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

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

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 / Clients 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).

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

Contents Page Abbreviations Tables Section 1: Context and Purpose Section 2: Company Background and Financial Overview Section 3: Financial Overview
Section 4: Indian Power Sector - Industry analysis

6 7 8 9 12
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Section 5: Valuation Analysis Section 6: Caveats

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Abbreviations

BSE SENSEX CAGR CAPM DCF D/E EBITDA EEG EV FCFF FCFE FMV FV FY Rs. NAV NSE PAT Valuation Date WACC YoY

Bombay Stock Exchange index Compounded Annual Growth Rate Capital Asset Pricing Model Discounted Cash Flow Debt Equity Earnings before Interest, Tax, Depreciation & Amortisation Erneuerbare-Energien-Gesetz Enterprise Value Free Cash Flow to Firm Free Cash Flow to Equity holders Fair Market Value Fair Value Financial Year ending 31 March Rupees Net Asset Value National Stock Exchange Profit After Tax 31 March 2009 Weighted Average Cost of Capital Year on Year

Tables Page Table 1.1: Capacity Addition Plan upto 2017 Table 1.2: Key Financial Information P&L and Common Size Statement Table 1.3: Key Financial Information Balance Sheet Table 1.4: Financial Projections Table 1.5 GDP Growth Rate of Different Countries Table 1.6 Demand & Power Supply in India Table 1.7 Demand & Power Supply in India for Regions Table 1.8 Indias Energy Generation Capacity Table 1.9 Additional Capacity requirement of India under different GDP growth rates Table 1.10: Cash flow projections Table 1.11: Sales, EBITDA & Installed Capacity multiples of comparable companies Table 1.12: Final Value Summary 11 12 13 14 15 15 16 18 19 22 24 25

1.

Context and Purpose

NTPC, a Company in the business of power generation began its operations in the year 1975. The Companys business model comprises of generation of power and sale of bulk power and has the distinction of being Indias 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).

2. Company Background and Financial Overview 2.1 Introduction and Background

NTPC is Indias Largest Power Company. NTPCs 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 Indias 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 - NTPCs 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.

2.2 History & Nature of Various Business: NTPCs 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 NTPCs 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 Yojanaprogramme 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.

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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 1. 2 3 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. Sipat I (3 x 660) Barh I (3 x 660) Korba III ( 1 x 500) Farakka III ( 1 x 500)s NCTPP II ( 2 x 490) Simhadri II ( 2 x 500) Indira Gandhi STPP- JV with IPGCL & HPGCL ( 3 x 500) Vallur I -JV with TNEB ( 2 x 500) Nabinagar TPP-JV with Railways (4 x 250) Bongaigaon(3 x 250) Koldam HEPP ( 4 x 200) Loharinag Pala HEPP ( 4x 150) Tapovan Vishnugad HEPP (4 x 130) Mauda ( 2 x 500) Barh II (2 X 660) Vindhyachal-IV (2X500) Rihand III(2X500) Total State Fuel Chhattisgarh Coal Bihar Coal Chhattisgarh Coal West Bengal Coal Uttar Pradesh Coal Andhra Pradesh Coal Haryana Coal Tamilnadu Coal Bihar Coal Assam Coal Himachal Pradesh Uttarakhand Uttarakhand Maharashta Coal Bihar Coal Madhya Pradesh Coal Uttar Pradesh Coal MW 1980 1980 500 500 980 1000 1500 1000 1000 750 800 600 520 1000 1320 1000 1000 17430

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3. 3.1

Financial Overview Financial Information

Key financial indicators from NTPCs 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)
Particulars Income Net Operating Income Other Income Total Income Expenditure Electricity and Fuel Employee Cost Other Expenses Total Expenditure EBITDA Interest Depreciation PBT Tax PAT Historical P&L FY2007 FY2008 FY2009 325,952 27,855 353,807 198,181 11,632 15,681 225,494 128,313 18,594 20,754 88,965 20,427 68,647 370,501 29,676 400,177 220,202 18,960 16,355 255,517 144,660 17,981 21,385 105,294 28,401 74,148 441,261 11,467 452,728 271,107 24,631 19,521 315,259 137,469 20,229 23,646 93,594 11,581 82,013 Common size FY2007 FY2008 FY2009 92% 8% 100% 56% 3% 4% 64% 36% 5% 6% 25% 6% 19% 93% 7% 100% 55% 5% 4% 64% 36% 4% 5% 26% 7% 19% 97% 3% 100% 60% 5% 4% 70% 30% 4% 5% 21% 3% 18%

Key financial indicators from Balance Sheet as at 31 March 2007, 31 March 2008 and 31 March 2009 are shown in Table 1.3:

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Table 1.3: Key Financial Information Balance Sheet (Amount in Rs. Million)
Particulars SOURCES OF FUNDS : Share Capital Reserves and Surplus Advance against Depreciation Secured Loans Unsecured Loans Deferred Foreign Currency Fluctuation Deferred Tax Liability Total Sources of Funds APPLICATION OF FUNDS : Fixed Assets Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Loans and Advances Total Current Assets Less: Current Liabilities and Provisions Net Current Assets Total Application of Funds Historical Balance Sheet 31-Mar-07 31-Mar-08 31-Mar-09 82,455.00 403,513.00 6,567.00 68,229.00 176,615.00 1.00 737,380.00 82,455.00 443,931.00 13,734.00 73,147.00 198,759.00 2,554.00 1.00 814,581.00 82,455.00 525,943.57 13,734.00 85,126.60 180,327.00 2,554.00 1.00 890,141.17 Commonsize Statement 31-Mar-07 31-Mar-08 31-Mar-09 11.2% 54.7% 0.9% 9.3% 24.0% 0.0% 0.0% 100% 10.1% 54.5% 1.7% 9.0% 24.4% 0.3% 0.0% 100% 9.3% 59.1% 1.5% 9.6% 20.3% 0.3% 0.0% 100%

507,273.00 250,792.00 256,481.00 128,567.00 160,943.00 25,102.00 12,523.00 133,146.00 40,476.00 221,827.00 70,263.00 151,564.00 737,380.00

533,680.00 272,743.00 260,937.00 184,389.00 152,672.00 26,757.00 29,827.00 149,332.00 40,354.00 255,488.00 79,299.00 176,189.00 814,581.00

625,711.25 296,334.25 329,377.00 191,668.00 152,672.00 30,467.57 35,697.24 161,102.44 40,354.00 276,839.24 101,663.77 175,175.47 890,141.17

69% 34% 35% 17% 22% 3% 2% 18% 5% 30% 10% 21% 100%

66% 33% 32% 23% 19% 3% 4% 18% 5% 31% 10% 22% 100%

70% 33% 37% 22% 17% 3% 4% 18% 5% 31% 11% 20% 100%

3.2 Shareholding Pattern

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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
Particulars FY2010 Income Net Operating Income Other Income Total Income Expenditure Electricity and Fuel Employee Cost Other Expenses Total Expenditure EBITDA Interest Depreciation PBT Tax PAT 540,412 5,404 545,816 307,214 26,891 23,376 357,480 188,336 23,738 26,298 138,300 19,362 118,938 FY2011 Projected P&L FY2012 FY2013 727,297 7,273 734,570 448,802 29,886 31,459 510,148 224,423 43,849 36,915 143,659 21,549 122,110 847,641 8,476 856,118 517,892 31,535 36,665 586,092 270,026 50,398 41,091 178,537 26,781 151,756 FY2014 1,006,046 10,060 1,016,106 584,207 33,295 43,517 661,018 355,088 55,407 44,852 254,828 38,224 216,604 Common size (% of Net Sales) FY2010 FY2011 FY2012 FY2013 FY2014 99% 1% 100% 56% 5% 4% 65% 35% 4% 5% 25% 4% 22% 99% 1% 100% 59% 5% 4% 68% 32% 5% 5% 22% 3% 18% 99% 1% 100% 61% 4% 4% 69% 31% 6% 5% 20% 3% 17% 99% 1% 100% 60% 4% 4% 68% 32% 6% 5% 21% 3% 18% 99% 1% 100% 57% 3% 4% 65% 35% 5% 4% 25% 4% 21%

621,649 6,216 627,865 370,778 28,341 26,889 426,008 201,857 34,470 31,713 135,675 20,351 115,323

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.

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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 Indias 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

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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, Indias 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

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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.

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4.3 Installed Generation Capacity by Sector and Fuel The following table and diagrams set forth a summary of Indias energy generation capacity as of February 28, 2009 in terms of fuel source and ownership: Table 1.8 Indias 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 Indias 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)

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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 278341 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 Indias 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 Indias 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)

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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 Indias energy scenario with 55.0% of the current total commercial energy needs being met by coal. Given Indias 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 Indias economic growth. 5. 5.1 Valuation Analysis 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 groups 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.

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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 Companys 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.

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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
Discounted Cash Flow Analysis Revenue Less: Expenses EBDITA Less: Depreciation/Amortization EBIT Tax Gross Cash Flow to Firm (FCFF) Add: Depreciation/Amortization Less: Changes in Working Capital Less: Increase in Capital Expenditure Less: Changes in Capital WIP Net FCFF FY2010 540,412 319,114 221,299 26,298 195,000 19,362 175,638 26,298 11,278 31,969 20,897 137,793 FY2011 621,649 360,994 260,655 31,713 228,942 20,351 208,591 31,713 (13,906) 149,000 20,942 84,267 FY2012

(Amount in Rs. Million)

FY2013 847,641 515,353 332,288 41,091 291,197 26,781 264,417 41,091 (5,886) 112,984 21,039 177,372

FY2014

727,297 430,578 296,719 36,915 259,804 21,549 238,255 36,915 24,424 97,100 20,989 132,657

1,006,046 592,944 413,102 44,852 368,249 38,224 330,025 44,852 28,482 81,102 21,091 244,203

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 + (Rm - Rf) where: Ke= Cost of Equity Rm= Market Rate of Return Rf = Risk Free Rate (beta)= Measure of Market Risk

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%.

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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 NTPCs 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

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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 EV/Sales EV/Installed Capacity EV/EBIDTA 3.36 57.54 9.51 Average Multiple 1,481,093 1,734,632 1,306,794 Enterprise Value 161,102 161,102 161,102 Add: Cash Balance 152,672 152,672 152,672 Add: Investments 265,454 265,454 265,454 Less: Debt 18,033 18,033 18,033 Less: Contingent Liabilities (50%) 1,511,381 1,764,920 1,337,083 Equity Value 8,245 8,245 8,245 No. of shares Weights 35.00% 35.00% 30.00% 64 75 49 Value Per Share Rs. Per share total value 188 Particulars

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.

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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 Discounting Cash Flow Share Price Multiple Market Multiple Total No. of Shares in million Value Per Share (Rs.)

Equity Value (Rs. Million) 1,615,355 1,426,465 1,547,830 4,589,651

Weights 70% 15% 15%

Product (Rs. Million) 1,130,749 213,970 232,175 1,576,893 8,245 191

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

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6. 6.1

Caveats 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.

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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.

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