Project on

INVESTMENT ANALYSIS AND

PORTFOLIO MANAGEMENY
On
National Thermal Power Corporation
Limited (NTPC Ltd.).

Submitted to- Submitted by-

Prof. Ashok Patil Mr. Prathamesh Taware

Date: 09/03/2020
National Thermal Power Corporation Limited (NTPC Ltd.)
Listing Details
Sector - Power Industry - Power Generation/Distribution, House- PSU

BSE Code-532555, NSE Symbol NTPC, Face Value-10, Listing- BSE, NSE, MCX. BSE Group -A

Other Details
Incorporation Year- 07-11 1975 Chairman- Gurdeep Singh

Market Cap (Rs. in Cr) - 122544.09 (Cr)

NIC Activity - Electric Power Generation by Coal Based Thermal Power Plants (35102)

Market share
NTPC is the largest power producer in India in terms of both installed capacity and generation, with
aggregate installed capacity of 45,548 MW (including 39352 MW through directly owned units and
6,196 MW through Subsidiaries and Joint Ventures) as on September 10, 2015. In addition, the
Company has a capacity of 23,004 MW, which is under different phases of completion as on date.

NTPC’s capacity excluding renewable but including capacity of Subsidiary and Joint Ventures
represented market share of 18.77% of India’s total installed capacity and we generated 260.58
billion units of power, representing market share of 24.95% of India’s total power generation in fiscal
2015.

NTPC ranked 431st overall on the Forbes Global 2000 list of the year 2015, and 379th among
companies worldwide in terms of profit and 616th among companies worldwide in terms of market
value.

All power plants are under Regulated return model in which Return on equity is assured on cost plus
basis subject to achievement of certain operating norms. This results in consistent and strong
operational cash flow unlike any other generator in India.

Coal plants are operating at a PLF of over 80% as against national average of 64%

Key Competitive Strengths:

- Leadership Position in the Indian Power Sector
- Long-term Fuel Security –All operating stations covered by long term fuel supply
agreements/ coal linkages
- High Operational Efficiency

Top Competitors or Alternatives

Adani Power, Tata Power, TPL, Reliance Power, Power Grid, LANCO Group, NLC, GVK Industries.

Returns
HPY - (-0.000202604) - Daily.

HPR - 0.999797396 - Daily.

As it can be seen, that mean HPY is negative as mean HPR is less than zero. This shows us that the
returns are negative for NTPC share price. It can also be easily noted as the share price on 20 th
February 2017 was Rs. 138, gradually grew to Rs. 155 (highest in last 3 years) on 27 th of November
2017 and the declined to Rs.111 on 20 th February 2020. So from the trends we can conclude that to
buy or keep the share of NTPC in short term as well as long term will bring losses to investor.

In long term (in 2020), prices are supposed to fall till Rs.84.

In short term the prices are expected to fall till Rs.102 (The analysis of NTPC is done on the data till
20 Feb 2020. As on 08 March 2020 share prices are fallen to Rs.104.75).
RATIO ANALYSIS
Among all the ratios these some of the most important ratios to look before investing in NTPC Ltd
are given below.

1) Current Ratio - 1.22

A liquidity ratio that measures a company’s ability to pay short-term obligations. The higher the
current ratio, the more capable the company is of paying its obligations. Generally, current ratio
greater than 20 is considered good. But in the case of NTPC its less than that means the liquidity of
the company is low than expected.

2) Quick Ratio - 1.07

The quick ratio measures a company's ability to meet its short-term obligations with its liquid assets.
For this reason, the ratio excludes inventories from current assets. Quick ratio greater than 1 is
considered good.

3) Dividend Yield - 4.90

A financial ratio that shows how much a company pays out in dividends each year relative to its
share price. Dividend yield is calculated as annual dividends per share divided by market price per
share. Dividend Yield greater than 1.5 is considers good. In this case its 4.90 so its very attractive for
the investors. NTPC is known for giving high dividends as it’s a PSU.

4) Interest Coverage Ratio - 4.92

It is used to determine how easily a company can pay interest on outstanding debt. It is calculated
by dividing a company’s EBIT by the interest expenses. Interest Coverage greater than 2 is
considered good. In case of NTPC it is 4.92, means NTPC pays interest on outstanding debts more
efficiently.

5) Debt Equity Ratio - 1.40

A measure of a company’s financial leverage calculated by dividing its total liabilities by stockholders
equity. The debt/equity ratio also depends on the industry in which the company operates. Debt to
Equity ratio for NTPC is 1.40, less than 2 considered good.

6) Return On Asset (%) - 5.49 %

An indicator of how efficient management is at using its assets to generate earnings. Calculated by
dividing a company’s annual earnings by its total assets Generally, return on asset greater than 5% is
considered good. Here it is 5.49%, so no worries in this case.

7) Return On Equity (%) - 11.48 %

Also called Return on net worth, it measures a company’s profitability by revealing how much profit
a company generates with the money shareholders have invested, it is calculated by dividing the net
profit after tax by shareholder's fund For high growth companies you should expect a higher ROE.
ROE for a good company should be greater than 18%, but here in case of NTPC its much lesser.
Indian Economic Analysis
Economic growth likely accelerated in the third quarter of FY 2019, which ran from October to
December, after slowing to a six-and-a-half-year low in the second quarter. Business confidence
regarding both current and future operating conditions improved in Q3. Moreover, consumers grew
more confident about future economic conditions in the same quarter, although confidence about
current conditions waned. Nevertheless, economic growth was likely modest in Q3, as industrial
production dropped slightly faster than in Q2, bank lending growth slowed and the private-sector
PMI reading was broadly unchanged. Meanwhile, in politics, the government unveiled its FY 2020
budget on 1 February, which projects a small narrowing of the estimated fiscal deficit in FY 2019. The
budget will likely have a positive but minimal effect on growth.

India Economic Growth

The economy should grow at a faster pace in FY 2020, which starts in April, due to accommodative
fiscal and monetary policy. However, weaker-than-expected growth in China due to the coronavirus
outbreak is a key short-term risk for exports, while high levels of bad debt in India’s banking sector
could constrain lending and, thus, consumption and fixed investment growth. Projected GDP growth
of 5.9% in FY 2020, which is down 0.1 percentage points from last month’s forecast, and 6.4% in FY
2021.

Some of the important Economic Indicators (as of 2018)

GDP (USD billion) - 2,704

Economic Growth (GDP, annual variation in %) - 6.1

Consumption (annual variation in %) - 7.2

Investment (annual variation in %) - 9.8

Industrial Production (annual variation in %) - 3.8

Public Debt (% of GDP) - 68.1

Inflation Rate (CPI, annual variation in %, eop) - 2.9

Inflation Rate (CPI, annual variation in %) - 3.4

Inflation (PPI, annual variation in %) - 4.3

Policy Interest Rate (%) - 6.25

Stock Market (annual variation in %) - 17.3

Exchange Rate (vs USD) - 69.19

Current Account (% of GDP)- (2.1)

Current Account Balance (USD billion)- (57.0)

Trade Balance (USD billion) – (182.1)

Exports (USD billion) - 330

Imports (USD billion) - 512

Exports (annual variation in %) - 8.4

Imports (annual variation in %) - 10.6

International Reserves (USD billion) - 414

External Debt (% of GDP) - 20.1

Power Sector Analysis: Porters Five Forces Model

Buyer Power

Based on the following parameters it can be said that Overall the buyer has weak power.

Low Switching Cost – switching cost for the buyers is low as of now but is supposed to increase when
new players come in the market as the product in not differentiable i.e. electricity.

Buyer size – Very small.

Oligopoly Threat – Very Low.

Undifferentiated product – As the product i.e. electricity is undifferentiated product, so this

increases buyer power.

Tendency to switch – Buyers will switch to the supplier who is efficient and cost effective.

Price sensitivity – Not much price sensitive

Financial muscle – Nothing as compared to PSEs.

Buyer independence – Low as of now but if more suppliers come into picture as Govt. has sought
competition in this market, the buyer power will increase.

Product dispensability – Very Low.

Supplier Power

Based on the following parameters it can be assessed that the supplier Power in High.

Supplier size – Very Large as the suppliers are Large PSEs.

Oligopoly threat – Small number of suppliers enjoy monopoly, thereby contributing to the supplier
power.

Switching costs – Very high, as only large govt. companies are the suppliers.

Player independence – Low

Substitute inputs – As no substitute inputs, so the firms have no choice.

Player dispensability – High

Differentiated input- Inputs are same i.e. electricity in case of company buying electricity from
wholesale market and selling to the end-users, and coal or gas in case the company is in power
generation field.

Threat of New Entrants

The Threat of new entrants is moderate based on the following parameters.

Low Switching Cost – Switching cost for the end-user is low, so it increases opportunity for the new
entrants.

Undifferentiated product – Product is not differentiable i.e. electricity, so the users have the
incentive to switch to the low cost supplier. This increases the opportunity for the new efficient
entrants.

Fixed costs – High fixed cost acts as a barrier to entry for new entrants.

Little regulation – Delicensed generation and multiple licenses in the distribution in the same area of
supply acts as an opportunity for the new entrants.

Distribution accessible – Increasing the threat of new entrants.

Suppliers accessible – Increasing the threat of new entrants.

Market growth – High, leading to great opportunities for new entrants.

Threat of Substitutes

The Threat of substitutes is Weak as per the following parameters.

Low Switching Cost – The cost of switching to substitutes like gas, solar penal, etc. is high.

Rivalry among existing firms

The rivalry among existing firms is low as per the following parameters.

Competitor size – Very Few companies very large in size like NTPC, NLC, NHPC, NPCIL, PGCIL etc.

Number of players – Very few.

Hard to exit

Ease of expansion – Difficult because of lack of investment and resources.

SWOT analysis of NTPC Ltd.

Strengths
1. Employee friendly work culture and personnel policies

2. Efficient production process of plants

3. Fully integrated project management system

4. Decades of experience in the sector shows its credibility

5. Backing of Central Government

6. Efficient & timely completion of projects

Weaknesses

1. Depleting input materials sources

2. Government intervention can often cause disruptions in operations

3. 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 growing private sector firms

3. New and cleaner sources of power

Beta of NTPC Ltd.

BETA of NTPC Ltd is -0.0512

Intrinsic value of NTPC

Value per share= Expected dividends per share / (Discount Rate - Perpetual growth rate)

= ₹6.67 / (13.40% - 6.48%)

= ₹96.48

(presently value per share is Rs.111 which is over valued.)

PORTFOLIO CONSTRUCTION
Portfolio investments are investments in the form of a group of assets, including transactions in
equity, securities, such as common stock, and debt securities, such as banknotes, bonds, and
debentures.

For the portfolio construction along with NTPC Ltd, HDFC Bank as taken. Data is taken from 20 th Feb
2017 to 20th Feb 2020 on daily basis in terms of share prices (Rs.).

HDFC Bank NTPC Ltd

MEAN HPR 1.000876847 0.999797396
MEAN HPY 0.000876847 -0.000202604
VARIANCE - 0.000444204 0.000183937
STANDARD DEV 0.021076138 0.013562346
CORRELATION 0.146570796
COVARIANCE 4.18961E-05
SIGMA (P) 0.010538069
R(P) 0.000337121

The lower point represents 100% investment in NTPC Ltd. that gives the returns of (0.0203%) daily.

The upper point represents 100% investment in HDFC Bank that gives the return of 0.0877% daily.

All other points in the graph are combinations of different weights in terms of HDFC Bank and NTPC
Ltd. For e.g. HDFC weight of 66% and NTPC weight of 34% will give us the return of 0.051% daily.
Capital Asset Pricing Model (CAPM)
In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically
appropriate required rate of return of an asset, to make decisions about adding assets to a well-
diversified portfolio.

For construction of CML Capital Market Line, risk free return is assumed 0%.

To get CML, we need to draw a tangent from risk free return to the portfolio curve. Here the CML
passes when weight of HDFC Bank is 1 and that of NTPC is 0.

Findings-

BETA NTPC -0.0512

BETA HDFC -0.084067368

Market Return 12.02%

YRNIFTY 12.02% (Yearly return of NIFTY)

YRNTPC -6.52% (Yearly return of NTPC)

YRHDFC 20.83% (Yearly return of HDFC)

ALPHA NTPC -12.65%

ALPHA HDFC 14.88%

Y RETURN (P) 20.83% (Yearly Return of Portfolio)

BETA (P) -0.08

STD.DEV 0.02

CML 0.22

SML NTPC 0.0613

SML HDFC 0.0595

(weight of HDFC Bank is 1 and that of NTPC is 0.)

Assuming Risk Free Return to be 6.42%.

Charts

1) Stock price of NTPC

2) Stock price & volume chart of NTPC

3) Candlestick (stock price - monthly) NTPC

4) Different moving average (monthly)

5) Bollinger chart
 a.       Excess Return (Alpha) 0.09

The investment has a return in excess of the reward for the assumed risk, as it is greater
than zero.

Alpha is a measure of the active return on an investment, the performance of that

investment compared with a suitable market index.

b.       Tracking Error 0.0881 = 9%

Tracking error or active risk is a measure of the risk in an investment portfolio that is due to
active management decisions made by the portfolio manager; it indicates how closely a portfolio
follows the index to which it is benchmarked.

Those active managers who are willing to take bigger bets away from an index might exhibit
tracking error of 9%.

c.       Treynor Ratio -1.05

The Treynor reward to volatility model (sometimes called the reward-to-volatility ratio or
Treynor measure), named after Jack L. Treynor, is a measurement of the returns earned in excess of
that which could have been earned on an investment that has no diversifiable risk (e.g., Treasury
bills or a completely diversified portfolio), per unit of market risk assumed.

A negative ratio indicates that the investment has performed worse than a risk free
instrument.

d.       Sharpe Ratio 4.18

The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-
variability ratio) measures the performance of an investment (e.g., a security or portfolio) compared
to a risk-free asset, after adjusting for its risk. It is defined as the difference between the returns of
the investment and the risk-free return, divided by the standard deviation of the investment (i.e., its
volatility). It represents the additional amount of return that an investor receives per unit of increase
in risk.

A ratio of 3.0 or higher is considered excellent.

e.       Jensen Measure 0.15

Jensen's alpha (or Jensen's Performance Index, ex-post alpha) is used to determine the
abnormal return of a security or portfolio of securities over the theoretical expected return. It is a
version of the standard alpha based on a theoretical performance index instead of a market index.

The investment has a return in excess of the reward for the assumed risk, as it is greater
than zero.
 f.        Information Ratio 1.00

The information ratio, also known as appraisal ratio, measures the performance of an
investment (e.g., a security or portfolio) compared to a benchmark index, after adjusting for its
additional risk. It is defined as the active return (the difference between the returns of the
investment and the returns of the benchmark) divided by the tracking error (the standard deviation
of the active return, i.e., the additional risk). It represents the additional amount of return that an
investor receives per unit of increase in risk.

An information ratio between 0.61 and 1 is considered to be a great investment.

Important Formulas Used

Information Ratio = (Portfolio Return−Benchmark Return)/ Tracking Error
Sharpe Ratio = (Rp-Rf) / σp

Jenesen’s Alpha = R(i) - (R(f) + B x (R(m) - R(f)))

Treynor Ratio= (rp−rf)/ βp

Tracking Error = Standard Deviation of (P - B)

CML Rp=rf +( (RT−rf) σp)/ σT

Expected Return Portfolio =WA×RA+WB×RB

σp = (w1σ1+w2σ2+2w1w2 σ1 σ2ρ12)^ ½