ASSIGNMENT

P5 - ADVANCE PERFORMANCE MANAGEMENT

USAMA KHAN (62653)

SIR JALAL AHMED KHAN

NTPC-SAIL Power Company Limited (NSPCL): Born or Bound to Succeed?

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 QUESTIONS AND ANSWERS:

Q1: Discuss the financial health of SAIL during the 1990s. What were the possible
reasons for the sluggish growth of the sector?

ANS:

SAIL recorded 2 consecutive years of net loss and net income decline for 4 consecutive
years in a row during fiscal year 1999-2000. In the 1997-1998 financial year this reduced by
44% its total net worth of 84,9 billion. SAIL has been unable to offer any dividends since
1998 owing to growing losses. The financial data over SAIL for the last five years is shown in
Exhibit 4. The Sick Industrial Companies Act (SICA) 1985 requires that the company's
cumulative losses in the four years directly preceding the year amount to more than 50
percent of the total net worth being lost, The Board of Industry and Financial Reconstruction
(BIFR) shall report this degradation to the corporation. These companies also stayed on the
BIFR closely monitored list and could recommend systemic reform in the management of
such companies or eventually liquidate them.

The reasons correlated with an unsustainable capacity expansion for the steel after
liberalization were one of the key triggers of the financial downturn at SAIL. In the early
1990s, India's steel manufacturing was opened to private companies. Such corporations'
capacity building plans is related to India's potential development. Although India witnessed
strong economic growth in the 1990s, service rather than manufacturing were the leading
participants. The Government of India envisaged a big approach to the construction of
infrastructure, including highways, power, water supply, irrigation and track. But the
government of India 's infrastructure growth efforts stayed weak in the latter half of the
decade, expecting to see greater involvement by the private sector. In fact, private
engagement was surprisingly quiet in capital preparation.

The installed steel production potential in India peaked at around 33 million tons in 2000,
while domestic demand stayed at around 26 million tons. In fact, shipments became inactive
on the foreign markets owing to anti-dumping and other countervailing duties.

Q2: Discuss the financial and business restructuring plans at SAIL. Do the plans
make sense to you?

ANS:

The business reform plan was a detailed path chart in the immediate term to reach those
goals. The emphasis was on defining and diverting non-core industries such as power
generation, steam generation and oxygen for the steel mill. The operation in secondary steel
manufacturing plants making alloys and special products; labor relations control by the
structural reduction of obsolete sectors.

SAIL also had in-house processing facilities for oxygen, along with the ability to produce
electricity. In addition, the Bokaro power plant might generate considerable industrial vapor
which many other industries can use. The Durgapur alloy steel factory, Salem steel plant
and Bhadravati's VISL are involved in alloy and high-grade steel manufacturing. Yet because

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 in India the market could not be identified for such a niche commodity, the plants could not
make a substantial contribution to the base of their sales. SAIL has also often classified such
advanced plants as non-core.

Q3: What were the chief concerns of a potential partner in the joint venture for
the said captive power plants of SAIL?

ANS:

In separate company, the disparity in the working of the power stations soon became
evident between the two organizations. Although big power generators pursued a
decentralized architecture, the consolidated deployment of smaller plants could profit.

NTPC's development potential for the joint venture should have been among the biggest
worries regarding the proposed partnership with SAIL to run its captive power plant.
Although the prospect existed that deficit customers might be sold externally growing
captive power plants, the installed capacity needed considerable additions. Increased
installed capacity will also increase the cost of production of electricity per unit vector.
Around the same time, though, greater efficiency will be counter to SAIL 's particular power
specifications. The tariff arrangement of the power thus created was the core of this dispute.

The CERC also allows the captive power stations to maintain their captive status, at least 51
percent in-house. Captive status allows power plants to escape unfair bidding problems
together with certain companies in order to market to end-users. Through jointly accepted
unique PPA captive units will offer up to 49 percent of their available power to end users
immediately.

Q4: What were the value drivers for the potential strategic acquisition by NTPC?

ANS:

M&A in the Indian Public Sector has substantially improved post-liberalization with the
implementation of steps such as business de licensing, de-care for the public sector in all of
the nine sectors of strategic significance and the relaxing of the MRTP (Monopolies and
Restrictive Trade Practices Act) and Foreign Exchange Regulation (FOR). Such laws also
created an industrial environment heavily regulated, with little competition and no complete
industrial growth strategy.

Q5: Use these value drivers to formulate a DCF valuation model and value the
venture Since question No. 5 is central to the valuation of the venture and
involves significant calculations in several steps; instructors may further break-up
the question into the following parts:

 Performance of Free Cash Flow

 Valuation through to Free Cash Flow

ANS:

Company Valuation Through FCFF of NSPCL

( ₹ In Million)

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Particular 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenue 22565 26142 32631 37050 44126 48221 58359 62053 65674 72019 73246
0 9 7 1 1 3 8 6 0 0 1
EBIT 41114 43708 80178 90854 10235 11669 13311 11259 13717 13622 11174
7 1 0 3 3 4 0
% of Revenues 18.22% 16.72% 24.57% 24.52% 23.20% 24.20% 22.81% 18.14 20.89% 18.92 15.26
% % %
Depreciation 19584 20477 20754 21385 23645 26501 24857 27917 33968 41422 49117
% of Revenues 8.68% 7.83% 6.36% 5.77% 5.36% 5.50% 4.26% 4.50% 5.17% 5.75% 6.71%
EBITDA 60698 64185
10093 11223 12600 14319 15796 14051 17114 17764 16085
2 9 2 1 7 0 1 6 6
% of Revenues 26.90% 24.55% 30.93% 30.29% 28.55% 29.69% 27.07% 22.64 26.06% 24.67 21.96
% % %
NOPLAT 57990 62030 77786 81154 110410 114814 119333 10514 125649 14021 15695
4 4 5
Depreciation*Ta 874 688 4759 5923 2926 5252 6079 7027 9029 8728 1191
x Rate
FA Inv -55113 -66389 -78929 -82798 - - - - - - -
129116 102165 120514 12523 166848 21510 23073
6 2 1
WC Inv -19869 22107 73443 42697 81352 -399 68957 61583 91491 13735 27324
Post Tax Non- 28479. 25224. 21185. 21457. 10048 8221.0 6709.0 20790. 22771. 21223. 20649.
operating cash 9 7 8 2 8 2 9 4 1 7
flows
Free Cash 12361 43660 98244 68433 75619 25722 80564 69309 82092 - -
Flow (FCFF) .5 .2 .9 .2 .9 .9 .6 .1 31201 24610
.9 .9

INTERPRETATION:

Displays the NSPCL FCFF 's results. NSPCL's free cash flow rose in the first year, but
decreased and reported negative free cash flows suggesting that the business has trouble
with cash flows. In 2005 the FCFF rose to ₹ 12361,5 million, then to ₹ 43660,2,2 million. In
2007 it started to climb, and then dropped to ₹ 68433,2 million. In 2014 and 2015 the ₹
31201.9 and ₹ 24610.9 million respectively had the detrimental impact of NTPC's FCFF.
Between the years 2014 and 2015, ₹ 215102 million and ₹ 230731 million made major
investments in fixed assets. The table also displays the average revenue level of 2007 and
2008, i.e. 24.57% and 24.52%. In 2014 and 2015, the statistics fell to 18.92 percent and
15.62 in 2015.

FORECASTED FREE CASH FLOW (FCFF):

The estimated NSPCL FCFF amount in table 2 and 2.1. Upon recognizing the business model
and past results of NSPCL, the predicted FCFF was determined. When preparing for the
upcoming FCFF, we presume the company's previous success and can proceed at the same
rate without uncontrollable incidents. For the estimation of the terminal valuation of NSPCL,
we presume an estimated GDP growth in the IMF of 7,5%. The final value is determined at
the end of the fifth year on the presumption that the business can operate indefinitely. The

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 projected FCFF for 5 years is measured at the weighted average costs of capital. The
terminal value for the next year is ₹ 203650,2 million, which is 11.69% decreased, and the
new terminal value for 2015 corresponds to ₹ 1171869,90 million. The business had a
cumulative income of ₹ 1943428 million in 2015. The financial value of the firm ₹ 825346
million is excluded and the underlying valuation of the equities of ₹ 1118082 million is that
from the overall value of the company. Starting from March 2015, NSPCL has 8256 million
outstanding shares. The fundamental value of the company is split into outstanding
securities, which we get as of 31 March 2015.

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 FINDINGS:

COMPANY VALUATION THROUGH FCFF OF NSPCL

(₹ IN MILLION)
PARTICULAR 2016(E) 2017(E) 2018(E) 2019(E) 2020(E)
REVENUE 729764 79769 873803 95624 1041843.
8 0 6
EBIT 157817 17233 189924 20533 220831
5 2
% OF REVENUES 21.63% 21.60% 21.74% 21.47% 21.20%
DEPRECIATION 42659 45028 47875 51671 55942
% OF REVENUES 5.85% 5.64% 5.48% 5.40% 5.37%
EBITDA 200476 21736 237799 25700 276774
4 3
% OF REVENUES 27.47% 27.25% 27.21% 26.88% 26.57%
NOPLAT 167429 178385 191431 207589 225958
DEPRECIATION*TAX RATE 7032 8075 9335 9935 10271
FA INV 489929. - - - -
1 183195 195602 230391 275805.
7
WC INV - 37107. 84797.6 92015. 89584.28
111339 1 9 2 2
POST TAX NON-OPERATING 27216.9 26620. 26786.9 28001. 29304.52
CASH FLOWS 8 5 5 2 9
FREE CASH FLOW TO 580267 66991 116749 1071 79312.1
FIRM(FCFF) .4 .9 .1 49 92

COMPANY VALUTION THROUGH FCFF (₹ IN

MILLION)
PARTICULAR 2015 2016(E 2017(E 2018(E 2019(E 2020(E)
) ) ) )
PV OF ESTIMATED FC 51955 5370 8380 6886 45639
FLOWS 0 6 1 3
TERMINAL VALUE 203650
3
PV OF ESTIMATED 117187
PERPETUITY FLOWS 0
TOTAL PRESENT VALUE OF 194342
FIRM 8

BOOK VALUE OF DEBT 82534

6

FUNDAMENTAL VALUE OF 111808

EQUITY 2

NO OF OUTSTANDING 8246
SHARES

FUNDAMENTAL VALUE PER 135.59

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 SHARE (RS) 1

Following are the findings of the study:

 The company did well later in the first year of the research cycle on the free cash flow
to the business was raising. Which are the Nspcl issues regarding cash flows?

 The company has invested significantly in fixed assets, which demonstrates that the
company's flexibility has risen in view of potential energy demand.

 The company's EBDITA margin is well managed, which provides a positive indication
of average 26.67%.

 The company has ample funds to cover the borrowing rates to return the nominal
balance of the loan.

 The company has invested in working capital to finance daily operations.

Q6: Comment on the sensitivity of different assumptions regarding growth rates

and cost of capital estimates on the valuation of the proposed venture.

ANS:

The following recommendations are based on the study:

 Business will diversify the business to other power production natural options.

 The company is required to increased its fixed asset spending.

 The total expense structure of the organization will be reduced.

 The money generated from the sale of the correct stake on the exchange will be used
to fund the company's capital spending. Rather, banks lent.

The company's fundamental value or intrinsic value is ₹ 135.59 as of 31st March 2015 and ₹
147.40.We thus believe that its valuation is rational and that it is likely to look ahead to the
future. As of 31st March 2015. It is essentially a large organization. The company's projected
FCFF is optimistic, indicating that it would have no potential cash issue.

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