Industry analysis of power sector in India. Valuation of eight companies using DCF and relative valuation techniques.

1. POWER SECTOR
Corporate Analysis
and Valuation
Shaurya Dhall 13271
Shubham Verma13288
Shivam Pandey 13274
Shriya Dargan 13282
Under the tutelage of :- Dr. Kumar Bijoy

2. Valuation Drivers
 Interest Rates
• Replace aging infrastructure
• Connect the increasing renewable capacity to the grid
• Modernize the existing grid to incorporate smart meters
• Improve the overall reliability of the system
 Improving Commodity Outlook
• Coal Prices (International and Domestic)
• Oil and Natural Gas
 Strong demand, stabilizing allowed returns
• Return on Equity to be allowed at 20.11% as determined by CAPM (hydro)
• Return on Equity to be allowed at 15.5% (renewables)
 Improving Regulatory Frameworks
 Incentivizing Renewables
• Tax Credits
• Carbon Regulations
• Decreasing LCOE (Levelised Cost of Energy)

3. Valuation Concerns

4. Power Sector in India
Generation
Hydro (17%)
Thermal
(65.5%)
Nuclear (4.5%)
Renewables (13%)
Transmission and
Distribution
National Grid
Grid Discipline
Technology
Regulatory
Electricity Act 2003
CERC Regulations
Mega Power/ Ultra
Mega Power Policy

5. Michael Porter 5 Forces
Industry
Rivalry
Threat of
Substitutes
High
Bargaining
Power of
Buyers
Low
Threat of New
Entrants
Medium
Bargaining Power
of Suppliers
Medium

6. Strengths
1. Leverage on the “Tata” brand which
signifies trust
2. Capable of expansion since it has large
reserves and low Debt-Equity Ratio
3. Various generation capabilities i.e.
thermal, hydro, wind, solar
4. International Presence
Weaknesses
1.Limited Market share due to intense
competition
2.Limited presence in South India
which is a lucrative market
Opportunities
1.Increasing demand for power
2.Non-conventional sources of
power
3.Expansion into third world
countries and global expansion
Threats
1. Fluctuating International prices
of coal
2.Changes in International policies
regarding import of coal and oil
3. Government policies and
regulations

7. Strengths
1. Strong network in remote areas
2. Robust network across India
3. Efficient manpower
4. Very few network failure
5. Backing of Central Government
Weaknesses
1.Slow decision making process
2.Manualnetwork needs urgently
computerization
3.Centralized authority
Opportunities
1.Huge demand and supply gap
2.Large opportunity in expanding
network
3.Can diversify into other network
Threats
1.Outdated grid can fail anytime
2. Intense competition from other
major players
3. Changing govt policies and govt
intervention can affect operations

8. Strengths
1. Efficient production process of plants
2. Strong backing of the Jaypee group makes
its presence strong
3. Fully integrated project management
system
4. New equipment and latest technology
5. Lower operating costs
6. Very good part load efficiency as
compared to sub-critical unit
Weaknesses
1. Intense competition from a few big
players means limited market share
2. Prices are determined by India's
Electricity Act
Opportunities
1.Huge demand and supply gap
2.Large opportunity in energy
consultancy service
3.New sources of power
generations
Threats
1.Rising cost of production
2.Huge competition from
established public sector firms
3. Industries are dependent of
economic conditions which affects
their business too

9. Strengths
1. Ethical business practices
2. Employee friendly work culture and
personnel policies
3. Efficient production process of plants
4. Fully integrated project management
system
5. Over 25 years of experience in the sector
6. Backing of Gujarat Government
Weaknesses
• 1.Localized presence, less
diversification
• 2. Depleting input materials
sources
• 3.Out dated plants urgently
needed investments for
modernization
Opportunities
1.Huge demand and supply gap
2.Large opportunity in energy
consultancy service
3.New sources of power
generations
Threats
1.Rising cost of production
2.Huge competition from
subsidized public sector firms
3. New and cleaner sources of
power

10. Strengths
1. Through acquisition of a majority stake in
a South African coal mine, it can lower its
fuel costs and thus its operating costs.
2. Each project is strategically located near
an available fuel source
3. Strong backing of JSW group adds value
to the company
Weaknesses
1. Present only in very few states
namely Karnataka, Maharashtra,
Himachal Pradesh and Rajasthan
2. Has a very low market share even
compared to the private players like
Tata Power and Reliance Power.
3. Not likely to compete against
companies having big projects
Opportunities
1. Can diversify into other means of power
generation
2. Can increase its spread in the country as
well as overseas
3. Increase global tie-ups
4. Huge demand and supply gap
Threats
• Changes in International prices of
coal, international policies
• Relies on imported coal, Forex
fluctuations affects its
profitability
• Legal hassles on environmental
clearance

11. Strengths
1. Being a “Navratna” Company having rich
experience and expertise in mining and
power generation
2. Availability of lignite and water for power
generation
3. Highest domestic credit rating
4. Committed and experienced workforce
5. Cordial and harmonious industrial relations
Weaknesses
1. Limited input materials
sources
2. Out dated plants urgently
needed investments for
modernization
Opportunities
1. Huge demand and supply gap
2. Large opportunity in energy consultancy
service
3. Diversify into new sources of power
generations
4. Thrust by Government of India for
development of power
5. Policy initiatives for power sector
Threats
1. Rising cost of production
2. Huge competition from growing
private sector firms

12. Strengths
1. Integrated Business Model
2. Provider of End to End Solutions
3. Vertically Integrated (supply chain)
4. Market Leader
5. Innovation
6. Strong Human Resource base
Weaknesses
• Operational Risk
• -Cash conversion
• -Growth in assets overweighing
profits
• Financial Performance
• Funding its acquisitions (Rising
debt)
• High inventory levels
Opportunities
1. Steady growth in demand
2. Untapped offshore markets
3. Policy support for renewable
energy
4. Tax exemptions
5. Increasing environmental
concerns
6. Replacement demand in
foreign markets
Threats
1. Intense competition
2. Falling oil and gas prices
3. Dependency on global markets
4. Forex risk
5. Technological risk
6. Shrinking order book
7. Rising cost of resources

13. Strengths
1. Strenghthening of EPC
2. Quality certificate by German TUV
Rhineland
Weaknesses
1. Solar energy sector is going through
its stagnation phase
2. Industry sits on oversupply
3. MBIL is heavily debt ridden
4. Its media storage and entertainment
businesses have declined in share,
but according to industry experts
Opportunities
1. Government’s National Solar
Mission
2. A product differentiation
strategy for thin film offering,
newly launched by the firm
can help cut installation costs
for customers by 8-10 percent
Threats
1. Sluggish growth in Eurozone
and retrieval of subsidies and
incentives for solar power
generation
2. China global epicenter of solar
manufacturing, eroding Moser
Baer’s cost competitiveness

14. DCF Analysis
• Calculating Free Cash Flows :
• The Discount Rate : WACC
• Terminal Value : Having estimated the free cash
flow produced over the forecast period, we need to come
up with a reasonable idea of the value of the company's
cash flows after that period.
The trouble is that it gets more difficult to forecast cash
flows over time. "terminal value" approach involves making
some assumptions about long-term cash flow growth.

15. • Gordon Growth Model :
• “Multiple” Method : Another way to determine a
terminal value of cash flows is to use a multiplier
of some income or cash flow measure, such
as net income, net operating profit, EBITDA
(earnings before interest, taxes, depreciation, and
amortization), operating cash flow or free cash
flow.

16. • Calculating Total Enterprise Value : To arrive at
a total company value, or enterprise
value (EV), we simply have to take the present
value of the cash flows, divide them by the
company’s discount rate and, finally, add up
the results.

17. Discounted Cash Flow Analysis

19. COMPANY EBITDA
MULTIPLE
METHOD
PERPETUITY
GROWTH
METHOD
Market Price**
Enterprise
Value
Share
Price
Enterprise
Value
Share
Price
TATA POWER
46,524 127 33,703 80 77.10
POWER GRID CORP. 154,981 136 534,674 861.45 105
JSW ENERGY 29,021 111.3 26,014 92.97 118.45
NLC 20,659 94.42 15,910 65.98 70.30
MOSER BAER 8645 35.23 9,275 38.41 9.40
SUZLON ENERGY (9832) (21.43) 12,328 (11.31) 27.40
*Market Price as on 31st March

20. Relative Valuation
• A method of determining an asset's value that takes into account the value
of similar assets. Relative valuation involves the use of similar, comparable
assets in valuing another asset.
• A valuation multiple is simply an expression of market value of an asset
relative to a key statistic that is assumed to relate to that value. To be
useful, that statistic – whether earnings, cash flow or some other measure –
must bear a logical relationship to the market value observed; to be seen, in
fact, as the driver of that market value.
• When the peer group consists of public quoted companies, this type of
valuation is also often described as comparable company analysis or
"comps", "peer group analysis", "equity comps", " trading comps", or
"public market multiples“.

21. • Select peer group of similar companies
• Select the relevant multiple
• Calculate the multiple for the peer group companies
• Aggregation of multiple into single number through analysis
• Apply to the company
• Find Value
Steps in Relative Valuation
21

22. • A peer group is a set of companies or assets which are selected as being
sufficiently comparable to the company or assets being valued (usually
by virtue of being in the same industry or by having similar
characteristics in terms of earnings growth and/or return on
investment).
Criteria for selection is as follows-
• Industrial / business environment factors: Business model, industry,
geography, seasonality, inflation
• Accounting factors: Accounting policies, financial year end
• Financial: Capital structure
• Empirical factors: Size
Criteria for selection of comparable firm
22

23. • P/E (Price Earning
Ratio)
• P/B (Price to Book
Ratio)
• Equity / Sales
• Equity / Cash flow
• Equity / PAT
• Equity / Book value of
share
Equity Multiples
23
• EV / Sales
• EV / EBITDA
• EV / EBIT
• EV/TA
Entity Multiples

24. • P/E Ratio = MPS / EPS
• Current PER = Current MPS / Current EPS
• Trailing PER = Current MPS / EPS based on last 4 quarters. [or, LTM:
Last twelve months]
• Forward PER = Current MPS / expected EPS during next F/Y
• EPS may further be based on fully diluted basis or primary basis
• EPS may include or exclude extraordinary items
 If valuation is being done to estimate firm value
◦ Value of firm = Average P/E multiple in industry  EPS of firm
 This method can be used when
◦ firms in the industry are profitable (have positive earnings)
◦ firms in the industry have similar growth (more likely for “mature”
industries)
◦ firms in the industry have similar capital structure
24
Valuation: P/E multiple

25. • This multiple measures the enterprise value, that is the value of the
business operations (as opposed to the value of the equity).
• EV = market value of equity + market value of debt +Minority interest+
preferred stock – cash and marketable securities
• EBITDA is Earnings before Interest, Taxes, Depreciation and Amortization
USES-
1. The multiple can be computed even for firms that are reporting net
losses, since EBDITA are usually positive.
2. More appropriate than the PE ratio for high growth firms.
3. Allows for comparison across firms with different financial leverage
25
Valuation: Enterprise Value to EBITDA multiple

26. Relative Valuation-Tata Power

27. • Usefulness: Valuation is about judgment, and multiples provide
a framework for making value judgements. When used
properly, multiples are robust tools that can provide useful
information about relative value.
• Simplicity: Their very simplicity and ease of calculation makes
multiples an appealing and user-friendly method of assessing
value. Multiples can help the user avoid the potentially
misleading precision of other, more ‘precise’ approaches such
as discounted cash flow valuation or EVA, which can create a
false sense of comfort.
• Relevance: Multiples focus on the key statistics that other
investors use. Since investors in aggregate move markets, the
most commonly used statistics and multiples will have the most
impact.
27
Advantages

28. • Simplistic: A multiple is a distillation of a great deal of information into a single number or
series of numbers. By combining many value drivers into a point estimate, multiples may make
it difficult to disaggregate the effect of different drivers, such as growth, on value. The danger
is that this encourages simplistic – and possibly erroneous – interpretation.[2]
• Static: A multiple represents a snapshot of where a firm is at a point in time, but fails to
capture the dynamic and ever-evolving nature of business and competition.
• Difficulties in comparisons: Multiples are primarily used to make comparisons of relative
value. But comparing multiples is an exacting art form, because there are so many reasons
that multiples can differ, not all of which relate to true differences in value. For example,
different accounting policies can result in diverging multiples for otherwise identical operating
businesses.
• Dependence on correctly valued peers: The use of multiples only reveals patterns in relative
values, not absolute values such as those obtained from discounted cash flow valuations. If
the peer group as a whole is incorrectly valued (such as may happen during a stock market
"bubble") then the resulting multiples will also be misvalued.
• Short-term: Multiples are based on historic data or near-term forecasts. Valuations based on
multiples will therefore fail to capture differences in projected performance over the longer
term, and will have difficulty correctly valuing cyclical industries unless somewhat subjective
normalization adjustments are made.
28
Limitation

29. RESULTS AND
CONCLUSION

30. COMPANY P/E
MULTIPL
E
METHO
D
EV/EBITDA
MULTIPLE
METHOD
Market Price*
Share Price Enterprise
Value
Share Price
TATA POWER 39.95027 3138.40 39.23406 77.10
POWER GRID CORP. 92.4 95947.7 2.3 105
JSW ENERGY 59.89 27475.59 101.88 118.45
NLC 101.86 22685.09 106.54 70.30
MOSER BAER 15 204.8 15.8 9.40
SUZLON ENERGY
24.9 81611
32.8
27.40
JP Ven. Ltd. 4.982 33800 5.97 6.61
Guj. Ind. Pow. 88.51 1476 49 71.1

31. COMPANY EBITDA
MULTIPLE
METHOD
PERPETUITY
GROWTH
METHOD
Market Price*
Enterprise
Value
Share
Price
Enterprise
Value
Share
Price
TATA POWER
46,524 127
33,703
80 77.10
POWER GRID CORP. 154,981 136 534,674 861.45 105
JSW ENERGY 29,021 111.3 26,014 92.97 118.45
NLC 20,659 94.42 15,910 65.98 70.30
MOSER BAER 8645 35.23 9,275 38.41 9.40
SUZLON ENERGY (9832) (21.43) 12,328 (11.31) 27.40
Jaypee power vent. 34191 24 37214 34.86 6.61
Gujarat ind. 3990 221 2016 90 71.2
*Market Price as on 31st March