1

NTPC Limited Valuation Report August 2009 III case study by Group No. 3

Prepared By:

Lavesh Mola

Hiren Patadia

Nisha Bhuta

Mahadevan Shankar

Samuel George

2

14 Aug 2009

NTPC Limited

NTPC Bhawan,

SCOPE Complex, Institutional Area, Lodhi Road,

New Delhi - 110003

For the Kind Attention of Mr. R. S. SHARMA, Chairman and Managing Director

VALUATION OF NTPC LIMITED

Dear Sir,

We refer to our Engagement Letter dated 28 June 2009 confirming our appointment for the valuation of

NTPC Limited (“NTPC” or “the Company”). As per the terms of the engagement, we are enclosing our

business valuation report of NTPC along with this letter.

We understand that the report is exclusively for your internal purposes and hence should not be used for

any statutory, regulatory, accounting purposes or for reporting in the annual report of the Company,

whether in whole or in part without our prior written consent, which consent will only be given after full

consideration of the circumstances at the time. Please note that all comments in our report must be read

in conjunction with the Caveats to the report, which are contained in Section 6.

Please feel free to contact us if you need any further information/clarifications.

Yours Sincerely,

LHNMS

3

Letter of Engagement

Strictly Confidential

28 June 2009

NTPC Limited

NTPC Bhawan,

SCOPE Complex, Institutional Area, Lodhi Road,

New Delhi - 110003

For the Kind Attention of Mr. R. S. SHARMA, Chairman and Managing Director

Dear Sir,

This letter of engagement sets out the basis upon which „The LHNMS Group‟ („LHNMS‟ or „we‟ or „us‟),

will work with NTPC Ltd. („the Client‟ or „you‟ or „the Company‟) in relation to the valuation of the

Client / Client‟s Company.

Scope of Work/Services

Based on discussions with the Management, we understand that the Company is evaluating the value of

the Company and its shares, as a part of the Management endeavour to undertake a internal restructuring

exercise. In this context, you require our assistance to carry out the Valuation of the Company and its

value per share.

In this role we may required to perform all or some of following work.

1) Obtain a good understanding of Company, from its past & present operations, financial conditions,

expansion plans, Strategies, prospectus of company & business.

2) Prepare a Presentation detailing Key aspects of Business with different options of the pricing (Share

valuation) for the Management using methodologies like DCF / Price earnings Multiples etc.

Valuation of a company is not an exact science and ultimately depends upon what it is worth to a serious

investor or buyer who for his or her own reasons may be prepared to pay a substantial goodwill. Our

valuation is not adjusted for any „special‟ purchaser who has particular connections or relationships with

the company or business and can obtain benefits such as rationalization, synergy in operations etc.

Our assessment of the valuation of the Company will be on the basic assumption of a going concern

entity and would be based on some or all of the popular methodologies.

Valuation Date:

This valuation of the Company and the value per share will be computed as on 31st March 2009

(Valuation Date).

4

Duration of Valuation Assignment:

Based on discussion with Management of NTPC Ltd & our Scope of Work detailed in this report we

expect to deliver our report in ………..days of commencement of our work.

Above timing however will be dependent on availability & promptness with which information is made

available to us.

Payment Terms:

Our fees will be based on quality & seniority of staff & time occupied for work.

It is excluding all taxes, Out of Pocket expenses & Outside Consultant Fees (If any appointed).

In case of any unforeseen event or circumstances arise which require us to do more work, it would be

charged in addition of above as may be decided in writing.

Our Fees will be paid 30% on acceptance of Engagement letter, 40% on submission of Draft Report &

Balance on submission of Final Report.

Distribution of Report & Other General Information:

We understand that the report is exclusively for your internal purposes and is confidential and has been

prepared exclusively for the Management of NTPC Ltd and it should not be used, reproduced or

circulated to any other person or for any purpose other than as mentioned above, in whole or in part,

without the prior written consent of LHNMS.

This report should not be used for any statutory, regulatory, accounting purposes or for reporting in the

annual report of the Company, whether in whole or in part without our prior written consent, which

consent will only be given after full consideration of the circumstances at the time. Please note that all

comments in our report must be read in conjunction with the Caveats to the report, which are contained

in Section 6.

Acceptance of Terms & Conditions:

We would be grateful if you would confirm our understanding of your instructions and your agreement to

the terms of this letter by signing and returning the enclosed copy of this letter.

We are keen to work with you and look forward to your confirmation. Meanwhile, please feel free to

contact us for any clarifications.

Please feel free to contact us if you need any further information/clarifications.

Yours Sincerely,

LHNMS

5

Contents

Page

Abbreviations 6

Tables 7

Section 1: Context and Purpose 8

Section 2: Company Background and Financial Overview 9

Section 3: Financial Overview 12

Section 4: Indian Power Sector - Industry analysis 15

Section 5: Valuation Analysis 20

Section 6: Caveats 26

6

Abbreviations

BSE SENSEX Bombay Stock Exchange index

CAGR Compounded Annual Growth Rate

CAPM Capital Asset Pricing Model

DCF Discounted Cash Flow

D/E Debt Equity

EBITDA Earnings before Interest, Tax, Depreciation & Amortisation

EEG Erneuerbare-Energien-Gesetz

EV Enterprise Value

FCFF Free Cash Flow to Firm

FCFE Free Cash Flow to Equity holders

FMV Fair Market Value

FV Fair Value

FY Financial Year ending 31 March

Rs. Rupees

NAV Net Asset Value

NSE National Stock Exchange

PAT Profit After Tax

Valuation Date 31 March 2009

WACC Weighted Average Cost of Capital

YoY Year on Year

7

Tables

Page

Table 1.1: Capacity Addition Plan upto 2017 11

Table 1.2: Key Financial Information – P&L and Common Size Statement 12

Table 1.3: Key Financial Information – Balance Sheet 13

Table 1.4: Financial Projections 14

Table 1.5 GDP Growth Rate of Different Countries 15

Table 1.6 Demand & Power Supply in India 15

Table 1.7 Demand & Power Supply in India for Regions 16

Table 1.8 India‟s Energy Generation Capacity 18

Table 1.9 Additional Capacity requirement of India under different GDP growth rates 19

Table 1.10: Cash flow projections 22

Table 1.11: Sales, EBITDA & Installed Capacity multiples of comparable companies 24

Table 1.12: Final Value Summary 25

8

1. Context and Purpose

NTPC, a Company in the business of power generation began its operations in the year 1975. The

Company‟s business model comprises of generation of power and sale of bulk power and has the

distinction of being India‟s largest power generator.

The Indian growth story has given a lot of impetus to basic infrastructure development, where power as a

sector was given the highest priority by the Dr. Manmohan Singh led UPA Government. The energy need

of India has increased manifold over the last few decades and certain vital developments like the nuclear

treaty between USA and India, emphasises the role of power sector to national econometrics. Some key

developments like initiation of Ultra Mega Power Projects (UMPP) of 4000 MW for the first time in India

to accelerate capacity addition and introducing bulk energy production using globally accepted energy

efficient technologies to India. Moreover the recent success of IPOs and financial closures has proved

that fund raising is not a constraint to the power sector.

The Management has been considering an internal evaluation of the value of the Company as a part of

an internal restructuring exercise. In this context the Company has requested LHNMS to carry out an

independent valuation of its shares.

We have carried out a valuation of the Company based on the financial information and accounting

estimates, provided to us by the Company, as of 31 March 2009 (“the Valuation Date”).

9

2. Company Background and Financial Overview

2.1 Introduction and Background

NTPC is India‟s Largest Power Company. NTPC‟s principal business is generation and sale of bulk

power. Other business includes providing consultancy, project management and supervision, oil and gas

exploration and coal mining. The total installed capacity of the company as on 31 March 2009 is

30,144MW including that under joint ventures. NTPC commissioned a 500 MW Unit 7 of Kahalgaon

Super Thermal Power Project- Stage II on 30 June 2009, taking the total capacity to 30,644 MW. Of this,

24,709 MW is coal based capacity and the rest gas.

NTPC is India's largest power generator with 31GW of capacity (23% of installed capacity) and generates 206bu (29% of generation). NTPC contributes more than one-fourth of India‟s total power generation with less than one-fifth capacity. Its Capacity is spread across 21 locations with coal-based units (22.4GW), gas-based units (3.9GW) and JV projects (1.0GW). NTPC's output is contracted through long term PPAs (25 years for coal-based and 15 years for gas-based) with customers (SEBs 99% of its sales). All billing to SEBs is secured through letters of credit. It plans to double capacity by FY12E and triple capacity by FY17E. NTPC ranked 317th in the „2009, Forbes Global 2000‟ ranking. NTPC has been awarded No.1, Best Workplace in India for the year 2008, by the Great Places to Work Institute.

Milestones:

1975 - Incorporated with authorized capital of Rs. 1250 Million

1982 - First 200 MW unit at Singrauli was commissioned

1985 - GOI approved setting up of three gas based projects by NTPC at Kawas in Gujarat,

Auraiya in UP and Anta in Rajasthan

1987 - NTPC crossed 5000 MW installed capacity

1989 - NTPC‟s consultancy division was launched

1990 - NTPC crossed total installed capacity of 10000 MW

1994 – The Company crossed installed capacity of 15000 MW.

1997 - Identified by the GoI as one of the Navratna public sector undertakings and achieved 100

billion units generation in one year.

2002 - Crossed 20000 MW of installed capacity.

2004 - NTPC became a listed company.

10

2.2 History & Nature of Various Business:

NTPC‟s quest for diversification started about a decade back with its foray into Hydro Power. It has, since then, been moving towards becoming a highly diversified company through backward, forward and lateral integration. The company is well on its way to becoming „An Integrated Power Major‟, having entered Hydro Power, Coal Mining, Power Trading, Equipment Manufacturing and Power Distribution. NTPC has made long strides in developing its Ash Utilization business. In its pursuit of diversification, NTPC has also developed strategic alliances and joint ventures with leading national and international companies.

Hydro Power: In order to give impetus to hydro power growth in the country and to have a balanced portfolio of power generation, NTPC entered hydro power business with the 800 MW Koldam hydro project in Himachal Pradesh. Two more projects have also been taken up in Uttarakhand. A wholly owned subsidiary, NTPC Hydro Ltd., is setting up hydro projects of capacities up to 250 MW.

Coal Mining: In a major backward integration move to create fuel security, NTPC has ventured into coal mining business with an aim to meet about 20% of its coal requirement from its captive mines by 2017. The Government of India has so far allotted 7 coal blocks to NTPC, including 2 blocks to be developed through joint venture route. Coal Production is likely to start in 2009-10.

Power Trading: 'NTPC Vidyut Vyapar Nigam Ltd.' (NVVN), a wholly owned subsidiary was created for trading power leading to optimal utilization of NTPC‟s assets. It is the second largest power trading company in the country. In order to facilitate power trading in the country, „National Power Exchange Ltd.‟, a JV between NTPC, NHPC, PFC and TCS has been formed for operating a Power Exchange.

Ash Business: NTPC has focused on the utilization of ash generated by its power stations to convert the challenge of ash disposal into an opportunity. Ash is being used as a raw material input for cement companies and brick manufacturers. NVVN is engaged in the business of Fly Ash export and sale to domestic customers. Joint ventures with cement companies are being planned to set up cement grinding units in the vicinity of NTPC stations.

Power Distribution: „NTPC Electric Supply Company Ltd.‟ (NESCL), a wholly owned subsidiary of NTPC, was set up for distribution of power. NESCL is actively engaged in „Rajiv Gandhi Gramin Vidyutikaran Yojana‟programme for rural electrification and also working as 'Advisor cum Consultant' for Ministry of Power for implementation of Accelerated Power Development and Reforms Programme(APDRP) launched by Government of India.

Equipment Manufacturing: Enormous growth in power sector necessitates augmentation of power equipment manufacturing capacity. NTPC has formed JVs with BHEL and Bharat Forge Ltd. for power plant equipment manufacturing. NTPC has also acquired stake in Transformers and Electricals Kerela Ltd. (TELK) for manufacturing and repair of transformers.

11

NTPC has formulated a long term Corporate Plan upto 2017. In line with the Corporate Plan, the capacity addition under implementation stage is presented below:

Table 1.1 Capacity Addition Plan upto 2017

Project State Fuel MW

1. Sipat I (3 x 660) Chhattisgarh Coal 1980

2 Barh I (3 x 660) Bihar Coal 1980

3 Korba III ( 1 x 500) Chhattisgarh Coal 500

4. Farakka III ( 1 x 500)s West Bengal Coal 500

5. NCTPP II ( 2 x 490) Uttar Pradesh Coal 980

6. Simhadri II ( 2 x 500) Andhra Pradesh Coal 1000

7. Indira Gandhi STPP- JV with IPGCL & HPGCL ( 3 x 500) Haryana Coal 1500

8. Vallur I -JV with TNEB ( 2 x 500) Tamilnadu Coal 1000

9. Nabinagar TPP-JV with Railways (4 x 250) Bihar Coal 1000

10. Bongaigaon(3 x 250) Assam Coal 750

11. Koldam HEPP ( 4 x 200) Himachal Pradesh 800

12. Loharinag Pala HEPP ( 4x 150) Uttarakhand 600

13. Tapovan Vishnugad HEPP (4 x 130) Uttarakhand 520

14. Mauda ( 2 x 500) Maharashta Coal 1000

15. Barh II (2 X 660) Bihar Coal 1320

16. Vindhyachal-IV (2X500) Madhya Pradesh Coal 1000

17. Rihand III(2X500) Uttar Pradesh Coal 1000

Total 17430

12

3. Financial Overview

3.1 Financial Information

Key financial indicators from NTPC‟s Profit and Loss (P&L) Account for the three years ended FY2007,

FY2008 and FY2009 are shown in Table 1.2. Also shown along side is the Common Size statement for

the Profit and Loss Account:

Table 1.2: Key Financial Information – P&L and Common Size Statement (Amount in Rs. Million)

FY2007 FY2008 FY2009 FY2007 FY2008 FY2009

Income

Net Operating Income 325,952 370,501 441,261 92% 93% 97%

Other Income 27,855 29,676 11,467 8% 7% 3%

Total Income 353,807 400,177 452,728 100% 100% 100%

Expenditure

Electricity and Fuel 198,181 220,202 271,107 56% 55% 60%

Employee Cost 11,632 18,960 24,631 3% 5% 5%

Other Expenses 15,681 16,355 19,521 4% 4% 4%

Total Expenditure 225,494 255,517 315,259 64% 64% 70%

EBITDA 128,313 144,660 137,469 36% 36% 30%

Interest 18,594 17,981 20,229 5% 4% 4%

Depreciation 20,754 21,385 23,646 6% 5% 5%

PBT 88,965 105,294 93,594 25% 26% 21%

Tax 20,427 28,401 11,581 6% 7% 3%

PAT 68,647 74,148 82,013 19% 19% 18%

Historical P&L Common size Particulars

Key financial indicators from Balance Sheet as at 31 March 2007, 31 March 2008 and 31 March 2009 are

shown in Table 1.3:

13

Table 1.3: Key Financial Information – Balance Sheet (Amount in Rs. Million)

31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-07 31-Mar-08 31-Mar-09

SOURCES OF FUNDS :

Share Capital 82,455.00 82,455.00 82,455.00 11.2% 10.1% 9.3%

Reserves and Surplus 403,513.00 443,931.00 525,943.57 54.7% 54.5% 59.1%

Advance against Depreciation 6,567.00 13,734.00 13,734.00 0.9% 1.7% 1.5%

Secured Loans 68,229.00 73,147.00 85,126.60 9.3% 9.0% 9.6%

Unsecured Loans 176,615.00 198,759.00 180,327.00 24.0% 24.4% 20.3%

Deferred Foreign Currency Fluctuation - 2,554.00 2,554.00 0.0% 0.3% 0.3%

Deferred Tax Liability 1.00 1.00 1.00 0.0% 0.0% 0.0%

Total Sources of Funds 737,380.00 814,581.00 890,141.17 100% 100% 100%

APPLICATION OF FUNDS :

Fixed Assets

Gross Block 507,273.00 533,680.00 625,711.25 69% 66% 70%

Less: Accumulated Depreciation 250,792.00 272,743.00 296,334.25 34% 33% 33%

Net Block 256,481.00 260,937.00 329,377.00 35% 32% 37%

Capital Work in Progress 128,567.00 184,389.00 191,668.00 17% 23% 22%

Investments 160,943.00 152,672.00 152,672.00 22% 19% 17%

Current Assets, Loans and Advances

Inventories 25,102.00 26,757.00 30,467.57 3% 3% 3%

Sundry Debtors 12,523.00 29,827.00 35,697.24 2% 4% 4%

Cash and Bank 133,146.00 149,332.00 161,102.44 18% 18% 18%

Loans and Advances 40,476.00 40,354.00 40,354.00 5% 5% 5%

Total Current Assets 221,827.00 255,488.00 276,839.24 30% 31% 31%

Less:

Current Liabilities and Provisions 70,263.00 79,299.00 101,663.77 10% 10% 11%

Net Current Assets 151,564.00 176,189.00 175,175.47 21% 22% 20%

Total Application of Funds 737,380.00 814,581.00 890,141.17 100% 100% 100%

Historical Balance Sheet Commonsize StatementParticulars

3.2 Shareholding Pattern

14

3.3 Financial Projections

The Management has provided us with the projections for Five financial years ended 2010, 2011,2012,

2013 and 2014. The projections and the common size statement are shown in the Table 1.4.

Table 1.4: Financial Projections

FY2010 FY2011 FY2012 FY2013 FY2014 FY2010 FY2011 FY2012 FY2013 FY2014

Income

Net Operating Income 540,412 621,649 727,297 847,641 1,006,046 99% 99% 99% 99% 99%

Other Income 5,404 6,216 7,273 8,476 10,060 1% 1% 1% 1% 1%

Total Income 545,816 627,865 734,570 856,118 1,016,106 100% 100% 100% 100% 100%

Expenditure

Electricity and Fuel 307,214 370,778 448,802 517,892 584,207 56% 59% 61% 60% 57%

Employee Cost 26,891 28,341 29,886 31,535 33,295 5% 5% 4% 4% 3%

Other Expenses 23,376 26,889 31,459 36,665 43,517 4% 4% 4% 4% 4%

Total Expenditure 357,480 426,008 510,148 586,092 661,018 65% 68% 69% 68% 65%

EBITDA 188,336 201,857 224,423 270,026 355,088 35% 32% 31% 32% 35%

Interest 23,738 34,470 43,849 50,398 55,407 4% 5% 6% 6% 5%

Depreciation 26,298 31,713 36,915 41,091 44,852 5% 5% 5% 5% 4%

PBT 138,300 135,675 143,659 178,537 254,828 25% 22% 20% 21% 25%

Tax 19,362 20,351 21,549 26,781 38,224 4% 3% 3% 3% 4%

PAT 118,938 115,323 122,110 151,756 216,604 22% 18% 17% 18% 21%

Particulars Projected P&L Common size (% of Net Sales)

The Management has projected an increase in Sales of 22%, 15%, 17%, 17% and 19% respectively over

the projected period FY2010, FY2011, FY2012, FY2013 and FY2014. The growth has been assumed

after taking into account the capacity expansion.

The Company is in an expansion phase with substantial amount of CAPEX planned for the next five

years. We have relied on these forecasts for the purpose of our analysis. Any changes in the revenue and

profitability estimates may have an impact on the resultant value of the equity shares of NTPC and the

impact may be material.

15

4. Indian Power Sector - Industry analysis

Unless otherwise indicated, all financial and statistical data in the following discussion is derived from

websites of and publicly available documents from, various sources, including the website of the Ministry

of Power and Central Electricity Authority (“CEA”). The data may have been re-classified by us for the

purpose of presentation. Unless otherwise indicated, the data presented excludes captive capacity and

generation.

4.1 Overview of the Indian Economy

India is the fourth largest economy in the world after the United States of America, China and Japan in

purchasing power parity terms (Source: CIA World Factbook website). India is also amongst the fastest

growing economies globally and has grown at an average rate of 7.4% per annum during the last five

years. The following table presents a comparison of India‟s real GDP growth rate with the real GDP

growth rate of certain other countries (in percentages).

Table 1.5 GDP Growth Rate of Different Countries

Industry Demand-Supply Overview

The Indian power sector has historically been characterized by energy shortages which have been

increasing over the years. In the period from April 2008 to February 2009, peak energy deficit was

estimated to be at 13.8% and normative energy deficit was estimated to be 11.0%. The following table

sets forth the peak and normative shortages of power in India from 2003 to February 2009:

Table 1.6 Demand & Power Supply in India

16

Regional Demand-Supply Scenario

The following table displays the peak and normative power shortages in India for the period from April

2008 – February 2009 across different regions in India:

Table 1.7 Demand & Power Supply in India for Regions

Energy deficit varies widely across India, with the western region having the highest peak and normative

energy shortages followed by the northern region. According to the 17th Electric Power Survey, India‟s

peak demand will reach approximately 152,746 MW with an energy requirement of approximately 968

billion units by fiscal year 2012. By the fiscal year 2017, peak demand is expected to reach 218,209 MW

with an energy requirement of 1,392 billion units.

Large Energy Deficit Results in Low Per Capita Consumption of Electricity

Due to inadequate supply and distribution infrastructure, the per capita consumption of energy in India is

extremely low in comparison to most other parts of the world. The following chart shows per capita

electricity consumption of energy in 2006 in various developed and developing countries.

Chart 1.1 Per Capita Electricity Consumption of Various countries

17

4.2 Historical Capacity Additions

The energy deficit in India is a consequence of slow progress in the development of additional energy

capacity. The Indian economy is based on planning through successive five year plans (“Five-Year Plans”)

that set out targets for economic development in various sectors, including power sector. In the

implementation of the last three Five-Year Plans (the Eighth, Ninth, and Tenth Five-Year Plans, covering

fiscal years 1992 to 2006), less than 50% of the targeted additional energy capacity was added. India added

an average of approximately 20,000 MW to its energy capacity in each of the Ninth and Tenth Five-Year

Plan periods (fiscal years 1997 to 2001 and 2002 to 2006). (Source: White Paper on Strategy for Eleventh Plan,

prepared by CEA and Confederation of Indian Industry (the “White Paper”).

The following chart sets forth the targeted energy capacity addition for Five-Year Plans, the installed

capacity actually achieved at the end of those Five-Year Plans and the installed capacity actually achieved

as a percentage of the targeted capacity additions for each of those Five-Year Plans:

Chart 1.2 Targeted, Installed & Achieved capacity additions of five year plans

The total capacity addition during the past 25 years between the VIth and the Xth Five-Year Plans was

approximately 91,000 MW. A total capacity addition of 78,577 MW is planned for the XIth Five-Year

Plan (2007-12) which should result in substantial investments in the power generation sector.

18

4.3 Installed Generation Capacity by Sector and Fuel

The following table and diagrams set forth a summary of India‟s energy generation capacity as of

February 28, 2009 in terms of fuel source and ownership:

Table 1.8 India‟s Energy Generation Capacity

The Central and State governments together own and operate over 85.0% of the installed power capacity

in India. The private sector has historically been reluctant to enter the market for power plants because of

onerous governmental regulations on the construction and operation of power plants and sourcing of fuel

for such plants. The participation of the private sector has however been increasing over time owing to

power sector reforms.

Thermal Power Generation

Thermal power plants account for over 63.0% of India‟s installed capacity, within which over 82.0% of

the capacity is accounted for by coal based plants, on total available thermal capacity, as of February 28,

2009.

(Source: CEA “Power Scenario at a Glance”, March 2009)

19

4.4 Future Capacity Additions

According to the CEA Executive Summary, as on February 28, 2009, India has an installed generation

capacity of 147,715.4 MW that has increased at a compound annual growth rate (“CAGR”) of 5.4%

between 2003 and 2008.

A key risk to the continued growth of the Indian economy is inadequate infrastructure. Infrastructure

investment in India is on the rise, but growth may be constrained without further improvements. The

Government of India (the “Government”) has identified the power sector as a key sector of focus to

promote sustained industrial growth by embarking on an aggressive mission – “Power for All” by 2012

backed by extensive reforms to make the power sector more attractive for private sector investment.

According to the Integrated Energy Policy (“IEP”) report dated August 2006 issued by the Planning

Commission, India would require additional capacity of about 73-86 gigawatt (“GW”) by 2012, 159- 190

GW by 2017 and 278–341 GW by 2022, respectively, based on normative parameters in order to sustain a

8-9% GDP growth rate (Source: IEP, Expert Committee on Power). The following table sets forth the

additional capacity required by 2012, 2017 and 2022 under different GDP growth rate scenarios:

Table 1.9 Additional Capacity requirement of India under different GDP growth rates

The likely capacity addition during the 11th Five-Year Plan is 78,700 MW. (Source: CEA, “Power Scenario at

a Glance”, March 2009)

Given India‟s large coal reserves, coal is expected to continue to dominate as a source of fuel for power

plants in India. India has the fourth largest coal reserves in the world. However, in the past there were

restrictions on the entry of private sector players into coal mining, which had caused India‟s coal

production to remain low in comparison to its reserves. These restrictions have now been removed and

private participation is allowed in coal mining. The total coal production for the fiscal year 2005 was

377.27 million tonnes and for April-December 2005 was 282.43 million tonnes. The total geological coal

reserves of India have been estimated at 253.30 billion tonnes as of January 1, 2006. (Source: Ministry of

Coal)

20

In 2004, the Government of India set up a committee on coal sector reforms that led to several new

initiatives being launched to encourage coal-based independent power plants in the country. These have

increased the prospects of coal blocks being allotted to various private sector entities. Coal is already the

key contributor to India‟s energy scenario with 55.0% of the current total commercial energy needs being

met by coal. Given India‟s large coal reserves and favourable policy outlook, coal is expected to continue

to be the dominant source of energy for India and play a major role in sustaining India‟s economic

growth.

5. Valuation Analysis

5.1 Valuation Methodology

The standard of value used in our Analysis is “Fair Value” which is often defined as the price, in terms of cash or equivalent, that a able and willing buyer could reasonably be expected to pay, and a able and willing seller could reasonably be expected to accept, if the business were offered for sale on the open market for a reasonable period of time, with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act.

Valuation of an enterprise or its equity shares is not an exact science and ultimately depends upon what it is worth to an able and willing investor who may be even prepared to pay goodwill. This goodwill maybe in the form of a premium on the valuation depending on the future benefits expected from the investment as well as the synergies arising from integrating the investee company into the investor group‟s operations. This exercise may be carried out using generally accepted valuation methodologies, the relative emphasis of each often varying with the factors such as:

Specific nature of the business

Whether the entity is listed on a stock exchange

Industry to which the Company belongs

Past track record of the business and the ease with which the growth rate in cash flows to perpetuity

can be estimated

Extent to which industry and comparable company information is available.

The results of this exercise could vary significantly depending upon the basis used, the specific

circumstances and professional judgment of the valuer. In respect of going concerns, certain valuation

techniques have evolved over time and are commonly in vogue. These can be broadly categorised as

follows:

a) Net Asset Value Method (NAV)

The value arrived at under this approach is based on the audited financial statements of the Company /

business and may be defined as Shareholders‟ Funds or Net Assets owned by the Company / business.

The balance sheet values are then adjusted for any contingent liabilities (if any) as disclosed in the

financial statements which are likely to materialize in future. The Net Asset Value is generally used as the

minimum break-up value for the Company / business. This methodology calculates NAV using historical

financial data. In view of nature of business, we have not considered the said method to estimate the

overall value of the company.

21

b) Discounted Cash Flow Method (DCF)

The DCF method uses the future free cash flows of the firm / equity holders discounted by the cost of

capital to arrive at the present value. In general, the DCF method is a strong and widely accepted

valuation tool, as it concentrates on cash generation potential of a business. Considering that this method

is based on future potential and is widely accepted, we have included this approach in the valuation

exercise.

c) Market Multiplier Method

This is based on the premise that the market multiples of comparable listed companies on BSE Sensex

and NSE are a good benchmark to derive valuation. In this method, price multiples of comparable listed

companies are applied to key financials to arrive at the valuation. We have considered the following two

multiples for arriving at the value of the Company‟s equity.

1) Sales Multiple

2) EBITDA Multiple

3) Installed Capacity

d) Share Price Method

This valuation reflects the price that the market at a point in time is prepared to pay for the shares of the

company being valued. It is therefore influenced by the condition of the stock market, the concerns and

opportunities that are seen for the business in the sector or market in which it operates. The market price

also reflects the investor's view on the ability of management to deliver a return on the capital it is using.

For deriving value of NTPC Ltd under this method, we have considered the high-low average market

price of the equity share quoted on BSE for a period of 52 weeks.

5.2 Valuation Analysis

We have carried out the valuation analysis, based on the fundamental assumption of going concern for

the business under consideration. The detailed analysis and the assumptions made for these purposes are

given below:

Method 1: Discounted Cash Flow Method (DCF)

Estimating Free Cash Flows:

For the purpose of our analysis, we have used the financial projections provided by the Management of

NTPC for FY2010, FY2011,FY2012, FY 2013 & FY 2014. These include the projected profitability

statement giving the details such as funds generated from operations, working capital and capital

expenditure.

22

The cash flow projections on a Free Cash Flow to the Firm (FCFF) basis are summarized in Table 1.5

below:

Table 1.10: Cash flow projections

(Amount in Rs. Million) Discounted Cash Flow

Analysis FY2010 FY2011 FY2012 FY2013 FY2014

Revenue 540,412 621,649 727,297 847,641 1,006,046

Less: Expenses 319,114 360,994 430,578 515,353 592,944

EBDITA 221,299 260,655 296,719 332,288 413,102

Less: Depreciation/Amortization 26,298 31,713 36,915 41,091 44,852

EBIT 195,000 228,942 259,804 291,197 368,249

Tax 19,362 20,351 21,549 26,781 38,224

Gross Cash Flow to Firm (FCFF)

175,638 208,591 238,255 264,417 330,025

Add: Depreciation/Amortization 26,298 31,713 36,915 41,091 44,852

Less: Changes in Working Capital 11,278 (13,906) 24,424 (5,886) 28,482

Less: Increase in Capital Expenditure

31,969 149,000 97,100 112,984 81,102

Less: Changes in Capital WIP 20,897 20,942 20,989 21,039 21,091

Net FCFF 137,793 84,267 132,657 177,372 244,203

Discounting Factor:

The discounting factor considered for arriving at the present value of the free cash flows to the firm is

WACC (Weighted Average Cost of Capital). The cost of equity is computed using the Capital Asset

Pricing Model (CAPM) using the formula Ke= Rf + β (Rm - Rf) where:

The following inputs have been used in the calculation of the Cost of Equity (Ke) and the WACC:

the Risk Free Rate of 7.00% based on the 10 years Government Bond rate as of the Valuation Date

the Equity Risk Premium (i.e. (Rm - Rf)) of 8.11% based on Market Risk Premium.

the Debt Equity (D/E) ratio of 70:30 as on 31 March 2009

the beta of 1.00 is based on the asset betas of the comparable companies

the Company Specific Risk Premium is based on a qualitative analysis of the risk factors inherent in

the subject Company as discussed below compared to other comparable companies considered as

benchmark:

– Risk with respect to the small size of the Company

– Possible risk of project shifts on the part of customers

the cost of debt of 6.68% based on the prevailing lending rates (post tax) and management perception

of the Company

After considering appropriate risk premiums, the Cost of Equity calculated is approximately 12.96% and

the WACC is approximately 12%.

Ke= Cost of Equity Rf = Risk Free Rate

Rm= Market Rate of Return Β (beta)= Measure of Market Risk

23

Terminal Value:

The terminal value refers to the present value of the business as a going concern beyond the period of

projections upto perpetuity. This value is estimated taking into consideration the past growth rates of the

product / service, economic life cycle of the product / service, expected growth rates in future, capital

investments made in the business as well the estimated growth rate of the industry and economy.

Considering the industry growth and projected growth of Indian economy, as well as the specific risks

associated with the business and the industry, we have assumed a terminal growth rate of 2% for NTPC‟s

business beyond the projection period.

Valuation based on DCF

Using this method, we have discounted the free cash flows using WACC to arrive at the total value of

equity. Accordingly, the value for total equity of NTPC considering this approach is estimated at Rs

16,15,355 million. Considering the total outstanding equity shares on valuation date is 8245 million, the

value of each equity share is estimated at Rs.196 per share.

Method 2: Market Multiplier Method

This method applies the most appropriate and reasonable multiple to the relevant operating performance

metrics of the Company being valued to estimate its Equity Value. The most appropriate and relevant

multiple is derived from reference to market based conditions of quoted companies. The methodology is

considered appropriate to use for an established business with an identifiable stream of continuing

earnings that are considered maintainable.

The Equity Value is estimated from the Enterprise Value (EV) in the following manner:

apply an appropriate and reasonable multiple to the relevant operating performance metric of the

Company

adjust the amount derived for surplus assets or excess/ unrecorded liabilities and other relevant

factors to derive an EV for the Company

adjust the EV for debt, cash, and surplus assets and contingent liabilities (if any), to identify the

equity value of the Company.

We have identified and analyzed companies engaged in the Power generation business to determine the

industry average of the relevant market multiple. For the current valuation exercise we have considered

the Enterprise Value to Sales multiple, Enterprise Value to EBITDA multiple and Enterprise value to

installed capacity as appropriate to determine the EV of the Company. Further, as discussed above, the

EV has been adjusted for debt and cash to determine the EV of the Company.

Based on the financial information available for the selected companies, the EV/ Sales, EV/ EBITDA

and EV/Installed capacity multiples respectively were calculated for each of the comparable

companies. The mean of EV/ Sales, EV/ EBITDA and EV/Installed capacity multiples for all the

comparable companies arrived at 3.36x, 9.51x and 57.54x respectively, which has been applied to the

estimated sales and EBITDA for the FY2009 to arrive at EV of the Company. The EV thus arrived

24

has been further adjusted for cash, and outstanding debt and contingent liabilities to arrive at the

Equity Value and the Price per Share of the Company.

Table 1.11: Sales, EBITDA & Installed Capacity multiples of comparable companies (Amount in Rs. Million)

Sales 441,261 Installed Capacity 30,144 EBIDTA 137,469

Average Multiple

Enterprise Value

Add: Cash Balance

Add: Investments

Less: Debt

Less: Contingent Liabilities (50%)

Equity Value

No. of shares

Weights 35.00% 35.00% 30.00%

Value Per Share

188 Rs. Per share total value

Particulars

64 75 49

152,672

8,245

265,454

18,033

1,337,083

8,245

18,033

1,764,920

265,454

8,245

1,306,794

161,102

152,672

1,734,632

161,102

18,033

1,511,381

EV/Installed Capacity EV/EBIDTA

3.36 9.51 57.54

EV/Sales

1,481,093

161,102

152,672

265,454

Valuation based on Market Multiplier method

Based on the average of the above mentioned multiple equity values, the value of the equity shares NTPC

has been estimated at Rs.188 per share.

Method 3: Share Price Method

We have carried out the valuation under this method on the basis of high-low average market price of the

equity share quoted on BSE for a period of 52 weeks. Accordingly, the value for total equity of NTPC

considering this approach is estimated at Rs 14,26,465 million. Considering the total outstanding equity

shares on valuation date is 8245 million, the value of each equity share is estimated at Rs.173 per share.

25

5.3 Valuation Summary

We have considered the approaches discussed above and assigned possible weights to each of these

methods based on the relevance of each approach given the nature of the business and the industry. The

DCF method is a strong and widely accepted valuation tool, as it focuses on the cash generation potential

of a business.

Considering the wider acceptability of this method, we have assigned a higher weight to this approach to

arrive at the value of equity of NTPC. A summary of this and the value thus arrived at is shown in Table

1.9.

Table 1.12: Final Value Summary

Value Per Share

Particulars Equity Value (Rs. Million)

Weights Product (Rs. Million)

Discounting Cash Flow 1,615,355 70% 1,130,749

Share Price Multiple 1,426,465 15% 213,970

Market Multiple 1,547,830 15% 232,175

Total 4,589,651 1,576,893

No. of Shares in million 8,245

Value Per Share (Rs.) 191

We therefore estimate the values for the equity shares of NTPC Limited to be Rs.

191 per share based on our analysis and subject to the assumptions and limitations

described in this report and our engagement letter

26

6. Caveats

6.1 General

Provision of valuation recommendations and considerations of the issues described herein are areas of our regular corporate advisory practice. The services do not represent accounting, audit, financial due diligence review, consulting, transfer pricing or domestic / international tax-related services that may otherwise be provided.

Our analysis and review of NTPC Limited. (including its historical and projected financial statements) does not constitute an audit in accordance with Auditing Standards and does not include the vetting of financial projections provided by the Management. We have solely relied on explanations and information provided by the Management of NTPC and accepted the information provided to us as consistent and accurate on an “as is” basis. Although, we have reviewed such data for consistency and reasonableness, we have not independently investigated or otherwise verified the data provided. Nothing has come to our attention to indicate that the information provided had material mis-statements or would not afford reasonable grounds upon which to base the Report.

We did not have access to the full annual accounting or any other due diligence documents and hence have assumed that the liabilities are only those which were made available to us in the summary balance sheet provided to us and that there are no other contingent liabilities or claims against the Company, other than the those considered for the purpose of valuation, which would have an impact on the value of the Company. Our valuation is primarily from a business perspective and has not taken into account various legal and other corporate structures beyond the limited information made available to us.

The responsibility for forecasts and the assumptions on which they are based is solely that of the Management of NTPC and we provide no confirmation or assurance on the achievability of these projections. It must be emphasized that profit forecasts necessarily depend upon subjective judgment. They are to a greater or lesser extent, according to the nature of the business and the period covered by the forecasts, subject to substantial inherent uncertainties. In consequence, they are not capable of being audited or substantiated in the same way as financial statements, which present the results of completed periods. Similarly, we have relied on data from external sources. These sources are considered to be reliable and therefore, we assume no liability for the accuracy of the data. We have assumed that the business continues normally without any disruptions due to statutory or other external/internal occurrences. We have also assumed that the transaction proceeds as envisaged without any delays or disruptions and is consummated immediately.

The scope of our work has been limited both in terms of the areas of the business and operations which we have reviewed and the extent to which we have reviewed them. There may be matters, other than those noted in this report, which might be relevant in the context of the transaction and which a wider scope might uncover. It may be noted that Valuation is not an exact science and ultimately depends upon what the business is worth to a serious investor or buyer who may be prepared to pay a substantial goodwill. The valuation exercise is carried out using generally accepted valuation methodologies, the relative emphasis of each often varying based on several specific factors. The results of this exercise could vary significantly depending upon the basis used, the specific circumstances and professional judgment of the valuer. In respect of going concerns, certain valuation techniques have evolved over time and are commonly in use which we have applied in this exercise.

This Report is issued on the understanding that Management of NTPC has drawn our attention to all matters of which they are aware concerning the financial position of the businesses, which may have an impact on our report up to the date of issue. We have no responsibility to update this report for events and circumstances occurring after the date of this Report.

We have no present or planned future interest in NTPC or any of its subsidiaries and the fee for this report is not contingent upon the values reported herein. Our Valuation Analysis should not be construed as investment advice; specifically, we do not express any opinion on the suitability or otherwise of entering into any transaction with NTPC.

27

6.2 Distribution of report

This Valuation Analysis is confidential and has been prepared exclusively for the Management of NTPC. We understand that the report is to be used exclusively for internal purposes. Hence, it should not be used, reproduced or circulated to any other person or for any purpose other than as mentioned above, in whole or in part, without the prior written consent of LHNMS. Such consent will only be given after full consideration of the circumstances at the time.

6.3 Sources of Information

The Valuation Analysis is based on a review of historical and projected financial information relating to NTPC provided by the Management and information of comparable companies as available in the public domain. The sources of information include:

Business information and profile as provided by NTPC Management

Past financial statements and projections of NTPC that were provided to us by NTPC Management

Other industry related information from various sources

Information from Capitaline Database, National Stock Exchange website

Discussions with NTPC Management

Website of NTPC Ltd.

In addition to the above, we have also obtained such other information and explanations which were considered relevant for the purpose of our analysis.