Neyveli Lignite Ltd Stake Valuation

8/12/2019 Neyveli Lignite Ltd Stake Valuation

1/13

Neyveli Lignite

Ltd BusinessValuationBy Group2:

Abhitesh Kumar

Ajay BagariaPriyabrata Bisoi

Ravi K Singh

Shankey Kapoor

Vinay Kumar H S


2/13

Problem Statement

SEBI Rule: PSUs Public Issues >= 10% Deadline 9thAug 2013

Private

Companies

Public Issues >= 25% Deadline 9thAug 2013

Hence GOI wanted to sell 3.56% stake

Not the first time effort to sell stake;

efforts during 2002 & 2006 failed due to

union issues

Again triggered Union issues

5 TN Government companies would

spend 360 crores to buy the 3.56% stake

Victory is due to my governments

continued action, my own independent

steps, workers struggle and due to the

united voice of the state- Jayalalitha, Chief

Minister, TN

Source: SEBI


3/13

Overview of Indian Power sector

Direct correlation between GDP and power

generation capacity

Fifth largest electricity generation capacity in the world-1,92,792 MW

Power generation through different resources

Challenges faced by Indian power sector

Fuel shortages

Coal and natural gas is depleting very fast

Deregulate the power sector to promote

investment

Environmental approval & Land clearance

Degrading financial health of state

distribution facilities

Risk associated with competitive bidding

Power generation companies bid for 25 years

Power transmission companies bid for 35 year

High competition from international OEM

manufacturers


4/13

Business analysis of Neyveli lignite corporation

Lignite/Coal mining Business Power generation Business

Coal reserves

Uncertainty about the reserves

Modern framework resulted in downward

correction

Coal productions

Increasing gap b/w supply & demand

Human labour and technological issues

Low productivity of human labour

Transportation and evacuation

Almost half of the coal is transported

through rails, where major problem is of

evacuation

High initial investment

Takes around 4-5 years

5000 crores for 1000 MW

Bargaining power of supplier (moderate)

More than 80% of thermal power is

generated through coal

Issue of environment clearance

Bargaining power of consumer (low to

moderate)

Threat of substitutes (low)

Though Nuclear and solar power is growing,

but still the threat is low

Many weakness in coal industry which impacts

its profitability

As the entry barrier is quite high and due to

huge demand, power generation is a profitable

business


5/13

S

TRENGTHS

Expertise in both Mining

and power generation

Over 50 years of

experience in the sector

Backing by Central Govt.

Low debt company with

D/E ratio .34

W

EAKNESSES

Limited input materials

sources

Outdated plants urgently

needed investments for

modernization

Prices are determined by

India's Electricity Act

OPPORTUNITIES

THREATS

Huge demand and supply

gap

Large opportunity in

energy consulting services

Diversify into new sources

of power generations

Rise cost of production

Huge competition fromgrowing private sector

firms

Eco-friendly sources of

power

Negative

External

factors

Positive

SWOT Analysis for Neyveli Lignite Corporation

Internal

factors


6/13

Financials & deal impact on market

0.00

10.00

20.00

30.00

40.00

50.00

60.00

2008 2009 2010 2011 2012

Revenue

Net Income

In 100 crores

Stock Market reaction

140

160

180

200

220240

260

2008 2009 2010 2011 2012

Lignite

Target

Lignite

Actual

Power

Target

PowerActual

Lignite in lakh tonnes

Power in Million units


7/13

Deal Structure

Deal Date: August 2nd

3.56 per cent stake (59.7 M shares) worth Rs 360 crore through IPP.

Price Band 58-60 a share.

Bidders: TIDCO(25%), SIPCOT(45%),

TIIC(10%), Powerfin(10%) and TUFIDCO(10%).

Firm valuation method

Value of NeyveliLignite

Value of LigniteMining Business

Value of developedLignite mines

(FCFF)

Value of option toexpand

(Option Pricing)Value of PowerBusiness (Multiples

Approach)


8/13

Value of Power Business

Rationale for using Multiples approach:

Abrupt capital expenditures changes leading to unreliable

growth rate projections

Many comparable firms are already there in the market

Ratio Used Ratio value (Mean) Market Capitalization

(Crores)

P/EBT 8.310951 5950.080801

P/S 0.835806 2658.961173P/EBIT 4.12112 3747.427696

Firms used for comparison:

Tata Power, JSW Power, CESC Ltd, NTPC


9/13

Option value Our approach is to consider each option separately, value it and cumulate the values of the

options to get the value of all options

Two option to expand : Rajasthan and Gujarat

Value of Rajasthan mine :1677.16 Crore

Value of Gujarat mine :969.84 Crore

Total option value :1677.16 Crore

Gujarat Sensitivity Analysis

cost per ton of developing resource option

In Crores 300 350 400 450 500 550 600

15% 972.8741 871.7762 780.31 698.1209 624.6144 559.0785 500.7634

Volatility

20% 1032.889 949.0034 873.4349 805.3252 743.8653 688.3181 638.0239

25% 1102.116 1032.121 968.9795 911.7837 859.7702 812.2966 768.82

30% 1173.789 1115.205 1062.21 1013.975 969.8371 929.2609 891.8046

35% 1244.094 1195.08 1150.608 1109.963 1072.589 1038.043 1005.967

40% 1310.798 1269.913 1232.713 1198.596 1167.103 1137.869 1110.607

Rajasthan Sensitivity Analysis

Cost per ton of developing resource option

In Crores 300.00 350 400.00 450 500.00 550 600.0015% 1682.416 1507.584 1349.41 1207.278 1080.161 966.8285 865.9827

Volatility

20% 1786.202 1641.136 1510.453 1392.669 1286.385 1190.326 1103.351

25% 1905.918 1784.872 1675.681 1576.771 1486.822 1404.725 1329.54

30% 2029.862 1928.553 1836.907 1753.492 1677.164 1606.994 1542.22

35% 2151.443 2066.681 1989.775 1919.487 1854.855 1795.113 1739.645

40% 2266.796 2196.092 2131.761 2072.763 2018.3 1967.746 1920.6

As there is no free-market price formation

for lignite used in power generation. This is

because its low calorific value makes

transport uneconomic over longer distances.

We have taken volatility in coal prices which

is 30% (According to RB index, NEWC index,

ICI index)

Their revenue from lignite per ton is 918.57

Rs and cost is 410.72 Rs

Option value is some what sensitive with

volatility but little sensitive with cost of

developing resource

Raj

Guj

TotalOptionvalue


10/13

Value of already developed mines

Rationale to use FCFF: Mature firm with no cyclicality so cash flows can be predicted with accuracy

Cant use multiple approach as similar firms will option price reflected in theirmarket prices and we are calculating them separately

Calculation of fundamental value

Value of developed mines = 4814.02 Crore

Sensitivity AnalysisValue In Crore

4814.017

Terminal Growth Rate

4% 4491.459

4.50% 4644.399

5% 4814.017

5.50% 5003.199

6% 5215.537

Total value of the firm = 10238.6 Crores


11/13

DDM approach to value Neyveli Lignite Ltd

Rationale to use DDM approach Dividend payout ratio is stable making the value estimate to be less volatile

Since only 3.56% stake will be divested, so the perspective is that of a

minority shareholder

Calculated value using a two-period DDM Based on fundamentals, growth rate for last 5 years was ~ 8.1%

Looking at the future projects, high growth period was set to 5 years

Stable Growth Phase

Growth rate was kept equivalent to GDP Growth rate5% Forecasted Value of the stock using the model: 56.64 Rs./Share


12/13

Conclusion Value of power business = 4118.823 Crore Value of option to expand (Mines) = 1677.16 Crore

Value of developed mines = 4814.02 Crore

Total value = 10238.6 Crore

Total number of shares = 167,77,09,600

Worst Case Base case Best case

Market

capitalization (Cr.)9977.019334 10610.00009 12911.95435

Per share price(Rs)59.46809468 63.240981 76.9617957

Amount paid by Tamilnadu govt was 60.30 per share for total of 5.97

Crore shares. Prices paid is in the band of price we have determined as is

near to our base case. So the deal was fairly priced.

And due to fair pricing their wasnt any significant reaction by market.


13/13

Thank You

Neyveli Lignite Ltd Stake Valuation

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