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 LIMITED
Dear Sir,
We refer to our Engagement Engagement Letter dated dated 28 June 2009 2009 confirming our appointment for the valuation of 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 that the report is exclusively exclusively for your internal internal purposes and and hence should not 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 our prior written consent, consent, which consent consent will only be given after full consideration of the circumstances at the time. Please Pl ease 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. 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 detailing Key aspects of Business Business with different options 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 i t 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 the Company and the value per share will 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 however will be dependent dependent on availability & promptness with with which information 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% 40% on submission of Draft Report & Balance on submission of Final Report. Distribution of Report & Other General Information:
We understand that that the report is exclusively exclusively for your your internal purposes 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 written consent of LHNMS. This report should not be used for any any statutory, regulatory, regulatory, accounting purposes purposes or for reporting 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: Conditions:
We would be grateful grateful if you would confirm our our understanding of your instructions instructions and your agreement agreement to the terms of this letter by signing and returning the enclosed copy of this letter. We are keen to to work with you and look forward to your your confirmation. Meanwhile, Meanwhile, please feel free to 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
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Tables
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Section 1: Context and Purpose
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Section 2: Company Background and Financial Overview
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Section 3: Financial Overview
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Section 4: Indian Power Sector - Industry analysis
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Section 5: Valuation Analysis
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Section 6: Caveats
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Abbreviations Abbreviations
BSE SENSEX CAGR CAPM DCF D/E EBITDA EEG EV FCFF FCFE FMV FV FY Rs. NAV NSE PAT Valuation Date WACC YoY
Bombay Stock Exchange index Compounded Annual Growth Rate Capital Asset Pricing Model Discounted Cash Flow Debt Equity Earnings before Interest, Tax, Depreciation & Amortisation Erneuerbare-Energien-Gesetz Enterprise Value Free Cash Flow to Firm Free Cash Flow to Equity holders Fair Market Value Fair Value Financial Year ending 31 March Rupees Net Asset Value National Stock Exchange Profit After Tax 31 March 2009 2009 Weighted Average Average Cost of Capital Capital Year on Year
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Tables Page
Table 1.1: Capacity Capacity Addition Plan upto 2017
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Table 1.2: Key Financial Information Information – – P&L P&L and Common Size Statement
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Table 1.3: Key Financial Information Information – – Balance Balance Sheet
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Table 1.4: Financial Projections Projections
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Table 1.5 GDP Growth Growth Rate of Different Different Countries Countries
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Table 1.6 Demand & Power Supply in India
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Table 1.7 Demand & Power Supply in India for for Regions
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Table 1.8 India‟s Energy Energy Generation Capacity Capacity
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Table 1.9 Additional Additional Capacity requirement requirement of India under different different GDP growth growth rates
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Table 1.10: Cash flow projections
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Table 1.11: Sales, EBITDA & Installed Capacity Capacity multiples of comparable comparable companies
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Table 1.12: Final Value Summary Summary
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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. generator . The Indian growth growth story has given given a lot of impetus impetus to basic infrastructure infrastructure development, 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 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 out a valuation of the the Company based based on the financial information information and accounting accounting (“the Valuation Date”) Date”). estimates, provided to us by the Company, as of 31 March 2009 (“the
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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 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 f or the year 2008, by the Great Places to Work Institute.
Milestones:
1975 - Incorporated with authorized 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 crossed total installed capacity of 10000 10000 MW
1994 – 1994 – The 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 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. customers. Joint ventures ventures with cement 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 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 Plan upto 2017 Project
State
Fuel
MW
1. Sipat I (3 x 660) Chhattisgarh Coal 2 Barh I (3 x 660) Bihar Coal 3 Korba III ( 1 x 500) Chhattisgarh Coal 4. Farakka III ( 1 x 500)s West Bengal Coal 5. NCTPP II ( 2 x 490) Uttar Pradesh Coal 6. Simhadri II ( 2 x 500) Andhra Pradesh Coal 7. Indira Gandhi STPP- JV with IPGCL & HPGCL ( 3 x 500) Haryana Coal 8. Vallur I -JV with TNEB TNEB ( 2 x 500) 500) Tamilnadu Coal 9. Nabinagar TPP-JV with Railways (4 x 250) Bihar Coal 10. Bongaigaon(3 Bongaigao n(3 x 250) Assam Coal 11. Koldam HEPP ( 4 x 200) Himachal Pradesh 12. Loharinag Pala HEPP ( 4x 150) Uttarakhand 13. Tapovan Vishnugad Vishnugad HEPP (4 x 130) 130) Uttarakhand 14. Mauda ( 2 x 500) Maharashta Maharas hta Coal 15. Barh II (2 X 660) Bihar Coal 16. Vindhyachal-IV (2X500) (2X500) Madhya Pradesh Coal 17. Rihand III(2X500) III(2X500) Uttar Pradesh Coal
1980 1980 500 500 980 1000 1500 1000 1000 750 800 600 520 1000 1320 1000 1000
Total
17430
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3.
Financial Overview
3.1
Financial Information
Key financial indicators from NTPC‟s 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 Information – – P&L P&L and Common Size Statement (Amount in Rs. Million) Particulars Income Net Operating Income Other Income Total Income Expenditure Electricity and Fuel Employee Cost Other Expenses Total Expenditure Expenditure EBITDA Interest Depreciation PBT Tax PAT
Historical P&L FY2007 FY2008 FY2009
Common size FY2007 FY2008 FY2009
325,952 27,855 353,807
370,501 29,676 400,177
441,261 11,467 452,728
92% 8% 100%
93% 7% 100%
97% 3% 100%
198,181 11,632 15,681 225,494 128,313
220,202 18,960 16,355 255,517 144,660
271,107 24,631 19,521 315,259 137,469
56% 3% 4% 64% 36%
55% 5% 4% 64% 36%
60% 5% 4% 70% 30%
18,594 20,754 88,965
17,981 21,385 105,294
20,229 23,646 93,594
5% 6% 25%
4% 5% 26%
4% 5% 21%
20,427 68,647
28,401 74,148
11,581 82,013
6% 19%
7% 19%
3% 18%
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 Information – – Balance Balance Sheet (Amount in Rs. Million) Particulars SOURCES OF FUNDS : Share Capital Reserves and Surplus Advance against Depreciation Secured Loans Unsecured Loans Deferred Fo F oreign Currency Fluctuation Deferred Tax Liability Total Sources of Funds APPLICATION OF FUNDS : Fixed Assets Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less: Current Li Liabilities an and Pr Provisions Net Current Assets Total Application of Funds
Historical Ba Balance S Sh heet 31-Mar-07 31-Mar-08 31-Mar-09
Commonsize St Statement 31-Mar-07 31-Mar-08 31-Mar-09
82,455.00 403,513.00 6,567.00 68,229.00 176,615.00 1.00 737,380.00
82,455.00 443,931.00 13,734.00 73,147.00 198,759.00 2,554.00 1.00 814,581.00
82,455.00 525,943.57 13,734.00 85,126.60 180,327.00 2,554.00 1.00 890,141.17
11.2% 54.7% 0.9% 9.3% 24.0% 0.0% 0.0% 1 00 %
10.1% 54.5% 1.7% 9.0% 24.4% 0.3% 0.0% 100%
9.3% 59.1% 1.5% 9.6% 20.3% 0.3% 0.0% 100%
507,273.00 250,792.00 256,481.00 128,567.00 160,943.00
533,680.00 272,743.00 260,937.00 184,389.00 152,672.00
625,711.25 296,334.25 329,377.00 191,668.00 152,672.00
69% 34% 35% 17% 22%
6 6% 3 3% 3 2% 2 3% 1 9%
70% 33% 37% 22% 17%
25,102.00 12,523.00 133,146.00 40,476.00 221,827.00
26,757.00 29,827.00 149,332.00 40,354.00 255,488.00
30,467.57 35,697.24 161,102.44 40,354.00 276,839.24
3% 2% 18% 5% 30%
3% 4% 1 8% 5% 3 1%
3% 4% 18% 5% 31%
70,263.00 151,564.00 737,380.00
79,299.00 176,189.00 814,581.00
101,663.77 175,175.47 890,141.17
10% 21% 1 00 %
1 0% 2 2% 100%
11% 20% 100%
3.2 Shareholding Pattern
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3.3 Financial Projections The Management has provided us with with the projections projections for Five financial years ended 2010, 2010, 2011,2012, 2011,2012, 2013 and 2014. The projections and the common size statement are shown in the Table 1.4. Table 1.4: Financial Projections Projections Particulars Income Net Net Oper Operat atin ingg Inco Income me Other Income Total Income Expenditure Electricity and Fuel Employee Cost Other Expenses Total Expenditure EBITDA Interest Depreciation PBT Tax PAT
FY2010
Projected P&L FY2011 FY2012 FY2013
Common size (% of Net Sales) FY2010 FY2011 FY2012 FY2013 FY2014
FY2014
540, 540,41 412 2 5,404 545,816
621,649 6,216 627,865
727,297 7,273 734,570
847,641 8,476 856,118
1,006,046 10,060 1,016,106
99% 1% 100%
99% 1% 100%
99% 1% 100%
99% 1% 100%
99% 1% 100%
307,214 26,891 23,376 357,480
370,778 28,341 26,889 426,008
448,802 29,886 31,459 510,148
517,892 31,535 36,665 586,092
584,207 33,295 43,517 661,018
56% 5% 4% 65%
59% 5% 4% 68%
61% 4% 4% 69%
60% 4% 4% 68%
57% 3% 4% 65%
188,336 23,738 26,298 138,300 19,362 118,938
201,857 34,470 31,713 135,675 20,351 115,323
224,423 43,849 36,915 143,659 21,549 122,110
270,026 50,398 41,091 178,537 26,781 151,756
355,088 55,407 44,852 254,828 38,224 216,604
35% 4% 5% 25% 4% 22%
32% 5% 5% 22% 3% 18%
31% 6% 5% 20% 3% 17%
32% 6% 5% 21% 3% 18%
35% 5% 4% 25% 4% 21%
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 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: 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). percentages).
Table 1.5 GDP Growth 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 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 – 2008 – February February 2009 across different regions in India: Table 1.7 Demand & Power Power Supply in India for Regions 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 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 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 (“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 “White Paper”). 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 generation capacity as of February 28, 2009 in terms of fuel source and ownership: Table 1.8 India‟s Energy Generation Generation Capacity
The Central and State governments together 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 147,715.4 147,715. 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 – “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 gigaw att att (“GW”) by 2012, 159159 - 190 GW by 2017 and 278 – 341 341 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 requirement of India under different GDP growth rates
“Power Scenario at The likely capacity addition during the 11th Five-Year Plan is 78,700 MW. (Source: CEA, “Power Scenario 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 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 expect ed 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 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 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 co mpany 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 entity is listed on a stock 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 f irm / 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 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 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 f low projections on a Free Cash Flow to the Firm (FCFF) basis are summarized in Table 1.5 below: Table 1.10: Cash flow projections projections (Amount in Rs. Million) Discounted Cash Flow Analysis Revenue Less: Expenses EBDITA Less: Depreciation/Amortization EBIT Tax Gross Cash Flow to Firm (FCFF) Add: Depreciation/Amortization Less: Changes in Working Capital Less: Increase in Capital Expenditure Less: Changes in Capital WIP Net FCFF
FY2010
FY2011
FY2012
FY2013
FY2014
540,412 319,114 221,299 26,298 195,000 19,362 175,638
621,649 360,994 260,655 31,713 228,942 20,351 208,591
727,297 430,578 296,719 36,915 259,804 21,549 238,255
847,641 515,353 332,288 41,091 291,197 26,781 264,417
1,006,046 592,944 413,102 44,852 368,249 38,224 330,025
26,298 11,278 31,969
31,713 (13,906) 149,000
36,915 24,424 97,100
41,091 (5,886) 112,984
44,852 28,482 81,102
20,897 137,793
20,942 84,267
20,989 132,657
21,039 177,372
21,091 244,203
Discounting Factor: The discounting factor considered for arriving at the present value of the free cash flows fl ows 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 K e= R f f + β (R m - R )f f where: K e= Cost of Equity
R f f = Risk Free Rate
R m= Market Rate of Return
Β (beta)= Measure of Market Risk
The following inputs inputs have been used in the calculation of the the Cost of Equity (Ke) and the WACC: 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 Premium (i.e. (R m - R )) f f 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 perception of the Company
After considering appropriate risk premiums, the Cost of Equity calculated is approximately 12.96% and the WACC is approximately 12%.
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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 NTPC‟s business beyond the projection period. Valuation based on DCF 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 share is estimated at Rs.196 per share. Method 2: Market Multiplier Method Method
This method applies the most appropriate and reasonable multiple to the relevant operating performance metrics of the Company Company being valued to estimate estimate its Equity Value. Value. The most appropriate appropriate and relevant multiple is derived from reference to market market based conditions of quoted companies. 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 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 EV/Installed capacity multiples for all the 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 comparable companies (Amount in Rs. Million) Particulars
Sales 441,261 In Inst stal alle led d Capa Capaci citty 30, 0,14 1444 EBIDTA 137,469 EV/Sales EV/Installed Ca Capacity EV/EBIDTA 3 . 3 6 57.54 9.51 Average Multiple 1,481,093 1,734,632 1,306,794 Enterprise Value 161,102 161,102 161,102 Add: Cash Balance Balance 152,672 152,672 152,672 Add: Investments Investments 265,454 265,454 265,454 Less: Debt 18,033 18,033 18,033 Less: Contingent Liabilities (50%) 1,511,381 1,764,920 1,337,083 Equity Value 8,245 8,245 8,245 No. of shares Weights 35.00% 35.00% 30.00% 64 75 49 Value Per Share Rs. Per share total value 188
Valuation based on Market Market Multiplier method 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 Method
We have carried out the valuation valuation under this method on the basis basis of high-low average market price of 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 Summary Value Per Share Particulars
Discounting Cash Flow Share Price Multiple Market Multiple Total
Equity Value (Rs. Weights Million) 1,615,355 70% 1,426,465 15% 1,547,830 15% 4,589,651
Product (Rs. Million) 1,130,749 213,970 232,175 1,576,893
No. of Shares in million
8,245
Value Per Share (Rs.) (Rs.)
191
We therefore therefore estimate the values for the equity 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. 6.1
Caveats 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. basis. Although, we have reviewed such data for consistency and reasonableness, we have not independently independently investigated investigated or otherwise verified the data provided. 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 any other due diligence 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 other corporate structures structures beyond the the limited information information made available to to us. The responsibility for forecasts and and the assumptions assumptions on which they 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 greater or lesser extent, extent, according to the nature of the business 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 work has been limited both both in terms of of the areas of the business business and operations operations which we have reviewed reviewed and the extent to to which we have reviewed them. There There may be matters, 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 business is worth to a serious investor or buyer who may be prepared to pay 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 depending upon the basis basis used, the specific specific circumstances and and professional judgment 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 issued on the understanding understanding that Management of NTPC NTPC has drawn our attention 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 present or planned future future interest in NTPC NTPC or any of its subsidiaries 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 Analysis is confidential and has been prepared exclusively for the Management of NTPC. NTPC. We understand that that the report is to be used exclusively exclusively for internal purposes. purposes. Hence, it should 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 without the prior written written consent of LHNMS. LHNMS. Such consent will will only be given after full consideration of the circumstances at the time. 6.3
Sources of Information
The Valuation Analysis Analysis is based on a review review of historical historical and projected financial information 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 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.
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