POWER SECTOR

SUBMITTED TO: Prof C.V. KUMAR

SUBMITTED BY:

• GANTAVYA BAJPAI
• NEHA
• NEETI KUTHIALA
• AMAN DAGA
• BHANU PRATAP SINGH

Table of contents
1.Introduction
2.Players In The Industry
3.Why power sector?
4.Objective
5.Systematic And Unsystematic Risks
6.Risk Factors Of Investing Of Power Sector
7.NTPC
8.TATA power
9.Which Company Is More Riskier
10.WACC
 1.INTRODUCTION
India is the 5th largest power producer in the world with the total power
capacity of more than 145,000MW. Despite growth in power generation
capacity over various 5-Year Plans, India is facing huge power deficit with
peak power deficit of about 16%. Growth of the Indian economy is targeted
to be over 8% for 2007-2012and power development is the key to this
economic development. The power Sector has been receiving adequate
priority ever since the process of planned development began in 1950. The
Power Sector has been getting 18-20% of the total Public Sector outlay in
initial plan periods. Remarkable growth and progress have led to extensive
use of electricity in all the sectors of economy in the successive five years
plans.

The electricity sector in India is predominantly controlled by Government of

India's public sector undertakings (PSUs). Major PSUs involved in the
generation of electricity include National Thermal Power Corporation (NTPC),
National Hydroelectric Power Corporation (NHPC) and Nuclear Power
Corporation of India (NPCI). Besides PSUs, several state-level corporations,
such as Maharashtra State Electricity Board (MSEB), are also involved in the
generation and intra-state distribution of electricity.
 2.PLAYERS IN TNE INDUSTRY

MAJOR PLAYERS CAPACITY GEN. TRANS. DIST.

PUBLIC SECTOR

NTPC 29144(MW) ✔

NHEPC 2755(MW) ✔

NPC 1412(MW) ✔

DOMESTIC PRIVATE
SECTOR

TATA power 2323(MW) ✔ ✔ ✔

RPG group 975(MW) ✔ ✔

Reliance energy 941(MW) ✔ ✔ ✔

INRERNATIONAL
PRIVATE SECTOR

CLP 655(MW) ✔

MC 347(MW) ✔

Above table depicts that NTPC has got highest installed capacity (29144MW)
in the public sector. Secondly, all three players in the public sector have
restricted their business only to power generation. In domestic private
sector, TATA Power is the biggest player with installed capacity of 2323 MW.
 1.Why Power sector?

Power is an essential requirement for all facets of our life and has been
recognized as a basic human need. It is the critical infrastructure on which
the socio-economic development of the country depends. The growth of the
economy and its global competitiveness hinges on the availability of reliable
and quality power at competitive rates. The demand of power in India is
enormous and is growing steadily. The vast Indian power market, today offers one
of the highest growth opportunities for private developers.

India is endowed with a wealth of rich natural resources and sources of

energy. Resources for power generation are unevenly dispersed across the
country. This can be appropriately and optimally utilized to make available
reliable supply of electricity to each and every household. Electricity is
considered key driver for target 8 to 10% economic growth of India.

There is good scope of investing in power sector due increasing demand and
non substitutability of it. An investor by investing in these stocks can gain a
lot.
 2.OBJECTIVE

Our objective is to analyze and estimate the risk and return associated with
the two major players in power sector in India:

• NTPC
• Tata Power

This project also deals with the systematic and unsystematic risk analysis in
the above mentioned companies.
Using Weighted Average Cost of Capital (WACC) model, cost of capital of
long term sources of finance is determined for NTPC and Tata Power
respectively.
 1.SYSTEMATIC AND
UNSYSTEMATIC RISK

Systematic risk is a type of risk that is beyond the control of investors and
cannot be mitigated to a large extent and is due to risk factors that affect
the entire market such as investment policy changes, foreign investment
policy, change in taxation clauses, and shift in socio-economic parameters,
global security threats and measures.

Unsystematic risk is due to factors specific to an industry or a company

like labor unions, product category, research and development, pricing,
marketing strategy. It can be mitigated through portfolio diversification. It is
a risk that can be avoided and the market does not compensate for taking
such risks.

This logic forms the base for the capital asset pricing model (CAPM). The
greater is the systematic risk, the greater is the return expected out of the
asset. The relationship between the expected returns and systematic risk is

What the CAPM (Capital Asset Pricing Model) explains.

Total Risk is defined as the sum total of systematic and unsystematic risk.
Total Risk = Systematic risk + Unsystematic Risk
 2.Risk Factors of investing of
power sector

The biggest risk of investing in power sector is the political risk. Since
power is on the concurrent list - i.e., the administrative & regulatory
authority in electricity generation, transmission & distribution is governed by
two sets of laws:- Both the State governments and the Central Government.
This makes it difficult to expand operations beyond one state, and takes a
longer time to clear all the regulatory hurdles. Government still has a
monopoly over power distribution networks and provides adhoc subsidy for
farmers - these subsidies are often unfunded and power distribution
companies have to take a hit on the profits.

Another bigger risk in power sector is shortage of raw materials: coal,

natural gas & other hydrocarbons. Coal mining is a state owned monopoly of
Coal India Limited - where corruption in coal supply has ensured that mafia
controls the distribution of coal in India. Private electricity generators using
coal as fuel will either have to oil the political machinery and the mafia to
ensure coal supplies or rely on imported coal. The supply of natural gas is
also a monopoly of the government and the pipelines to distribute natural
gas to all parts of the country does not exist. This implies that power
generation plants will have to build the infrastructure needed to get
adequate supply of natural gas.
 3.NTPC

Company Background

NTPC Ltd. Is a Central Government commercial enterprise was incorporated

as National Thermal Power Corporation in 1975 to accelerate power
development in India? Primarily engaged in the generation and sale of bulk
power to state electricity boards/utilities, the company widened its area of
operations to engineering and construction of power plants as well as
consultancy to other power utilities in the country and abroad. It is also
diversifying into power trading and distribution; and generation of hydro--
electricity.

NTPC is India's largest thermal power generating company with an installed

capacity of 26,874 megawatt (mw) as on 31 March 2008. This is 3.9 per
cent higher than the year--ago level. It includes 15 coal--fired power
stations (22,920 mw) and seven gases based power stations (3,954 mw).
The company has four joint venture power plants with an annual capacity of
1,054 mw. NTPC accounts for 20.6 per cent of the total installed capacity in
the country and it generated 2, 00,853 million kWh of electricity which is
equivalent to 28.5 per cent of the total generation during 2007--08.

NTPC has gone beyond the thermal power generation. It has diversified into
hydro& hydro power, coal mining, power equipment manufacturing, oil &
gas Exploration, power trading & distribution.
NTPC is now in the entire power value chain and is poised to become an
Integrated Power Major and is among the largest five companies in India in
terms of market capitalization.
Key Risks

The following factors can pose a threat to NTPC:

• Uncertainty in fuel prices:-NTPC’s coal-based power is operating at

a lower PLF due to a rain-induced coal shortage. Moreover, the gas-
based power plants are facing a similar problem Because of difficulties
in procuring gas.

• Non-availability of gas linkages:-NTPC depends a lot on gas as a

fuel and getting new gas linkages is a major problem. There are not
many gas suppliers in India .This increases the risk even more.

• Loss or any delay in the approval of contracts:- since NTPC is a

government undertaking there is a lots of bureaucracy. at times
approval of contracts takes a lot of time which hampers
 1.TATA POWER
Company Background

Tata Power Company Ltd was incorporated in 1919 as a result of the merger
between Tata Hydroelectric Power Supply Company and Andhra Valley
Power Supply Company. The Power segment of TPL is engaged in
generation, transmission and distribution of electricity. The other segment
includes electronic equipment, broadband services, project consultancy and
oil exploration.

Tata Power, India's one of the largest private power supplier, owns 3
hydroelectric and 1 thermal generating stations. It has an installed power
generation capacity of over 2000 MW and a presence across the power
business system i.e. generation (thermal, hydro, solar and wind)
transmission and distribution (T&D). It has T&D facilities throughout
Mumbai, interconnected as a grid. The Thermal Power stations of the
company are located at Trombay in Mumbai, Jojobera in Jamshedpur and
Belgaum in Karnataka. The Hydro stations are located in Raigad district
Maharashtra and the Wind Farm in Ahmednagar.

Tata Power supplies power to several direct bulk customers like textile mills,
railways and industrial consumers. A substantial quantum of power is
supplied to the metro's railway network, refineries, ports and Reliance
Energy Limited.The company has big overseas power projects in a number
of countries, including Malaysia, Saudi Arabia, Kuwait, Algeria and the U.A.E
The company is headed by Mr Ratan Tata, the Chairman of Tata Sons.
Promoters (Tata Sons & TISCO) hold about 33 %, while institutional
investors and the India Public hold around 43 % and 22 % of the total
equity holdings respectively.
Key Risk
In the power business, a key risk is on account of emerging new regulation
in the sector where some of the proposed modifications are not yet clear,
whether put up in the shape of the Electricity Bill 2001 or other changes in
statutes. However, the Company has been adequately represented in all fora
dealing with this issue. The high fluctuation in fuel price constitutes another
risk factor and the Company is constantly optimizing the fuel mix to partly
mitigate the problem. The wheeling of power inter-state could provide future
opportunities as the Company has some surplus power both in its eastern
and western generating plants.
On the distribution side, although heavy losses have hitherto stopped
private investment from entering this area, some selected urban areas could
provide opportunities for breaking into this vital sector. A start will soon be
made by the Company in one zone in Delhi.

The following factors can also pose a risk:

• Delay in capacity additions
• Any fall in coal prices, which can hurt the value accretion from Bumi’s
stake
• Any delay in completion of the Maithon and Mundra power projects.
 1. WHICH COMPANY IS MORE
RISKIER
For calculating risk we used CAPM Model to estimate Beta. For this we
accumulated data for five years from Nifty(NSE).We used Monthly data for
TATA Power ,NTPC and Nifty(NSE).

As we can see from this graph, TATA Power moves more in tandem with
Nifty and NTPC is less fluctuating when compared to TATA Power .From this
we can see that TATA Power is Riskier than NTPC because there is more
variability.

We then calculated Beta to confirm our hypothesis. The beta for NTPC was
0.689417966 and for TATA Power was 1.194811638
This confirmed our hypothesis as beta for NTPC was less than one it was
less riskier than the market (NSE) ,whereas for TATA Power it was more
than one which confirmed that it was more riskier than Market(NSE)
Since Risk and return are related the required rate of return on TATA Power
by an investor would be more than in NTPC. We used this concept to
calculate Ke for both of them. We took risk free rate of return as 6.89 which
was return on five year govt. bond. Rm was calculated by taking average of
returns from the market over five years. It was found out to be 2.25 %
percent monthly then this rate was converted to yearly.

We used formula:-
FOR TATA MOTORS FOR NTPC
Kt=Rf+β(Rm-Rf) Kn=Rf+β(Rm-Rf)
Rf= 6.89 Rf 6.89
Rm(month 2.2538028 Rm(month 2.253802
ly) 65 ly) 87
Rm(yearly 30.663300 Rm(yearly 30.66330
) 19 ) 02
Kt 35.294615 Kn 23.27974
74 03

The required rate of return for TATA Power was 35.29461574 and for NTPC
was 23.2797403 which mean that an investor investing in TATA Power
would expect a return of Rs 35.29 on every Rs 100 invested. The rate of
return of TATA Power is more because it is bearing more risk than NTPC
.This risk can be attributed to company specific risk. NTPC is a government
undertaking, hence prone to less uncertainty
 2.WACC
All capital sources - common stock, preferred stock, bonds and any other
long-term debt - are included in a WACC calculation. All else help equal, the
WACC of a firm increases as the beta and rate of return on equity increases,
as an increase in WACC notes a decrease in valuation and a higher risk.
The WACC equation is the cost of each capital component multiplied by its
proportional weight and then summing:
Calculation of WACC for NTPC
As we can see that from balance sheet of 2009 the company has used
various sources of finance like equity, retained earnings and loans.
Equity
Total value of share is Rs. 82445(mn) of face value Rs. 10 so the total
number of shares in the market are 8244.5(mn) shares at present market
value of share is 215 so total market value of the firm is total number of
shares multiplied by market value of each share i.e. Rs. 1772567.5(mn)
Dividend for the year2009 was Rs.29683 (mn) hence dividend per share
3.60 which was last year 3.50 and this was 2.40 in March 2005. So growth
rate of dividend as per CAGR could be found out Using formula Ke=(D1/Po)
+ g but since we have calculated cost of capital using CAPM model its much
better to use Ke from CAPM model. Hence cost of equity is 23.27%. But
there is clause of dividend tax so cost of capital will increase by (1+t). To
calculate dividend rate we need to divide total dividend tax by total
dividend. After calculating this tax we should multiply it to 23.27 which give
us value of 27.21%.
Cost of Equity (capm)

beta 0.689417

Rm 30.66330
019

Rf 6.89

dividend paid 29683

dividend tax 5017

dividend tax 16.90193

rate 04

Ke 27.21443
891

RETAINED EARNINGS
Earnings can be reinvested or paid as dividend to the shareholder. If
company retains some part than shareholder there should be some
compensation given to shareholder for using that money. As a result, cost of
retained earnings simply represents cost of equity. Retained earnings of
company were Rs.491246 (mn) which grew from Rs. 443,931(mn), since
the cost of retained earnings is same as cost of equity so cost of retained
earnings is 23.27%.
LOANS
Secured loans raised by NTPC is Rs. 89696 (mn) and unsecured loans are
RS. 255,982 (mn) the total amounts of loans raised by NTPC is Rs. 345678
(mn). The total interest and finance charge for the period was Rs. 20229
(mn). The tax rate was calculated by dividing total tax by profit before tax.
The total tax was calculated by subtracting profit after tax (PAT) from profit
before tax (PBT). Over here PBT was Rs.93595 (mn) and profit after tax was
Rs. 82013 (mn). Hence total tax would be Rs. 11582 (mn). So tax rate will
be tax divided by profit before tax (PBT). Tax rate calculated was 12.37%
which very low because company is enjoying tax holidays on various
projects.
We can calculate Kl (cost of loan) by using formula i (1-t) where i is interest
rate and t is tax. So cost of loan came out to be 5.12781943 %.
 Cost of Loan(in Rs.mn)

secured loan 89696

unsecured 255982
loan

total loan 345678

interest 20229

interest rate 5.8519778

52

PBT 93595

PAT 82013

tax paid 11582

tax rate 12.374592

66

Kl 5.1278194
3

WEIGHTS
We then calculated weights of these sources of long term capital of NTPC.
The weight was calculated using market value of equity.
 book value(mn)

par value

no. of shares(mn) So WACC can be calculated by

multiplying these weights by there
market value
respective costs WACC for NTPC was
total market
value(mn) found out to be 24.28864
total loans(mn)

total retained WACC

earnings(mn)
TYPE Weight Cost
total(mn)
Equity 0.679276978 27.2144
weight of equity 4

weight
Retained of laon
earnings 0.188253535 27.2144
4
weight of retained
Loansearning 0.132469487 5.12781
9
Calculation of WACC for TATA power
As we can see that from balance sheet of 2009 the company has used
various sources of finance like equity, retained earnings and loans.

Equity
Total value of share is Rs. 22214(mn) of face value Rs. 10 so the total
number of shares in the market are 2221.4(mn) shares at present market
value of share is 1350 so total market value of the firm is total number of
shares multiplied by market value of each share i.e. Rs. 2998890(mn)
Dividend for the year2009 was Rs. 2559.8 (mn) .We have to calculate cost
of capital using CAPM model its much better to use Ke from CAPM model.
Hence cost of equity is 35.163%
But there is clause of dividend tax so cost of capital will increase by (1+t).
To calculate dividend rate we need to divide total dividend tax by total
dividend. After calculating this tax we should multiply it to 1.124 which gives
us value of 39.67%.
Cost of Equity (capm)
Beta 1.194811638
Rm 30.66330019
Rf 6.89
dividend paid 2559.8
dividend tax 317.5
dividend tax rate 12.40331276
Ke 39.67231731

RETAINED EARNINGS
Earnings can be reinvested or paid as dividend to the shareholder. If
company retains some part than shareholder there should be some
compensation given to shareholder for using that money. As a result, cost of
retained earnings simply represents cost of equity. Retained earnings of
company were 78884.5.Since the cost of retained earnings is same as cost
of equity so cost of retained earnings is 39.67%.
LOANS
Secured loans raised by NTPC are Rs. 39317.1 (mn) and unsecured loans
are RS. 12664.9 (mn) the total amounts of loans raised by NTPC is Rs.
51982 (mn). The total interest and finance charge for the period was Rs.
3277.6 (mn). The tax rate was calculated by dividing total tax by profit
before tax. The total tax was calculated by subtracting profit after tax (PAT)
from profit before tax (PBT). Over here PBT was Rs. 11166.8 (mn) and
profit after tax was Rs. 9222 (mn). Hence total tax would be Rs. 1944.8
(mn). So tax rate will be tax divided by profit before tax (PBT). Tax rate
calculated was 17.41% which very low because company is enjoying tax
holidays on various projects.
We can calculate Kl(cost of loan) by using formula i(1-t) where i is interest
rate and t is
Cost of Loan(in Rs.mn)
tax. So cost of secured loan 39317.1
loan came out unsecured loan 12664.9
total loan 51982
to be 5.207 %. Interest 3277.6
interest rate 6.305259513
PBT 11166.8
PAT 9222
tax paid 1944.8
tax rate 17.41591145
Kl 5.207141099
WEIGHTS
We then calculated weights of these sources of long term capital of NTPC.
The weight was calculated using market value of equity.

Weights
book value 22214
par value 10
no. of shares 2221.4
market value 1350
total market value 2998890
total loans 51982
total retained earnings 78884.5
Total 3129756.5
weight of equity 0.958186364
weight of loan 0.01660896
weight of retained earning 0.025204676

So WACC can be calculated by multiplying these weights by there respective

costs WACC for TATA were found out to be 39.099.
WACC
TYPE Weight Cost
Equity 0.958186364 39.67231731
Retained earnings 0.025204676 39.67231731
Loans 0.01660896 5.207141099

WACC 39.09988658
The WACC for TATA Power and NTPC are 39.09988658 and 24.28864
respectively.

This shows that cost of borrowing for TATA Power is more than NTPC; hence
TATA Power has to pay Rs 15 more per Rs 100 borrow. The cost of loans is
very low in both the cases but their weight in capital structure is low. Equity
is the most expensive source of finance.

Excel sheet for Calculation:

Beta_Calculation.xls
x

WACC Calculation:

wacc_calculation.xls
x