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March 2014 Edition of BEACON, A Monthly Newsletter by SIMCON.
Inside this issue:
Concept of the Month
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  1. 1. B E A C O N A Newsletter by SIMCON– SIMSREE Consulting Club Volume : 2 Issue : 5 March 2014
  2. 2. INDUSTRY ANALYSIS : POWER SECTOR Introduction India has the world’s fifth-largest electricity generation capacity and demand is expected to surge in the coming years owing to growth in the economy. The demand for electricity in the coun- try has been growing at a rapid rate and is expected to increase further in the years to come. The power sector in India is mainly governed by the Ministry of Power. There are three major pil- lars of power sector these are Generation, Transmission, and Distribution. Power is one of the key sectors attracting foreign direct investment (FDI) inflows into India. Total FDI inflows in the sector has touched US$ 7.8 billion during April 2000-March 2013, accounting for 4 per cent of total FDI inflow in India. Major investments earmarked by public as well as private sector companies across the value chain. PORTER’S FIVE FORCES ANALYSIS:- Threat of New Entrants: - Low As it is highly capital-intensive industry it demands high amount of investments. Obtaining regulatory approvals, huge land, fuel linkages are further bottlenecks. So threat of new en- trants is comparatively low. The threat of substitute products or services: - Medium Power does not have substitute but it can be generated from different sources of energy. The cost of switching to substitutes like gas, solar penal, etc. is high. Government is encouraging alternative and non-renewable sources. The bargaining power of customers: - Medium Industrial consumers have huge demand for power. Their bar- gaining power is low in India as the number of power compa- nies to buy from is limited in number. Retail customers also have huge demand, government regulates the power sector to ensure supply of power at reasonable prices so customers direct- ly don’t have bargaining power. The bargaining power of suppliers: - High Coal is majorly used as a feed for generating power. Their bargaining power is low in India as the number of power com- panies to buy from is limited in number. Retail customers also have huge demand, government regulates the power sector to ensure supply of power at reasonable prices so customers direct- ly don’t have bargaining power. The bargaining power of suppliers: - High Coal is majorly used as a feed for generating power. The supply of coal in India is limited and hence coal players are in domi- nant position. Indian power industry imports coal from other countries like Indonesia, Australia so they have to rely on rules and regulation of that country too. Some of the power generat- ing companies has their own coal mines. But overall supplier side is in dominant position. The intensity of competition within the industry :- Medium As demand for power is way above its supply and all the power generated is used up there is no competitive rivalry. However, with government encouragement, private participation is ex- pected to increase in the coming years to take advantage of huge demand for power in India. So in future the competition will be intense. Top Power Companies in India NTPC: NTPC is a public sector undertaking with a capacity to generate nearly 33 GW of power and the company is planning to double its capacity by the year 2015. The main dependence of the com- pany for power generation is on gas and coal, but now they are using solar power, nuclear power and hydel power as well for generation of power and energy. NHPC: NHPC is hydro power focused company and recently the stock values of the company came down due to lower profits and slower implementation of power projects. However, they are planning by all means to improve their power production in the Volume : 2 Issue : 5 BEACON : Page 1 Mar-2014 For detailed report and all industry analysis from previous Beacons together, please visit our blog :
  3. 3. next five years by focusing on hydel power generations in the states belonging to the northern part of India. Tata Power: Tata Power is one of the few power & energy companies in the private sector in India and they are engaged in the production of power through wind, solar, hydro and thermal energies. Their production capacity is 3 GW and they are in the process of building a number of power transmission and power generation plants in India. Reliance Power: Reliance power is the subsidiary of the popular Reliance group of companies and they have great expansion plans in the power and energy sector in India. They are presently engaged in the construction of 34000 MW project and they are also planning to build a plant with a capacity of 35 GW and planning to use coal, gas and hydel as base for power generation. Impact Analysis Though some of the factors that affected the power sector were: Fuel shortages Power is a capital intensive industry with long gestation peri- ods, and the shortage of fuel can be a major challenge in the long term. Traditionally, most power plants in India use coal or natural gas as fuel, both of which are fast depleting reserves. Further, the Working Committee on Power forecasts a shortage of 238 metric tons of coal per annum by FY17. Additionally, there is also a shortage of natural gas in the market, though the deficit has reduced by 25 per cent over the past decade to reach 20 per cent over FY1113. Difficulty in obtaining environmental approvals and land clearances: Land acquisition is one of the key challenges impeding the growth of the power sector in India. Further, obtaining environ- mental approvals is also difficult as a large number of govern- ment bodies need to be contacted for clearances, including the Ministry of Environment and Forests, Ministry of Aviation, Department of Forests, and other government institutions. These challenges primarily arise due to concerns over environ- mental pollution, issues regarding rehabilitation, afforestation and regulatory delays. Degrading financial health of state distribution utilities Eight state electricity boards (SEBs) had stopped making pay- ments to NTPC in 2011, despite getting discounts of up to 2 percent on immediate payments, and 1 per cent on payments made within one month. The losses of distribution utilities in India were pegged at Rs 75,000 crore (US$ 13.9 billion) in 2011, and are expected to rise to Rs 1.16 trillion (US$ 21.4 bil- lion) by 2014-2015. Trends in Power industry Strong growth in generation capacity led by per capita con- sumption, urbanization There is strong growth opportunity in power generation led by exponential growth in economy, increasing propensity for elec- tricity consumption and urbanization. Indian companies have shown a huge interest in power generation and the recent change in power procurement landscape towards competitive bidding is expected to drive investments and efficiency in the sector. Alternate sources of energy While Indian companies are largely focused on tradition sources of energy, global investments in renewable energy has jumped 32% reaching record USD 211 billion in 2010, which is over 5 fold increase since 2004. Even developing countries like China have ramped up their investments in alternate sources of energy. Steadily, Government of India is offering a number of incen- tives to renewable energy developers to accelerate investments in renewable energy space. RPO requirements set by state regu- lators and REC mechanism is expected to create demand for renewable energy across solar and non-solar sources. In addi- tion, several benefits like accelerated depreciation, preferential tariff and generation based incentives offer attractive incentives to developers investing in renewable energy, and aim to en- hance supply through renewable energy. The National Solar Mission plans a capacity addition of 22,000 MW by 2022. Gov- ernment of India targets a growth in renewable energy con- sumption of over 6% CAGR and a capacity addition of 18500 MW during the 12th five year plan period. Conclusion The last decade has seen a sea change in India’s electricity sec- tor, from being 10th largest in the world to 5th largest now. The industry is moving away from negotiated & guaranteed arrange- ments of the past era, to more open market and performance based competition. The approach now is more pro investment, although the legacy problems of cross-subsidies, losses, and rural access remain a challenge. The private sector has emerged as a key player in both conventional and renewable power, and increasingly in other parts of the business. There is still a long way to go. increasingly in other parts of the business. There is still a long way to go. References: report.pdf generation_12.pdf For detailed report and all industry analysis from previous Beacons together, please visit our blog : Volume : 2 Issue : 5 BEACON : Page 2 Mar - 2014 INDUSTRY ANALYSIS : POWER SECTOR
  4. 4. COMPANY ANALYSIS : TATA POWER Volume : 2 Issue : 5 For detailed report and all company analysis from previous Beacons together, please visit our blog: BEACON : Page 3 Mar - 2014 Introduction: Tata Power is the electric utility company of the Tata Group. Founded in 1911 as Tata Hydro-Electric Power Supply Compa- ny (which was merged into Tata Power, which was established in 1919) to supply power to Mumbai, Tata Power is today In- dia's largest integrated power company. Headquartered in Mum- bai, the company has presence in Generation (thermal, hydro, solar and wind), Transmission, Distribution, Trading and Con- sultancy in the power sector. It has installed capacity of 8560 MW in India, 7407 MW is via thermal power. The company is one of the largest renewable energy players in India and is developing country's first 4000 MW Power Project at Mundra (Gujarat) under the subsidiary Coastal Gujarat Pow- er. The company has existing operations in the states of Maha- rashtra, Gujarat, Karnataka, West Bengal, Jharkhand and Raja- sthan. The company supplies power to Mumbai and Delhi and part of the 1,200km Tala transmission project, India's first inter- state transmission project. Tata Power has customer base of 4.5 lakh direct customers in Mumbai as well as bulk customers like Railways, BARC, BEST. It has 1.3 million (out of total 4.5 million electricity us- ers) customers in Delhi. Along with Wipro, Tata Power is the only Indian company which was featured in Ethisphere magazine’s World’s Most Ethical (WME) Companies (2014) list, released on 20 March. Joint ventures, subsidiaries and associates Tata Power also operates on a PPP model with Delhi Vidyut Board for distribution in North Delhi (Tata Power Delhi Distri- bution Limited), with Power Grid Corporation of India Ltd. for transmission of power from its Bhutan plant to Delhi (Powerlinks Transmission Ltd.) and with Damodar Valley Cor- poration for a 1050 MW Mega Power Project at Jharkhand (Maithon Power Ltd). The company has captive coal blocks in Jharkhand and Odisha along with joint venture partners. Tata Power also has a 30 % stake in Indonesia’s PT Kaltim Prima Coal (KPC) and a related trading company PT Bumi Resources, and has entered into an offtake agreement with KPC. Tata Power has a 10 % stake in the Australian company Geody- namics and has a partnership with Australian solar power com- pany Sunengy Pty. Tata Power has a joint venture with Bhutan government’s Druk Green Power Corporation for the 114MW Dagachhu Hydro Project. It also has a joint venture with South Africa-based Exxaro Resources, Cennergi Pty which focuses in projects in southern Africa. It has also partnered with SN Pow- er, Norway for developing hydro-electric plants in India and Nepal. Trust Energy Resources Pte, incorporated in Singapore, is a 100 -percent wholly-owned subsidiary of Tata Power is engaged in shipping and supply of coal for the parent company. Another subsidiary, Tata Power Trading Company is the first company to acquire a license in power trading in India. Tata Power SED (Strategic Engineering Division), an internal division, develops electronic products for the Indian defense power. Leadership: Shareholding Pattern: SWOT Analysis: Name Post About Cyrus P Mistry Chairman Chairman of Tata Group Anil Sardana CEO & MD Former MD, Tata Teleserv- ices Ltd and Board Member from 2007
  5. 5. COMPANY ANALYSIS : TATA POWER Volume : 2 Issue : 5 For detailed report and all company analysis from previous Beacons together, please visit our blog: BEACON : Page 4 Mar - 2014 Financial Statements: In FY13, revenue grew by 27% mainly because of additional revenue generated from CGPL Mundra and higher revenue of TPDDL due to increase in power purchase cost. It grew from Rs. 26001.40 crore to Rs. 33025.43 crore. Operating profit achieved a growth of 31%. It grew to Rs. 6444.70 as compared to Rs.4900.20 crore last year. In FY13 PAT decreased due to lower dividends income from coal investment, higher finance charges and higher tax provi- sioning due to change in depreciation rates. Profit After Tax stood at Rs. 1024.69 crore as against Rs. 1169.73 crore. Operating income to PAT of Tata Pawer: Performance of Tata Power in last three years: Business Strategy: Tata Power has been putting continuous efforts in implementing modernization and cost reduction strategies. Its goal is to be perceived as a low cost power producer which guarantees af- fordable and 24x7 uninterrupted power supply. The company is encouraging its “Right to choose” exercise for consumers across Mumbai. The company has organized 880 camps to explain the benefits of switchover for low-end con- sumers from their current electricity company, mainly Reliance April 1 to December 31, 2013, with 75,125 consumers being low-end (0-300 units). It has increased its cable network by more than 300 km by December 2013 and added two new distri- bution sub-stations (DSS) and 36 Consumer Sub Stations (CSS), totaling the DSS to 23 DSS and 619 CSS, majority in the 11 clusters where the regulator MERC ordered the company to expand its network. From April 1, the tariffs for switchover customers up to 100 units will increase to Rs 2.49 per unit (v/s 2.13 earlier) while for those using electricity up to 300 units, its tariff will be Rs 4.13 (3.62 earlier). For changeover customers (those who shifted from its close rival Reliance), the new tariff will be Rs 2.38 (2.11 earlier) and Rs 4.45 (4.1 earlier) for up to 100 units and 300 units, respectively. Like rival Reliance, Tata Power is also leveraging social media to address customer com- plaints and reach out to potential customers. It aimed to reach 5 lakh in Mumbai by end of March. Tata Power, one of the largest players in renewable energy in India, has a gross installed capacity of 912 MW from clean en- ergy sources, of which 447 MW comes from hydropower and 465 MW comes from renewable sources such as wind and solar power. Besides Mundra plant, Tata Power plans to increase its renewable energy capacity by about 71 per cent to cut carbon emissions and reduce risks from fluctuating fuel prices. The utility is planning to add 646.7 MW of renewable energy capac- ity. Power projects in India face multiple challenges, primarily over land and the environment. Because of this the company is ex- ploring business in other countries where the investment climate is more favorable. It has 26 per cent stake in the Dagachhu Hy- droelectric Power Project in Bhutan which will have an in- stalled capacity of 126 MW. Through its joint-venture company Cennergi, is developing the 94.8 MW Tsitsikamma wind power project in South Africa. 35% of the revenues came from its In- donesia business last year. Over the years it is planning to add 26,000MW capacity in 6-7 years, of which a major chunk is expected to come from global projects. Besides global expansion, the company has worked on the PPP model in Jamshedpur and Delhi. With the ambitious growth plans, the company aims to follow ‘Responsible Growth’ model. References: Year 2010-11 2011-12 2012-13 Generation (in MU's) 15325 15230 15770 Operating Income 6918 8496 9567 Operating Expenses 5328 6711 7543 Operating Profit 1591 1785 2024 Other Income 494 983 721 Interest and Fi- nance Charges 462 515 678 Depreciation 510 570 364 PBT 1112 1683 1703 PAT 941 1170 1025 EPS 41 4.53* 3.44 Dividend per share (%) 1.25 1.25 1.15
  6. 6. Concept of the Month DISCOUNTED CASH FLOW (DCF) Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analy- sis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is then used to evaluate the potential for investment. If the value arrived at through DCF analysis is high- er than the current cost of the investment, the opportunity may be a good one. Formula for DCF : The formula for calculating DCF is usually given something like this: Where: PV = present value, CFi = cash flow in year i k = discount rate, TCF = the terminal year cash flow g = growth rate assumption in perpetuity beyond terminal year n = the number of periods in the valuation model including the terminal year The key essence of DCF analysis 1. Determination of Free Cash Flows: Value of business in the projection period Free Cash Flow: Cash flows available for distribution to a specified group of security holders Building free cash flows : EBIT - Taxes (@Tax Rate) = Tax Effected EBIT + Depreciation and Amortization - Capital Expenditures - Increase in Working Capital + Other non-cash items = Unlevered Free Cash Flow 2. Calculation of Terminal Value: Value of business/cash flows post the projection period — The terminal value estimates the residual value of cash flow stream at the end of an investment time horizon — Serves as a proxy for the present value of the cash flow that is to be generated by the business after the investment hori- zon (usually 5 to 10 years) — Calculate the PV of Terminal Value and add to PV of projected cash flows to arrive at a total value for the company — Terminal Value Approach: Perpetuity Growth Method : TV(n) = FCF(n+1)/ (WACC – Growth Rate) Exit Multiple Method : TV = EBITDA * Multiple 3. Calculation of Discount Rate: Incorporates Time Value of Money Steps in Calculating DCF:  Project Unlevered FCFs (UFCFs)  Choose a discount rate  Calculate the TV  Calculate the enterprise value (EV) by discounting the projected UFCFs and TV to net present value  Calculate the equity value by subtracting net debt from EV  Review the results Source: Volume : 2 Issue : 5 BEACON : Page 5 Mar - 2014 Typical uses of DCF  How much could buyer pay?  How much should seller want?  Reality check against other valuation methods  Allows us to perform ‘what if?’ scenario analysis  Assessing how a business must perform in order to be worth a given amount DCF is applicable for the following :  Project with finite life  Stable, low growth and predictable cash flows  Fixed income securities  Majority of cash flows lies outside projection period  High growth or start-up firms  Cyclical business  Troubled or loss making firms
  7. 7.  Bruce Doolin Henderson (1915–1992), founder of the Boston Consulting Group (BCG), began his career as a salesman selling The Bible.  Satyam Computers incubated Cognizant in a joint venture with the Dun & Bradstreet Corpora- tion (D&B) in 1994.  Mckinsey, BCG and Bain are considered to be the "Big Three" Management Consulting firms.  In 1989, the Institute of Management Consultants of India (IMCI) became the first Asian organ- isation to be accepted for membership of the International Council of Management Consulting Insti- tutes (ICMCI), the global apex body of Management Consulting Institutes. QUIZ OF March 1. Larry Page 2. Chevron 3. William C. Durant 4. Richard Stallman 5. Oreo 1. Identify this US based MNC that was named one of the World's most ethical compa- ny for seventh year running in 2014 in the business service category. 2. Identify the person in the image. 3. X’s global partners voted overwhelmingly to approve a combination with Y. The two organizations announced in October 2013 they had signed a conditional merger agreement. Identify X and Y. 4. Connect the bunch of three im- ages to identify a strategy to de- ter hostile takeover 5. X proposed to buy a 100% stake in Y. As a part of the negotia- tion, X would have been liable to pay $112.5 million if it would have withdrawn, while Y would have had to pay a termination penaly of $50 million if it walked out of the deal. The deal eventually fell out with both the companies blaming the other for the failure. Identify X & Y. ANSWERS : FEBRUARY ISSUE Answer To: with Subject= simcon_quiz_mar_2014 Winner will be recognized. All Correct Answers will be published in next month’s Edition. Contributions invited: To make this feature a successful effort, we seek continued involvement and contribution from our readers, that is YOU. We invite articles and trivia on themes related to consulting. Be it industry news, consulting trends, a joke, a cartoon or feedback, we are eager to hear from you. So go ahead, do your research, pen down your thoughts and mail your entries to Best Regards, Our FB page : SIMCON –SIMSREE CONSULTING CLUB Mail To: Volume : 2 Issue : 5 BEACON : Page 6 Mar - 2014 Priyanka Kaul MMS, SIMSREE Winner:-