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CMM Assignment

WACC and Seasonality of Stock

27/01/2010

Submitted by

Tushar Alva
2009A06

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Table of Content

Table of Content ...................................................................................................................................... 2


Executive Summary ................................................................................................................................. 5
Methodologies:- ...................................................................................................................................... 6
1) Dividend- Growth Model: ............................................................................................................ 6
2) CAPM Method: ........................................................................................................................... 6
Pharmaceutical Sector: ............................................................................................................................ 9
CIPLA: .................................................................................................................................................. 9
CAPM Model: Market value .......................................................................................................... 11
Dividend Growth Model:................................................................................................................ 12
Seasonality of Stock ........................................................................................................................... 13
MACD Model: Analysis ................................................................................................................... 13
DR.REDDY’S LAB: ............................................................................................................................... 14
CAPM Model: Market value .......................................................................................................... 16
Dividend Growth Model:................................................................................................................ 17
Seasonality of Stock: .......................................................................................................................... 18
MACD Model: Analysis ................................................................................................................... 18
Power Sector: ........................................................................................................................................ 19
NTPC: ................................................................................................................................................ 19
CAPM Model: Market value .......................................................................................................... 22
Dividend Growth Model:................................................................................................................ 24
Seasonality of Stock ........................................................................................................................... 25
MACD Model: ................................................................................................................................ 25
TATA Power: ...................................................................................................................................... 25
CAPM Model: Market value .......................................................................................................... 28
Dividend Growth Model:................................................................................................................ 30
Seasonality of Stock ........................................................................................................................... 30
MACD Model: ................................................................................................................................ 30
Annexure: ............................................................................................................................................. 32
Cipla: Technical Analysis: ............................................................................................................... 32

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Dr Reddy’s Lab:Technical Analysis: ................................................................................................. 34


NTPC: Technical Analysis:............................................................................................................... 35
Tata Power: Technical Analysis: ..................................................................................................... 36
Bibliography: ........................................................................................................................................ 37

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Executive Summary

In this report the finding the weighted cost of capital and the seasonality of the stocks are discussed in
detail. The sectors and the companies selected for the same are as follows:

1.Pharmaceutical Sector- Bulk Drugs

 Cipla
 Dr.Reddy’s Lab

2. Power Generation Sector

 NTPC
 Tata Power

The cost of capital of a company is used for

 Investment evaluation
 Designing debt policy
 Performance appraisal.

In this report 2 ways of finding the weighted cost of capital are discussed ie

 CAPM -Capital Asset Pricing Model


 Dividend Growth Model

The seasonality of the stocks is also found by using the Moving Average Convergence Divergence
(MACD) Model.

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Weighted Average Cost of Capital:-


It is defined as an average representing the expected return on all of a company's securities. Each source
of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these
required rates of return are weighted in proportion to the share each source of capital contributes to
the company's capital structure. The resulting rate is what the firm would use as a minimum for
evaluating a capital project or investment.

Methodologies:-

1) Dividend- Growth Model:


 Weighted Average Cost of Capital at Market Value Weights.

2) CAPM Method:
 Weighted Average Cost of Capital at Market Value Weights.

The Weighted Average Cost of Capital is generally composed of :-

a) Cost of Debt Capital


b) Cost of Preference Capital
c) Cost of Equity Capital

a) Cost of Debt Capital:-

Kd = INT + 1/N (F – B0) X (1 – T)


½ (F + B0)

Where,
Kd = Cost of Debt
INT = Amount of Interest
N = Maturity period of Bond (Debt)
F = Face Value of Bond (Debt)
B0 = Issue Price of Bond (Debt)
T = Tax Rate

b) Cost of Preference Capital:-

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Kp = PDIV
P0

Where,
Kp = Cost of Preference Capital
PDIV = Expected Preference Dividend
P0 = Issue Price of Preference Share

c) Cost of Equity Capital:-

There are two approaches for calculating the cost of \equity:-

i) Dividend- Growth Model.


ii) The Capital Asset Pricing Model.

i) Dividend-Growth Model:-

1) Normal Growth:

Ke = DIV1 + G
P0

Where,
Ke = Cost of Equity
DIV1 = Dividend on Equity
P0 = Price of Equity Share
G = Growth Rate
(Note: There has been assumption that growth can be of two types one is constant growth and the
other is the change in the growth rate of every year)

2) Zero Growth:

Ke = DIV1

P0

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Where,
Ke = Cost Of Equity
DIV1 = Dividend on Equity

P0 = Price of Equity Share

ii) The Capital Asset Pricing Model:-

Ke = Rf + ( Rm - Rf) Be

Where,
Ke = Cost of Equity
Rf = Risk- Free Return
Rm = Market Return
Be = Beta of Share

The sectors selected for analyzing the WACC and seasonality are:

1. Pharmaceutical Sector- Bulk Drugs & Formln Lrg

2. Power Generation Sector

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Pharmaceutical Sector:

Indian Pharmaceuticals market is expected to triple by 2015. According to FICCI and E & Y
report on Indian Pharmaceutical industry, the Pharma market in India is expected to reach USD
20 billion by 2015 from USD 7.1 billion in 2007 with compounded annual growth rate of 12.3%
and also move into the world top 10 markets. It also stated that India would be a potential USD 8
billion market for multi-national companies with patented drugs accounting for nearly 8-10% of
the total market.

CIPLA:

Dr. Khwaja Abdul Hamied founded The Chemical, Industrial & Pharmaceutical Laboratories at
Mumbai, which came to be popularly known as Cipla. He gave the company all his patent and
proprietary formulas for several drugs and medicines, without charging any royalty. On August
17, 1935, Cipla was registered as a public limited company. Cipla was officially opened on
September 22, 1937 when the first products were ready for the market and now over 170
countries buy Cipla's products. Cipla's products & services are categorized into Prescription,
Animal Products, OTC, Bulk Drugs, Flavours & Fragrances, Agrochemicals and Technology.

As the Second World War cuts off drug supplies, the company starts producing fine chemicals,
dedicating all its facilities for the war effort in 1941. The government accepted Dr. Hamied's
blueprint for a technical industrial research institute in 1942, and led to the birth of the Council
of Scientific and Industrial Research (CSIR), which is today the zenith research body in the
country. In 1944, the company bought the premises at Bombay Central and decided to put up a
"first class modern pharmaceutical works and laboratory." It was also decided to acquire land
and buildings at Vikhroli. With severe import restrictions hampering production, the company
decided to commence manufacturing the basic chemicals required for pharmaceuticals. Cipla's
product for hypertension, Serpinoid, was exported to the American Roland Corporation, to the
tune of Rs 8 Lakhs during the year 1946. The company had lay down the first research division
for attaining self-sufficiency in technological development during the period of 1952 and the
company entered into an agreement with a Swiss firm for manufacturing foromycene. In 1960
the company started its operations at second plant at Vikhroli, Mumbai, producing fine
chemicals with special emphasis on natural products and the Vikhroli factory was started its
manufacturing of diosgenin in 1961. This heralded the manufacture of several steroids and
hormones derived from diosgenin. Cipla manufactures ampicillin in 1968; it was the first time of
its kind in the country.

The Agricultural Research Division at Bangalore was commenced to vigorous in 1972, for the
purpose of scientific cultivation of medicinal plants. Cipla launched the medicinal aerosols for

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asthma, wins Chemexcil Award for Excellence for exports and the fourth factory begins
operations at Patalganga, Maharashtra during the periods of 1976, 1980 and 1982 respectively.
The name of the Company was changed from The Chemical Industrial & Pharmaceutical
Laboratories Ltd., to the present one Cipla Ltd in July 1984 and Cipla Developed anti-cancer
drugs, vinblastine and vincristine in collaboration with the National Chemical Laboratory, Pune.
Wins Sir P C Ray Award for developing in-house technology for indigenous manufacture of a
number of basic drugs. In 1988, Cipla wins the National Award for Successful
Commercialisation of Publicly Funded R&D. Cipla launched etoposide; a breakthrough in cancer
chemotherapy by association with Indian Institute of Chemical Technology in 1991 and the
company pioneers the manufacture of the antiretroviral drug, zidovudine, in technological
collaboration with Indian Institute of Chemical Technology, Hyderabad. The fifth factory of the
company was started its commercial production at Kurkumbh, Maharashtra in the year 1994. As
a social responsibility, the company sets up the palliative cancer care centre through its
Foundation, begins offering free services in the year 1997 at Warje, near Pune. In 1998 the
company launched the product lamivudine, becomes one of the few companies in the world to
offer all three-component drugs of retroviral combination therapy (zidovudine and stavudine
already launched).

Launched Nevirapine, antiretroviral drug by the company in 1999, it used to prevent the
transmission of AIDS from mother to child. Cipla and Ranbaxy have entered into a strategic
partnership in the same year 1999 to jointly market a select basket of drugs. The alliance helped
their strengths in the strongly emerging cardiovascular and perennial anti-infectives market.
During the period 2000, Cipla became the first company, outside the USA and Europe to launch
CFC-free inhalers - ten years before the deadline to phase out use of CFC in medicinal products.
Four state-of-the-art manufacturing facilities sets up in Goa in a record time of less than twelve
months in the year 2002 and the second phase of manufacturing operations at Goa was
commissioned in 2003. The company launched TIOVA (Tiotropium bromide), a novel inhaled,
long-acting anticholinergic bronchodilator that is employed as a once-daily maintenance
treatment for patients with chronic obstructive pulmonary disease (COPD). In 2004, the
company signed a long-term agreement with Morton Grove Pharmaceuticals Inc (MGP) of
Illinois, US, for launch the product in US market and made alliance with Avesthagen forges.
Cipla has joined a global initiative taken up by the Vatican in collaboration with global generic
pharmaceutical manufacturers and the International Federation of Catholic Pharmacies and
Academics to float CUMVIVIUM. The company launched a new treatment for arthritis in
technical collaboration with California-based Cymbiotics Inc. During the period 2005, Cipla sets
up state-of-the-art facility for manufacture of formulations at Baddi, Himachal Pradesh.

As of February 2007, the company has entered into a development and supply agreement with
Drugs for Neglected Diseases Initiative (DNDi), a global non-profit organisation, for a new anti-
malarial combination drug as a global initiative. Cipla overtook Ranbaxy and GlaxoSmithKline

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India (GSK) to become the largest pharmaceutical company in the domestic market for the first
time in May 2007 and Cipla scores a generic win over Swiss drug major Roche for
manufacturing and selling generic versions of its patented anti-cancer drug Tarceva (Erlotinib) in
India in 2008.

CAPM Model: Market value

Cost of capital for a private firm

CIPLA

DATA Market value of equity 4,351


Market (or book) value of
debt 940
Tax rate 34%
Equity beta 0.41

RESULT 1+ (1-T)D/E 1.14


Unlevered equity beta 0.36

Private Company

DATA % Debt 18%


% Equity 82% Estimate value of equity from P/E of comparables
Tax rate 34%

RESULT 1+ (1-T)D/E 1.14


Multiply unlevered project = average of unlevered equity betas of comparable
beta 0.36 firms
Company equity beta 0.41

DATA Risk-free rate 8.50% = yield on long-term Treasury bonds


Market risk premium 6.50%

RESULT Company equity beta 0.41


Multiply by market risk
premium 6.50%
Equity risk premium 2.66%
Plus risk-free rate 8.50%
Cost of equity 11.16%

DATA Cost of debt 5.6%

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RESULT Weighted
Weights Cost

After-tax cost of debt 3.7% 17.8% 0.7%


Cost of equity 11.2% 82.2% 9.2%
Weighted average cost of
capital 9.8%

Dividend Growth Model:

Dividend % Growth in
Years Yield% EPS EPS(GEPS)
2009 0.91 9.65
2008 0.91 8.68 0.111751152
2007 0.85 8.25 0.052121212
2006 0.76 19.54 -0.57778915
2005 3.43 13.16 0.484802432
2004 16.03 49.22 -0.732629013
2003 17.49 40.03 0.229577817
2002 8.6 39.2 0.021173469
2001 5.63 29.4 0.333333333
2000 6.13 21.86 0.344922232
Average 6.074 Arithmetic Mean of GEPS 0.029695943

Dividend Growth Model


Average Dividend Yield 6.07%
Arithmetic mean growth of EPS 2.97%

Re = (Dividend Yield + EPS growth rate) 9.04%

Using Dividend-Growth Model


WACC = [E/(D+E)*Re] + [D/(D+E)*Rd]

We=Weight of Equity [E/(D+E)] 0.822306


Wd=Weight of Debt [D/(D+E)] 0.177694
Re 9.04%
Rd 3.7%

Weighted average cost of capital 8.09%

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Seasonality of Stock

MACD Model: Analysis

From the MACD models shown in the Annexure for Cipla it is clear that the share price of this is
constantly below the Sensex and the graph for the MACD is also plotted.

Now as can be seen from the second figure that the various important dates in the stocks existence are
as follows

22nd Aug 2003-Dividend Final-100%

11th May 2004-Split FV-10 to FV-2

19th Aug 2004-Dividend Final- 150%

19th Aug 2005-Dividend final -175%

24th April 2006-Bonus Ratio-2:3

18th Aug 2006-Dividend Final-100%

8th August 2007- Dividend Final-100%

12th Aug 2008- Dividend Final-100%

10th Aug 2009- Dividend Final-100%

Thus it can be seen that always prior to the dividend being given ie when the dividend is
announced for the stocks, there is a spike in the volume till the date the dividend are given. Here
the shares are purchased till the date announced in the circular for the dividend to be given. But
once after the dividend is given the volumes traded of the stock decreases and this is a common
trend observed and the trend usually is observed for Cipla from Mid July to second week of June.
This trend has been observed year on year and the graph also iterates the same.

Also the share prices soar high when the volumes traded rises and hence usually can be seen
from the graph as well.

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DR.REDDY’S LAB:

Dr. Reddy's Laboratories was came to on track in the year 1984 in Hyderabad, it was established
by Dr Anji Reddy with an initial capital outlay of Rs.25 lakhs. It is a global pharmaceutical
company with a presence in more than 100 countries and its doing well with wholly-owned
subsidiaries in the US, UK, Russia, Germany and Brazil; joint ventures in China, South Africa
and Australia; representative offices in 16 countries; and third-party distribution set ups in 21
countries. The company proven research capabilities and vertically integrated with a presence
across the pharmaceutical value chain and it conducts research in the areas of diabetes, obesity,
cardiovascular diseases, anti-infectives and inflammation. The Indian based company produces
finished dosage forms, active pharmaceutical ingredients and biotechnology products which are
marketed globally, with focus on India, US, Europe and Russia.

The company made its beginning with the manufacture of Active Pharmaceutical Ingredients
and Intermediates (API) in 1984 and commenced operations with a single drug in a 60-tonne
facility near Hyderabad, India. In 1986, the first consignment of that drug, Methyldopa, was
shipped to West Germany. In 1988 the company acquired Benzex Laboratories Pvt. Limited to
expand its Bulk Actives business and in the next year it acquired American Remedies Limited, a
pharmaceutical company based in India. In the year 1993 the company established Dr. Reddy's
Research Foundation and started its Drug Discovery program. The company has membership in
WTO since April 1994 and in the same year 1994 the company Makes a GDR issue of USD 48
million.

The Company's Custom Pharmaceutical Services (CPS) business was formed in the year 2001,
and in 2002 conducts its first overseas acquisition - BMS Laboratories Limited and Meridian
Healthcare in UK, the company received ASIASTAR Award for Packaging Excellence 2002 for
Mintop Forte - Customer Convenience Pack by Asian Packaging Federation in the year.
Announced a 15-year exclusive product development and marketing agreement for OTC drugs
with Leiner Health Products in the US by the company in the year 2003 and launched Ibuprofen,
first generic product to be marketed under the "Dr. Reddy's" label in the US and it conferred
WORLDSTAR Award for Packaging Excellence 2003 For Omez capsules pack with Anti-
Counterfeiting Features. The acquisition of Trigenesis gives the company to access drug delivery
technology platforms in the year 2004. Dr. Reddy's Lab increased focus point in CPS business
after the acquisition of Roche's API manufacturing unit, Mexico in the year 2005 and in the same
year the company acquired Roche's API Business at the state-of-the-art manufacturing site in
Mexico with a total investment of USD 59 million. Announced the formation of Perlecan
Pharma: India's First Integrated Drug Development Company and again announced India's first
major co-development and commercialization deal for it's molecule Balaglitazone (DRF 2593),
with Rheoscience. It made unique partnership for the commercialization of ANDAs with ICICI
Venture, the Best Management Award 2005 by Labour Department, Govt. of Andhra Pradesh,

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India came to the company. In the year 2006 the company acquired Betapharm- the fourth-
largest generics company in Germany for a total enterprise value of ? 480 million and received
Finance Asia Achievement Awards 2006 for Best India Deal - acquisition of Betapharm. Dr.
Reddy's Lab becomes No.1 pharmaceutical company in India in turnover and profitability as on
2007.

The appreciation and recognition is a role to boost, as part the company has received plenty of
awards and applications already, continued that, the company got Pharma Excellence Awards
2006-07 under the category of Sustained Growth by The Indian Express, Dun & Bradstreet
American Express in Corporate Awards 2007, Best Corporate Social Responsibility Initiative
2007 by BSE - India and Amity Leadership Award for Best Practices in HR in Pharmaceutical
Sector. 4th HR Summit '08.

Dr Reddy's Laboratories has entered into a settlement agreement with Novartis Pharma AG on
January 2008, which involves a stipulation of dismissal of the lawsuits in the United States
relating to the Abbreviated New Drug Applications filed by the company for a generic version of
rivastigmine tartrate capsules sold under the trade-name Exelon and in same month and year the
company has launched Supanac (Diclofenac potassium immediate release 50 mg tablets) in
India, increasing its offering in the Rs 2700 crores in NSAID market. Supanac is in-licensed
from Applied Pharma Research (APR), Switzerland and is used for Acute Pain management. On
February, 2008 the company has entered into an agreement with SkyePharma PLC to undertake
a feasibility study of a product utilizing two of SkyePharma's proprietary drug delivery systems.
Dr. Reddy's Laboratories announced that it has entered into a definitive agreement with The Dow
Chemical Company to acquire a portion of Dowpharma Small Molecules business associated
with its United Kingdom sites in Mirfield and Cambridge on 1st April 2008. In the same month
of same year Dr.Reddy's Lab and 7TM Pharma has announced the signing of drug discovery
collaboration on selected drug targets in the area of metabolic disorders. Under the terms of the
agreement, Dr. Reddy's and 7TM Pharma will collaborate to identify clinical candidates for pre-
selected targets. Both the parties will jointly develop these candidates from the pre-clinical stage
up to Phase IIa (proof-of-concept). As on April 2008, the company has acquired Jet Generici Srl,
a company engaged in the sale of generic finished dosages in Italy. The deal has been completed
via Dr Reddy's Italian subsidiary.

To help people lead healthier lives by delivering affordable and accessible medication to all
parts of the world and discovering, developing and commercializing innovative medicines that
satisfy unmet medical needs are the two parallel objectives of Dr. Reddy's Laboratories Limited,
and it is sustain path of the company to survive.

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CAPM Model: Market value

Cost of capital for a private firm

Dr Reddy’s
Lab

DATA Market value of equity 5,259


Market (or book) value of
debt 640
Tax rate 34%
Equity beta 0.45

RESULT 1+ (1-T)D/E 1.08


Unlevered equity beta 0.42

Private Company

DATA % Debt 11%


Estimate value of equity from P/E of
% Equity 89% comparables
Tax rate 34%

RESULT 1+ (1-T)D/E 1.08


Multiply unlevered project = average of unlevered equity betas of
beta 0.42 comparable firms
Company equity beta 0.45

DATA Risk-free rate 8.50% = yield on long-term Treasury bonds


Market risk premium 6.50%

RESULT Company equity beta 0.45


Multiply by market risk
premium 6.50%
Equity risk premium 2.93%
Plus risk-free rate 8.50%
Cost of equity 11.4%

DATA Cost of debt 4.3%

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RESULT Weighted
Weights Cost

After-tax cost of debt 2.8% 10.9% 0.3%


Cost of equity 11.4% 89.1% 10.2%
Weighted average cost of
capital 10.5%

Dividend Growth Model:

Dividend % Growth in
Years Yield% EPS EPS(GEPS)
2009 1.28 35.25
2008 0.63 27.62 0.276249095
2007 0.52 69.45 -0.602303816
2006 0.7 26.82 1.589485459
2005 1.35 7.85 2.41656051
2004 1.03 36.37 -0.784162772
2003 1.09 50.6 -0.281225296
2002 1.37 59.56 -0.150436535
2001 1.28 45.32 0.314210062
2000 0.74 22.36 1.026833631
Average 0.999 Arithmetic Mean of GEPS 0.422801149

Dividend Growth Model


Average Dividend Yield 1.00%
Arithmetic mean growth of EPS 42.28%

Re = (Dividend Yield + EPS growth rate) 43.28%

Using Dividend-Growth Model


WACC = [E/(D+E)*Re] + [D/(D+E)*Rd]

We=Weight of Equity [E/(D+E)] 0.891507035


Wd=Weight of Debt [D/(D+E)] 0.108492965
Re 43.28%
Rd 2.8%

Weighted average cost of capital 38.89%

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Seasonality of Stock:

MACD Model: Analysis

From the MACD models shown in the Annexure for Dr Reddy’s Lab it is clear that the share price of this
is constantly below the Sensex and the graph for the MACD is also plotted.

Now as can be seen from the second figure that the various important dates in the stocks existence are
as follows

10th Oct 2001-Old FV-10 to New FV-5

8th Aug 2002-Dividend Final-50%

8th Aug 2003-Dividend Final-100%

13th Jul 2004-Dividend Final-100%

7th Jul 2005-Dividend Final-100%

7th Jul 2006-Dividend Final-100%

28th Aug 2006-Bonus Ratio-1:1

6th Jul 2007-Dividend Final-75%

4th Jul 2008-Dividend Final-75%

3rd Jul 2009-Dividend Final-125%

Thus it can be seen that always prior to the dividend being given ie when the dividend is
announced for the stocks, there is a spike in the volume till the date the dividend are given. Here
the shares are purchased till the date announced in the circular for the dividend to be given. But
once after the dividend is given the volumes traded of the stock decreases and this is a common
trend observed and the trend usually is observed for Dr Reddy’s Lab from Mid June to first week
of June.This trend has been observed year on year and the graph also iterates the same.

Also the share prices soar high when the volumes traded rises and hence usually can be seen
from the graph as well.

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Power Sector:

Power sector continue to thrive on the sustained power deficit in the country. New capacity
generation additions targets within in the five year plan period as well as outside of it under
merchant basis though has increased in the 11th five year plan period the industry players who
has got feedstock/fuel for its plants as well as with better execution capability are better
positioned to capitalize on current market conditions.

On the demand side the country has an ambitious plan to ensure Electricity to all by 2012, under
Rajiv Gandhi Grameen Vidyutikaran Yojana. Currently, there are about 1 lakh Un-electrified
villages in the country. Even where they are available, the quantity and quality needs significant
improvements. The rising domestic demand, increasing industrialization and unmet demand
together is expected to drive power demand.

Integrated Energy Policy has projected the peak demand to be at about 158 GW (at a GDP
growth of 8%) by 2012. Considering the low capacity utilization of older plants (leading to low
Plant Load Factor (PLF)), higher AT&C (average transmission & commercial) losses, to meet
the above peak demand, ideally an installed generation capacity of 220 GW (1 GW = 1000 MW)
is wanted for the country by 2012.

Currently, India's generation capacity (excluding renewable energy) is only 139 GW, which
means, we need to add 81 GW by March 2012. This calculation factors in rise in PLF and fall in
AT & C losses too, on which front India is making progress, but at a slower pace. As against
this, we have added only 14.337 GW between April 2007 and August 2009.

As against 81 GW required, the country may at best add 62 GWH in 2007-12 against the 11th
plan target of 78.7 GW. This continues to leave the country as power deficit in the medium term.

NTPC:

NTPC Limited is the largest power generating and Navratna status company of India; it was
incorporated in the year 1975 as National Thermal Power Corporation Private Limited to
accelerate power development in the country. As a wholly owned company of the Government
of India, NTPC has emerged as a truly national power company, with power generating facilities
in all the major regions of the country. NTPC's core business is engineering, construction and
operation of power generating plants. NTPC as an integrated Power Major with presence in
Hydro Power, Coal mining, Oil & Gas exploration, Power Distribution & Trading and also enter
into Nuclear Power Development. It provides consultancy also in the area of power plant
constructions and power generation to companies in India and abroad. It is providing power at

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the cheapest average tariff in the country. With its experience and expertise in the power sector,
also NTPC is extending consultancy services to various organisations in the power business. The
consulting Wing of NTPC is an ISO 9001:2000 accreditation. In the year of 1982, the company
commissioned the first Singrauli unit.

The Company's status was converted into a public limited in the year 1985 and the name was
changed to National Thermal Power Corporation Limited. In the year 1989, the company
commissioned first gas based combined cycle plant (88MW) at Anta, Rajasthan and its
consultancy services division was commissioned during the same year. The Company had taken
over the 2x210 Mw Feroze Gandhi Unchahar Thermal Power Station in the year 1991, which
was owned by UP RajyaVidyut Utpadan Nigam of Uttar Pradesh. The first gas turbine was
synchronised in 1991-92 and the Unit-I of the company was synchronised in March of the year
1992. Pursuant to legislation by Parliament of India, the transmission systems owned by the
company was transferred to Power Grid Corporation of India Ltd during the year of 1992. The
Company's three gas turbines and two steam turbines were commissioned in the 1992-93. A
tripartite agreement was signed between NTPC, UPSEB and GAIL for direct power supply to
GAIL during the year of 1994. NTPC had undertook the 4x60 MW + 2x110 MW Talcher
Thermal Power Station during the year of 1995 from the Orissa State Electricity Board. MOUs
had signed with M/s. Nagarjuna Litecrete Ltd. and M/s. Ria-Shelcon for setting up ash based
products manufacturing units with ash from Ramagundam and Farakka Power Stations.

In 1998, the company commissioned the first Naptha based plant at Kayamkulam with a
capacity of 350MW. Maharashtra State Electricity Board has signed separate power purchase
agreement with the company for the total power supply of 1,345 mw from Kawas-II, Gandhar-II,
Vindhyachal-II and Siptat power stations in the year of 2000. NTPC has signed a memorandum
of understanding with the Ministry of Power for generating 9,4000 million units of electricity
during the year. The Company forayed into wind power segment, started the preliminary work
on two projects in Karnataka and Tamil Nadu each with a capacity of 20 MW. The Company has
established a 2000MW gas-based power plant near Mangalore. The 4x110 MW of Tanda
Thermal Power Station, which was taken by the company in the year 2000, the UP State
Electricity Board formerly owned it. NTPC has launched a drive to recover arrears from the
electricity boards of Maharashtra, Madhya Pradesh, Gujarat, Goa, Daman and Diu and Dadra
Nagarhaveli. The Company has signed a memorandum of understanding with the government to
generate 1,21,000 million units of electricity during 2001-2002.

During the year 2002, the company incorporated three wholly owned subsidiary of the company
viz. NTPC Electric Supply Company Limited, NTPC Hydro Limited and NTPC Vidyut Nigam
Limited. Golden Peacock Award conferred to the company for Corporate Social Responsibility
in14th November of the year 2003. Unit IV (500 MW) of Talcher Super Thermal Power Project -
Stage II (TSTPP-II) of THE COMPANY has been successfully synchronized on 6th February

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WACC and Seasonality of Stock

2005. The 500 MW Unit at Ramagundam Super Thermal Power Station has commenced
commercial operation on 25th March 2005. In May of the year 2005, NTPC and Defence
Metallurgical Research Laboratory (DMRL) have signed an MOU. NTPC has bagged IPMA
International Project Management Award 2005 for its Simhadri Thermal Power project on 15th
November 2005.

NTPC established the medium Term Note ('MTN') Programme in February of the year 2006 to
facilitate the raising of funds on a regular basis from the international debt capital markets and
also signed an MOU with Delhi Transco Ltd., (DTL) on 10th February 2006 for expansion of
one of its stations namely National Capital Power Station Stage-II at Dadri (U. P.). During the
March of the year 2006, NTPC Ltd has entered into a Memorandum of Understanding with
Petronet LNG Limited for arranging one MMTPA of LNG, which used to overcome shortage of
gas at the existing gas power stations of NTPC. The Company had taken over the Badarpur
Thermal Power Station with the capacity of 705MW in the year 2006 from Central Electricity
Authority. The Company had signed a Memorandum of Understanding in 11th March of the year
2006 with the Energy and Resources Institute (TERI) for implementation of distributed
generation projects in villages in India.

A 500 MW unit of Vindhyachal Super Thermal Power Project - Stage III of NTPC Limited
located in the state of Madhya Pradesh has been successfully synchronized on 27th July 2006.
NTPC Limited and Singareni Collieries Company Limited have signed a Memorandum of
Understanding during August of the year 2006, for creation of a Joint Venture Company to
undertake various activities in coal and power sectors including acquisition of coalmines,
development and operation of integrated coal based plants and providing consultancy services.
The Company has signed a Memorandum of Agreement (MOA) in September 21st of the year
2006 with the Government of Arunachal Pradesh for implementation of the following two
hydroelectric power projects in the States of Arunachal Pradesh. NTPC had formed a joint
venture Company under the name and style of 'Aravali Power Company Pvt Ltd' on December
21, 2006 with Haryana Power Generation Corporation Ltd (A Government of Haryana
Undertaking). The Company has signed a MoU in February 14th of the year 2007 with Bharat
Earth Movers Limited (BEML) for collaborating and associating with NTPC for a long-term
mutually beneficial business.

A 500 MW unit of Vindhyachal Super Thermal Power Project, Stage III of NTPC Limited
located in the state of Madhya Pradesh has been successfully (test) synchronized in the night of
8th March 2007. Signed a Memorandum of Understanding with Coal India Limited on
15.03.2007 for undertaking development, operation & maintenance of coal blocks and integrated
coal based power plants. NTPC signed an agreement for a term loan of USD 100 million with
KFW of Germany on March 23, 2007 at Frankfurt am Main.

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WACC and Seasonality of Stock

During the year 2007-08, the MOU was signed with ADB for establishment of power generation
capacity of about 500 MW through Renewable Energy Sources. The JVA was signed between
NTPC and BSEB for setting up 3x660 MW at Nabinagar, Bihar and also another one JVA was
signed with UPRVUNL to set-up 2x660 MW power project at Meja Tehsil in Allahabad, UP.
The Joint Venture Company (Subsidiary of NTPC) under the name of 'Bhartiya Rail Bijlee
Company Limited' incorporated with Railways for setting up 1000 MW coal based power plant
at Nabinagar, Bihar. Business Collaboration and Share Holder's Agreement signed with Govt. of
Kerala and TELK to acquire around 44.6% stake of TELK. The MOU was signed with Bharat
Forge Limited for setting up a new facility to take up manufacture of Balance of Plant
equipments, castings, forgings, fittings etc. JVA signed with BHEL for taking up activities
related to carrying out EPC and manufacturing of equipments in the period of 2007-08. The 500
MW Unit-I at Sipat Super Thermal Power Project, Stage-II has commenced commercial
operation in June of the year 2008. NTPC has signed a Memorandum of Understanding (MOU)
with Secretary (Power), Government of India for generating 2.09 billion units of Electricity
during the financial year 2008-09.

Developing and operating world-class power stations is NTPC's core competence. Its scale of
operation, financial strength and large experience serve to provide an advantage over
competitors. To meet the objective of making available reliable and quality power at competitive
prices, NTPC would continue to speedily implement projects and introduce state-of-art
technologies.

CAPM Model: Market value

Cost of capital for a private firm

NTPC

DATA Market value of equity 59,914 .

Market (or book) value of debt 34,568


Tax rate 34%
Equity beta 0.56

RESULT 1+ (1-T)D/E 1.38


Unlevered equity beta 0.41

Private Company

DATA % Debt 37%


% Equity 63% Estimate value of equity from P/E of comparables

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Tax rate 34%

RESULT 1+ (1-T)D/E 1.38


Multiply unlevered project beta 0.41 = average of unlevered equity betas of comparable firms
Company equity beta 0.56

DATA Risk-free rate 8.50% = yield on long-term Treasury bonds


Market risk premium 6.50%

RESULT Company equity beta 0.56


Multiply by market risk premium 6.50%

Equity risk premium 3.66%


Plus risk-free rate 8.50%
Cost of equity 12.16%

DATA Cost of debt 5.9%

RESULT Weighted
Weights Cost

After-tax cost of debt 3.9% 36.6% 1.4%


Cost of equity 12.2% 63.4% 7.7%
Weighted average cost of capital 9.1%

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WACC and Seasonality of Stock

Dividend Growth Model:

% Growth in
Years Dividend Yield(%) EPS EPS(GEPS)
2009 0.02 9.34
2008 0.0178 8.4 0.111904762
2007 0.0214 7.85 0.070063694
2006 0.0209 6.67 0.176911544
2005 0.028 6.72 -0.007440476
2004
2003
2002
2001
2000
Arithmetic Mean of
Average 0.02162 GEPS 0.087859881

Dividend-Growth Model
Average Dividend Yield 2.162%
Arithmetic mean growth of EPS 8.786%

Re = (Dividend Yield + EPS growth rate) 10.95%

Using Dividend-Growth Model


WACC = [E/(D+E)*Re] + [D/(D+E)*Rd]

We=Weight of Equity [E/(D+E)] 0.634132


Wd=Weight of Debt [D/(D+E)] 0.365868
Re 10.95%
Rd 3.90%

WACC 8.37%

2009A06 Page 24
WACC and Seasonality of Stock

Seasonality of Stock

MACD Model:

From the MACD models shown in the Annexure for NTPC Ltd it is clear that the share price of this is
constantly below the Sensex and the graph for the MACD is also plotted.

Now as can be seen from the second figure that the various important dates in the stocks existence are
the dates when the dividends are given out and the volumes traded when the dividend is announced is
high.

Thus it can be seen that always prior to the dividend being given ie when the dividend is
announced for the stocks, there is a spike in the volume till the date the dividend are given. Here
the shares are purchased till the date announced in the circular for the dividend to be given. But
once after the dividend is given the volumes traded of the stock decreases and this is a common
trend observed and the trend usually is observed for NTPC say a month before the dividend is
given. This trend has been observed year on year and the graph also iterates the same. Also the
share prices soar high when the volumes traded rises and hence usually can be seen from the
graph as well.

Also the share prices soar high when the volumes traded rises and hence usually can be seen
from the graph as well.

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. The Company operates in two
business segments: Power and Other. The Power segment is engaged in generation, transmission
and distribution of electricity. The other segment deals with electronic equipment, project
consultancy.

The Tata-Ebasco Consulting Engineering Services' was established based on partnership with
Ebasco India, Ltd for consulting engineering together with its two associated companies in the
year 1961. In the year 1969, a new company under the name Chemical Terminal Trombay Ltd
was formed in participation with other Tata Companies and Elephanta India Private Ltd to
installation of storage tanks on a part of the Company's ash disposal area at Trombay and the

2009A06 Page 25
WACC and Seasonality of Stock

laying of a pipeline connecting the storage tanks with the Mumbai Port Trust's pier at Pir Pau.
TPC sets up its new manufacturing facility at Bangalore during the year 1980, for commercial
production of electronic items designed by its R&D laboratory. The company constructed a new
double circuit 22/110 KV transmission line in the year 1987 at North Mumbai from Borivli to
Malad to meet the requirements of Municipal Corporation of Greater Mumbai besides meeting
loads in Kandivili, Malad, etc.

TPC has undertaken a 180 MW combined cycle plant at Trombay using gas turbines. In 1989,
six new outlets for BEST at 33 KV from Carnac receiving stations were commissioned during
the year. In the same year the company also associated with Siemens in the erection and
commissioned the mechanical and electrical equipment for the 4 x 130 MW gas turbines and 2 x
150 MW steam turbines at NTPC's combined cycle power plant at Dadri in Uttar Pradesh. The
second 500 MW units 6 at Trombay was trial synchronized with the grid on 23rd March 1990.
The Company took up two major generation projects, viz., 150MW Pumped Storage Unit at
Bhira and a gas-based 180 MW Combined Cycle Plant at Trombay Thermal Power Station in
case of a major system disturbance and supply power to essential consumers, viz., Railways,
BMC, BARC, etc. TPC started one new 110 KV substation at Versova during 1991, which
comprised 2 x 90 MVA, 110/33 KV power transformers along with 33 KV indoor
SF6switchgear and supervisory control and data acquisition system and also another one
switching station was established in the same year, which comprised 3 x 250 MVA, 220/110/33
KV autotransformers, space saving 245 KV gas insulated switchgear and supervisory control and
data acquisition system.

The modern 22 KV indoor SF6switchgear was installed at Salsette and also the 60 MVAR new
capacitor banks were installed during the year 1992 at Versova and Malad. Apart from these,
replacement of 110 KV oil circuit breakers by modern SF6 breakers at Kalyan, Ambernath,
Vikhroli and Salsette receiving stations and extension of fibre optic communication network
were also carried out during the same year. In 1994, the Trombay Unit-7 steam turbine generator
of the company was harmonized, which generated 650 MUS with PLF of 61.9%. During the
year, the Company undertook the work of strengthening dams as per designs codes in respect of
earthquakes.

The Government of Maharashtra had accorded its permission for rebuilding a dam at Somwadi.
A MoU was signed between TEC and the Tennesse Valley Authority of USA for renovation and
modernisation of power plants. In the same year 1994, the Company issued 91,549 Global
Depository Shares. The 150 MW Pumped storage unit was commissioned in the year 1995,
based on the synchronous condenser mode and also the Company undertook the work of
modernisation and renovation of old 12 MW hydro units at Bhivpuri and Khopoli Generating
Stations. In the year 1996, the generating station five 25 MW units were refurbished by
installation of new modern turbine runners of higher efficiency at Bhira. During same the year,

2009A06 Page 26
WACC and Seasonality of Stock

the Company bagged the Multi-fuel based 80 MW power project from the Government of
Karnataka. The thermal Units at Trombay operated by the company in the year 1997 based on-
line availability of about 74% and utilization of about 64.3%. TPC entered into a Joint Venture
Agreement with Total Gas and Power India in the year 1998 for establishment of LNG Terminal
at Trombay.

During 1999, the company acquired a generating station consisting of 37.5 MW Unit at Wadi,
Karnataka and also in the year the Power Purchase Agreement for 81.3 MW Diesel-based Power
Plant at Belgaum, Karnataka was signed with Karnataka Electricity Board. Tata Power Company
has obtained A' licence as Internet service provider that enables it to operate throughout the
country in the year 2000. The Andhra Valley Power Supply Company Ltd and Tata Hydro
Electric Supply Company Ltd were merged with the company in the same year 2000. Tata Power
Company Ltd on September of the year 2001, decided to sell its stake consisting of 45 lakh
shares in Tata Liebert Ltd (TLL) considering of Rs 170 per share to Emerson Electric
(Mauritius) Ltd. The Company signed an agreement with Power Grid Corporation of India Ltd
for 'Tala Transmission Line' in the year 2002. The 120 MW Unit 3 at the Jojobera Power Plant of
the Company situated in Jamshedpur was commenced its commercial production. TPC has
signed the share acquisition agreement with Gvt of National Capital Territory of Delhi to acquire
the North North-West Delhi Distribution Co. Ltd. (Discom-III), a distribution company
belonging to the Delhi Vidyut Board (DVB), which supplies power to north and northwestern
Delhi. The company ties up with the UK-based energy major British Petroleum to jointly work
on 2,184 mw Dabhol power project during the year 2003. During the same year 2003, TPC
awarded the contract for supply and construction of 180 KM long 400 KV Double Circuit
Transmission Line from Palandur to Chandrapur (Maharashtra) By Power Grid Corporation of
India Ltd. Tata Power infuses Rs 352 crore in the group's telecom businesses.

Tata Power acquired 100% equity stake in Tata Power Trading Co. Pvt Ltd in the year 2004.
The Christened Tata Power Trading Company was incorporated in the year as a subsidiary of the
company. TPC has signed a Development Agreement with GAIL India Ltd & BP to jointly
participate in evaluating the Dabhol gas and power opportunity. A MoU was signed with
National Power Company of Al-Zamil Group, Kingdom of Saudi Arabia. The company bagged
the 2nd Wartsila - Mantosh Sondhi Award for outstanding contribution to the Indian Power
Sector in 2004. Tata Power signed a generation pact with DVC on Maithon Project in the year
2005 and entered into an agreement for sale of shares in Tata Power Broadband. The company
received CII EXIM Bank Award 2005 for 'Certificate for Strong Commitment to Excel'. During
the period of 2006, the company joined hands with Siemens. The company signed a joint venture
agreement with Tata Steel to set up a Captive Power plants in Chattisgarh, Orissa and Jharkhand.
The company received seven licenses from the Gvt of India, Ministry of Commerce and
Industry, Dept of Industrial Policy & Promotion for its Strategic Electronics Division (Tata
Power SED).

2009A06 Page 27
WACC and Seasonality of Stock

In the year 2007, TPC has signed a MoU with the Government of Chhattisgarh for the setting up
of a 1000 MW coal fired mega power plant in the State. The company has roped in Korea-based
Doosan Heavy Industries and Construction Ltd for supercritical boilers for its Mundra ultra mega
power project. The acquisition of Coastal Gujarat Power Ltd was med by the company and a
Special Purpose Vehicle (SPV) formed for Mundra Ultra Mega Power Project (UMPP). TPC has
signed an EPC contract for supply of five (5) 800 MW Steam Turbine Generators with Toshiba
Corporation for the first 4000 MW Ultra Mega Power Project (UMPP) in India to be located at
Mundra, Gujarat in August 2007.

As on February 2008, The Tata Power Company Limited (Tata Power) and Damodar Valley
Corporation (DVC) jointly completed its financing for the 1050 MW coal based thermal power
project, being set up in Dhanbad District of Jharkhand State. Recognising the steady and stable
performance in generating quality and reliable energy, the Central Electricity Authority has
awarded Tata Power's Bhira Hydro generation facility with the Silver Shield award for the
meritorious performance in March 2008. April of the year 2008, the Tata Power Completes the
Signing of Financial Agreements for 4000 MW Ultra Mega Power Project, coming up at
Mundra, Gujarat under the Special Purpose Vehicle (SPV) Coastal Gujarat Power Limited
(CGPL). The cost of the project is estimated at INR 17000 crores (USD 4.2 billion). Tata Power
announced in September of the year 2008, it would acquire a 11.4 per cent stake in Geodynamics
Ltd, an Australian company specialising in geothermal energy, for Rs 165 crore.

Tata Power is surging ahead, lighting up lives through its activities from its inception. The
challenge of fulfilling the ever growing needs of power have been met by Tata Power through
efficient generation, transmission, distribution and constant upgradation of its technology in
every aspects.

CAPM Model: Market value

Cost of capital for a private firm

DATA Market value of equity 8,692


Market (or book) value of
debt 5,198
Tax rate 34%

Equity beta 0.83

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WACC and Seasonality of Stock

RESULT 1+ (1-T)D/E 1.40

Unlevered equity beta 0.60

Private Company

DATA % Debt 37%


% Equity 63% Estimate value of equity from P/E of comparables
Tax rate 34%

RESULT 1+ (1-T)D/E 1.40


Multiply unlevered project = average of unlevered equity betas of comparable
beta 0.60 firms

Company equity beta 0.83

DATA Risk-free rate 8.50% = yield on long-term Treasury bonds


Market risk premium 6.50%

RESULT Company equity beta 0.83


Multiply by market risk
premium 6.50%
Equity risk premium 5.41%
Plus risk-free rate 8.50%
Cost of equity 13.9%

DATA Cost of debt 6.3%

RESULT Weighted
Weights Cost

After-tax cost of debt 4.2% 37.4% 1.6%


Cost of equity 13.9% 62.6% 8.7%
Weighted average cost of capital 10.3%

2009A06 Page 29
WACC and Seasonality of Stock

Dividend Growth Model:

% Growth in
Years Dividend Yield(%) EPS EPS(GEPS)
2009 0.015 40.21
2008 0.009 38.19 0.052893428
2007 0.0186 33.59 0.136945519
2006 0.0147 29.66 0.132501686
2005 0.021 26.8 0.106716418
2004 0.0186 25.72 0.041990669
2003 0.0575 26.27 -0.020936429
2002 0.0441 25.68 0.022975078
2001 0.0504 19.69 0.304215338
2000 0.0625 20.08 -0.019422311
Arithmetic Mean of
Average 0.03114 GEPS 0.084208822
Dividend-Growth Model
Average Dividend Yield 3.114%
Arithmetic mean growth of EPS 8.421%

Re = (Dividend Yield + EPS growth


rate) 11.53%

Using Dividend-Growth Model


WACC = [E/(D+E)*Re] +
[D/(D+E)*Rd]

We=Weight of Equity [E/(D+E)] 0.625775


Wd=Weight of Debt [D/(D+E)] 0.374225
Re 11.53%
Rd 4.20%

WACC 8.79%

Seasonality of Stock

MACD Model:

2009A06 Page 30
WACC and Seasonality of Stock

From the MACD models shown in the Annexure for Tata Power Ltd it is clear that the share price of this
is constantly above the Sensex and the graph for the MACD is also plotted.

Now as can be seen from the second figure that the various important dates in the stocks existence are
the dates when the dividends are given out and the volumes traded when the dividend is announced is
high.

Thus it can be seen that always prior to the dividend being given ie when the dividend is
announced for the stocks, there is a spike in the volume till the date the dividend are given. Here
the shares are purchased till the date announced in the circular for the dividend to be given. But
once after the dividend is given the volumes traded of the stock decreases and this is a common
trend observed and the trend usually is observed for Tata Power say a month before the dividend
is given. This trend has been observed year on year and the graph also iterates the same. Also the
share prices soar high when the volumes traded rises and hence usually can be seen from the
graph as well.

Also the share prices soar high when the volumes traded rises and hence usually can be seen
from the graph as well.

2009A06 Page 31
WACC and Seasonality of Stock

Annexure:

Cipla: Technical Analysis:

2009A06 Page 32
WACC and Seasonality of Stock

2009A06 Page 33
WACC and Seasonality of Stock

Dr Reddy’s Lab:Technical Analysis:

2009A06 Page 34
WACC and Seasonality of Stock

NTPC: Technical Analysis:

2009A06 Page 35
WACC and Seasonality of Stock

Tata Power: Technical Analysis:

2009A06 Page 36
WACC and Seasonality of Stock

Bibliography:

1) Financial Management (Ninth Edition) by I M Pandey.


2) Financial Management (Fifth Edition) by Prasanna Chandra.
3) www.moneycontrol.com
4) www.capitaline.com
5) Software of IAS & Prowess from computer laboratory of SCMHRD.
6) Yahoo Finance
7) www.myiris.com
8) http://money.livemint.com/LiveMarket

2009A06 Page 37