Analysis of Common Size Statement, Ratio Analysis, DuPont

Analysis and Valuation of Shares

A Group Project for

Management Accounting

Submitted to

Professor Prakash Singh

IIM Lucknow, Noida Campus

Submitted by – Group 4
Stage 3 Submission

Name Roll No
Aditya Baid IPMX09005
Akhil Kumar Dubey IPMX09008
Aman Yadav IPMX09009
Animesh Jaiswal IPMX09012
Krishna Swamy Naidu Paladugu IPMX09030
Smruti Ranjan Panda IPMX09054

June 20, 2016

Contents
INTRODUCTION ................................................................................................................................................................................... 1
(A) COMMON SIZE STATEMENT: ................................................................................................................................................. 1
Income Statement Common Size ................................................................................................................................... 1
Balance Sheet Common Size .......................................................................................................................................... 3
(B) RATIO ANALYSIS: .................................................................................................................................................................... 5
SOLVENCY RATIOS .......................................................................................................................................................... 5
LIQUIDITY RATIOS ......................................................................................................................................................... 6
PROFITABILITY RATIO..................................................................................................................................................... 7
TURNOVER RATIO .......................................................................................................................................................... 7
(C) DU PONT ANALYSIS: ............................................................................................................................................................... 8
(D) VALUATION OF SHARES ......................................................................................................................................................... 9
REFERENCES ...................................................................................................................................................................................... 15
APPENDIX .......................................................................................................................................................................................... 15
Introduction:
For the 3 selected companies in the Power Generation Industry : 1) NTPC 2) Tata Power 3) Adani Power ,
we have :

1) Analyzed the Common size statement of the Balance Sheet and Income Statement for the past 4 years.
2) Analyzed the Solvency Ratios, Liquidity Ratios, Turnover Ratio and Profitability Ratios for past 3 years.
3) Done the Du-Pont Analysis for the past 3 years.
4) Carried out Valuation and recommended buy/sell/hold decision.

(A) COMMON SIZE STATEMENT:

1. Income Statement Common Size:

Industry
Aggregate
ADANI POWER NTPC TATA POWER CO.
PARAMETERS
2014 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015
INCOME :
Operating Income 100 100 100 100 100 100 100 100 100 100 100 100 100
Excise Duty 0.24 0 0 0 0 0.69 0.79 0.86 0.91 0.19 0.17 0.21 0.04
Net Operating Income 99.76 100 100 100 100 99.31 99.21 99.14 99.09 99.81 99.83 99.79 99.96
Other Income 5.73 6.15 9.26 5.72 5.88 4.74 7.36 3.79 3.59 11.46 7.5 7.54 11.8
Total Income 105.55 106.2 109.3 105.7 105.9 104.1 106.6 102.9 102.6 111.3 107.3 107.3 111.8
EXPENDITURE :
Electricity & Fuel
Expenses 61.11 53.69 74.2 57.35 58.2 67.5 62.87 64.02 66.97 61.6 60.96 47.67 47.17
Operating Expenses 8.77 2.98 3.42 4.36 12.33 2.97 3.25 3.25 3.35 7.25 7.97 12.38 14.55
Employee Cost 7.59 1.33 2.13 1.45 1.8 6.03 6.32 6.56 6.25 5.98 6.41 7.14 8.92
Selling &
Administration
expenses 2.05 9.43 4.87 3.43 3.93 2.56 2.34 2.53 2.54 3.33 2.98 3.52 4.49
Miscellaneous
Expenses 6.1 4.91 6.27 1.72 -1.55 -0.01 0.71 0.61 0.84 0.86 1.15 3.6 1.49
Less : Pre-operative
Expenses Capitalised 1.29 0 0 0 0 1.93 1.99 2.3 2.02 0 0.72 0.88 1.01
Total Expenditure 84.33 72.35 90.89 68.3 74.72 77.11 73.5 74.69 77.92 79 78.74 73.44 75.61
Operating Profit 20.47 33.8 18.38 37.42 31.16 26.94 33.06 28.24 24.76 32.27 28.59 33.89 36.15
Interest 10.93 19.93 25.98 30.76 23.51 2.74 2.92 3.39 3.84 6 7.11 9.99 12.07
Gross Profit 9.54 13.86 -7.6 6.66 7.65 24.2 30.15 24.84 20.91 26.27 21.48 23.91 24.09
Depreciation 7.16 13.96 15.98 10.95 8.3 4.47 5.13 5.7 6.64 6.65 3.78 6.75 6.63
Profit Before Tax 2.38 -0.09 -23.59 -4.29 -0.65 19.73 25.02 19.14 14.27 19.62 17.69 17.15 17.46
Tax 1.32 0 0 0 0 4.91 5.55 3.85 0.44 3.74 3.51 4.99 4.12
Deferred Tax 0.22 7.35 7.24 -9.77 0 0.05 0.42 0.19 -0.1 2.24 3.54 1.19 1.7
Reported Net Profit 0.85 -7.44 -30.82 5.48 -0.65 14.76 19.04 15.11 13.92 13.64 10.64 10.97 11.64
Extraordinary Items 0.02 -7.27 -1.91 -1.27 4.1 -0.05 1.85 -0.04 0.2 0.24 0.42 0.16 0.18
Adjusted Net Profit 0.83 -0.16 -28.91 6.76 -4.75 14.82 17.2 15.15 13.72 13.4 10.22 10.81 11.46
Dividend 1.31 0 0 0 0 5.28 7.16 6.53 2.79 3.46 2.84 3.89 4.05
http://www.capitaline.com

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Differentiating Parameters found between the 3 target companies from the derived Common Size
Income Statement

1. Electricity & Fuel Expenses :

Imported coal prices decreased from 2013, hence the Electricity and fuel expenses is less for Tata Power in
year 2013-14 and 2014-15.

http://www.bloomberg.com/news/articles/2016-03-04/coal-prices-may-do-something-they-haven-t-done-
in-2-years-rise

Adani Power bought coal in 2013 at the peak of the coal cycle but failed to predict the structural
decline of coal.

2. Employee Cost :
Adani employee strength is 1364, Tata’s strength is 4290, NTPC is having employee strength around 25,000.
Adani Power has more cost effective workforce in comparison to TATA Power and NTPC and it is evident
through low employee cost for Adani Power.

3. Interest:

Adani’s Debt is too high due to extensive acquisition of Udupi power plant from Lanco Infratec at 6000
crores, Korba power plant from Avantha Group at 4200 crores.

4. Depreciation :

Tata Power -
a) The Company has changed its accounting policy in respect of Tangible Assets at its Strategic Engineering
Division. These Tangible Assets which were hitherto carried at cost have been revalued as at 1st April,
2013. The revaluation is based on a valuation made by an independent value using the Depreciated
Replacement Cost Method.
b) Depreciation of 219.80 crore for the years 2009-10 to 2011-12 has been written back during the year
ended 31st March, 2013. Further the depreciation charge for the year ended 31st March, 2013 is lower by
48.02 crore.

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2. Balance Sheet Common Size:
Ind.
Aggreg ADANI POWER NTPC TATA POWER CO.
PARAMETERS ate
2014 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015
SOURCES OF FUNDS :
Share Capital 16.24 6.57 7.27 8.52 9.04 6.48 5.79 5.22 4.76 1.09 0.97 0.91 0.95
Reserves Total 18.77 11.6 6.86 14.58 15.25 51.08 50.63 49.1 42.42 53.13 49.39 49.66 54.22
Total Shareholders
Funds 35.78 18.17 14.13 23.1 24.3 57.56 56.42 54.32 47.19 54.22 50.37 50.57 55.17
Secured Loans 40.07 63.48 60.08 54.33 48.74 7.88 7.36 8.17 13.65 23.94 24.54 21.97 19.31
Unsecured
Loans 17.92 17.7 25.29 20.65 26.55 31.6 33.44 34.35 36.05 12.33 16.82 20.71 19.4
Total Debt 58.32 81.18 85.37 74.98 75.29 39.49 40.81 42.52 49.69 36.26 41.36 42.69 38.71
Other Liabilities 5.9 0.66 0.5 1.92 0.42 2.96 2.77 3.17 3.12 9.51 8.27 6.74 6.12
Total Liabilities 100 100 100 100 100 100 100 100 100 100 100 100 100
APPLICATION OF FUNDS :
Gross Block 66.02 46.75 79.37 82.63 75.47 64.26 72.46 74.05 74.24 57.21 55.14 57.14 57.28
Less:
Accumulated
Depreciation 18.81 2.48 5.97 10.07 12.14 28.72 28.29 28.41 28.68 24.31 23.2 24.01 23.6
Net Block 47.21 44.28 73.4 72.56 63.33 35.54 44.17 45.64 45.56 32.9 31.94 33.13 33.68
Capital Work in
Progress 25.69 28.59 1.86 0.43 0.15 32.85 26.04 28.41 32.65 2.8 2.94 2.99 1.92
Investments 11.57 7.01 14.98 14.58 17.72 8.8 7.55 6.18 5.22 44.92 45.67 47.63 46.48
Current Assets, Loans & Advances
Inventories 2.26 2.46 3.84 2.67 3.09 2.91 2.89 3.45 4.36 3.92 3.13 2.74 2.35
Sundry
Debtors 8.93 1.35 2.05 0.82 4.56 4.58 3.77 3.3 4.39 4.6 5.34 5.09 5.53
Cash and Bank 3.87 9.13 4.52 1.22 1.16 12.68 11.84 9.69 7.44 4.76 1.7 0.26 0.98
Loans and
Advances 8.19 2.96 2.32 7.4 7.31 7.93 9.05 7.8 4.36 7.1 4.36 5.53 4.03
Total Current
Assets 23.24 15.91 12.72 12.11 16.13 28.09 27.55 24.25 20.56 20.38 14.53 13.61 12.89
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 Less: Current Liabilities and Provisions
Current
Liabilities 14.67 6.16 11.21 13.95 17.99 7.56 7.52 8.36 8.84 10.89 10.3 11.71 12.39
Provisions 1.91 0.82 0.97 1.06 0.8 2.54 4.96 4.67 4.53 1.77 1.8 2.55 1.73
Total Current
Liabilities 16.58 6.98 12.18 15.01 18.79 10.1 12.48 13.03 13.37 12.66 12.1 14.25 14.13
Net Current
Assets 6.66 8.93 0.54 -2.9 -2.67 17.99 15.07 11.21 7.18 7.71 2.43 -0.64 -1.24
Deferred Tax
Assets 1.65 0.03 0.01 6.42 7.26 4.21 3.8 3.59 3.92 0.46 0.35 0.28 0.35
Deferred Tax
Liability 2.49 1.85 3.23 6.42 7.26 4.71 4.44 4.25 4.49 2.39 3.66 3.68 3.94
Net Deferred Tax -0.85 -1.81 -3.22 0 0 -0.5 -0.64 -0.67 -0.57 -1.92 -3.31 -3.39 -3.6
Other Assets 9.71 13.02 12.45 15.32 21.47 5.31 7.81 9.22 9.95 13.59 20.33 20.3 22.75
Total Assets 100 100 100 100 100 100 100 100 100 100 100 100 100
Contingent
Liabilities 9.25 14.46 0.45 0.84 0.9 9.43 7.89 6.03 8.71 58.38 1.82 62.05 49.89

Differentiating Parameters found between the 3 target companies from the derived Common Size
Balance Sheet

1. Adani's Debt is high due to bank loans for acquisition of new power plants.

2. Increase in Gross Block during 2011-12 and 2012-14 is mainly because of acquisition of Udupi power
plant from Lanco Infratec at 6000 crores, Korba power plant from Avantha Group at 4200 crores

3. Various NTPC projects with capacity of 19,000 MW are under commissioning and it is reflected in high
capital work in progress.

4. NTPC cash reserve is very high in comparison to TATA Power and Adani Power.

5. Contingent liability of TATA power is very high in year 2011-12 and 2013-14 due to suits filed against
Tata power, claiming compensation of 20.51 crore (31st March, 2013 - 20.51 crore) by way of damages for
alleged wrongful disconnection of power supply and interest accrued thereon 116.29 crore (31st March,
2013 - 111.99 crore).

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(B) RATIO ANALYSIS:
SOLVENCY RATIOS

a) Debt to Equity Ratio

Debt to Equity Ratio = Total Debt/Total Equity

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 5.15 4.29 3.17
Tata Power 0.75 0.84 0.78
NTPC 0.71 0.75 0.91
Industry Average 1.59 1.55 1.44

Analysis from Debt to Equity Ratios :

● Power Industry is a capital asset intensive industry and so the level of debt is expected to be on the
higher side (at least in the initial years of establishing and operating power plant). Adani Power has
much higher debt than other 2 companies. Higher debt is due to acquisitions and new power plants.
● In case of Tata power and NTPC, they are more established players than Adani Power with cash flow
generated over many years of operations. Thus the level of debt requirement is comparatively lower
than Adani (which is very aggressive in its approach to build higher power plant capacity in a shorter
time)
● In case of Adani Power, the ratio is decreasing over the past 3 years because loans (especially term
loans from banks) are paid off.

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b) Interest coverage Ratio

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 0.2 0.9 0.8
Tata Power 3.49 2.72 2.45
NTPC 9.58 6.64 4.71
Industry Average 0.91 1.72 1.93

Analysis from Interest Coverage Ratio :

● The interest expenses are usually high for Power Generation industry as the level of debt is
significant to cover high cost of fixed assets. NTPC is a market leader in industry and has low debt
requirement compared to other players because of its higher reserves over years of operations.
However NTPC is modernizing old power plants and adding new power plant capacity and hence its
debt level has increased over years. So its interest coverage ratio has decreased.
● Adani Power has much higher debt than other 2 companies. Higher debt is due to acquisitions and
new power plants. Adani is very aggressive in its approach to add higher power plant capacity in a
shorter period leading to high capex requirement and high debt. Thus, the ratio is lower than other 2
companies and overall industry average.

LIQUIDITY RATIOS

a) Current Ratio

Current Ratio = Current Assets/Current Liabilities

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 0.3 0.38 0.45
Tata Power 0.84 0.52 0.46
NTPC 1.64 1.45 1.23
Industry Average 1.85 1.9 1.95

Analysis from Current Ratio :

● Adani has high level of current liabilities because of acceptances (promised future payment or Letter
of Credit) and Sundry creditors. This can be partly owed to fact that Adani is aggressively expanding
its capacity but the sales are not growing fast enough to fulfil the liabilities
● Adani has lower cash reserves since it is still a new player compared to Tata Power and NTPC with
fewer years of operational cash flows. So its current assets and current ratio is relatively low.

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PROFITABILITY RATIO

Return on Capital Employed (ROCE)

ROCE = Earnings before Interest and Tax(EBIT)/Total Assets

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 0 8.91 0
Tata Power 10.35 9.42 9.49
NTPC 13.72 10.9 8.09
Industry Average 0 5.82 6.02

Analysis from ROCE :

● Adani has very low operating profit in comparison to its assets. Hence ROCE is near to zero in 2013
and 2015

TURNOVER RATIO

1) Receivables Turnover Ratio

Receivables Turnover = Sales/Total Receivables

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 11.27 22.85 12.33
Tata Power 8.36 6.64 5.99
NTPC 11.84 13.73 11.53
Industry Average 4.56 4.01 3.54

Analysis from Receivables Turnover Ratio :

● The % of receivables as part of sales for Tata Power is comparatively high as compared to Adani
and NTPC. Tata Power has major Power plant operations in Mumbai and Delhi.
● Tata Power supplies power to Consumers in Mumbai via its distribution arm and also supplies
power to its competitor BEST. The increase in receivables over the years is attributed to delay in
payments by BEST.
● The ratios of the 3 companies are much higher than industry average. The power plants for the 3
companies are able to operate at a higher plant factor (higher sales) in spite of the distressed
environment in power sector because of higher working capital and PPA (lower receivables).

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 2) Inventory Turnover Ratio

Inventory Turnover = Sales/Inventory

Company/Year Mar-13 Mar-14 Mar-15

Adani Power 6.09 10.03 11.28
Tata Power 11.92 11.81 12.58
NTPC 16.94 15.19 11.38

Analysis from Inventory Turnover Ratio :

● The Major inventory for the three companies is Coal.
● The ratio has decreased for NTPC (steep reduction from Mar-14 to Mar-15) because of sharp rise
in inventory (majorly coal). The reason is not clearly specified by NTPC but we infer that it can
be attributed to the fact that 3 of NTPC's captive coal mines were de-allocated in 2014 by
Supreme court that led to the purchase of higher

(C) DU PONT ANALYSIS:

EQUITY
ROA Turnover
ROE Net margin MULTIPLIER
COMPANY YEAR (PAT/Total (Sales/Total
(PAT/EQUITY) (PAT/Sales) (TOTAL
asset) asset)
ASSET/EQUITY)

2011 13.97% 7.98% 16.43% 48.00% 169.00%

2012 13.07% 7.02% 14.54% 49.00% 174.00%

NTPC 2013 16.42% 8.55% 18.84% 47.00% 177.00%

2014 13.21% 6.89% 14.96% 46.00% 184.00%

2015 12.29% 6.16% 13.86% 43.00% 212.00%

2011 8.61% 4.95% 13.48% 37.00% 167.00%

2012 10.14% 5.46% 13.64% 39.00% 184.00%

TATA
POWER 2013 8.51% 4.07% 10.64% 40.00% 199.00%

2014 7.58% 3.52% 10.97% 33.00% 201.00%

2015 7.11% 3.52% 11.64% 30.00% 184.00%

2011 8.64% 1.95% 24.86% 9.00% 390.00%

2012 -0.10% -0.88% -7.43% 12.00% 550.00%

ADANI
POWER 2013 0.00% -6.71% -30.82% 19.00% 708.00%

2014 10.95% 1.76% 5.48% 32.00% 433.00%

2015 0.00% -2.07% -0.64% 33.00% 412.00%

Page 8 of 17
 Analysis from Dupont’s Analysis

1. As is evident from the Margin and turnover ratios, power generation is more of a turnover business
than margin business. Most of the sales happen at fixed rate at PPA arrangement between the
government and the power supply.
2. Adani Power is debt ridden to the extent that its equity multiplier is highest among the three power
supplier across 5 year period. Adani power has aggressively increased its power generation
capacity through new acquisition of power plan such as KORBA and Udupi. Funds also raised for
development of Mundra power plant.
3. Adani's high leverage has also affected its Net margins from 2012 to 2015 with consistent loss.
4. NTPC ROA has decreased consistently from 2013 to 2015.Although Gross profit and total asset
increased consistently the net profit took a hit due to higher fuel cost and other operating expenses.
5. NTPC raised borrowing 18225 crores in 2014-15 to fund its investment in on-going capacity
expansion plan. Hence its equity multiplier ratio spiked during 2014-15.
6. Tata power equity multiplier increased by 17 percent on account fresh issuance of shares to
existing shareholders on 15 April 2014.The issue was oversubscribed 1.96 times resulting in a
share premium of 1996 crores.
7. ROE for Adani is not a good estimate of the company's performance especially in year 2014 due to
its very high leverage.

(D) VALUATION OF SHARES

Valuation of the shares (recommendation of buy/ sell / hold)
There are various methods to do the valuation of the shares of any company by determining the intrinsic
value of a stock which is the price reflecting the actual value of the stock. In our project, the valuation of the
shares has been done using the forecasted EPS and forward P/E ratio, where

𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄 𝐨𝐨𝐨𝐨 𝐍𝐍𝐍𝐍𝐍𝐍 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏

𝐄𝐄𝐄𝐄𝐄𝐄 = 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄 𝐩𝐩𝐩𝐩𝐩𝐩 𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬 =
𝐍𝐍𝐍𝐍𝐍𝐍𝐍𝐍𝐍𝐍𝐍𝐍 𝐨𝐨𝐨𝐨 𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒𝐒

Forecasted EPS: The next fiscal year EPS is calculated using the last eight years net profit values of the
selected power generation companies i.e. NTPC, TATA Power and ADANI Power Ltd. The Projected Net
Profit for next fiscal year is calculated using various methods such as excel solver , exponential forecasting
or quadratic regression based on the type of trend of past net profits. Then by dividing the forecasted Net
Profit with the total number of shares (obtained from INSIGHT database), the forecasted EPS for next fiscal
year is calculated using the above equation.

𝐏𝐏 𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 𝐨𝐨𝐨𝐨 𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬

𝐑𝐑𝐑𝐑𝐑𝐑𝐑𝐑𝐑𝐑 =
𝐄𝐄 𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄𝐄 𝐏𝐏𝐏𝐏𝐏𝐏 𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬𝐬

Forward P/E Ratio: It is the 12 month future P/E ratio i.e. the ratio of future price per share of the stock
divided by next fiscal year’s annual net diluted earnings per share of the firm as shown in the above formula.
For our project, the 12 month Forward P/E ratio is obtained from the Bloomberg terminal.

Intrinsic Value of Stock = (EPS) Forecasted * 12 month Forward P/E ratio

The intrinsic value or future value of stocks is calculated using the above equation. It is then compared with
the current market price of a stock of our focused group of companies (obtained from Bloomberg terminal)

Page 9 of 17
in order to determine which stocks are undervalued, correctly valued and overvalued stocks. Based on this
calculation, an investment decision is put forward, recommending buying or selling the stock. It is to be
noted that while the price of a stock fluctuates even within a very short period of time, the intrinsic value of
a stock is considered fixed within a very short period of time

𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈 𝐕𝐕𝐕𝐕𝐕𝐕𝐕𝐕𝐕𝐕 𝐨𝐨𝐨𝐨 𝐅𝐅𝐅𝐅𝐅𝐅𝐅𝐅𝐅𝐅𝐅𝐅 𝐯𝐯𝐯𝐯𝐯𝐯𝐯𝐯𝐯𝐯− 𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂 𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏 –

Return on Investment (ROI) = ∗ 𝟏𝟏𝟏𝟏𝟏𝟏
𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂𝐂 𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌𝐌 𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏𝐏

If ROI > Opportunity costs, then Recommendation for “BUY”

ROI < 0 or ROI < Opportunity costs, then Recommendation for “SELL”
ROI > 0 but less than Opportunity costs, then Recommendation for “HOLD”

Note : Opportunity costs is defined as the return that the investor will get if the investment is done in
equivalent risky second best alternative mode of investment instead of stock purchase

Interpretation of P/E ratios

The P/E ratio is primarily affected by the dividend policy, the quality of company management, type of
industry and its popularity amongst investors and used accounting method. For power generation industry,
the deciding factors majorly include Project costs, plant load factors, raw material costs, debt to equity
ratios. In most easy terms PE ratio means the number of years, it will take for an investor to make back the
money invested if the earnings per share of the company do not grow on a yearly basis.

If the forward P/E is lower (value stocks), that means future earnings are expected to be higher than the
recently completed annual earnings. If the forward P/E is higher( growth stocks), it means the company is
expected to earn less over the coming year than it did in the past year -- not a great sign, in general.
However, fast-growing companies are typically associated with high PEs. Obviously, investing in fast-
growing companies can be profitable. Therefore a high PE should not necessarily prevent investors investing
in the stock.

● If EPS is expected to grow then the Forward PE will be lower than the Historical or Trailing PE.
● On the other hand, if EPS is expected to decrease, then you will note that the Forward PE will be higher
than the Trailing PE.

Use of Valuations
1. To compare the value obtained with the share’s price on the stock market and to decide whether to sell,
buy or hold the shares.
2. In Mergers and acquisition for finding market capitalization.
3. It is used to decide the securities that the portfolio should concentrate on: those that seem to it to be
undervalued by the market.
4. Public offerings: The valuation is used to justify the price at which the shares are offered to the public.
5. Inheritances and wills: The valuation is used to compare the shares’ value with that of the other assets.
6. The valuation provides a means for measuring the impact of the company’s possible policies and
strategies on value creation and destruction.

In the Power Generation industry for the three securities, the decision to BUY/SELL/HOLD is arrived at as
follows.

Page 10 of 17
Valuation of Stocks of ADANI POWER

PARAMETERS Mar Mar 10 Mar 11 Mar 12 Mar’ 13 Mar’ 14 Mar’ 15 Mar’ 16 Correlation
09 with Stock
Price

EPS 0 0.78 2.36 0 0 0 0 1.64 0.585999

Total
Income 0 466.79 2,154.21 4,242.21 6,994.07 15,695.33 19,065.14 25,231.57 -0.81183

Operating
Income 0 434.86 2,135.19 4,092.16 6,779.36 15,463.90 18,823.73 25,198.32 -0.80846

Net Profit -5.54 170 513.18 -294.5 -2,295.01 -290.55 -815.63 488.48 0.688445

Projecting of Net Profit based on quadratic expression.

PARAMETERS Mar
09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar’ 16 Mar’ 17

Net Profit -5.54 170 513.18 -294.5 -2,295.01 -290.55 -815.63 488.48

Projected 0 169.9999 94.15913 315.5781 -138.774 -264.449 -137.117 -308.703 255.7808

Squared
Error 0 7.87E-09 175578.5 372195.3 4649353 681.2628 460379.9 635500.6 6293689

The equation used is

Net Profit Projected = Q1*PF1^2 + Q2* PF1 + Q3
Where PF1 is the net profit for previous period and Q1, Q2 and Q3 are obtained from excel solver as follows
Quadratic Q1 0.000178

Quadratic Q2 0.523626

Quadratic Q3 172.8953

Forward EPS is calculated as Net profit for 2017 divided by total number of shares.
No of Shares from INSIGHT database is 287.1922 crores.
Forecasted earnings per share obtained as 0.89 rupees per share.
Future P/E from Bloomberg is obtained as 76.41.
Future price is obtained as P/E multiplied by future EPS.
Future Price = 76.41* Rs 0.89 = Rs. 68.05
Based on the current price of Rs 29.8, the return on investment (percentage gain) is 128 %
Recommendation – BUY

Screenshot from Bloomberg (For Future P/E and current stock price)

Page 11 of 17
Valuation of Stocks of TATA POWER
PARAMETER Mar’ Mar’ 10 Mar’ 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar’ 16 Projected
S
09 Mar 17

Net Profit 1,298.73 2,138.64 2,181.91 -968.29 98.72 -33.31 408.82 1,067.39

Project Exp 1,298.73 1298.73 1298.73 1298.73 1298.73 1298.73 1298.73 1298.73 1298.73

Error 0 705448.8 780006.9 5139380 1440024 1774331 791939.8 53518.2 10684648

Exponential smoothing equation is used to forecast the net profit for year 2017.

Net Profit projected = α*PF1 + (1-α)*FC 1

Where
α is the smoothing constant
PF1 is the previous period net profit
FC1 is the previous period forecast.
Forward EPS is calculated as Net profit for 2017 divided by total number of shares.
No of Shares from INSIGHT database is 270.4625 crores.
Forecasted earnings per share obtained as Rs 3.97 per share.
Future P/E from Bloomberg is obtained as 14.39.
Future price is obtained as P/E multiplied by future EPS.
Hence, Intrinsic Value or Future Price =14.39* Rs 3.97 = Rs 57.13
Based on the current price of Rs 73.7, the return on investment (percentage loss) is 22.47 %
Recommendation - SELL

Screenshot from Bloomberg (For Future P/E and current stock price)

Page 12 of 17
Valuation of Stocks of NTPC

PARAMETER Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Projected
S
Mar 17

1 2 3 4 5 6 7 8 9

8,092.5 8,837.6 12,586.2 11,403.4 10,162.4

Net Profit 0 5 9,348.23 9,814.66 2 0 9,992.37 3

8,092.5 10049.3 10177.7 10694.7

Projected 0 9861.95 7 9 10295.11 10992.22 1 10339.81 10382.58121

104919 491598. 131865. 493283.

Error 0 0 7 3 5249186 169072.5 5 31462.78 7615659.748

Straight line equation is used to forecast the net profit for year 2017.

Net Profit projected = M*PF1 + C

Where
M is the slope of the equation.
C is the intercept.
PF1 is the previous period net profit.
Excel solver was used to reduce the squared errors and obtain the best fit M and C as follows
Intercept 7826.55

Slope 0.25151

Forward EPS is calculated as Net profit for 2017 divided by total number of shares.
No of Shares from INSIGHT database is 824.5464 crores.
Forecasted earnings per share obtained as Rs 12.59 per share.
Future P/E from Bloomberg obtained as 12.73.
Future price is obtained as P/E multiplied by future EPS.
Hence, Intrinsic Value or Future Price = 12.73 * Rs 12.59 = Rs 160.29
Based on the current price of Rs 152.3, the return on investment (percentage loss) is 5.24 %
Based on opportunity profit of 8 % (minimum return on Bank Fixed Deposit), we arrive at
Recommendation - HOLD

Page 13 of 17
Screenshot from Bloomberg (For Future P/E and current stock price)

SUMMARY OF VALUATION OF STOCKS

PARAMETERS\ TATA
COMPANY POWER ADANI POWER NTPC

Forward 12 M P/E 14.39 76.41 12.73

Forecasted EPS 3.97 0.89 12.59

Current Price 73.70 29.80 152.30

Future Price 57.14 68.05 160.29

Decision SELL BUY HOLD

Details of the figures are mentioned in Appendix.

Page 14 of 17
REFERENCES
1) www.Bloomberg.com for future P/E
2) www.capitaline.com for financial data.
3) https://insight.dionglobal.in INSIGHT database for financial and share data.
4) http://www.adanipower.com/businesses/operational-power-plants/mundra
5) http://www.business-standard.com/article/companies/ntpc-lines-up-new-projects-of-19-000-mw-capacity-
113122600609_1.html
6) http://cleanenergyinfo.in/ntpc-lines-up-new-projects-of-19000-mw-capacity
7) http://www.mercindia.org.in/pdf/Order%2058%2042/Order_60_of_2012_27_Nov_2012.pdf
8) http://www.tatapower.com
9) http://www.ntpc.co.in
10) http://www.business-standard.com/article/companies/debt-hurdle-for-adani-s-buying-spree-116051200019_1.html
11) http://archive.financialexpress.com/news/ntpc-to-seek-clarification-from-sc-on-deallocation-of-coal-blocks/1296313

Page 15 of 17
APPENDIX: For valuation of stocks

Adani Power
Correlati
on with
Stock
Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   16-Mar Price
EPS 0 0.78 2.36 0 0 0 0 1.64 0.585999
Total Income 0 466.79 2,154.21 4,242.21 6,994.07 15,695.33 19,065.14 25,231.57 -0.81183
Operating Income 0 434.86 2,135.19 4,092.16 6,779.36 15,463.90 18,823.73 25,198.32 -0.80846
Net Profit -5.54 170 513.18 -294.5 -2,295.01 -290.55 -815.63 488.48 0.688445
Dividend 0 0 0 0 0 0 0
Total Assets 7,348.34 16,467.32 33,107.50 46,459.00 46,598.49 51,468.71 50,685.79 -0.87345
Price Earning (P/E) 0 148.65 47 0 0 23.5 0 0.737814
Assets Gross 347.17 2,854.92 9,028.34 16,702.18 31,218.23 50,701.71 50,754.15 -0.87104
Depreciation 10.35 67.8 281.1 897.98 2,129.63 4,337.18 5,674.47 -0.81045
Net Block Assets 336.82 2,787.12 8,747.24 15,804.20 29,088.60 46,364.53 45,079.68 -0.87476
Asset Freshness 0.97 0.98 0.97 0.95 0.93 0.91 0.89 0.905003
Total Debt 4,989.69 10,585.50 24,502.72 38,600.34 41,795.44 44,150.23 44,741.96 -0.91638
Book Value 12.42 26.5 28.84 27.71 17.94 22.78 19.93 0.218212
Share Price 98.38 123.64 101.62 57.52 43.95 48.02 35.84 30.11 1

Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   16-Mar 17-Mar Quadratic Alpha 0.000178
Net Profit -5.54 170 513.18 -294.5 -2,295.01 -290.55 -815.63 488.48 Quadratic Beta 0.523626
Projected 0 169.9999 94.15913 315.5781 -138.774 -264.449 -137.117 -308.703 255.7808 Quadratic Delta 172.8953
Error 0 7.87E-09 175578.5 372195.3 4649353 681.2628 460379.9 635500.6 6293689

NTPC

Correlati
on with
Stock
Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   Mar 16  Price
EPS 9.2 10.07 10.71 11.24 14.31 12.84 11.59 12.35 -0.81772
Total Income 46,118.20 51,313.95 60,072.73 69,047.34 76,937.09 81,828.28 83,238.53 78,705.50 -0.99006
Operating Income 42,948.80 48,585.88 57,920.64 66,365.89 72,669.65 79,648.12 81,367.02 78,136.12 -0.98756
Net Profit 8,092.50 8,837.65 9,348.23 9,814.66 12,586.22 11,403.40 9,992.37 10,162.43 -0.79973
Dividend 3.6 3.8 3.8 4.1 5.83 5.75 2.5 -0.33325
Total Assets 96,396.40 108,727.28 123,574.84 138,647.10 156,762.38 175,053.39 191,253.29 -0.9642
Price Earning (P/E) 19.29 20.8 18.52 15.42 9.89 9.73 12.31 0.94457
Assets Gross 64,741.60 71,527.39 79,210.13 88,880.05 113,803.77 131,393.74 144,360.75 -0.94298
Depreciation 29,775.50 32,722.64 34,346.30 37,748.56 41,971.06 47,185.76 52,507.73 -0.92658
Net Block Assets 34,966.10 38,804.75 44,863.83 51,131.49 71,832.71 84,207.98 91,853.02 -0.94581
Asset Freshness 0.54 0.54 0.57 0.58 0.63 0.64 0.64 -0.97239
Total Debt 38,822.60 44,148.53 50,754.24 59,803.60 70,418.78 81,454.98 102,252.00 -0.91519
Book Value 69.62 75.95 83.01 90.23 98.53 105.91 99.56 -0.97662
Share Price 200.27 202.56 175.92 163.8 146.48 137.28 137.43 135.35 1

Projecte
Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   Mar 16  d Mar 17 Alpha 7826.515
1 2 3 4 5 6 7 8 9
Net Profit 8,092.50 8,837.65 9,348.23 9,814.66 12,586.22 11,403.40 9,992.37 10,162.43 Beta 0.251521
Projected 8,092.50 9861.95 10049.37 10177.79 10295.10969 10992.22 10694.71 10339.80752 10382.58
Error 0 1049190 491598.7 131865.3 5249186.458 169072.5 493283.5 31462.78318 7615660

Page 16 of 17
Tata Power
Correlation
with Stock
Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   16-Mar Price
EPS 53.02 80.82 85 0 0 0 0.37 2.73 0.87195871
Total Income 18,985.44 19,602.19 19,956.41 26,621.72 33,890.15 35,979.16 34,665.40 37,480.20 -0.876672
Operating Income 18,057.04 18,939.18 19,537.74 26,171.30 33,248.18 35,900.80 34,372.20 37,138.41 -0.8727326
Net Profit 1,298.73 2,138.64 2,181.91 -968.29 98.72 -33.31 408.82 1,067.39 0.69201395
Dividend 11.5 12 12.5 1.25 1.15 1.25 1.30 0.84337809
Total Assets 24,450.67 31,964.55 42,441.37 51,890.27 55,896.38 58,236.26 61,153.85 -0.8072373
Price Earning (P/E) 19.03 36.17 34.13 21.19 22.95 21.63 21.30 0.75041443
Assets Gross 21,039.86 22,502.42 24,366.89 38,256.23 56,192.85 61,366.56 64,960.81 -0.9007234
Depreciation 6,807.89 7,454.93 8,329.51 10,602.77 14,839.60 17,972.96 20,221.71 -0.8875277
Net Block Assets 14,231.97 15,047.49 16,037.38 27,653.46 41,353.25 43,393.60 44,739.10 -0.8978332
Asset Freshness 0.68 0.67 0.66 0.72 0.74 0.71 0.69 -0.5945172
Total Debt 14,143.42 18,446.94 24,742.14 33,859.82 37,882.29 40,172.54 40,841.87 -0.8361373
Book Value 411.49 513.26 586.31 52.96 51.59 50.88 51.7 0.85164352
Share Price 105.01 127.9 111.87 97.9 85.89 88.02 73.03 65.72 1

Mar 09   Mar 10   Mar 11   Mar 12   Mar 13   Mar 14   Mar 15   16-Mar 17-Mar Exp 1.00993
Net Profit 1,298.73 2,138.64 2,181.91 -968.29 98.72 -33.31 408.82 1,067.39
Project Ex 1,298.73 1298.73 2146.98 2182.256843 -999.574 109.6257 -34.7293 413.2243 1073.886
Error 0 705448.8 1220.104 9925945.407 1206249 20430.61 196736 427932.8 12483963

Page 17 of 17