March 2014 Edition of BEACON, A Monthly Newsletter by SIMCON.
Inside this issue:
INDUSTRY ANALYSIS : Power Sector
COMPANY ANALYSIS : Tata Power
Concept of the Month
Quiz
Did You Know?
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Beacon.march2014
1. B E A C O N
A Newsletter by SIMCON– SIMSREE Consulting Club
Volume : 2
Issue : 5 March 2014
2. INDUSTRY ANALYSIS : POWER SECTOR
Introduction
India has the world’s fifth-largest electricity generation capacity
and demand is expected to surge in the coming years owing to
growth in the economy. The demand for electricity in the coun-
try has been growing at a rapid rate and is expected to increase
further in the years to come. The power sector in India is mainly
governed by the Ministry of Power. There are three major pil-
lars of power sector these are Generation, Transmission, and
Distribution. Power is one of the key sectors attracting foreign
direct investment (FDI) inflows into India. Total FDI inflows in
the sector has touched US$ 7.8 billion during April 2000-March
2013, accounting for 4 per cent of total FDI inflow in India.
Major investments earmarked by public as well as private sector
companies across the value chain.
PORTER’S FIVE FORCES ANALYSIS:-
Threat of New Entrants: - Low
As it is highly capital-intensive industry it demands high
amount of investments. Obtaining regulatory approvals, huge
land, fuel linkages are further bottlenecks. So threat of new en-
trants is comparatively low.
The threat of substitute products or services: - Medium
Power does not have substitute but it can be generated from
different sources of energy. The cost of switching to substitutes
like gas, solar penal, etc. is high. Government is encouraging
alternative and non-renewable sources.
The bargaining power of customers: - Medium
Industrial consumers have huge demand for power. Their bar-
gaining power is low in India as the number of power compa-
nies to buy from is limited in number. Retail customers also
have huge demand, government regulates the power sector to
ensure supply of power at reasonable prices so customers direct-
ly don’t have bargaining power.
The bargaining power of suppliers: - High
Coal is majorly used as a feed for generating power. Their
bargaining power is low in India as the number of power com-
panies to buy from is limited in number. Retail customers also
have huge demand, government regulates the power sector to
ensure supply of power at reasonable prices so customers direct-
ly don’t have bargaining power.
The bargaining power of suppliers: - High
Coal is majorly used as a feed for generating power. The supply
of coal in India is limited and hence coal players are in domi-
nant position. Indian power industry imports coal from other
countries like Indonesia, Australia so they have to rely on rules
and regulation of that country too. Some of the power generat-
ing companies has their own coal mines. But overall supplier
side is in dominant position.
The intensity of competition within the industry :- Medium
As demand for power is way above its supply and all the power
generated is used up there is no competitive rivalry. However,
with government encouragement, private participation is ex-
pected to increase in the coming years to take advantage of huge
demand for power in India. So in future the competition will be
intense.
Top Power Companies in India
NTPC:
NTPC is a public sector undertaking with a capacity to generate
nearly 33 GW of power and the company is planning to double
its capacity by the year 2015. The main dependence of the com-
pany for power generation is on gas and coal, but now they are
using solar power, nuclear power and hydel power as well for
generation of power and energy.
NHPC:
NHPC is hydro power focused company and recently the stock
values of the company came down due to lower profits and
slower implementation of power projects. However, they are
planning by all means to improve their power production in the
Volume : 2
Issue : 5
BEACON : Page 1
Mar-2014
For detailed report and all industry analysis from previous Beacons together, please visit our blog :
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3. next five years by focusing on hydel power generations in the
states belonging to the northern part of India.
Tata Power:
Tata Power is one of the few power & energy companies in the
private sector in India and they are engaged in the production of
power through wind, solar, hydro and thermal energies. Their
production capacity is 3 GW and they are in the process of
building a number of power transmission and power generation
plants in India.
Reliance Power:
Reliance power is the subsidiary of the popular Reliance group
of companies and they have great expansion plans in the power
and energy sector in India. They are presently engaged in the
construction of 34000 MW project and they are also planning to
build a plant with a capacity of 35 GW and planning to use coal,
gas and hydel as base for power generation.
Impact Analysis
Though some of the factors that affected the power sector were:
Fuel shortages
Power is a capital intensive industry with long gestation peri-
ods, and the shortage of fuel can be a major challenge in the
long term. Traditionally, most power plants in India use coal or
natural gas as fuel, both of which are fast depleting reserves.
Further, the Working Committee on Power forecasts a shortage
of 238 metric tons of coal per annum by FY17. Additionally,
there is also a shortage of natural gas in the market, though the
deficit has reduced by 25 per cent over the past decade to reach
20 per cent over FY1113.
Difficulty in obtaining environmental approvals and land
clearances:
Land acquisition is one of the key challenges impeding the
growth of the power sector in India. Further, obtaining environ-
mental approvals is also difficult as a large number of govern-
ment bodies need to be contacted for clearances, including the
Ministry of Environment and Forests, Ministry of Aviation,
Department of Forests, and other government institutions.
These challenges primarily arise due to concerns over environ-
mental pollution, issues regarding rehabilitation, afforestation
and regulatory delays.
Degrading financial health of state distribution utilities
Eight state electricity boards (SEBs) had stopped making pay-
ments to NTPC in 2011, despite getting discounts of up to 2
percent on immediate payments, and 1 per cent on payments
made within one month. The losses of distribution utilities in
India were pegged at Rs 75,000 crore (US$ 13.9 billion) in
2011, and are expected to rise to Rs 1.16 trillion (US$ 21.4 bil-
lion) by 2014-2015.
Trends in Power industry
Strong growth in generation capacity led by per capita con-
sumption, urbanization
There is strong growth opportunity in power generation led by
exponential growth in economy, increasing propensity for elec-
tricity consumption and urbanization. Indian companies have
shown a huge interest in power generation and the recent
change in power procurement landscape towards competitive
bidding is expected to drive investments and efficiency in the
sector.
Alternate sources of energy
While Indian companies are largely focused on tradition sources
of energy, global investments in renewable energy has jumped
32% reaching record USD 211 billion in 2010, which is over 5
fold increase since 2004. Even developing countries like China
have ramped up their investments in alternate sources of energy.
Steadily, Government of India is offering a number of incen-
tives to renewable energy developers to accelerate investments
in renewable energy space. RPO requirements set by state regu-
lators and REC mechanism is expected to create demand for
renewable energy across solar and non-solar sources. In addi-
tion, several benefits like accelerated depreciation, preferential
tariff and generation based incentives offer attractive incentives
to developers investing in renewable energy, and aim to en-
hance supply through renewable energy. The National Solar
Mission plans a capacity addition of 22,000 MW by 2022. Gov-
ernment of India targets a growth in renewable energy con-
sumption of over 6% CAGR and a capacity addition of 18500
MW during the 12th five year plan period.
Conclusion
The last decade has seen a sea change in India’s electricity sec-
tor, from being 10th largest in the world to 5th largest now. The
industry is moving away from negotiated & guaranteed arrange-
ments of the past era, to more open market and performance
based competition. The approach now is more pro investment,
although the legacy problems of cross-subsidies, losses, and
rural access remain a challenge. The private sector has emerged
as a key player in both conventional and renewable power, and
increasingly in other parts of the business. There is still a long
way to go. increasingly in other parts of the business. There is
still a long way to go.
References:
http://www.pwc.in/assets/pdfs/publications-2011/wec-pwc-
report.pdf
http://www.kpmg.com/IN/en/IssuesAndInsights
http://www.ibef.org/download/Power-Sector-040213.pdf
http://www.cea.nic.in/reports/powersystems/nep2012/
generation_12.pdf
For detailed report and all industry analysis from previous Beacons together, please visit our blog :
http://simconblog.wordpress.com
Volume : 2
Issue : 5
BEACON : Page 2
Mar - 2014
INDUSTRY ANALYSIS : POWER SECTOR
4. COMPANY ANALYSIS : TATA POWER
Volume : 2
Issue : 5
For detailed report and all company analysis from previous Beacons together, please visit our blog:
http://simconblog.wordpress.com
BEACON : Page 3
Mar - 2014
Introduction:
Tata Power is the electric utility company of the Tata Group.
Founded in 1911 as Tata Hydro-Electric Power Supply Compa-
ny (which was merged into Tata Power, which was established
in 1919) to supply power to Mumbai, Tata Power is today In-
dia's largest integrated power company. Headquartered in Mum-
bai, the company has presence in Generation (thermal, hydro,
solar and wind), Transmission, Distribution, Trading and Con-
sultancy in the power sector. It has installed capacity of 8560
MW in India, 7407 MW is via thermal power.
The company is one of the largest renewable energy players in
India and is developing country's first 4000 MW Power Project
at Mundra (Gujarat) under the subsidiary Coastal Gujarat Pow-
er. The company has existing operations in the states of Maha-
rashtra, Gujarat, Karnataka, West Bengal, Jharkhand and Raja-
sthan. The company supplies power to Mumbai and Delhi and
part of the 1,200km Tala transmission project, India's first inter-
state transmission project.
Tata Power has customer base of 4.5 lakh direct customers in
Mumbai as well as bulk customers like Railways, BARC,
BEST. It has 1.3 million (out of total 4.5 million electricity us-
ers) customers in Delhi.
Along with Wipro, Tata Power is the only Indian company
which was featured in Ethisphere magazine’s World’s Most
Ethical (WME) Companies (2014) list, released on 20 March.
Joint ventures, subsidiaries and associates
Tata Power also operates on a PPP model with Delhi Vidyut
Board for distribution in North Delhi (Tata Power Delhi Distri-
bution Limited), with Power Grid Corporation of India Ltd. for
transmission of power from its Bhutan plant to Delhi
(Powerlinks Transmission Ltd.) and with Damodar Valley Cor-
poration for a 1050 MW Mega Power Project at Jharkhand
(Maithon Power Ltd). The company has captive coal blocks in
Jharkhand and Odisha along with joint venture partners. Tata
Power also has a 30 % stake in Indonesia’s PT Kaltim Prima
Coal (KPC) and a related trading company PT Bumi Resources,
and has entered into an offtake agreement with KPC.
Tata Power has a 10 % stake in the Australian company Geody-
namics and has a partnership with Australian solar power com-
pany Sunengy Pty. Tata Power has a joint venture with Bhutan
government’s Druk Green Power Corporation for the 114MW
Dagachhu Hydro Project. It also has a joint venture with South
Africa-based Exxaro Resources, Cennergi Pty which focuses in
projects in southern Africa. It has also partnered with SN Pow-
er, Norway for developing hydro-electric plants in India and
Nepal.
Trust Energy Resources Pte, incorporated in Singapore, is a 100
-percent wholly-owned subsidiary of Tata Power is engaged in
shipping and supply of coal for the parent company. Another
subsidiary, Tata Power Trading Company is the first company
to acquire a license in power trading in India. Tata Power SED
(Strategic Engineering Division), an internal division, develops
electronic products for the Indian defense power.
Leadership:
Shareholding Pattern:
SWOT Analysis:
Name Post About
Cyrus P Mistry Chairman Chairman of Tata Group
Anil Sardana CEO & MD Former MD, Tata Teleserv-
ices Ltd and Board Member
from 2007
5. COMPANY ANALYSIS : TATA POWER
Volume : 2
Issue : 5
For detailed report and all company analysis from previous Beacons together, please visit our blog:
http://simconblog.wordpress.com
BEACON : Page 4
Mar - 2014
Financial Statements:
In FY13, revenue grew by 27% mainly because of additional
revenue generated from CGPL Mundra and higher revenue of
TPDDL due to increase in power purchase cost. It grew from
Rs. 26001.40 crore to Rs. 33025.43 crore. Operating profit
achieved a growth of 31%. It grew to Rs. 6444.70 as compared
to Rs.4900.20 crore last year.
In FY13 PAT decreased due to lower dividends income from
coal investment, higher finance charges and higher tax provi-
sioning due to change in depreciation rates. Profit After Tax
stood at Rs. 1024.69 crore as against Rs. 1169.73 crore.
Operating income to PAT of Tata Pawer:
Performance of Tata Power in last three years:
Business Strategy:
Tata Power has been putting continuous efforts in implementing
modernization and cost reduction strategies. Its goal is to be
perceived as a low cost power producer which guarantees af-
fordable and 24x7 uninterrupted power supply.
The company is encouraging its “Right to choose” exercise for
consumers across Mumbai. The company has organized 880
camps to explain the benefits of switchover for low-end con-
sumers from their current electricity company, mainly Reliance
April 1 to December 31, 2013, with 75,125 consumers being
low-end (0-300 units). It has increased its cable network by
more than 300 km by December 2013 and added two new distri-
bution sub-stations (DSS) and 36 Consumer Sub Stations (CSS),
totaling the DSS to 23 DSS and 619 CSS, majority in the 11
clusters where the regulator MERC ordered the company to
expand its network. From April 1, the tariffs for switchover
customers up to 100 units will increase to Rs 2.49 per unit (v/s
2.13 earlier) while for those using electricity up to 300 units, its
tariff will be Rs 4.13 (3.62 earlier). For changeover customers
(those who shifted from its close rival Reliance), the new tariff
will be Rs 2.38 (2.11 earlier) and Rs 4.45 (4.1 earlier) for up to
100 units and 300 units, respectively. Like rival Reliance, Tata
Power is also leveraging social media to address customer com-
plaints and reach out to potential customers. It aimed to reach 5
lakh in Mumbai by end of March.
Tata Power, one of the largest players in renewable energy in
India, has a gross installed capacity of 912 MW from clean en-
ergy sources, of which 447 MW comes from hydropower and
465 MW comes from renewable sources such as wind and solar
power. Besides Mundra plant, Tata Power plans to increase its
renewable energy capacity by about 71 per cent to cut carbon
emissions and reduce risks from fluctuating fuel prices. The
utility is planning to add 646.7 MW of renewable energy capac-
ity.
Power projects in India face multiple challenges, primarily over
land and the environment. Because of this the company is ex-
ploring business in other countries where the investment climate
is more favorable. It has 26 per cent stake in the Dagachhu Hy-
droelectric Power Project in Bhutan which will have an in-
stalled capacity of 126 MW. Through its joint-venture company
Cennergi, is developing the 94.8 MW Tsitsikamma wind power
project in South Africa. 35% of the revenues came from its In-
donesia business last year. Over the years it is planning to add
26,000MW capacity in 6-7 years, of which a major chunk is
expected to come from global projects.
Besides global expansion, the company has worked on the PPP
model in Jamshedpur and Delhi.
With the ambitious growth plans, the company aims to follow
‘Responsible Growth’ model.
References:
http://www.tatapower.com/
http://timesofindia.indiatimes.com/business/india-business
http://articles.economictimes.indiatimes.com
http://www.livemint.com/Companies
Year 2010-11 2011-12 2012-13
Generation (in
MU's)
15325 15230 15770
Operating Income 6918 8496 9567
Operating Expenses 5328 6711 7543
Operating Profit 1591 1785 2024
Other Income 494 983 721
Interest and Fi-
nance Charges
462 515 678
Depreciation 510 570 364
PBT 1112 1683 1703
PAT 941 1170 1025
EPS 41 4.53* 3.44
Dividend per share
(%)
1.25 1.25 1.15
6. Concept of the Month
DISCOUNTED CASH FLOW (DCF)
Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. DCF analy-
sis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at
a present value, which is then used to evaluate the potential for investment. If the value arrived at through DCF analysis is high-
er than the current cost of the investment, the opportunity may be a good one.
Formula for DCF :
The formula for calculating DCF is usually given something like this:
Where: PV = present
value, CFi = cash flow
in year i
k = discount rate, TCF = the terminal year cash flow
g = growth rate assumption in perpetuity beyond terminal year
n = the number of periods in the valuation model including the terminal year
The key essence of DCF analysis
1. Determination of Free Cash Flows: Value of business in the projection period
Free Cash Flow: Cash flows available for distribution to a specified group of security holders
Building free cash flows :
EBIT - Taxes (@Tax Rate)
= Tax Effected EBIT + Depreciation and Amortization
- Capital Expenditures - Increase in Working Capital + Other non-cash items
= Unlevered Free Cash Flow
2. Calculation of Terminal Value: Value of business/cash flows post the projection period
— The terminal value estimates the residual value of cash flow stream at the end of an investment time horizon
— Serves as a proxy for the present value of the cash flow that is to be generated by the business after the investment hori-
zon (usually 5 to 10 years)
— Calculate the PV of Terminal Value and add to PV of projected cash flows to arrive at a total value for the company
— Terminal Value Approach:
Perpetuity Growth Method : TV(n) = FCF(n+1)/ (WACC – Growth Rate)
Exit Multiple Method : TV = EBITDA * Multiple
3. Calculation of Discount Rate: Incorporates Time Value of Money
Steps in Calculating DCF:
Project Unlevered FCFs (UFCFs)
Choose a discount rate
Calculate the TV
Calculate the enterprise value (EV) by discounting the projected UFCFs and TV to net present value
Calculate the equity value by subtracting net debt from EV
Review the results
Source: http://www.investopedia.com/walkthrough/corporate-finance/3/discounted-cash-flow/introduction.aspx
Volume : 2
Issue : 5
BEACON : Page 5
Mar - 2014
Typical uses of DCF
How much could buyer pay?
How much should seller want?
Reality check against other valuation methods
Allows us to perform ‘what if?’ scenario analysis
Assessing how a business must perform in order to be
worth a given amount
DCF is applicable for the following :
Project with finite life
Stable, low growth and predictable cash flows
Fixed income securities
Majority of cash flows lies outside projection period
High growth or start-up firms
Cyclical business
Troubled or loss making firms
7. Bruce Doolin Henderson (1915–1992), founder of the Boston Consulting Group (BCG), began
his career as a salesman selling The Bible.
Satyam Computers incubated Cognizant in a joint venture with the Dun & Bradstreet Corpora-
tion (D&B) in 1994.
Mckinsey, BCG and Bain are considered to be the "Big Three" Management Consulting firms.
In 1989, the Institute of Management Consultants of India (IMCI) became the first Asian organ-
isation to be accepted for membership of the International Council of Management Consulting Insti-
tutes (ICMCI), the global apex body of Management Consulting Institutes.
QUIZ OF March
1. Larry Page
2. Chevron
3. William C. Durant
4. Richard Stallman
5. Oreo
1. Identify this US based MNC that was named one of the World's most ethical compa-
ny for seventh year running in 2014 in the business service category.
2. Identify the person in the image.
3. X’s global partners voted overwhelmingly to approve a combination with Y. The
two organizations announced in October 2013 they had signed a conditional merger
agreement. Identify X and Y.
4. Connect the bunch of three im-
ages to identify a strategy to de-
ter hostile takeover
5. X proposed to buy a 100% stake
in Y. As a part of the negotia-
tion, X would have been liable to pay $112.5 million if it would have withdrawn, while Y would have
had to pay a termination penaly of $50 million if it walked out of the deal. The deal eventually fell out
with both the companies blaming the other for the failure. Identify X & Y.
ANSWERS : FEBRUARY ISSUE
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Volume : 2
Issue : 5
BEACON : Page 6
Mar - 2014
Priyanka Kaul
MMS, SIMSREE
Winner:-