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VALUATIO OF I DIA POWER COMPA IES

[ TPC Ltd, Power Grid Corporation of India Ltd (PGCIL) and Maharashtra State Electricity Distribution Company Ltd. (MSEDCL)]

Angshuman Rudra, MBA in Power Management, 6 th Batch, ational Power Training Institute, Faridabad-121003, India.

ABSTRACT

Long-run economic growth is influenced by the availability of infrastructure services including electricity (Canning & Pedroni, 2004; Calderon & Serven, 2004)). Infrastructure is also a key component of the investment environment, in general (World Bank, 2005). It also contributes to poverty reduction and helps in bridging the income gap (ADB et al., 2005). A survey of the literature on the influence of infrastructure on economic growth also reveals that infrastructure is most critical in the case of low-income and developing economies (Estache, 2004). The future growth profile of emerging economies like India would be influenced by availability of various infrastructure services including electricity. The economic growth rate of India is expected to grow at 9-10% in the forthcoming years despite the slowdown in the global economy. If India wishes to grow at such a rate then the power sector of India has to grow at least at par with this expected growth rate. Currently power sector is growing at a rate of 4-5%. At the end of 31 st July, 2008 India’s Installed Generating Capacity is 1,45,588 MW with an Energy requirement deficit of 10.4% and Peak demand deficit of 14.6% as per Central Electricity Authority of India (CEA). The Govt. of India has a vision of power for all by 2012.

Particulars

31st March,2008

2012 Vision

Required Growth Rate

Installed Generating Capacity (MW)

145588

224165

13.49%

Inter Regional Transmission Capacity (MW)

17625

35700

25.64%

Per Capita Consumption (kWh)

700

1000

10.71%

-Source: CEA To achieve this massive target not only the generation, transmission and distribution of power but also the entire electricity supply value chain has to be augmented technologically and commercially, whereas, in reality the historical achievement of targets are somewhat 50%. In such a situation every Power Company must

Consolidate its Fiscal position

Explore every avenue of Revenue earning

Encourage Private investment

As per International Energy Agency (IEA), India requires an investment of 50 million USD in Generation and

another 50 million USD investment in Transmission and Distribution of Power by 2012. Investments are made to generate returns. Thus it is important to know

How much to invest? How to valuate the investments?

In the wake of economic liberalisation, companies are relying more on the capital market, acquisitions and

restructuring are becoming commonplace, strategic alliances are gaining popularity, employee stock option plans are proliferating.

In these exercises a crucial issue is: How the value of a power company or a division, thereof, can be

appraised? Some commonly performed appraisals in Indian power companies has been,

Reforms and Restructuring

Disinvestment

Privatisation

Public offerings

Buybacks

Merger and acquisitions

Taxation Litigation

Business Strategy Development

Dividend Policy Augmentation

Investment Decision Analysis

OBJECTIVE A D SCOPE OF THE STUDY

Oxford Dictionary says, ‘Valuation’ means an estimation of something’s worth or the monetary worth estimated. Wikipedia says, in finance, Valuation is the process of estimating the market value of a financial asset or liability.

The firm has Real and Financial Assets and Equity and Borrowed Funds. As a Manager we have to take the following decisions

Investment Decisions

Capital Structure Decisions

Dividend Decisions

Liquidity Decisions

While valuating a Power Company our goal should be,

Profit Maximization

Maximising Profit After Tax (PAT)

Valuating a Company means Future Planning of its

Sources of Funds

Application of Funds

Maximising Earnings Per Share (EPS)

Shareholders Wealth Maximisation

Maximising Earnings Per Share (EPS)

Shareholders Wealth Maximisation

Concept of Valuation

Discounted Cash Flow Method

Value of business is the discounted value of the free cash inflows generated in future, at a rate that reflects the degree of risk associated with the business.

et Asset Valuation [Adjusted] Method

Net Asset Value (NAV) of the unit as on the valuation date on the basis of book values. On a going concern basis normally the book value of the assets is added with the Future capitalisation of the Assets.

Market Valuation Method

Applicable to listed companies and use average traded prices of listed shares over a particular period.

Fair Valuation of Company

The price at which buyer and seller is not under any compulsion to buy or sell. In this study it is considered as the weighted average value of the given above three principles (if applicable).

value of the given above three principles (if applicable). The methodology followed emphasizes on the future

The methodology followed emphasizes on the future projection of sales revenue earning by the company correlating future sales revenue growth rate to its growth rate of operation. As with the increase in sales revenue how the expenditure (capital and revenue) will be incurred and the future planning of sources and application of funds can be done considering the historical financial and accounting ratios adjusted with recent market trend. These ratios reflect the variability of different components of balance sheet and profit and loss account with respect to sales revenue. After projection of the final accounts, appropriate and suitable principles of valuation of equity shares has been undertaken in this study report. The discussions in this report is based on the fair valuation of the companies mentioned and about the investment environment of their respective subsectors.

RESULTS A D FI DI GS OF THE STUDY

VALUATIO OF TPC Ltd, PGCIL A D MSEDCL AS O 31 ST MARCH, 2008

Company

Fair Valuation of Company (In Rs. Crores)

Fair Valuation of each Share (in Rs.)

Return on Capital Employed(ROCE)

Return on et Worth (RO W)

ame

TPC Ltd

1,67,053.84

194.53

13.03%

18.46%

PGCIL

30,356.87

79.88

4.47%

8.70%

MSEDCL

4,137.25

16.55

8.49%

9.72%

8.70% MSEDCL 4,137.25 16.55 8.49% 9.72% EPS in Rs.   Forthcoming Years   Expected
8.70% MSEDCL 4,137.25 16.55 8.49% 9.72% EPS in Rs.   Forthcoming Years   Expected
8.70% MSEDCL 4,137.25 16.55 8.49% 9.72% EPS in Rs.   Forthcoming Years   Expected

EPS in Rs.

 

Forthcoming Years

 

Expected EPS

2009

2010

2011

2012

NTPC Ltd

13.42

16.59

20.65

25.86

PGCIL

2.50

2.78

3.13

3.58

MSEDCL

2.56

4.81

7.60

12.23

20.65 25.86 PGCIL 2.50 2.78 3.13 3.58 MSEDCL 2.56 4.81 7.60 12.23 2009 2010 2011 2012

2009

2010

2011

2012

RECOMME DATIO S A D DISCUSSIO S

The study reflects, the forthcoming years will see a strong EPS in case of TPC Ltd and MSEDCL, they also has good future prospective in earnings, whereas, PGCIL has not that much promising EPS. Historical and projected Returns on Capital and Net worth employed indicates that NTPC Ltd will give more returns than MSEDCL and PGCIL. Though all the three companies are public limited companies still the

regulations has made the generation sector more investor friendly and liberalised than distribution and transmission sector. Distribution reforms have helped the distribution utilities to enhance their operational and commercial efficiency but still the sector is risky regarding the realization of revenue from the consumer. Comparatively transmission is far less risky than distribution. PGCIL is the king of transmission sector but it’s a long term business with high initial investments, low returns and returns are coming over long span of years. Though EPS is less but still the accumulated earnings over the years are substantial and PGCIL has a strong future prospect too. The economic liberalization and privatization has created a big threat for all these three companies. The other public and private limited companies are growing aggressively. Reliance Power Limited (RPL) after winning the bidding of India’s first Ultra Mega Power Project (UMPP) at Sasan, Madhya Pradesh with a bid of Rs. 1.19 per kWh has came with an Initial Public Offering (IPO) in February, 2008. The IPO was the biggest ever IPO in Indian Financial Market. The second UMPP at Mundra, Gujrat by Tata Power Company (TPC) has already achieved financial closure. TPC won the bid at Rs. 2.26 per kWh and raised the biggest debt of Rs. 127.5 billion in the country. Thus NTPC, MSEDCL and PGCIL have to improve their performance to dominate the power market. All the problems whether technological, commercial, financial, operational or managerial have to be identified and solve quickly through strategic interventions. Its true that these are the biggest public companies in Indian power market, reliability of investments made are also quite high and will give good returns to its investors but the capability of other competing companies can also not be denied.

The success of Reliance IPO, Financial closure of Mundra, Investment ceiling waiver on TPC, Franchisee concept in Distribution, Multi Year Tariff (MYT), Fuel linkage agreements and International Competitive bidding in Transmission sector reflect substantial investments are coming for future projects too. Expectedly the funds will be mobilized properly into the operations and will give satisfactory returns to the investors. Though it is true that earlier there has were lack of funding facilities but now with the prevailing debt-equity ratio of 70:30, it requires large equity which may come through domestic sources or FDI rout. It has been indicated by the financial institutions that for good and credible developers and for power projects offering cheaper tariff, debt funding may not be a constraint at all. To keep the financial institutions updated FIs are being involved at various stages including the selection of consultants and final evaluation of the bids for selection of developer. India is the second fastest growing economy after China, the growth rate projects substantial returns on investment is expected and investor sentiments are reflecting it too in the stock market. Despite the recent slowdown in the world economy Indian Power Companies are still a promising destination to park the funds for better investment.

The study reflects power generating companies are better choice to invest for good returns as the sector is more liberal to invest. Power Distribution sector is also a good avenue to park funds but underlying risks are more regarding the realization of revenue. Operational and financial performance improvement can make this sector a lucrative one. The power transmission sector is substantially under control of public sector and private investments are comparatively less. Transmission sector has been less lucrative to invest because of less returns. But the growth rate of transmission works required holds a good promise for the for future investors to make this sector more viable for investment as financial risk associated is much less than distribution. India is a power starved country and investments are required heavily to make the country power surplus. The proper valuation of power companies will help in better investment realization by the power projects. Hopefully the power business will grow and will generate good returns for the investors.

LIMITATIO S OF THE STUDY

Limitations of Discounted Cash Flow Method

The future estimates and projections are difficult to be made.

Consensus on the projections is a Herculean task as they are highly subjective.

The actual performance may vary from the projections due to errors in assumptions and changes in business environment.

They are least relevant in the case of companies which are to be valued on the

replacement cost basis.

Limitations of et Asset Value [Adjusted] Method

No value is assigned to the intangible assets of a company.

It is too historical in nature.

It is irrelevant to the tertiary sector.

Limitations of Market Valuation Method

It cannot be applied to companies, which are not listed.

It is not an entirely objective method for valuation. Herd mentality is observed in the movement of

the market prices, which go through bullish or bearish phases, often without any relevance to the performance of the company. It is highly dynamic and often even the technical analysis of the movement of the prices of shares fails to trigger off the support prices and hammer prices in bearish and bullish phases of the market.

CO CLUSIO

1. Though valuation models are quantitative, the valuation is still subjective and not entirely objective.

2. Even when a valuation is done with lot of research, the valuation is not static but it is dynamic and changes according to the changes in the market, industry and the company itself.

3. Though the valuation is indicated with the nearest rupee, still it is not an accurate estimate of the value of the company.

5.

The valuation of a share may differ with the market perception of the shares but it does not necessarily mean that the markets are right or wrong.

6. The valuation process is as important as the outcome of the valuation.

There is no single definition of the term Value that is suitable for all purposes or at all times. The value of a particular asset will vary from time to time and there may be differing values at the same time according to the purpose for which it is necessary to establish a value. Valuations are required for different circumstances and the purpose, for which the valuation is intended, often has an impact on the value derived and the methodologies adopted.

BIBLIOGRAPHY

Damodaran on Valuation, Aswant Damodaran, Jhon Wiley and Sons

Financial Management, I.M. Pandey, Vikas Publishing House

Financial Management and Policy, James C. Van Horne, Pearson Education

en.wikipedia.org

www.ntpc.nic,in

www.powergridindia.com

www.mahadiscom.in

www.cea.nic.in

www.powermin.nic.in

www.indiaearnings.com

www.yahoofinance.com

www.icicidirect.com

SPECIAL THA KS TO

Centre for Advance Management and Power Studies (CAMPS), National Power Training Institute

(NPTI), Faridabad-121003, Haryana. Capital Fortunes Private Limited, Hyderabad-500034, Andhra Pradesh.