.5

1

1.5

2

2.5


PGCIL

DER EPS


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24 SAPM Assignment

Exhibit13: Fundamentals of Tata Power

Exhibit14: Leverage and Earnings of Tata Power

0

50

100

150

200

250

300

350

400

450

500


TataPower

Operating margin

Gross Margin

Net Profit Margin

ROA

ROE

0.51

0.61

0.39

0.61

0.55

30.85

35.21

39.4241.65

39.93

0

5

10

15

20

25

30

35

40

45

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


TataPower

DER EPS


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25 SAPM Assignment

Exhibit15: Fundamentals of CESC

Exhibit16: Leverage and Earnings of CESC

0

50

100

150

200

250

300


CESC


1.65

1.29

0.79

0.98 1.0121.56

35.66

28.44

32.7934.68

0

5

10

15

20

25

30

35

40

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8


CESC

DER EPS


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26 SAPM Assignment

Exhibit17: Fundamentals of Suzlon

Exhibit18: Leverage and Earnings of Suzlon

-50

-40

-30

-20

-10

0

10

20

30

4050

60


Suzlon


0.12

0.31

0.44

1.13

1.3628.51

36.82

9.47

-3.13

-9.08

-20

-10

0

10

20

30

40

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6


Suzlon

DER EPS


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27 SAPM Assignment

Exhibit19: Fundamentals ofGIPCL

Exhibit20: Leverage and Earnings ofGIPCL

0

10

20

30

40

50

60

70

80

90


GIPCL


0.65

0.5

0.6

0.71

0.85

7.59

12.09

6.76

5.64

7.06

0

2

4

6

8

10

12

14

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9


GIPCL

DER EPS


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28 SAPM Assignment

Exhibit21: Operating Margin of Different Companies

Exhibit22: Gross Margin of Different Companies

0

10

20

30

40

50

60

70

80

90

100


Operating Margin

NTPC NHPC PGCIL Tata Power CESC Suzlon GIPCL

-20

-10

0

10

20

30

40

50

60

70

80

90


Gross Margin



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29 SAPM Assignment

Exhibit23: Net Profit Margin of Different Companies

Exhibit24: ROA of Different Companies

-50

-40

-30

-20

-10

0

10

20

30

40

50


NetProfit Margin


0

50

100

150

200

250

300

350

400

450

500


ROA



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30 SAPM Assignment

Exhibit25: ROE of Different Companies

Exhibit26: EPS of Different Companies

-30

-20

-10

0

10

20

30

40


ROE


-20

-10

0

10

20

30

40

50


EPS



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31 SAPM Assignment

Exhibit27: DER of Different Companies

Exhibit28: EVA of Different Companies

Economic Value Added (EVA)

NTPC NHPC PGCIL TataPower CESC Suzlon GIPCL

Mar'06 -1,000.45 -1,489.47 73.22 -570.02 -498.62 -19.33 -16.17

Mar'07 -388.81 -1,423.28 -80.25 -751.99 -432.80 -73.47 34.40

Mar'08 -796.34 -1,132.93 486.89 -861.69 -605.24 -953.75 -65.10

Mar'09 -2,169.13 -1,384.22 1,664.78 -929.26 -659.08 -2,621.45 -112.14

Mar'10 -1,762.27 -1,442.63 -146.60 -1,307.88 -581.81 -2,825.28 -109.20

Mar'11 -1,652.06 -78.50 -2,226.98 -1,590.68 -420.87 -40,043.62 -118.99

Mar'12 -1,504.37 2,550.16 -5,409.34 -1,958.02 -169.32 -31,20,538.11 -129.94

Mar'13 -1,313.21 7,354.72 -10,531.36 -2,442.91 207.93 -26,46,89,920.07 -142.17

Mar'14 -1,071.84 15,839.38 -19,094.64 -3,092.95 758.55 -22,48,72,19,791.67 -155.81

0

0.5

1

1.5

2

2.5


DER



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Exhibit29: Comparison of stock prices by different methods

NTPC NHPC PGCIL Tata

Power

CESC Suzlon GIPCL

Number of Shares

(in lakhs)

82454.64 123007.43 42088.41 2373.07 1249.36 15567.32 1512.51

Market Price

(09 -Sep -2010)

202.35 30.70 104.75 1259.60 399.80 51.35 118.50

Market Capitalization

(in crores)

166846.96 37763.28 44087.61 29891.19 4994.94 7993.82 1792.32

PAT (in crores) 872

8.20

210

8.73

20

40.

94 947.65 4

33.30

-141

4.0

910

6.79

P/E 19.12 17.91 21.60 31.54 11.53 -5.65 16.78

BV per share 75.72 20.09 37.88 447.68 263.94 35.90 82.38

BV (in crores) 62437.50 24710.63 15941.90 10623.77 4671.30 5604.31 1246.07

P/BV 2.67 1.53 2.77 2.81 1.07 1.43 1.44

Industrial Ratios

P/E 22.65

P/B 2.34

Pricebydifferentmethods

NTPC NHPC PGCIL Tata

Power

CESC Suzlon GIPCL

Market Price (09 -Sep -2010) 202.35 30.70 104.75 1259.60 399.80 51.35 118.50

CCDM 37.72 3.08 17.64 66.29 37.29 2.59 20.22

P/E 239.88 38.51 109.86 904.47 785.55 Not Applicable 159.92

P/B 177.38 47.06 88.74 1048.71 618.29 84.10 192.98

-25,000.00

-20,000.00

-15,000.00

-10,000.00

-5,000.00

0.00

5,000.00

10,000.00

15,000.00

20,000.00

Mar '06 Mar '07 Mar '08 Mar '09 Mar '10 Mar '11 Mar '12 Mar '13 Mar '14

EVA

NTPC NHPC PGCIL Tata Power CESC GIPCL

sapm assignment power sector groupf

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