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POWER INDUSTRY

India's power generation recorded a 7% growth in June 2009 compared


with 2.36% in June 2008. Thermal power generation recorded 13% growth
in June 2009 compared with 2% increased recorded in last year. However
hydro and nuclear power generation recorded 5.62% and 2.87% negative
growth rate in June 2009 respectively compared with June 2008.

In April-June 2009-10 India's power generation recorded 5.83% growth


compared with April-June 2008-09. Thermal power generation recorded
9% growth and nuclear power generation recorded 7% increased in April-
June 2009-10 compared with April-June 2008-09. However hydropower
generation recorded 9.46% fall in April-June 2009-10 compared with April-
June 2008-09.

The companies considered for analysis are:

1. CESC 5. Reliance Infra

2. Gujarat Power 6. Tata Power

3. GVK Power 7. NTPC

4. Neyveli Lignite Ltd

1. CESC Limited

CESC, a power utility in India was set up in 1899. It is claimed that it


brought electricity to Calcutta, just a few years after electricity was first
used to light up London. CESC is part of the RPG Group which has a
strong presence in the fields of power generation, transmission network,
cable manufacturing and consultancy in the operation and maintenance of
power plants. The group has strategic tie-ups with a number of Fortune
500 companies.

• Price Earnings (P/E) Ratio:


2009 2008 200 200 200 200 200 200 200 200
7 6 5 4 3 2 1 0

CESC 6.58 14.91 10. 16. 9.9 8.2 12. 0 0 0


86 32 2 5 96

Industry 34.5 27.43 19. 25. 12. 15. 9.7 6.0 15. 4.9
Average 2 72 36 1 4 8 8 5 1

As mentioned that P/E looks at the relationship between the stock price
and the company’s earnings. The company got listed in the year 2003 and
was overvalued that time but after that it’s P/E multiple went down
drastically against the industry average which moved upwards probably
because investors started thinking that the stocks of the company are
overvalued. After that the movements in the P/E value of the company
were in accordance with the industry but in the recent year it shown a
opposite negative growth this huge gain in industry is due to high growth
in the value of P/E for GVK Power Infra which made an impact on the
industry average, and made CESC a less preferred stock.

• Price to Book Value:

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

CESC 0.79 1.75 1.62 1.7 1.12 0.6 0.2 0.1 0.3 0.2
3 6 2 8 7 8

Industry 1.58 2.52 1.61 1.7 1.50 1.5 0.6 0.6 0.5 0.6
Average 5 6 1 4 8 7

Looking at the P/BV multiple of Power sector as whole it is 0.67 in the year
2000 which means that investors think that the industry is overvalued and
also the company’s P/BV ratio is 0.28 which again shows the investors
distrust in the company. But the trend got changed in the year 2005 and
the ratio started moving in accordance with the industry movement
means that the investors had good opinion towards the company.
• Price to Cash EPS

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

CESC 4.58 10.0 7.08 6.6 3.29 1.7 0.2 0.3 0.8 1.0
4 5 9 8 1 7

Industry 30.8 22.3 16.1 19. 7.12 7.8 2.8 2.7 2.4 3.0
Average 1 7 1 78 9 8 3 9 7

As higher this ratio is better is the company. Throughout the years ratio of
the company is lesser than that of the industry that means that the
company is not performing as good as the industry but the movements in
the value of the ratio are almost similar. So we can say that although the
company is performing as per the trend but is not a good option.

• EV/EBIDTA

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

CESC 5.92 8.93 7.09 7.0 5.4 4.7 4.5 5.0 5.4 5.7
5 9 1 8 6 8

Industry 27.1 18.8 11.5 11. 6.09 7.7 4.3 4.3 4.2 5.6
Average 4 0 2 73 5 6 9 1 1

When we check the EV/EBITDA of the power industry as whole it is 5.61


where as for CESC it is 5.78 which is almost same that means company is
performing as per the industry with little fluctuations. Also it shows that
the company is undervalued throughout that means it is a good pick
within the industry.

• Market Cap/Sales:

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

CESC 0.85 1.8 1.27 1.1 0.61 0.2 0.0 0.0 0.0 0.0
3 2 9 4 3 6 8

Industry 18.7 33. 12.4 9.9 2.10 1.9 0.6 0.7 0.5 0.6
Average 0 22 1 1 6 2 0 2 8

The price/sales ratio is one of the most important tools you can use to
determine if the market is under or over valuing a stock’s price.

As throughout the last 10 years the stock is undervalued as compare to


industry average and this can be because of less belief of the investors in
the particular company. And that’s the reason the movements in the ratio
are not as sharp as that of industry average.

1. Gujarat Industries Power Company Limited

The Company's principal activities are to generate, transmit and distribute


electric power in India. The Company's plants are located at Vadodara and
Surat. It has its own captive lignite mines for Surat Lignite Power Plant.

• Price Earnings (P/E) Ratio:


200 200 20 200 20 200 200 200 200 2000
9 8 07 6 05 4 3 2 1

Guj. Ind. 12. 14. 4.6 8.7 7.7 8.7 8.4 10. 62. 7.13
Power 98 23 7 3 6 9 94 5

Industry 34. 27. 19. 25. 12. 15. 9.7 6.0 15. 4.916
Average 5 4 7 36 1 49 84 8 59

The P/E looks at the relationship between the stock price and the
company’s earnings. The P/E is the most popular stock analysis ratio,
although it is not the only one you should consider. Some investors read a
high P/E as an “overpriced stock”. However, it can also indicate the
market has high hopes for this stock’s future and has bid up the price.
Conversely, a low P/E may indicate a “vote of no confidence” by the
market or it could mean that the market has just overlooked the stock.
Many investors made their fortunes spotting these overlooked but
fundamentally strong stocks before the rest of the market discovered
their true worth. In conclusion, the P/E tells what the market thinks of a
stock.
So when we compare this ratio with the industry average we can check
out that in the initial phase i.e. in the year 2000 the company’s P/E ratio is
7.13 which is 1.5 times the industry average this clearly indicates the
share is overpriced this is because there were not many big players in the
field. But the ratio gained huge increment in the year 2000-01 this is
because it started its Surat operations this year which made a huge
impact on its P/E ratio. But when in the year 2001-02 industry’s P/E ratio
fell down it made a drastic impact on the company’s P/E ratio which fell
down 5 times the previous year. And there after due to arrival of other big
players the P/E ratio started falling this is because their profits fell down
due to failure of various industries in Gujarat and people started believing
that it’s not that good business to invest in Gujarat Industries Power Ltd.
as compare to other available companies. When we check the last year’s
fluctuations the company reacted opposite to industry’s change as
industry shown an increase in the P/E ratio but the company has shown
negative growth this shows that people believed in the industry’s growth
but are negative towards the company.

• Price to Book Value:

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

Guj. Ind. 1.01 1.2 0.77 1.0 1.38 1.1 0.4 0.5 0.5 0.8
Power 5 1 5 9 1

Industry 1.58 2.58 1.61 1.7 1.50 1.5 0.6 0.6 0.5 0.6
Average 5 6 1 4 8 7

P/BV is a valuation ratio and is arrived at by dividing the market price of a


share with the respective company's book value per share. P/BV is a good
metric to value stocks of companies in the capital-intensive industries like
engineering, automobiles and banks, which have large amount of tangible
assets in their books (balance sheet). If a company is trading at a P/BV of
less than 1, this indicates any or both of the two -

 Investors believe that the company's assets are overvalued, or

 The company is earning a poor return on its assets.

A high P/BV indicates vice versa, i.e., markets believe the company's
assets to be undervalued or that the company is earning and is expected
to earn in the future a high return on its assets. Book value also has a
relationship with the 'Return on Equity' of a company. In fact, book value
can also be termed as equity (equity capital plus reserves and surplus). As
such, for a company that earns a high return on equity, investors would
be ready to give the stock a high P/BV multiple.

So when we check out the P/BV multiple of Power sector as whole it is


0.67 in the year 2000 which means that investors think that the industry
is overvalued but the company’s P/BV ratio is 0.84 which means that the
investors have good opinion towards the company irrespective of the
industry but slowly the trend changed because of the problems faced by
the industries in Gujarat and entrance of new players. And after that its
movement became in accordance with the industry’s movement.

• Price to Cash EPS

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

Guj. Ind. 6.62 7.41 3.11 4.8 3.98 3.2 1.0 1.3 1.7 3.4
Power 1 6 8 8 6 8

Industry 30.8 22.3 16.1 19. 7.12 7.8 2.8 2.7 2.4 3.0
Average 1 7 1 78 9 8 3 9 7

It is a measure of financial performance that looks at the cash flow


generated by a company on a per share basis. This differs from basic
earnings per share (EPS), which looks at the net income of the company
on a per share basis. The higher a company's cash EPS, the better it is
considered to have performed over the period. A company's cash EPS can
be used to draw comparisons to other companies or to the company's
own past results.

In the initial phase i.e. in the year 2000 GIPCL’s ratio is greater than that
of the industry but as already discussed that the company started
incurring losses due to failures in various industries in Gujarat thereafter
its ratio started falling as its operations also got affected and in the year
end again it showed a opposite negative movement as compare to
industry because of low EPS this year.

• EV/EBIDTA

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

Guj. Ind. 8.0 7.1 4.0 4.5 4.3 4.3 3.8 4.3 5.1 11.
Power 3 9 5 8 9 2 2 4 11

Industry 27. 18. 11. 11. 6.0 7.7 4.3 4.3 4.2 5.6
Average 14 80 52 73 9 5 6 9 1 1

This ratio is again used to check the actual worth of a company the main
advantage of EV/EBITDA over the PE ratio is that it is unaffected by a
company's capital structure. It compares the value of a business, free of
debt, to earnings before interest. EV includes the cost of paying off debt.
EBITDA measures profits before interest and before the non-cash costs of
depreciation and amortisation.

So when we check the EV/EBITDA of the power industry as whole it is 5.61


where as for GIPCL it is almost double that means company is a good pick.
In the second year unlike the P/E ratio GIPCL has shown the almost same
performance as that of industry and after that the trend started changing
the reason for that is again the same of industries failure in Gujarat.

• Market Cap/Sales:
200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0

Guj. Ind. 1.0 1.4 1.0 1.2 1.0 0.7 0.1 0.2 0.2 0.6
Power 5 6 5 9 5 7 6 8 3

Industry 18. 33. 12. 9.9 2.1 1.9 0.6 0.7 0.5 0.6
Average 70 22 41 1 0 6 2 0 2 8

The price/sales ratio is one of the most important tools you can use to
determine if the market is under or over valuing a stock’s price.

As throughout the last 10 years the stock is undervalued as compare to


industry average and this can be because of less belief of the investors in
the particular company. And that’s the reason the movements in the ratio
are not as sharp as that of industry average.

1. GVK Power & Infrastructure


• Price Earnings Ratio

2009200 200 200 200 2004 200 200 2001 200


8 7 6 5 3 2 0
P/E 155.6 61.6 57.8 73.2 0 0 0 0 0 0
7 9 7 5
Industry 34.53 27.4 19.7 25.3 12. 15.4 9.78 6.0 15.5 4.91
Aggreg 3 2 7 1 92 4 8 98 6
ate

The price earnings ratio of GVK Power Infrastructure has been increasing
over the year except in the year 2007 due to an increase in both the EPS
and the share price. In the year 2008 both the share price and the EPS
dropped. The share price went down by 22.88% and the EPS dropped by
89% as a result of which the value of the overall ratio went up by 6.6%. In
2009 the EPS dropped by 76% and the share price went down by 20.82%
which has resulted in an increase of 152%.

• Price to Book Value


2009 2008 2007 2006 200 200 200 200 200 200
5 4 3 2 1 0
P/BV 1.89 3.28 2.31 1.44 0 0 0 0 0 0
Industry 1.58 2.53 1.61 1.75 1.51 1.56 0.61 0.64 0.58 0.67
Aggreg 2 4 2 4 4
ate

The price to book value ratio has been going up till 2008 and then
dropped by 42.3% in 2009. In the year 2009 the WC of the co is good
whereas corresponding to CA there is steep increase in CL also. While
increasing in CL it increased intrinsic value of shares which overall affects
the book value of the company. Therefore, there is decrease in price to
book value ratio as the book value increases. Intrinsic value is secured,
unsecured loans and CL.

• Price to Cash EPS

2009 2008 200 2006 200 200 200 200 200 200
7 5 4 3 2 1 0
P/CEPS 156.0 62.0 57.9 73.3 0 0 0 0 0 0
9 4 3
Industry 30.81 22.3 16.1 19.7 7.12 7.8 2.8 2.73 2.49 3.0
Aggreg 7 1 8 7 9 8 6 4 7
ate

The cash EPS and the EPS are the same and hence the resulting ratios are
also the same. As seen before in 2009 the EPS dropped by 76% and the
share price went down by 20.82% which has resulted in an increase of
152% in the ratio. The earnings generated by the shares is entirely in the
form of cash due to which the liquidity position of the company is very
good. So, we can observe that GVK Infra’s WC is much better than any
other company.

The expenses in the year 2009 dropped by 72.4 % with respect to MIAL.

• EV/EBIDTA

2009 200 200 200 200 200 200 200 200 200
8 7 6 5 4 3 2 1 0
EV/EBID 132.7 53.0 32.3 31.0 0 0 0 0 0 0
TA 9 5 6 3
Industry 27.15 18.8 11.5 11.7 6.09 7.7 4.36 4.39 4.21 5.61
Aggrega 0 2 3 7 5 4 8 2 2
te

EV/EBIDTA ratio is an alternative to P/E ratio especially in companies like


GVK Infra. As GVK Infra has a neutral capital structure which states that
their debt equity ratio is 1:1. This ratio depicts that GVK Infra relies more
on cash which ultimately penetrates towards WC. That’s why in the year
2009 only GVK Infra’s EV/EBIDTA increased with 150%.

• Market Cap/Sales

2009 2008 2007 2006 200 200 200 200 200 200
5 4 3 2 1 0
MC/S 117. 209.0 72.7 51.3 0 0 0 0 0 0
7 2 5 4
Industry 18.7 33.22 12.4 9.91 2.10 1.96 0.6 0.70 0.52 0.68
Aggreg 0 2 7 6 2 4 8 8
ate

With respect to the market capitalisation by sales ratio, the market


capitalisation went up in 2008 by 594% which has resulted in an increase
of 187% in the ratio and it dropped the following year by 43.69% since
even the market capitalization went down by 41.77%. The market
capitalization increased compared to the year 2007 since the number of
outstanding shares is 1.411 in 2007 and 111.59 in 2008. The capital
structure is as follows:

• Capital structure

From To Class Authorize Issued Paid Up Paid Up Paid


Year Year Of d Capital Capital Shares Face Up
Share (Nos) Value Capital

2008 200 Equity 177.25 140.58 140584890 1 140.58


9 Share 0

2007 200 Equity 177.25 140.58 140584890 1 140.58


8 Share 0

2006 200 Equity 177.25 23.64 23644445 10 23.64


7 Share

2005 200 Equity 50.00 23.64 23644445 10 23.64


6 Share

2004 200 Equity 2.00 0.04 35000 10 0.04


5 Share

• GVK plans to acquire stakes in coal mines in Indonesia. First such


acquisition was made by tata power when it bought a 30% stake in 2
months. They also plan to acquire stake in Maytas Infra Ltd.
• The Company has initialled the draft Power Purchase Agreement with
Punjab State Electricity Board ('PSEB') in December 2006.
• GVK consolidates its Power, Airports And Road Projects Under GVK
Power & Infrastructure Limited in January 2007.
• During July of the year 2007, GVK signed MoU with Tamil Nadu
Industrial Development Corporation (TIDCO) to set up multi-product SEZ
in Perambalur.
• As at August of the year 2007, Alakananda Hydro Power Company Ltd,
a GVK group company has achieved financial closure for its 330 MW
Shrinagar Hydro Electric Project, being set up in Uttarakhand.
• During February 2008, the Chhatrapati Shivaji International Airport
(CSIA), Mumbai International Airport Pvt Ltd (MIAL) today signed an
agreement with SITA, the world's leading provider of IT applications to
airports.
• The GVK-BHP Billiton consortium has emerged as provisional winners of
seven deepwater exploration blocks off the west coast of India during
June of the year 2008.
• GVK Power & Infrastructure Limited is an India-based company. The

Company is focusing on power generation assets (gas, hydel and


thermal), roads, airports, coal mines and oil and gas.
• On May 9, 2008, the Company acquired GVK Developmental Projects
Private Limited. On November 27, 2008, the Company acquired GVK
Energy Limited. The Company’s wholly owned subsidiary GVK Aviation
Private Limited ceased to be a subsidiary with effect from September
30, 2008.
• GVKPIL has initiated power projects that will cross over 2000 MW
capacity once operational. While Jegurupadu Combined Cycle Power
Plant is operational, several ambitious power projects are under
development.
1. Neyveli
• Price Earnings Ratio:

There have been great fluctuations in the P/E ratio from the year 2000-
2009.The P/E ratio was 2.79 in the year 2000 and it increased twice in
2002 with the ratio 4.09. This was because the rapid increase in the
market value of the share from 9.79 to 22.32 showing 127.98% increases.
The P/E ratio increased to 8.26 in year 2004 because of again increase in
the market value of share. In 2006 due to sudden decrease of earning per
share from 6.96 in 2005 to 3.91 in 2006 the price earnings ratio went up
to 19.19 from 9.55.In 2008 the earning per share increased to 6.23 from
3.17 in 2007 which leads to increase in price earning ratio. But in 2009
the market share decreased and even the earning per share decreased
which resulted in direct decrease in price earnings ratio.

In 2008, announcing the performance of the company for the fiscal FY08
figures closed the year with a total income of Rs.36.38 billion and a net
profit of Rs.11.01 billion as against Rs.27.05 billion and Rs.5.66 billion
posted the previous year.

The company board at its meeting recommended a final dividend of 10


percent taking the total dividend to 20 percent for the year under
Review.The Company had declared an interim dividend of 10 percent this
February

• Price to Book Value:

The ratio for price to book value has been increasing because of the
increase in market share from the year 2000 to 2008.But in year 2008 the
value for price to book value increases to a great extent because of the
great increase in market per share and proportional increase in book
value. And in 2009 there was a fall in market price from 116.69 in 2008 to
102.49 in 2009 which lead the decrease in price to book value also.

• Price to Cash EPS:

The market value has increased to a great extent in 2004 from 39.31 in
2003 to 55.13 in 2004 resulting 40.24% increase and thus increasing the
price to cash EPS to 5.7 from 3.21 in 2003. There has been decrease in
cash earnings per share in 2006 from 10.06 in 2005 to 5.97 in 2006 again
resulting in fall of price to cash EPS. In 2008 the cash earnings per share
increased to 8.96 from 5.85 in 2007 resulting increase in price to cash EPS
from 8.62 in 2007 to 13.38 in 2008.But again in 2009 the cash EPS
decreased to 7.34 and even the market share decreased to a great extent
resulting in decrease of the price to cash EPS to 11.42 in 2009 from 13.38
in 2008.

• EV/EBIDTA

The liquidity position of Neyveli Lignite is not good in the year 2009 and
the effect of this is clear when the working capital of the company comes
down due to which earnings before interest, tax, depreciation and
amortisation as well as the enterprise value of the company comes down.

• Market Capitalization/Sales

In case of market capitalization, market capital as well as sales has been


gradually increasing but in 2004 the market capital has increased to a
great extent from 4420.77 in 2003 to 9202.24 due to which the market
capitalization has increased from 1.61to 3.25.In 2007 the market capital
has fallen from 12591 in 2006 to 8455 in 2007 resulting in decrease of
market capitalization. In 2008 again there has been a tremendous
increase in market capital and the sales increasing to a certain extent
resulting in the increase of market capitalization to 6.73.In 2009 the
market capital decreases resulting in the fall of market capitalization to
4.18 from 6.73.

Reasons for decrease in the ratio


Mumbai, Nov. 6 Neyveli Lignite Corporation, a public sector lignite mining
and lignite-based power generation company based in Tamil Nadu, has
been hitting new highs with each passing day in recent times.

Despite rains in the area flooding the mines recently and a strike by the
contract labourers of Neyveli Lignite Corporation that affected the
production, , the stock price has been on the rise. The stock gained 10.22
per cent; it opened at Rs 147.7 and closed at Rs 162.8 on Tuesday.
However, the labourers called off their strike following an agreement with
the management.

Investor interest

The company expects to increase its capacity in power generation in both


Tamil Nadu and Rajasthan by 1000 MW, by 2009. The company has spent
Rs 1,000 crore of its Rs 2,000-crore capex plan for FY-08 and analysts
presume this could be a reason for the upswing in the stock price. Some
research analysts believe that there is a shortage of supply in the mining
industry pushing up the prices of these stocks.

“Neyveli Lignite seems to have good capacity in comparison to the others


in the industry. And also they are priced much cheaper than the other
mining companies competing with them,” said an analyst with a
brokerage firm.

“The quarterly results of Neyveli Lignite have been quiet good and this
has brought about an increase in interest in the company by investors.
People want to make money before Diwali and they are putting their
money in a company that looks the most lucrative to them,” said a sub-
broker.

Financials

The company’s net profit increased by 40.98 per cent to Rs 231.04 crore
for the quarter ended September 30. Total income rose 20.19 per cent at
Rs 882.08 crore over the corresponding quarter of the previous year

Another reason
Chennai, July 15 (IANS) With the Neyveli Lignite Corp. Ltd. (NLC) in Tamil
Nadu set to see another strike from Friday, not all seems well in this state-
run lignite mining and power generation company. The Cuddalore district-
based NLC has already seen two strikes by contract workers in the last
five months. Now the PMK-backed Pattali Thozhil Sangam (PTS) union has
called the third one this week for permanent workers.

“The workers are trying to kill the goose that lays the golden eggs by
striking work. The company is already overstaffed. There is no charm in
working here as we are bombarded with questions about the strike,” one
NLC official told IANS on condition of anonymity.

Power generation at NLC was affected when 13,000 contract workers


struck work in March and June, demanding absorption or pay and perks
parity with that of permanent workers.

The successive strikes have maligned the reputation of not only the
company but also of Tamil Nadu, a state known for its labour friendly
environment.

NLC annually mines 24 million tonnes of lignite and produces 2,490 MW of


power for the southern grid. It has around 13,000 contract workers and
around 20,000 permanent workers apart from administrative staff.

1. Reliance Infra
• Price earning (P/E):

The price earnings of reliance infra have mostly been above the industrial
average being highest in 2003-2004 to 37.53 and the lowest of 8.41 in
2000-2001. This shows that the share price of reliance infra remained
mostly overvalued in the market.

• Price to book value:

The price to book value ratio of reliance infra has been mostly above the
industrial average but has been below the same over the recent years.
This depicts that prices of the reliance share has been overall overvalued.
This generally may be on the account of future growth prospects and with
the amalgamation of Andhra power ltd. in the year 2003-04 during which
its share price to book value reached peak.

• Price to cash EPS:

The price to cash EPS of Reliance infra indicates that the share price has
been mostly overvalued over the periods as compared to the industrial
average’s. It also can be attributed to the trust and future growth
prospects of the company because of which prices of share would have
remained at peak.

• EV/EBIDTA

The enterprise multiple of the Reliance Infra indicates that the company is
the next biggest overvalued company (out of all the big power players
and comes next to the GVK Power Infra which posses the highest
valuation of the company. Its generally because of the high enterprise
value of Rs. 18749.72 crores as per the latest balance sheet and being the
highest in Mar 08 of Rs.34.494.68 crores.( a sharp 129% increase from the
previous year).

• Market cap/sales:

The market capitalization to sales of reliance infra remains the 3rd highest
out of the following power players next to GVK power Infra and Neyveli
Lignite and has been above the industrial average until 2005-2006
wherein GVK Infra power significantly effects the industrial average.

1. Tata Power

Tata Power Company Limited (TPC), India's largest integrated Electric


Power Utility in private sector with a reputation for reliability, incorporated
in the year 1919 at Mumbai. TPC pioneered the generation of electricity in
India nine decades ago. The core business of Tata Power Company is to
generate, transmit and distribute electricity.

• P/E ratio
The P/E ratio looks at the relationship between the stock price and the
company’s earnings. In general, a high P/E suggests that investors are
expecting higher earnings growth in the future compared to companies
with a lower P/E. However, the P/E ratio doesn't tell us the whole story by
itself. It's usually more useful to compare the P/E ratios of one company to
other companies in the same industry, to the market in general or against
the company's own historical P/E. It would not be useful for
investors using the P/E ratio as a basis for their investment to compare
the P/E of a technology company (high P/E) to a utility company (low P/E)
as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how


much investors are willing to pay per dollar of earnings.

200 200 200 200 200 2004 200 200 2001 2000
9 8 7 6 5 3 2
Tata 19.0 30.6 15.1 19.5 13.3 14.6 4.31 4.42 5.04 3.35
Power 3 9 7 4 4 6
Industry 34.5 27.4 19.7 25.3 12.1 15.4 9.87 6.08 15.5 4.91
Average 3 3 2 7 92 4 98 6

If we compare the price earnings ratio of Tata Power with the industry
average, we observe that except for the year 2005 and 2008, the ratio
remained lower than the industry average. In 2008 we can see a sharp
rise in the price to earnings ratio. This increase may be attributed to the
company’s high profit after tax and high cash flows from operating
activities which stood at Rs 1126.25 Cr. Also the market capitalization of
the company stood at its peak of Rs 25,863.83 Cr in the year 2008.

• Price to book value

This ratio compares the market's valuation of a company to the value of


that company as indicated on its financial statements. The higher the
ratio, the higher the premium the market is willing to pay for the company
above its hard assets. A low ratio may signal a good
investment opportunity, but the ratio is less meaningful for some types of
companies, such as those in technology sectors. In general, price to book
ratio is of more interest to value investors than growth investors. A
lower P/B ratio could mean that the stock is undervalued. However, it
could also mean that something is fundamentally wrong with the
company.

200 200 200 200 200 200 200 200 200 200
9 8 7 6 5 4 3 2 1 0
Tata 2 3.33 1.75 2.16 1.44 1.54 0.49 0.55 0.53 0.51
Power
Industry 1.58 2.53 1.61 1.75 1.5 1.56 0.61 0.64 0.58 0.67
Average 4 2 4 4

The price to book value ratio of Tata power over the years has been
increasing continuously except for the year 2009 and 2006. The price to
book value ratio of the company is the highest in the year 2008. This hike
is mainly due to the high market capitalization of the company for the
year 2008 which stood at Rs 25,863.63 Cr. But in the year 2009, the price
to book value ratio has declined by 40%. This can be attributed to 34.48%
decline in the market capitalization in the year 2009 compared to the year
2008.

• Enterprise multiple

2009 200 2007 200 200 200 200 200 200 2000
8 6 5 4 3 2 1

Tata 12.4 20.1 11.5 11.1 6.84 6.76 3.38 3.63 3.59 3.68
Power 7 4 5 1

Industry 27.1 18.8 11.5 11.7 6.09 7.75 4.36 4.39 4.21 5.612
Average 45 23 3 4 8 2

A ratio used to determine the value of a company. A low ratio indicates


that a company might be undervalued. The enterprise multiple is used for
several reasons:

1) It's useful for transnational comparisons because it ignores the


distorting effects of individual countries' taxation policies.
2) It's used to find attractive takeover candidates. Enterprise value is a
better metric than market cap for takeovers. It takes into account the
debt which the acquirer will have to assume. Therefore, a company with a
low enterprise multiple can be viewed as a good takeover candidate.

The enterprise multiple of Tata power for the year 2008-2009 was much
below the industry average. This reflects that the company was
undervalued. But for the year 2008, the enterprise multiple of Tata power
was much higher than the industry average. This high ratio indicates that
the company in the year 2008 was able to generate high values to their
investors. From the above table we can see that for the year 2008, the
enterprise multiple ratio was the highest because of its operating profits
and a high market capitalization as well as the Rate of growth (Net
Worth) stood at 34.24%, the highest growth so far.

• Price to Cash EPS

200 200 2007 200 2005 200 200 200 200 2000
9 8 6 4 3 2 1

Tata 13.9 22.8 10.5 13.2 7.95 8.85 2.67 2.84 3.3 2.34
Power 2 4 5

Industry 30.8 22.3 16.1 19.7 7.12 7.89 2.88 2.73 2.49 3.07
Average 1 7 11 8 67 6 4

The cash EPS and the EPS are the same and hence the resulting ratios are
also the same. As seen before that the market capitalization of the firm
was at its highest in the year 2008, so we can see a rise in the price to
cash EPS ratio in the year 2008.. The earnings generated by the shares
are entirely in the form of cash due to which the liquidity position of the
company is very good.

• Market cap/sales

200 2008 200 200 200 200 200 200 200 200
9 7 6 5 4 3 2 1 0
Tata 2.33 4.36 2.1 2.51 1.8 1.7 0.5 0.5 0.58 0.5
Power 3 6 2 9 6
Industry 18.7 33.22 12. 9.91 2.10 1.9 0.6 0.7 0.52 0.6
Average 014 418 666 66 2 04 8 88
3 57 7

It is calculated by dividing the company's market cap by the company's


revenue in the most recent fiscal year or, equivalently, divides the per-
share stock price by the per-share revenue. The metric can be used to
determine the value of a stock relative to its past performance. It may
also be used to determine relative valuation of a sector or the market as a
whole. By analysing graph we found that market cap to sales ratio is
higher in year 2008 and in the same year industry average is also higher.
But company’s ratio is only 13.12% of industry average, which is very
minimal in itself.

1. NTPC
• Price to earnings ratio(P/E):

The price to earnings ratio of NTPC raise from 12.75 to 20.09 in 2006 from
the preceding year primarily because of increase in market capitalization
from Rs. 70663.59 crores to Rs. 110489.16 crores while the earnings
remaining almost constant. However the price of the NTPC seems to be
undervalued as the industrial P/E was at 25.36. During 2006-07 the P/E of
NTPC came down to 19.08 due to increase in earnings but still it stood to
be below the industrial average. The P/E ratio of NTPC was highest in
2007-08 at 23.45 (still below the industrial average of 27.4) but went
down to 18.55 in year 2008-2009 because of the downturn due to which
the market price of the shares went low to Rs. 113 .

• Price to Book value:

The price to book value of NTPC shows growing trend from 1.68 in 2004-
05 to 3.01 in 2007-08 after which it declined to 2.8 in 2008-09 primarily
due to the crash in the market price because of recession.

• Price to Cash EPS:


The price to cash earnings per share of NTPC overall stood to be the
second highest in the major power players which shows the overvaluation
of share price of the company as compared to the others. However it was
corrected in 2008-2009 because of the global meltdown.

• EV/EBIDTA:

The EV/EBIDTA of NTPC is indicating that the company is undervalued as it


lies below the industrial average except in 2004-05 wherein it exceeds the
same due to increase in market capitalization to 70663.59.

• Market capitalization to sales (M cap./Sales):

The M cap/ Sales of NTPC has been good throughout the years as
compared to the industrial average’s and has been best in the 2007-2008
period but has been disappointing in 2004-2005 due to initial hikes in the
share price of it when it went public.

Beta Analysis:

200 200 200 200 200 200 200 200 av


2001 2 3 4 5 6 7 8 9 g
0.802 0.65 1.12 0.9 0.9 0.9 1.0 0.8 0.8 0.8
CESC Ltd 1 01 1 618 049 846 361 78 268 92
Gujarat
Industries 0.9
Power Co 0.769 1.41 1.30 1.5 0.8 0.8 0.6 0.7 0.8 57
Ltd 4 97 48 774 666 701 305 493 202 2
GVK Power
& 0.9
Infrastructu 1.3 0.8 0.6 1.2 76
re Ltd 0 0 0 0 0 041 223 638 258 6
Neyveli
Lignite 1.2
Corporatio 1.184 0.78 1.62 1.3 1.4 0.6 1.2 1.6 1.1 17
n Ltd 7 27 98 032 721 452 07 819 012 5
Reliance 1.2
Infrastructu 0.918 0.49 0.34 1.1 1.5 1.0 0.9 1.6 1.6 91
re Ltd 5 45 89 988 227 238 109 831 818 6
0.8
0.8 0.7 0.6 1.0 0.6 13
NTPC Ltd 0 0 0 0 144 129 822 367 786 4
Tata Power 1.0
Company 0.79 0.92 1.2 1.5 1.0 0.7 1.1 0.9 59
Ltd 1.718 69 97 731 207 51 067 985 65 1
1.2 1.1 0.9 0.8 1.1 1.0
Industry 1.078 0.82 1.06 628 835 416 565 273 427
Average 54 878 684 6 67 71 29 29 71

The overall beta value of the Power Industry is close to 1 (0.9266). This
value signifies that all the shares in this industry move with the market;
any change (rise or fall) in the market the same change is reflected in
these shares and in same magnitude. CESC Ltd is one share that has
lowest beta value in this industry which is 0.892; it signifies that the share
is less volatile in comparison to market. Neyveli Lignite Corporation Ltd
and Reliance Infrastructure Ltd are the two most volatile shares in this
sector having the beta value more than 1 ( 1.2175 and 1.2916);it signifies
that these shares are more volatile than the market. In past two years
Reliance Infrastructure Ltd has shown a drastic increase in its Beta value
reaching to 1.6. It means that the risk associated with this share is very
high but the returns are also very high. While NTPC is one of the most
consistent player in this industry with the beta value close to one. It
follows the same trend as the market. GVK Power and Infrastructure Ltd is
the share whose beta value is also very close to 1 (0.9766). TATA Power
Company’s beta value is 1.051 which is equal to 1; it signifies that this
stock is highly co-related with the market.