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^ Power Industry in India 4
^^ Generation 4
^
Transmission 4
^ Distribution 4

Strategy for Growth in Energy in India 4
 Policy & Regulatory Framework 5
4 Challenges & Risks 5
5 Industry Benchmarks 6
6 Why Invest in Power Sector? 6
6^ Risks in Power Sector 6
6
Invest or Not to Invest in Power ʹ Yes, Invest 6
7 Analysis of Companies 7
7^ National Thermal Power Corporation (NTPC) 7
7
National Hydroelectric Power Corporation (NHPC) 8
7 Power Grid Corporation of India Limited (PGCIL) 9
74 Tata Power ^
75 Calcutta Electric Supply Corporation (CESC) ^^
76 Suzlon Energy ^

77 Gujarat Industries Power Company Limited (GIPCL) ^
8 Which Company to Invest? ^4
9 Criticism of Dividend Discount Model ^6
APPENDIX ^7
Exhibit ^ Salient Features ^7
Exhibit
 Plan Vs Achievement ^8
Exhibit  Major Reasons for Delay during

7 (MW) ^8
Exhibit 4 Requirement of Construction Equipments ^9
Exhibit 5 Capacity of Adani Power ^9
Exhibit 6 Power Companies in India

Exhibit 7 Fundamentals of NTPC
^
Exhibit 8 Leverage and Earnings of NTPC
^
Exhibit 9 Fundamentals of NHPC


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Exhibit ^ Leverage and Earnings of NHPC

Exhibit ^^ Fundamentals of PGCIL

Exhibit ^
 Leverage and Earnings of PGCIL

Exhibit ^ Fundamentals of Tata Power
4
Exhibit ^4 Leverage and Earnings of Tata Power
4
Exhibit ^5 Fundamentals of CESC
5
Exhibit ^6 Leverage and Earnings of CESC
5
Exhibit ^7 Fundamentals of Suzlon
6
Exhibit ^8 Leverage and Earnings of Suzlon
6
Exhibit ^9 Fundamentals of GIPCL
7
Exhibit
 Leverage and Earnings of GIPCL
7
Exhibit
^ Operating Margin of Different Companies
8
Exhibit

 Gross Margin of Different Companies
8
Exhibit
 Net Profit Margin of Different Companies
9
Exhibit
4 ROA of Different Companies
9
Exhibit
5 ROE of Different Companies 
Exhibit
6 EPS of Different Companies 
Exhibit
7 DER of Different Companies ^
Exhibit
8 EVA of Different Companies ^
Exhibit
9 Comparison of stock prices by different methods 

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India is the fifth largest generator of power in the world having a total installed capacity of ^64 GW (as on ^st Jul, ^)
This is about 4% of the global power generation capacity The average per capita consumption of electricity is at an
estimated value of 7 kWh However, this is much below than those of the developed countries like US (^5 kWh)
and emerging economies like China (^8 kWh) The global average stands at
 kWh

The government has set ambitious goals for power sector in the ^^th Plan It has been estimated that for providing
availability of at least ^ kWh per capita electricity by year
^
, a total capacity addition of ^ GW is required This
massive plan will have spillover effect on both the transmission as well as the distribution sectors

  

The demand for power has consistently outstripped the pace of addition of generation capacity A present peak deficit
of about ^
% and a total energy deficit of 8% show the poor progress in this direction The majority of the share of this
capacity is controlled by the central and the state sectors Power generation has recorded a growth of 5 8% during Apr
Jun,
9^ Thermal power generation grew by 9%, nuclear by 7% and hydroelectric fell by 9 46%

During the ^th plan, private sector contributed
% The same is expected in the projected ^^th year plan The PLF
achieved by private companies is 95 ^%, while that by government managed companies is 7^
%

ÿ
  



The current transmission capacity in the country is about ^% of the total generation capacity Globally, every dollar
invested in generation is followed by the same amount invested in transmission But in India, the factor is half
Transmission lines in India are loaded to 9% capacity compared to 56% globally This indicates heavy investment will
be expected in future in transmission lines PGCIL is the market leader in transmission, being the major transmitter of
power in the country As the planned transmission is over 6GW by
^
, total addition of
5 km of 4v and
^5 km of
kv will move northwards More substations will obviously be required

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Transmission and distribution losses hover at around % despite many measures taken by the central and state sectors
which have a combined control of over 95% Both technical as well as commercial areas are responsible for the high
AT&C losses Distribution Franchisee models have been adopted by many pioneering states with privatepublic
partnership and they are showing a lot of promise in the direction of revenue realization and reducing overall
distribution losses There is a lot of scope for the private sector in investing in these areas

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

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Being a regulated sector, the policies and regulations play a vital role in the development of this sector The Electricity
Act,
 was a pivotal point towards the reform and paved the way for private sector participation in a big way by
supporting competitive bidding, delicensing generation projects and a host of other measures (Exhibit ^) Further the
Central Electricity Regulatory Commission has notified several regulations concerning tariff, licensing of service providers
& traders and open access in transmission (Exhibit
) The government has also introduced a Mega Power Policy and has
revised it continuously for boosting investment into the creation of mega power plants

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 Historically, power sector in India has always failed to meet the target by a significant margin
despite so much growth opportunities (Exhibit
) This has proved to be a major bottleneck in the growth of country as a
whole The major reasons for the slippage of such projects from their deadlines are provided in the Exhibit 

 

  Supply constraints for coal based power plants have become a major hurdle Due to low quality and
unreliable supply, Indian companies have started looking towards importing coal




 

 The primary shortage is in the area of core components like BTG while other
components required for the balance of plant (BOP) are also facing supply issues (Exhibit 4) Two approaches have been
adopted to alleviate this enhancing domestic manufacturing capability by setting up joint ventures with foreign
suppliers and procuring equipment from foreign markets Again reliability and cost has to be considered for this It is
now a general consensus that talent shortage has become a long term problem and the industry needs to improve itself
to retain and attract talent

 


  

 The Land Acquisition Amendment bill,
7 provides new guidelines for
adopting best practices for this Still there are a lot of local issues which need to be dealt before kickstarting any large
project Again, environmental clearance procedures have become stringent and pose to be a difficult part to negotiate

Other issues like 

   


 
 
 


  are also posing hurdles in the path of
rapid project execution

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

  
 



 

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96

8 79

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India is a growing economy, with a growth rate roaming around ^% Unlike the last decade when growth was lead by
technology, this decade will be dominated by infrastructure and energy growth The GoI has comprehended the
importance of infrastructure and energy and has thus invited private players as energy is acute for development

India requires ^, MW of additional capacity by
^ The critical gap between demand and supply and entry of
business stalwarts like Tata and Reliance speaks of the attraction this sector has for big players

While private investors are on a spree, foreign collaborations are not ruled out The foreign companies are eager to be a
part of the Indian bandwagon, and the capital, technology lures Indian companies for collaborations with them as well

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 Biggest risk the sector faces is that of politics Since power is a central as well as a state subject, interstate
operations cannot be seamless The government has a monopoly over the sector and the subsidies given to
farmers are sometimes not backed by government funding This puts companies at the receiving end
 Raw material crisis has hit the sector time and again There is high level of corruption at the coal supply level
Gas supply is also controlled by the government Pipelines for gas supply do not exist across the country
Thus companies have to build their own infrastructure
 With so many regulations and multiple levels of corruption, companies maintain high buffer stock just in case
there is disruption in supplies 

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We support our call to invest with the following reasons
 Economic reforms are being executed with great aggression on development sector
 India is a power deficit country, and expansion of capacity is imperative
 More power players are entering the industry, which will mean increased competition and better services to
consumers
 Power sector will see high expansion and thus creation of wealth in the times to come

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The companies considered for analysis are given in Exhibit 6 The table shows a mix of generation, transmission &
distribution companies representing the  sectors inside the industry Further, classification in terms of energy source
has been taken care of The thermal power companies selected constitute about 5% of the total thermal installed
capacity NHPC is the major player in the hydroelectric power generation sector PGCIL is the government owned
Transmission Company having the majority of transmission capacity Torrent Power has links into all the three sectors It
also has forayed into the distribution sector through the Distribution Franchisee Model Suzlon is the sole entry in this
list representing renewable energy development

It can also be noted that, going forward all these companies are planning huge capacity addition As the Indian economy
grows at a fast pace of 8 5%, these power generation capacity will easily be sucked by the industrial demand These
companies have huge opportunity to grow and should see considerable interest from the investors

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NTPC is the largest power generating company in India Its installed capacity is 
,^94MW NTPC has concentrated on
value chain integration, which will help it emerge as the largest Integrated Power Major in the country It is also
venturing into hydel projects, beginning with a run of the river hydro project in NE India Its planned capacity is Mw
and supported by Ministry of Power




NTPC is involved in generating and selling bulk power NTPC is one of the few companies which generate power in more
than one ways The company͛s business can be divided into
main dimensions


 

 It has power generation stations spread across India The power stations are further classified into
Coal Based, Gas or Liquid fuel based and Hydro based stations

  This includes power consulting, exploring oil and gas, coal mining and supervising projects
NTPC parts with  5% of its net income for R&D and the remaining  5% for research related to climate change The
company aims to grow by adding capacity through expansion, takeovers, JVs and Greenfield projects NTPC provides
power to every 4th home in India

  M (

The major growth drivers for NTPC are

 Existing gap between the demand and supply of energy

 The current per capita consumption is low This gives the company incentive to expand capacity of its stations
 Diversifying its operational portfolio by way of inorganic growth

$


 With increased use of imported coal, the coal situation improved in most plants NTPC used
4 times more
imported coal in
89

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 The PLF of gas plants has improved over time This was mainly because of the correction in price of gas globally
last year
 The target P/E was^9 5 while the actual P/E was ^9 ^
 The returns on equity have marginally dropped from ^
% in
89 to ^
7 in
9^


Valuation of NTPC took a hit, when there was a delay in implementing its capacity expansion plans The projected
capacity addition of NTPC was ^97MW did not seem feasible in the next three years This was also because in the past

years, it had added only
7MW This also reduced the CAGR of earnings from 8 9% to 7 8% This delay in capacity
expansion reduced the ratings of NTPC from PERFORMER to HOLD At this juncture, the stock was trading at
 7 and
^9 ^ price multiples of
89 and
89 earnings The fundamentals of NTPC are shown in Exhibit 7 The leverage
and earnings are shown in Exhibit 8

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NHPCis one of the top ten companies in India in terms of investment NHPC, since its inception in ^975, has grown into
one of the largest organizations in the field of hydro power development in the country and it has taken over all
activities of hydroelectric projects from concept to commissioning stage





The Company spent Rs ^
565 crore in June
^ on capex NHPC is working in tandem with the Orissa government on 
projects The planned capacity of these  plants is MW at Sindol In the first quarter of FY^^, the projected
generation is 566^ MUs showing a YoY of  8%

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.
Because of its expansion plan as per ^^th Plan period,
7
^
, NHPC has planned to add 5

MW It is already
engaged in the construction of ^^ projects combining to a total installed capacity of 46

MW There are ^ other
projects of 998^ MW are awaiting clearances/Govt approval for their implementation

$
.
The leverage ratio for the firm in the last 56 years has ranged from ^ 5 to ^ 8 It lowered to ^ 5 during recession and
increased to ^ 8 Since the ROA was more than the interest rate, the company financed its operations through debt The
plowback ratio of the firm is as high as 7% and the ROE is 5 58% over the past 5 years The company is giving lower
dividend and reinvesting heavily in its operations The total Asset turnover ratio was stable at  ^ The company has a
low fixed asset turnover and low inventory turnover The gross profit, 46% was because of the low COGS


NHPC was listed in BSE on
nd Sept͛
9 with issue price of Rs 6 The price has continued to be in the range of  to 4
only Due to the delay in implementation at Chutak Plant and Nimoo Plant, the growth in earnings will be following a
plateau trend The high capex in FY^
and FY^ gives positive signals regarding the growth of the industry The
fundamentals of NHPC are shown in Exhibit 9 The leverage and earnings are shown in Exhibit ^

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POWERGRID, recognized as a navratna is playing a pivotal role in establishing and maintaining the power infrastructure
of the Indian Power Industry It has been conferred as the Central Transmission Utility of the country In accordance with
its responsibilities, it provides services w r t construction and maintenance of interstate transmission systems and
regional grids




The main business of PGCIL is transmission of power However, it has also forayed into Telecom and consultancy
assignments as well It is working at national and global level to create wealth for its shareholders It utilizes its budget in
the most efficient manner in the industry It is recognized as the best managed firm and the largest transmission utility
in the world Its operational efficiency exceeds 99% and its future ventures include enhancing the capacity of the
national grid

  M (

The major growth drivers for PGCIL are

 Increase in capitalization will drive its profits in the future

 The Open Access Policy, as per which any plant that has an installed capacity of more than
5MW and any
consumer who has a minimum load of ^MW can seek interstate connectivity
 Since PGCIL is the CTU, (Central Transmission Utility), it is the nodal agency for processing requests for long
term open access to the interstate transmission system

$

 GenerationPGCIL earns RoE on the assets capitalized and not on the Capital Work in Progress (CWIP) Thus
quantum of capitalization becomes important
 The fixed assets went down from 7b in FY9 to ^b in FY^ This was mainly because of the delay in capacity
additions
 Since the transmission capex went down, the CWIP increased to
4b, inFY^ This was 47% of the gross assets


PGCIL is foraying into the telecom sector It has ^5, towers But, since most of them do not lie in a catchment area
and are present in remote forests, ^5, to
, can only be used for commercial purposes It has appointed PMG
for its valuation and business planning purposes Since % of the capex is funded through equity, the regulated asset
base will increase by 7b This will drive the medium term earnings growth Since the expected CAGR growth of EPS is
^
%, it is a lucrative Buy option The fundamentals of PGCIL are shown in Exhibit ^^ The leverage and earnings are
shown in Exhibit ^

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

977 MW It has presence across areas catering to thermal, hydro, solar and wind power generation, transmission and
retail It pioneered India͛s first hydroelectric power plant in hopoli (7
MW) in ^9^5, followed by hydro stations in
Bhivpuri and Bhira Establishing thermal power stations in Trombay (Mumbai), Jamshedpur and Belgaum make it biggest
integrated power company in India that͛s privately owned




Tata Power has presence in all domains of Power  Thermal, Hydro, Wind, Solar Energy, Power Generation, and
Transmission & Distribution Tata power is chief power supplier in Mumbai while it also caters to power generation in
Jharkhand and arnataka North Delhi Power Limited (NDPL), a Distribution joint venture of Tata Power with
Government of Delhi catering to energy consumption of 69 MUs is yet another successful venture of Tata Power Tata
Power Strategic Electronics Division (SED) is yet another of its ventures that services the domestic engineering space &
defense system requirements

  M (
.

  
  
  Tata Power's systems in Western India are interconnected with the State Electricity Boards of
Maharashtra, Madhya Pradesh, and Gujarat & Goa The extensive network of grids ensures stable power generation
& transmission

 
     Regular up gradation to stateoftheart technology along with its diverse areas of power
generation enable it to gain significant costadvantage in electricity production


    

  ʹ It supplies power directly to big clients like Central and Western Railways,
Mumbai Port, refineries, as well as residential complexes thereby building a strong clientele base
 
  



  Accounting for 5
% of the total private generating capacity and being first Load
Dispatch center to get ISO certificate backed with prudent management and growth has enabled it to go ahead in
the competition
Besides the company is majorly into further power expansion as well as keeping consumers interests at forefront
has made it the player it is today

$
.
 PAT increased by 5
crores from last year to net Rs 9


 crore growing at 6%, a sign of healthy growth and
company structure, while the consolidated PAT increased by ^5 5^% from ^55 7 crores to ^
^8 74 crores
 Net PAT after statutory regulations increased ^9
5% to Rs 968 5 crores recording highest ever figures
 The Earning retention ratio of the company has steadily been declining as it seeks to increase dividend payout
ratio while the EPS has been rising constantly over the years


Generation capacity of 4
^ MW has been added to total
785 MW, suggesting expansion strategy is on its course But
such expansion will be at cost of equity dilution Tata Power would need 55 billion to fund the expansion of which only

8 billion can be funded through internal sources while the rest has to be raised through equity dilution The coal
segment͛s strong performance in FY9 led to Tata Power͛s 6^ 48% leap in total income which is unlikely to continue
^ SAPM Assignment

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given the dip in coal prices The company is implementing various new projects that will ensure future growth and lead
to improved operating results The fundamentals of Tata Power are shown in are shown in Exhibit ^ The leverage and
earnings are shown in Exhibit ^4 

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  is the flagship company of India It provides pwer to more than 5
million consumers in olkata and neighboring areas, sufficing almost 88% of the power needs of the region It is India͛s
first fully integrated electrical utility firm Its customers range from industrial, commercial and domestic users




.
CESC owns and operates four power plants generating ^

5 MW of power Transmission and distribution side ownership
is reflected with over 5 km of transmission lines, 85 distribution stations, over 4 km of HT lines and over ^ km
of LT lines More than 5% of coal needs is sourced through captive mines CESC͛s operational expansion plans with key
power stations coming up provides huge revenue potential considering the context of power deficient state of West
Bengal

  M (


 The current PLF of CESC is 9
^6%, which is much higher than the national average It is operationally efficient
die to its better technology, restructuring, monitoring and maintenance
 The power crisis in West Bengal along with India͛s power demand increasing at 7% annually will mean more
business for the firm
 Multiple power plants with total capacity in excess of 4 MW across Maharashtra, Orissa, Jharkhand and
Bihar, enhancement of power availability and load handling capacities with more substations along with
ownership across the power sector value chain, CESC stands to grow considerably in all aspects
 CESC͛s plants are ageing, to a point beyond which shutting down or replacement will be inevitable But with high
cost of distribution in remote areas, it would result in conservative service delivery and profitability figures over
the years

$
.
Operating profits of the company took a beating due to the increase in fuel costs The EPS has risen in the past two
years Similar to GIPCL, CESC has also paid back high debt and thus pulled down its interest expenses Increase in
capacity will result in increase in ROE and EPS of the company As the sector becomes more deregulated, dividends will
also become attractive with time But, expansion with push up the leverage exposure and induce pressure on the
company in the short run The expected cash flows will however, have a high DSCR and generate surplus cash as well


CESC trades at ^ price multiples, while its peers in the industry trade at
 CESC is located in a region that has high
power deficit Its power efficiency is high and its attractive dividends make CESC attractive scrip The debt will have to be
serviced and the constant flow of cash has to be ensured for interest payments This is a challenge that the company will

^^ SAPM Assignment

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face in the close future The fundamentals of CESC are shown in Exhibit ^5 The leverage and earnings are shown in
Exhibit ^6

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  is a wind power company with a global footprint It is the largest manufacturer of wind turbines in Asia
and has the highest net worth in the wind power sector With an installed capacity of 7^8 MW, and a market share of
9 8%, the company is the third largest player in the sector




.
Suzlon is involved with providing end to end solutions to wind power business, right from assembly, installation to
commissioning The company has followed downward integration and provides consultation, operations and project
management, maintenance services It also manufactures generators, blades, panels and gearboxes It has partial
ownership in Hansen Transmissions and provides stateoftheart turbines

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

The primary growth drivers for Suzlon are

 Emergence of renewable energy as a major power source

 Lack of competition in the wind energy segment The company has enjoyed significant first mover͛s advantage
 Vertical integration strategy which the company deploys to offer endtoend wind power solutions thereby
giving it an exhaustive portfolio

$
.
 Loss on account of amortization of foreign exchange losses on all convertible bonds aggregating Rs ^6
4 crore
which includes Rs ^
 6 crore being losses on Phase I bonds and Phase II bonds cancelled due to buy back
and exchange
 Marktomarket losses aggregating in respect of foreign exchange contracts taken for hedging purposes
 Diminution, other than temporary, of the value of investments in certain subsidiaries aggregating Rs 5
5 44
crore


Valuation of Suzlon has taken a big jolt owing to its continued losses over the past couple of years Improper handling of
FOREX hedging coupled with rising debts has eroded investor confidence significantly The only positive factor acting in
favor of Suzlon is the prospective growth of the Wind Energy sector for which Suzlon is in limelight owing to its well
established end to end solutions Over the past couple of years the stock price of the scrip has significantly come down
from Rs
4 8 to Rs 5^ 5 on the current date The scrip has significantly underperformed the market over the past one
year The fundamentals of Suzlon are shown in Exhibit ^7 The leverage and earnings are shown in Exhibit ^8

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  was conceived as a public company and promoted by the government of
Gujarat, Gujarat Alkalies, Gujarat State Fertilizers and Chemicals, and Petrofils Cooperatives (PCL) It has contributed to
the growth and development of the state and is listed as one of the ͞Panchratnas͟ (five jewels), in the State of Gujarat




.
The main business of GIPCL is generating electricity It is currently operating in three power plants in Gujarat The total
installed capacity of GIPCL is 85 MW 5 MW comes from the Vadodara plant, that work with naptha,
5MW from
lignite at Surat and the remaining
5MW from a new plant in phase The company has entered into a lease with the
Gujarat government This has ensured that GIPCL has lignite for ^ MW generation for the next 5 years

  M (

 It plans to invest Rs  cr in commercialization of SLPP II, and cr on a Greenfield thermal power project,
based on CFBC technology
 GIPCL signed MOU with ONGC for Underground Lignite Gasification process and plans to complete the
pilot project by the year
^
 If Pilot Studies are successful at this Site, this can become a process providing a vast alternative source in the
Form of low Bgs Syngas from an unminable lignite reserves
 Constant endeavors are being made to improve the overall performance of the Stations and to improve
efficiency by energy conservation measures The result of all these investments will start reflecting in ROE and
EPS in the coming financial years 

$
.
PAT declined from ^8
crores in FY7 to 85 crores in FY^, but the fact that its operating profits are declining
consistently is disturbing The rise in fuel prices were the main reason for this decline EPS fell to Rs 5 64 per share in
FY9 from 9 ^ FY5
The decline in the interest payable is encouraging as the debt has fallen due to repayment of debt GIPCL is also
expected to post growth in its ROE and EPS going forward as it plans to build its capacity further However the expansion
plans have started impacting its leverage ratios from FY7 onwards Its debt to equity ratio increased to  85 in FY^
from  5 in FY7 This can lead to a short term pressure on GIPCL͛s balance sheet but all these projects are expected to
generate enough cash flows to service the debt many times over


With low interest payments and high PLF, the company can be valued at a higher number The increase in profitability
will also result in higher payout of dividends The public issue has also boosted the visibility of the company However,
GIPCL has planned its future ventures by way of debt than through retained earnings Thus, P/E is a better measure than
Dividend discount model With large scale expansion and improvement in efficiency, the company can post strong
figures in the coming quarters The expansions indicate higher cash flows in future and improvement in operating profit
margins and net margins The fundamentals of GIPCL are shown in Exhibit ^9 The leverage and earnings are shown in
Exhibit


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)
In deciding which stocks to buy or not the main focus once the value the company can create for its shareholders by
effectively carrying out its current operations and expansion plans and also how efficiently the company has financed its
operations and expansion This superimposed on the macroeconomic condition of India and changes in the regulatory
framework is helpful in making the buying decision

As the consolidated analysis in Exhibit
9 shows, the market capitalization is highest for NTPC at Rs ^66846 96 While
Tata Power is trading at highest price multiples, ^ 54, the PAT for NTPC is 9 times higher than Tata Power Suzlon is
trading at negative price multiple, mainly because its PAT is negative However, its current market price has been
consistently falling, due to the German investment blunder made by the management CESC is trading at price multiples
below its peers CESC has not added any additional capacity unlike other companies that have guzzling capex
The cross company analysis is as follows

^  
Though NTPC is far ahead of other companies in terms of market capitalization, it has seen a fall in its operating and
net profit margins and has negative EVA and much depends on the timely execution of its expansion plans Refer to
Exhibit
^,

,
 for the comparison of these parameters across companies Though it Its P/B is higher than the
industry average, it has the best return on equity among all the players Being the largest player it is also best poised
to take advantage of the reforms process So it is still an attractive buying option

 
NHPC is trading significantly below the industry P/E and P/BV and has seen both its operating profit margin and net
profit margin surge ahead However it has the lowest ROTA, ROE and EPS among the given players A comparison of
these parameters with other companies in the industry is given in Exhibits
4,
5,
6 Its growth plans have been
rather subdued by delays in commissioning The main case for NHPC is that it has the highest EVA (Exhibit
8) among
all i e it has created wealth for its shareholders Also the rain shortfall this year has put doubts on its capacity
utilization

  
PGCIL has seen very less variability in the operating and net profit margins and also it͛s P/E and P/BV is very much
near the industry benchmark Also its ROE is one of highest in the industry and also its EPS has grown Also the
company has the highest DER (Exhibit
7) which makes it even more attractive for investors in a growing economy

4  



The stock has the highest EPS among all others making it an attractive proposition Also it has an aggressive
expansion plan and being the largest private player involved in generation as well as transmission and distribution
makes it very attractive for investors The point against Tata Power is that it has the highest P/E and P/BV well above
the industry average of

65 and
64 respectively and thus has the lowest yield among all

5  

CESC has also a good return on equity and it has the lowest P/E and P/BV among all which makes it an attractive
proposition However the company has a subdued expansion plan which may affect its future earnings

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6  
GIPCL has a P/E of ^6 78 and a P/BV of ^ 44 which makes it a good buy for investors Also the company has recently
seen a turnaround in its fortunes in FY^ and its new plant at surat has stabilized The factor that most goes in its
favour is that gujurat is likely to see a surge in power demand as it takes a big chunk of india͛s growth story

7   
Suzlon is one of the failure stories in the power generating sector after a promising start and all its profitability
indicators are in red after disastrous results in FOREX hedging As a result it has eroded the value of its shareholders
It is a straight ͚no buy͛

Based on the above analysis and the Price value we calculated as given in Exhibit
9, the decision of buy is as
follows The list is in the order of priority

^ CESC

 GIPCL
 NHPC
4 TATA Power
5 NTPC

Don͛t buy ʹ Suzlon

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We observe that the price that we get by dividend discount model is much less than the actual stock prices i e all stocks
seem overvalued according to the model With due regards to dividend discount model, the issue with the model is that
it is as good as the assumptions that we make while computing stock prices with this model Some of the points are
discussed

 Dividend discount model assumes that the dividend is constant or it grows at a constant rate till perpetuity But
in reality all companies that we have considered have seen their dividends fluctuate over the years So to apply
the model we have assumed that the average dividend that the company has given for the last five years is the
expected dividend i e D^ which is used for calculating the price This assumption may not hold completely in the
power sector context which is experiencing rapid growth of Capex and widespread reforms which are not
accounted for

 In calculating the price we have assumed that the companies finance their future growth delivering assets
through ploughing back of the earnings But here we see that the companies have funded future growth by
taking debt This can be seen in the increase in the debt equity ratios of all companies throughout the power
sector The dividend discount model is not able to capture this

 The present value of growth opportunities (PVGO) is very sensitive to the rate of return on equity Even small
changes in the risk free rate and the market returns can change the value of PVGO and hence the price of the
stock So figuring the appropriate discount rate becomes a problem

 The DDM is not able to factor in a turnaround achieved in the near future For example GIPCL has seen a sharp
turnaround in FY
^ mainly because of reducing fuel expenses and also because it͛s new plant in Surat
stabilized only from August and increased its PLF (plant load factor)

 DDM is unable to account for the widespread power sector reforms that are taking place in India and the
regulatory changes for which the market is upbeat for the sector The reason is because the increased revenues
or savings are difficult to account for For e g future reduction in generation and transmission losses and
smoothening of fuel supplies in the new regulatory environment is difficult to estimate On the other hand,
investors have long been weary of the sector͛s bureaucracy and regulatory complexity Therefore incorporating
all these dynamics in the cash flows becomes problematic

 The analysis is also dependent on the window that we are using For example markets have seen much volatility
and upswings in the recent years with high growth in


7 and then crash in
8 and then again a revival
Hence the market returns are susceptible to the window taken Also in such volatile markets the assumption of
constant dividend or constant growth of dividends becomes even more infeasible

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NTPC Generation Thermal ^74 75 ^9 89%

NHPC Generation Hydroelectric 5^75 95 
5%

Adani
Power Generation Thermal 66 ^65 4 ^4%

Reliance
Power Generation Thermal 94^ 48  59%

CESC Generation Thermal ^
5 5  78%

Torrent
Power Generation Thermal ^647 465 ^ %

Suzlon
Energy Generation Wind 49 ^4  7%

Tata Power Generation Thermal ^4
5 ^ 95%

GIPCL Generation Thermal 44 ^
76%











  

 


PGCIL Transmission 77
^7

Transmission
Torrent &
Power Distribution 

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Number of Shares 8
454 64 ^
7 4 4
88 4^
7 7 ^
49 6 ^5567 
^5^
5^
(in lakhs)
Market Price

5  7 ^4 75 ^
59 6 99 8 5^ 5 ^^8 5
(9 Sep 
^)
Market Capitalization ^66846 96 776
8 4487 6^
989^ ^9 4994 94 799 8
^79


(in crores)
PAT (in crores) 87
8

^8 7
4 94 947 65 4  ^4^4 9 ^6 79
P/E ^9 ^
^7 9^
^ 6 ^ 54 ^^ 5 5 65 ^6 78
BV per share 75 7

 9 7 88 447 68
6 94 5 9 8
8
BV (in crores) 6
47 5
47^ 6 ^594^ 9 ^6
 77 467^  564 ^ ^
46 7
P/BV
67 ^ 5
77
8^ ^ 7 ^ 4 ^ 44

 



P/E

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P/B
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Market Price (9 Sep 
^)

5  7 ^4 75 ^
59 6 99 8 5^ 5 ^^8 5
CCDM 7 7
 8 ^7 64 66
9 7
9
59



P/E
9 88 8 5^ ^9 86 94 47 785 55 Not Applicable ^59 9

P/B ^77 8 47 6 88 74 ^48 7^ 6^8
9 84 ^ ^9
98

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