INTRODUCTION
The Indian Equity Market has mainly two indices i.e. NIFTY and SENSEX. The
equity market of India is one of the oldest in the Asia region. India had an active stock
market for about 150 years that played a significant role in developing risk markets as
also promoting enterprise and supporting the growth of various industries. India has been
one of the best performers in the world economy in recent years, but rapidly rising
inflation and the complexities of running the worlds biggest democracy are proving
challenging.
STRUCTURE OF EQUITY MARKET:
The Indian market of equities is transacted on the basis of two major stock
exchanges, National Stock Exchange of India Ltd. (NSE) and The Bombay Stock
Exchange (BSE). In terms of market capitalization, there are over 2500 companies in the
BSE chart list with the Reliance Industries Limited at the top. The SENSEX at present is
ranging between the level of 15000-17000 providing a profitable business to all those
who had been investing in the Indian Equity Market. There are about 23 stock exchanges
in India which regulates the market trends of different stocks.
Generally the bigger companies are listed with the NSE and the BSE, but there is
Over the Counter Exchange of India (OTCEI), which lists the medium and small sized
companies. SEBI is the body who governs and supervises the functioning of the stock
markets in India.
Stock markets became intensely technology and process driven, giving little scope
for manual intervention that has been the source of market abuse in the past. Electronic
trading, digital certification, straight through processing, electronic contract notes, online
broking have emerged as major trends in technology. Risk management became robust
reducing the recurrence of payment defaults. Product expansion took place in a speedy
manner. Stock exchange reforms brought in professional management separating
conflicts of interest between brokers as owners of the exchanges and traders/dealers.
RESEARCH DESIGN:
Research design selected for this project is descriptive.
BENEFICIARY:
1.
2.
3.
4.
LIMITATIONS:
1. Intrinsic values are based on operating income only and no other inflows
are considered.
2. Project is restricted to PSEs representing NIFTY 50 and not all PSEs.
3. No company visits are possible so assumptions are based on secondary
data, current scenario and statistics of RBI.
CHAPTER-II
REVIEW OF LITERATURE
EQUITY VALUATION
Every asset has a value; we just dont know what it is, states Professor
Damodaran. Thus valuation is the first step toward intelligent investing. Valuation of a
firm or an equity as a going concern is the basis for any investment exercise.
Knowing what an asset is worth and what determines that value is a pre-requisite
for intelligent decision making - in choosing investments for a portfolio, in deciding on
the appropriate price to pay or receive in a takeover and in making investment, financing
and dividend choices when running a business. Without original value, one is set floating
in a sea of random short-term price movements and gut feelings.
It is important for the Finance Manager in particular and other manager in general
to understand the process and method of valuing equity or a firm. The valuation of equity
is dependent on the basic financial concepts of Time Value of Money, Risk and Return
and Future Cash Flow.
VALUATION
The term valuation implies the task of estimating the worth/value of an asset, a
security or a business. The price an investor or a firm (buyer) is willing to pay to
purchase a specific asset/security would be related to this value.
EQUITY VALUATION
An equity valuation takes several financial indicators into account; these include
both tangible and intangible assets, and provide prospective investors, creditors or
shareholders with an accurate perspective of the true value of a company at any given
time.
Equity valuations are conducted to measure the value of a company given its
current assets and position in the market. These data points are valuable for shareholders
and prospective investors who want to find out if the company is performing well, and
what to expect with their stocks or investments in the near future.
Valuation methods based on the equity of a company typically include a thorough
analysis of cash accounts, as well as a forecast or projection of future dividends, future
earnings (revenue) and the distribution of dividends.
FEATURES OF EQUITY VALUATION
Following are the features of Equity Valuation;
Equity Valuation is a highly specialized process.
Like other assets in finance, the value of a stock is the Present Value of its Cash
Flows.
The total equity of a company is the sum of both tangible assets and intangible
qualities. Tangible assets include working capital, cash, and inventory and
shareholder equity. Intangible qualities, or intangible "assets," may include brand
potential, trademarks and stock valuations.
The valuation may also take the firm's enterprise value (EV) into account; this is
calculated by combining the net debt per share with the price per share.
Performance indicators include the price/earnings ratio, dividend yield, and the
Earnings Before Interest, Depreciation and Amortization (EBIDA).
Any company under consideration for sale needs proficient, objective valuation,
whether its stock is privately owned by one individual or publicly traded on one
or more of the major exchanges or in the over the counter market.
PORTFOLIO MANAGEMENT
The role that valuation plays in portfolio management is determined in large part
by the investment philosophy of the investor. Valuation plays a minimal role in portfolio
management for a passive investor, (Passive investors, feel that simply investing in a
market index fund may produce potentially higher long-term results.) whereas it plays a
larger role for an active investor. (Activist investors take positions in firms that have a
reputation for poor management and then use their equity holdings to push for change in
the way the company is run. Their focus is not so much on what the company is worth
today but what its value would be if it were managed well. )
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Valuation should play a central part of acquisition analysis. The bidding firm or
individual has to decide on a fair value for the target firm before making a bid, and the
target firm has to determine a reasonable value for itself before deciding to accept or
reject the offer.
There is a role for valuation at every stage of a firms life cycle. For small private
businesses thinking about expanding, valuation plays a key role when they approach
venture capital and private equity investors for more capital.
Though it may seem, most valuations, especially of private companies, are done
for legal or tax reasons. A partnership has to be valued, whenever a new partner is taken
on or an old one retires, and businesses that are jointly owned have to be valued when the
owners decide to break up or businesses have to be valued for tax purposes when the
owner dies. While the principles of valuation may not be different when valuing a
business for legal proceedings, the objective often becomes providing a valuation that the
court will accept rather than the right valuation.
12
The second way is to just value the equity stake in the business, and this is called equity
valuation.
13
Therefore,
Equity Valuation, value just the equity stake in the business
Firm Valuation, value the entire firm, which includes, besides equity, the other
claimholders in the firm
14
Asset
Based
Approach
Other
Approaches
EVA
MVA
Period
Methods of
comparable
(Ratio Based)
Gordon Model
P/E Ratio
PEG Ratio
Relative P/E Ratio
P/BV Ratio
P/Sales ratio
The valuation model used to estimate the intrinsic value of a share is the present
value model. The intrinsic value of a share is the present value of all future amounts to be
received of the ownership of that share, computed at an appropriate discount rate. The
major receipts that come from the ownership of a share are the annual dividends and the
sale proceeds of the share at the end of holding period. These are to be discounted to find
their present value using a discount rate that is the rate of return required by the investor,
15
taking into consideration the risk involved and the investors other investment
opportunities.
The investment decision of the fundamental analyst to buy or sell a share is based
on the comparison between the intrinsic value of a share and its current market price. If
the market price is lower than the intrinsic value then such a share is bought and is
perceived to be under priced. If the market price is higher than the intrinsic value then
such a share would be considered as overpriced and is sold.
Following are two methods in Present Value Method,
It is easy to start valuation with one year holding period assumption. Here an
investor intends to purchase a share now, hold it for one year and sell it off at the end of
one year. In this case the investor would be expected to receive an amount of dividend as
well as the selling price after one year.
An investor may hold a share for a certain number of years and sell it off at the
end of his holding period. In this case he would receive annual dividends each year and
the sale price of the share at the end of the holding period.
DRAWBACK OF THE PRESENT VALUE METHOD:
Probably the biggest drawback in the previous two models was that we had to
predict a selling price.
The buyer of the stock, when we sell it, will presumably go through a similar
procedure to value the stock in other words the buyer will be using future
dividends to value the stock.
The selling price of the stock should thus be the value of all future dividends.
16
Given investors can hold a common stock for over a year, it is useful to value a
stock over the investors expected holding period. In this case, the DDM model
can be used.
The simplest model for valuing equity is the dividend discount model. The only
cash flow we receive from a firm when we buy publicly traded stock is the dividend and
appreciation of its value. The appreciation of the value is nothing but the expected price
of the stock. But the expected price is itself determined by the future dividends. Hence
the value of a stock is the present value of expected dividends on it.
The General Model,
The rationale for the model lies in the present value rule - the value of any asset is
the present value of expected future cash flows discounted at a rate appropriate to the
riskiness of the cash flows.
DPS
t=1
(1+ k)
There are two basic inputs to the model - expected dividends and the rate of
return. To obtain the expected dividends, we make assumptions about expected future
growth rates in earnings and payout ratios .To know more about DDM model first we
have to understand growth periods i.e. High growth period, transition period and stable
growth period.
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a. GORDON MODEL:
Gordon Model also known as Constant Growth Model. The Gordon growth model
can be used to value a firm that is in 'steady state' with dividends growing at a rate that
can be sustained forever. The Gordon growth model is best suited for firms growing at a
rate comparable to or lower than the nominal growth in the economy and which have
well established dividend payout policies that they intend to continue into the future. The
dividend payout of the firm has to be consistent with the assumption of stability, since
stable firms generally pay substantial dividends.
18
19
The constant growth assumption may not be realistic in many situations. The
growth in dividends may be at varying rates. A typical situation for many companies may
be that a period of extraordinary growth (either good or bad) will prevail for a certain
number of years after which growth will change to a level at which it is expected to
continue indefinitely. This situation can be represented by a Multiple Growth Model also
known as - two stage growth model.
In this model the future time period is viewed as divisible into two different
growth segments the initial extraordinary growth period and the subsequent constant
growth period. During the initial period growth rates will be variable from year to year
while during the subsequent years the growth rate will remain constant from year to year.
The model can be adapted to value companies that are expected to post low or
even negative growth rates for a few years and then revert back to stable growth.
According to the model, the value of the stock is given by,
The second problem with this model lies in the assumption that the growth rate is
high during the initial period and is transformed overnight to a lower stable rate at
the end of the period. While these sudden transformations in growth can happen,
it is much more realistic to assume that the shift from high growth to stable
growth happens gradually over time.
The focus on dividends in this model can lead to skewed estimates of value for
firms that are not paying out what they can afford in dividends. In particular, we
will under estimate the value of firms that accumulate cash and pay out too little
in dividends.
The discounted cash flow (or DCF) approach describes a method of valuing a
project, company, or asset using the concepts of the time value of money. A
valuation method used to estimate the attractiveness of an investment opportunity.
All future cash flows are estimated and discounted to give them a present value.
There are different types of DCF model i.e. Cash flow to equity model, Cash flow to firm
model, adjusted present value model.
FREE CASH FLOW TO EQUITY (FCFE):
The free cash flow model estimates the value of equity as the present value of the
expected free cash flow to equity over time. This is a measure of how much cash can be
paid to the equity shareholders of the company after all expenses, reinvestment and debt
repayment. The free cash flow to equity is defined as the residual cash flow left over after
meeting interest and principal payment and providing for capital expenditure to maintain
existing assets and create new assets for future growth.
21
Value of Equity =
FCFE
r-g
23
The two stage FCFE model is designed to value a firm which is expected to grow
much faster than a stable firm in the initial period and at a stable rate after that. The two
stage FCFE model is designed to value a firm which is expected to grow much faster than
a stable firm in the initial period and at a stable rate after that. From this model value will
be calculated as follows,
Pn
(1+ r )t
n
The terminal price
calculated using the infinite growth rate model.
(1 +isr)generally
Pn =
FCFEn+1
r gn
This model makes the same assumptions about growth as the two-stage dividend
discount model, i.e., that growth will be high and constant in the initial period and drop
abruptly to stable growth after that. It is different because of its emphasis on FCFE rather
than dividends. Consequently, it provides much better results than the dividend discount
model when valuing firms which either have dividends which are unsustainable (because
they are higher than FCFE) or which pay less in dividends than they can afford to (i.e.,
dividends are less than FCFE).
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Where,
P0 = Value of the stock today
Facet = FCFE in year t
Ke = Cost of equity
Pn2 = Terminal price at the end of transitional period = FCFEn2+1
r-gn
n1 = End of initial high growth period
n2 = End of transition period
Since the model allows for three stages of growth and for a gradual decline from
high to stable growth, it is the appropriate model to use to value firms with very high
growth rates currently. The assumptions about growth are similar to the ones made by the
three-stage dividend discount model, but the focus is on FCFE instead of dividends,
making it more suited to value firms whose dividends are significantly higher or lower
than the FCFE.
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If firm is
Large and growing at a rate close to or less than growth rate of the economy or
Constrained by regulation from growing at rate faster than the economy
Has the characteristic of a stable firm (average risk & reinvestment rates)
Then use a stable growth model.
If firm is
Is large & growing at a moderate rate (Overall growth rate + 10%) or
Has a single product & barriers to entry with a finite life (e.g. Patents)
Then use a 2-stage growth model.
If firm is
Is small and growing at a very high rate (> Overall growth rate + 10%) or
Has significant barriers to entry into the business
Has firm characteristics that are very different from the norm
Then use a 3-stage or n-stage model.
Asset Based Approach focuses on determining the value of net assets from the
perspective of equity share valuation. It should determine whether the assets should be
valued at book, market, and replacement or liquidation value. More often than not, they
are (and should be) valued at book value, that is, original acquisition cost minus
26
accumulated depreciation, as assets are normally acquired with the intent to be used in
business and not for resale. Thus valuation of assets is based on the going concern
concept.
Apart from tangible assets, intangible assets, such as goodwill, patents, trademark,
brands, know-how, and so on, also need to be valued satisfactorily. It may be useful to
adopt the super profit method to value some of these assets.
To arrive at the net assets value, total external liabilities (including preference
share capital) payable are deducted from total assets (excluding fictitious assets). The
companys net assets are computed as per equation,
Net Assets = Total Assets Total External liabilities
Net Assets
Number of Equity Shares issued and
outstanding
The value of net assets is contingent upon the measure of value adopted for the
purpose of valuation of assets and liabilities. In the case of book value, assets and
liabilities are taken at their balance sheet values. In the market value measure, assets
shown in the balance sheet are revalued at the current market prices.
The net assets valuation based on book value is in tune with the going concern
principle of accounting. In contrast, liquidation value measure is guided by the realizable
value available on the winding up/ liquidation of a corporate firm.
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Liquidation value is the final net asset value (if any) per share available to the
equity shareholder. The value is given as per equation,
This method is based on the principal of substitution which states that one will
pay no more for an item than the cost of acquiring an equally desirable substitute.
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Easy to understand and apply; uses easily available current market data
eliminating the need for projecting cash flows. Valuation based on multiples and
comparable firm can be done with fewer assumptions and at a faster rate than the
discounted cash flow valuation.
The relative valuation is simple and easy to understand and present to clients than
DCF method.
The relative valuation measures the relative value of assets rather than intrinsic
value and hence it reflects current atmosphere of the market.
29
Difficult to find companies that are truly comparable - listed companies are
typically larger and less risky.
Because we dont make assumptions, we may ignore the role of key fundamentals
such as growth, ROC, and cash flows.
Relative valuation captures current market sentiment, so it may also incorporate
market misevaluations. Each step in valuing using multiples analysis is subjective
and provides an opening for manipulation of results. The multiples approach can
justify a wide range of values for businesses.
The lack of explicit assumptions makes a relative valuation easy to manipulate
a.
P/E RATIO:
When it comes to valuing stocks, the price/earnings ratio is one of the oldest and
most frequently used metrics. It is also known as "price multiple" or "earnings
multiple". A valuation ratio of a company's current share price compared to its per-share
earnings.
30
basis for their investment to compare the P/E of a technology company (high P/E) to a
utility company (low P/E) as each industry has much different growth prospects.
Using the Price to earnings (P/E) ratio ignores the cost of capital, time value of
money and is sensitive to the accounting policies adopted.
Because the P/E ratio does not reflect future earnings growth, we use the PEG
ratio to determine whether the market valuation is supported by the predicted future
earnings growth rates.
b.
PEG RATIO:
The PEG ratio was developed to address shortcomings in the use of the P/E ratio.
Specifically, it was created to adjust the P/E ratio for relative projected future earnings
growth rates of different firms. A ratio used to determine a stock's value while taking into
account earnings growth.
PEG Ratio =
P/E Ratio
Annual EPS Growth
31
32
c.
Relative P/E compares the current absolute P/E to a benchmark or a range of past
P/Es over a relevant time period, such as the last 10 years. Relative P/E shows
what portion or percentage of the past P/Es the current P/E has reached. Relative P/E
usually compares the current P/E value to the highest value of the range, but investors
might also compare the current P/E to the bottom side of the range, measuring how close
the current P/E is to the historic low. The relative P/E will have a value below 100% if
the current P/E is lower than the past value (whether the past high or low). If the relative
P/E measure is 100% or more, this tells investors that the current P/E has reached or
surpassed the past value.
Suppose a company's P/Es over the last 10 years have ranged between 15 and
40. If the current P/E ratio is 25, the relative P/E comparing the current P/E to the highest
value of this past range is 0.625 (25/40), and the current P/E relative to the low end of the
range is 1.67 (25/15). These values tell investors that the company's P/E is currently
62.5% of the 10-year high and 67% higher than the 10-year low.
d.
P/BV RATIO:
It reflects the markets expectation. Book value of an asset reflects its original
cost. It might deviate significantly from market value if the earning power of the asset has
increased or declined significantly since its acquisition.
The Price/ Book value ratio is the ratio of market value of equity to book value of
equity, i.e. the measure of stakeholders equity in the balance sheet. It is calculated as
follows,
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ADVANTAGES:
For investors who instinctively mistrust discounted cash flow estimates of value,
the book value is a much simpler benchmark for comparison.
Price-book value ratios can be compared across similar firms for signs of under or
over valuation.
Even firms with negative earnings.
DISADVANTAGES:
Affected by accounting decisions on depreciation and other variables
Completely ignores intangible assets.
e.
P/SALES RATIO:
A ratio for valuing a stock relative to its own past performance, other companies
or the market itself. Price to sales is calculated by dividing a stock's current price by its
revenue per share for the trailing 12 months:
Share Price
Revenue Per
Share
The
price-to-sales
ratio
can
vary
substantially
across
industries;
therefore, it's useful mainly when comparing similar companies. Because it doesn't take
any expenses or debt into account, the ratio is somewhat limited in the story it tells.
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6. OTHER APPROACHES:
In recent years a number of new approaches to measure value has been developed
and practiced. The two major approaches are,
a.
Where,
NOPAT= Net operating profit after tax
TCE = Total capital employed
WACC = weighted average cost of capital
35
ADVANTAGES OF EVA:
It is directly linked to creation of shareholders wealth over time
The mechanism of EVA forces management to recognize the cost of equity in all
its decision from board room to the shop floor
It is used to assess the likely impact of competing strategies on shareholders
wealth and thus help management to select that one that will best serve the
shareholders.
Improves the overall capital efficiency.
EVA implementation will result in a better business performance due to better
understanding of objectives.
Allows managers to make better decisions.
DISADVANTAGE OF EVA:
EVA provides information that is obvious but offers no solutions in much the
same way as historical financial statement.
EVA is based on financial accounting methods that can be manipulated by
managers
Shareholder-centric
The emphasis of EVA on improving business-unit performance, it does not
encourage collaborative relationship between business unit managers.
36
b.
MVA measures the change in the market value of the firms equity vis--vis
equity investment. Market Value Added (MVA) is the difference between the current
market value of a firm and the capital contributed by investors. If MVA is positive, the
firm has added value. If it is negative, the firm has destroyed value. The amount of value
added needs to be greater than the firm's investors could have achieved investing in the
market portfolio.
Though the concept of MVA is normally used in the context of equity investment
therefore it has greater relevance for equity shareholder. Value of the stock with the help
of MVA can be calculated as follows,
DRAWBACKS OF MVA:
The market value added Approach is very much dependent on the market price of
the target company. As the share price is dependent on various factors, viz., market
conditions, its own performance, some natural calamity, investors sentiments or
perceptions about the market. Because of all this factors the share price of the company
may fluctuate, so it becomes difficult to get the best price. Other drawbacks are,
Only on listed shares
Depends on capital market
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DCF FRAMEWORK
The following section will present the theoretical recommendations on each
aspect that was included in the empirical study.
ANALYSIS OF HISTORICAL PERFORMANCE:
A crucial step in the DCF model is to collect and analyze relevant historical
information in order to evaluate the historical performance. A solid understanding of the
past performance will enable reasonable forecasts of future performance.
The historical information should at a minimum include income statements
and balance sheets. Additional information such as cash flow statements and
relevant notes may also add value. The number of years of historical data included
should be sufficient to determine historical performance and business trends.
In order for the historical information to provide an understanding of
historical performance it needs to be analyzed. The analysis is performed through
calculating historical financial ratios such as sales growth, profit margins, capital
expenditure etc. Through analyzing these ratios over a number of years the historical
performance
will
become
evident
38
39
The cost of net debt should be calculated using the companys yield to
maturity on its long-term debt.
The marginal tax rate should be used as the tax rate in the WACC formula,
which is the tax that the firm would pay if the financing or non
operating items were eliminated.
For
mature
companies,
the
target
capital
structure
is
often
The Capital Asset Pricing Model (CAPM) is used to determine the required
rate of return on equity.
40
41
42
1995). In addition, recent empirical studies have indicated that the terminal value
calculations are crucial for the overall accuracy of a valuation model.
The terminal growth rate in steady state must be less than or equal to that of the
economy (the GDP growth). A higher growth rate would eventually make the company
unrealistically large compared to the aggregated economy. 21 The growth rate is often
assumed to equal the rate of inflation (Francis et al 1997).
FINANCIAL CASH FLOW:
The financial cash flow consists of transactions to or from all investors in
the firm. Hence, the financial cash flows consist of all transactions with those providing
capital to the firm. Financial cash flows should be identical to the free cash flows. Thus,
through including the financial cash flows it is possible to check that the free cash
flow calculations are correct. As a result it is possible to identify potential
mistakes concerning the free cash flow calculations (Keller et al 2005 and
Jennergren 2007).
FORECASTING PROCEDURE:
Regarding the forecasting procedure, the following theoretical conditions are used
to determine its quality
The number of years in the explicit forecast period should be at least 1015 years.
The forecasting should include entire income statements and balance
sheets.
The assumptions on future expected performance should be clearly linked
from an analysis of historical financial ratios.
The assumptions should be clearly stated in a separate section.
43
CHAPTER-III
COMPANY PROFILE&
INDUSTRY PROFILE
44
COMPANY PROFILE
GIS
We introduce our self as Global Insurance Services, a financial and wealth Management
Company. As a corporate we provide all kinds of financial services and solutions for
Individuals, families and Corporate. Our services are been experienced by thousands
of customers from last 4 years and are as follows:
Life Insurance:
Term Insurance Plans, Endowment Plans, Pensions and annuities, Unit Linked
Investment Plans (ULIPS) and Mortgage Protection Plans (Loan Protection Plans),
Monthly Income Plans.
General Insurance:
Motor Insurance(2 & 4 wheelers), Tippers, Bore well Vehicles, all Commercial vehicles,
all types of contractual Insurance(Govt. and Pvt. contracts), Travel Insurance, student
travel insurance, teacher's insurance (gururaksha insurance), marine, burglary, fire
etc...
Health Insurance:
Health Insurance & Personal Accident plans for Individuals, Family and Corporate.
Housing Loans:
Secured Housing loans & Mortgage loans.
Internships and Research Works:
GIS has provided Internships more than 2000+ Management Students on their electives
and have achieved milestones like No.1 Company among 60 other companies for
providing projects for students and guiding them to get placed in their respective fields &
45
also been a part of research works conducted by NGOs under the sponsorship of
central government bodies
INDUSTRY PROFILE
The main challenge before any country is to move ahead with rapid expansion as well as
development. This challenge seems to be an opportunity for any government and they
play an important role in any economy to bring its country to the top of the world.
The basis for selecting companies for our project i.e. equity valuation is those
Public Sector Enterprises (PSEs) representing in NIFTY 50. There are total 246 PSEs
(mentioned in Appendix II) which were owned or having majority stake by central
government and out of that 7 companies are in NIFTY 50. Those companies are:
In all that
PowerGrid is not being valued because just two years have passed going public. So we
are unable to predict its future growth prospect based on their two years data as well as
we were unable to assume its revenue growth rate, depreciation, change in working
capital, change in capital expenditure and weighted average cost of capital. This is the
main reason why we go with remaining six companies to go ahead with our project and
all six companies snapshots and brief history is mentioned in next page.
1. BHEL
46
BHEL is the largest engineering and manufacturing enterprise in India in the energy
related/infrastructure sector. BHEL was established more than four decades ago ushering
in the indigenous heavy electrical equipment in India. BHEL has built over the years, a
robust domestic market position by becoming the largest supplier of power plant
equipment in India, and by developing strong market presence in select segments of the
Industrial sector and the Railways. Currently, 80% of the Nuclear power generated in the
country is through BHEL sets. For the third consecutive year, BHELs performance was
recognized by the prestigious publication Forbes Asia, which featured BHEL in its
fourth annual 'Fabulous 50' list of the best of Asia-Pacific's publicly-traded companies.
The company has been earning profits continuously since 1971-72 and paying dividends
since 1976-77.
VISION:
A world-class engineering enterprise committed to enhancing stakeholder value.
MISSION:
To be an Indian multinational engineering enterprise providing total business
solutions through quality products, systems and services in the fields of energy, industry,
transportation, infrastructure and other potential areas.
BHEL manufactures over 180 products under 30 major product groups and caters
to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry,
Transportation, Telecommunication, Renewable Energy, etc. The wide network of
BHEL's 14 manufacturing divisions, four Power Sector regional centers, over 100 project
sites, eight service centers and 18 regional offices, enables the Company to promptly
serve its customers and provide them with suitable products, systems and services -efficiently and at competitive prices. The high level of quality & reliability of its products
is due to the emphasis on design, engineering and manufacturing to international
standards by acquiring and adapting some of the best technologies from leading
companies in the world, together with technologies developed in its own R&D centers.
47
2. BPCL
VISION:
Setting our sights on achieving excellence, we benchmark ourselves against the
highest global standards, forging ahead with enthusiasm and commitment.
48
MISSION:
Our focus on sustainable development remains unabated, with social
responsibility, healthy, safety, security and environmental care as our corporate goals.
We have redoubled our efforts to seek fresh avenues in our quest for renewable energies
creating a brighter future for generations to come.
3. GAIL
GAIL (India) Ltd. (erstwhile Gas Authority of India Ltd), India's principal gas
transmission and marketing company, was set up by the Government of India in August
1984 to create gas sector infrastructure for sustained development of the natural gas
sector in the country. The 2800-km Hazira-Vijaipur-Jagdishpur (HVJ) pipeline became
operational in 1991. During 1991-93, three LPG plants were constructed and some
regional pipelines acquired, enabling GAIL to begin its regional gas distribution in
various parts of India. GAIL began its city gas distribution in Delhi in 1997 by setting up
49
nine CNG stations, catering to the city's vast public transport fleet. In 1999, GAIL set up
northern India's only petrochemical plant at Patan.
GAIL became the first Infrastructure Provider Category II Licensee and signed
the country's first Service Level Agreement for leasing bandwidth in the Delhi-Vijaipur
sector in 2001, through its telecom business GAILTEL. In 2001, GAIL commissioned
worlds longest and India's first Cross Country LPG Transmission Pipeline from Jamnagar
to Loin.
GAIL today has reached new milestones with its strategic diversification into
Petrochemicals, Telecom and Liquid Hydrocarbons besides gas infrastructure. The
company has also extended its presence in Power, Liquefied Natural Gas re-gasification,
City Gas Distribution and Exploration & Production through equity and joint ventures
participations. Incorporating the new-found energy into its corporate identity, Gas
Authority of India was renamed GAIL (India) Limited on November 22, 2002
VISION:
Be the leading company in natural gas and beyond, with global focus, committed
to customer care, valuation creation for all stakeholders and environment responsibility.
MISSION:
To accelerate and optimize the effective and economic use of natural gas and its
fractions to the benefit of national economy.
50
4NTP
Indias largest power company, NTPC was set up in 1975 to accelerate power
development in India. NTPC is emerging as a diversified power major with presence in
the entire value chain of the power generation business. Apart from power generation,
which is the mainstay of the company, NTPC has already ventured into consultancy,
power trading, ash utilization and coal mining. NTPC ranked 317 th in 2009 Forbes
Global 2000ranking of the Worlds biggest companies.
The total installed capacity of the company is 31,134 MW (including JVs) with 15
coal based and 7 gas based stations, located across the country. In addition under JVs, 3
stations are coal based & another station uses naphtha/LNG as fuel. By 2017, the power
generation portfolio is expected to have a diversified fuel mix with coal based capacity of
around 53000 MW, 10000 MW through gas, 9000 MW through Hydro generation, about
2000 MW from nuclear sources and around 1000 MW from Renewable Energy Sources
(RES). NTPC has adopted a multi-pronged growth strategy which includes capacity
addition through green field projects, expansion of existing stations, joint ventures,
subsidiaries and takeover of stations.
NTPC has been operating its plants at high efficiency levels. Although the
company has 18.79% of the total national capacity it contributes 28.60% of total power
generation due to its focus on high efficiency.
VISION:
A world-class integrated power major, powering Indias growth, with increasing
global presence.
51
MISSION:
Develop and provide reliable power, related products and services at competitive
prices, integrating multiple energy sources with innovative and eco-friendly technologies
and contribute to society.
5 ONGC
In 1955, Government of India decided to develop the oil and natural gas resources
in the various regions of the country as part of the Public Sector development. In April
1956, the Government of India adopted the Industrial Policy Resolution, which placed
mineral oil industry among the schedule 'A' industries, the future development of which
was to be the sole and exclusive responsibility of the state. Soon, after the formation of
the Oil and Natural Gas Directorate, it became apparent that it would not be possible for
the Directorate with its limited financial and administrative powers as subordinate office
of the Government, to function efficiently. So in August, 1956, the Directorate was raised
to the status of a commission with enhanced powers, although it continued to be under
the government. In October 1959, the Commission was converted into a statutory body
by an act of the Indian Parliament, which enhanced powers of the commission further.
The main functions of the Oil and Natural Gas Commission subject to the provisions of
the Act, were "to plan, promote, organize and implement programs for development of
Petroleum Resources and the production and sale of petroleum and petroleum products
produced by it, and to perform such other functions as the Central Government may, from
time to time, assign to it ". The act further outlined the activities and steps to be taken by
ONGC in fulfilling its mandate.
52
In the year 2002-03, after taking over MRPL from the A V Birla Group, ONGC
diversified into the downstream sector. ONGC will soon be entering into the retailing
business. ONGC has also entered the global field through its subsidiary, ONGC Videsh
Ltd. (OVL). ONGC has made major investments in Vietnam, Sakhalin and Sudan and
earned its first hydrocarbon revenue from its investment in Vietnam.
VISION:
To be world class Oil & Natural Gas Company integrated in energy business with
dominant Indian leadership and global presence.
MISSION:
53
of
37
Branch
Sales
Offices
spread
across
the
four
regions, 25
VISION:
54
MISSION:
We create and nurture a culture that supports flexibility, learning and is proactive
to change. We value the opportunity and responsibility to make a meaningful difference
in peoples lives.
55
CHAPTER-IV
DATAANALYSIS &
PRESENTATION
56
The ultimate aim of any report is to analyze the topic on certain target population
and likewise we have to analyze six companies intrinsic share price based on past
performance, current scenarios and statistics of RBI.
The basis of DCF model is to collect and analyze relevant historical accounting
information in order to evaluate historical performance. A solid understating of the past
performance as well as the current market scenario enables reasonable forecasts of future
performance and thats why these variables played an important role in our analysis.
Before starting with our analysis we have considered financial year 2008-09 as an
abnormal year because of global recession and our conclusions as well as
recommendations are done when economy gets stabilize. So comparison of the intrinsic
share price with current market price is done on the closing price of the companies share
on 1st February, 2010 in NSE.
57
estimation of 10 years and from 11th year onwards everything will remain stable and the
year 2019-2020 is considered to be the horizon year.
Our analyses are as follows
58
1. BHEL:
SHAREHOLDING PATTERN AS ON 31-12-2009
Voting (%)
No. of Shares
held
67.72
331510000
400
67.72
331510400
5.14
25168090
4.01
19619712
FIIs
17.03
83379194
400
3.86
18875727
Indian Public
1.97
9604223
1250
0.12
609975
13657
0.15
737372
32.28
158009600
100
489520000
Category
Promoters holding
President of India (POI)
Nominees of POI
Total Promoter holding
Non-Promoters holding
Institutional Investors
Others
Directors & Relatives
Foreign Nationals
NRIs/OCBs
Trust
Grand Total
2.
Table:1
59
Figure:1
INTERPRETATION:
Based on the past performance and current trends in energy sector we have
assumed the growth rate of revenue at 20.00% and NOI growth rate of 15.00% of
revenue annually. The depreciation is stable at 4.00% every year while working capital is
reduced to 3.00% and capital expenditure increases at 4.50%. WACC is 15.00%. In the
year 2019-20 the revenue growth stabilize at 10.00%.
Table 1 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 380172.93 cr. and present
value of cash flow comes at Rs. 39465.25 cr. which gives total value of the firm of Rs.
60
121180.85 cr. and after deducting the value of debt and dividing the figure with total
outstanding share the intrinsic share price of the company comes to Rs. 2472.45 while the
closing price on 1st February, 2010 on NSE was Rs. 2405.50. So there is a deviation of
Rs. 66.95.
2.BPCL:
SHAREHOLDING PATTERN AS ON 31-12-2009:
Category
Voting (%)
Government of India
54.93
LIC
10.9
9.33
Banks/FIs/Mutual Funds
8.81
FIIs
8.39
2.83
Government of Kerala
0.86
UTI
0.8
0.08
Others
3.07
Grand Total
100
Table:2
61
Figure:2
INTERPRETATION:
The past performance shows that the revenue is growing at 16.00% annually but on the
other side the expenditure is also growing nearly at same percentage and thats why the
NOI is assumed at just 0.75% of revenue. The depreciation is also assumed at 0.75%
every year while working capital is reduced at 2.00% and capital expenditure increases at
2.06%. WACC is 10.00%. In the year 2019-20 the revenue growth stabilize at 10.00%.
Table 2 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 22232.02 cr. and present
value of cash flow comes at Rs. 19194.04 cr. which arrives total value of the firm at Rs.
41426.06 cr. and after deducting the value of debt and dividing the figure with total
outstanding share the intrinsic share price of the company comes to Rs. 560.23 while the
closing price on 1st February, 2010 on NSE was Rs. 584.05. So there is a difference of Rs.
23.82.
62
3. GAIL:
SHAREHOLDING PATTERN AS ON 31-12-2009
No. of Shares
Category
Voting (%)
held
58.08
727405675
58.08
727405675
4.57
57227302
Banks and FI
0.91
11364641
State Government
7.34
91888984
Insurance companies
12.68
158787858
FIIs
13.57
169974003
Corporate Bodies
0.59
7426419
Indian Public
2.2
27463310
NRIs/OCBs
0.08
942404
41.92
525074921
100
1268477400
Promoters holding
Public holding
Institutional Investors
Others
Grand Total
Table:3
63
Figure:3
The historical financial results of GAIL and current situation in gas sector, its
revenue is growing at 12.00% annually while NOI is also growing at the same rate of
revenue. The depreciation is assumed to be 3.50% every year while working capital is
increasing at 2.25% and capital expenditure at 7.00%. WACC is 13.00%. In the year
2019-20 the revenue growth stabilize at 10.00%.
Table 3 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 48610.43 cr. and present
value of cash flow comes at Rs. 4875.69 cr. which gives total value of the firm of Rs.
53486.12 cr. and after deducting the value of debt and dividing the figure with total
outstanding share the intrinsic share price of the company comes at Rs. 412.19 while the
closing price on 1st February, 2010 on NSE was Rs. 412.60. So there is no much
difference and the share looks at its actual value.
4. NTPC:
SHAREHOLDING PATTERN AS ON 31-12-2009:
64
No. of Shares
Category
Voting (%)
held
Government of India
89.5
7379634400
FIIs
3.6
297078917
Indian Public
2.18
179738461
2.81
231213797
1.21
99788139
Mutual Funds
0.61
50231251
NRI/OCBs
0.05
4536360
Others
0.04
3243075
Grand Total
100
8245464400
Table:4
65
Figure:4
Based past performance and current trends in the power sector we have assumed the
revenue growth of the company at 15.00% annually but the profit margin looks good in
this company and average NOI comes at 17.00% of revenue. The depreciation is assumed
at 5.50% every year while working capital is increased at 2.25% and capital expenditure
at just 2.00%. WACC is 12.00%. In the year 2019-20 the revenue growth stabilize at
10.00%.
Table 4 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 192128.84 cr. and present
value of cash flow comes at Rs. 3348.26 cr. which gives the total value of the firm of Rs.
195477.10 cr. and after deducting the value of debt of 34567.80 and dividing the figure
with total outstanding share the intrinsic share price of the company comes at Rs. 195.13
while the closing price on 1st February, 2010 on NSE was Rs. 211.30. So there is a
difference of Rs. 16.17.
66
No. of Shares
Category
Voting (%)
held
74.14
1,585,740,673
4.91
105,054,973
FIIs
5.43
116,097,133
1.72
36,656,577
NRIs
0.04
816,829
10.09
215,881,124
1.9
40,590,974
Employees
0.1
22,43,606
Public
1.67
35,790,641
Grand Total
100
2,138,872,530
Bodies Corporate
Government Companies
Others
Table:5
67
Figure: 5
Based on the past performance and current scenario in oil & gas sector the
companys revenue growth rate is assumed at 6.00% and NOI growth rate is 20.00% of
revenue.
increases at 1.00% and capital expenditure at 16.00%. WACC is 14.00%. In the year
2019-20 the revenue growth stabilize at just 4.00%.
Table 5 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 127880.19 cr. and present
value of cash flow comes at Rs. 92947.31 cr. which gives total value of the firm of Rs.
220827.50 cr. and after deducting the value of debt of just Rs. 26.74 cr. and dividing the
figure with total outstanding share the intrinsic share price of the company comes to Rs.
1032.31 while the closing price on 1st February, 2010 on NSE was Rs. 1101.55. So there
is a deviation of Rs. 69.24.
6 SAIL SHAREHOLDING PATTERN AS ON 31-12-2009:
Category
Voting (%)
68
No. of Shares
held
Promoters holding
Government of India (GOI)
85.82
3,544,690,285
85.82
3,544,690,285
0.76
3,13,91,984
Banks and FI
0.39
1,62,26,276
Insurance Companies
6.45
26,63,41,385
FIIs
3.76
15,54,91,955
0.7
2,87,17,588
Indian Public
2.04
8,44,52,764
NRIs/OCBs
0.06
24,44,963
Other
0.02
6,43,345
14.18
585710260
100
4,130,400,545
Non-Promoters holding
Institutional Investors
Others
Grand Total
Table: 6
69
Figure: 6
TABLE 6;The performance of the company in past and the recent industry trend
in steel sector gives us an assumption of various growth rates. The revenue growth rate is
assumed at 8.00% while the NOI as a percentage of revenue is 19.00%. The depreciation
is also assumed at 2.75% every year while working capital increases at 2.00% and capital
expenditure at 5.00%. WACC is 16.00%. In the year 2019-20 the revenue growth
stabilize at 5.00%.
Table 7 shows the calculation of the company by DCF model. Based on this
calculation the present value of terminal value comes at Rs. 58377.74 cr. and present
value of cash flow comes at Rs. 49676.36 cr. which arrives total value of the firm at Rs.
108054.10 cr. and after deducting the value of debt and dividing the figure with total
outstanding share the intrinsic share price of the company comes to Rs. 243.36 while the
70
closing price on 1st February, 2010 on NSE was Rs. 213.50. So there is a difference of Rs.
29.86
Thus after each such a deep empirical research our findings comes as follows:
Company
Intrinsic value
BHEL
2472.45
2405.50
66.95 (U)
BPCL
560.23
584.05.
23.82 (O)
GAIL
412.19
412.60
0.41 (O)
NTPC
195.13
211.30
16.17 (O)
ONGC
1032.31
1101.55
69.24 (O)
SAIL
243.36
213.50
29.86 (U)
*U=Undervalued
*O=Overvalued
Table: 7
71
72
73
74
SUMMARY OUTPUT
Regression
Statistics
0.00640
02
4.096E05
0.33327
87
1.82570
45
Multiple R
R Square
Adjusted R
Square
Standard Error
Observations
ANOVA
df
Regression
Residual
Total
3
4
Intercept
2472.45
SS
0.00040
96
9.99959
04
10
Coefficie
nts
Standar
d Error
4.01469
63
1.55695
11
-3.008E05
0.00271
3
MS
0.0004
1
3.3331
97
t Stat
2.5785
63
0.0110
9
RESIDUAL
OUTPUT
F
0.0001
Significan
ce F
0.99185
Pvalue
Lower
95%
0.0819
-0.9402
8.969
61
-0.0087
0.008
6
0.9919
Upper
95%
PROBABILITY OUTPUT
Predicte
d1
Observation
1
3.99784
7
4.00229
94
3
4
5
4.00882
76
3.98364
89
4.00737
71
Residua
ls
1.99784
7
1.00229
94
0.00882
76
1.01635
11
1.99262
29
Percentile
10
30
50
70
90
75
Lowe
r
95.0
%
0.94
02
0.00
87
Upper
95.0%
8.9696
0.0086
76
CHAPTER-V
FINDINGS,
SUGGESTION&CONCLUSION
77
FINDINGS
78
79
CONCLUSION&SUGGESTION
The objective behind this project was to compare the intrinsic value of the equity
with the ongoing market price.
The intrinsic value and ongoing market price are more or less similar. Market
price is the investors understanding regarding the value of the equity.
This conclusion is on the basis of our DCF model analysis of the companys
equity.
However this conclusion is not exactly match with the market price, because the
market value of the stock is a function of supply and demand in the market and
not a theoretical correct value.
Here the analysis is done with use the of historical data and the estimation are
made for the long period of 10 years, which shows the equity value are calculated
are long-term value and in the long period market price will reach to intrinsic
value.
From the Table 7 given in previous page we can say that BHEL is traded at
Rs.2405.05 which is Rs.66.95 lower than its intrinsic value and SAIL are traded at
80
Rs.213.50 which is also Rs.29.86 lower price than its intrinsic value.
BPCL is traded at Rs.584.05 which is Rs. 23.82 higher than its intrinsic value,
NTPC is traded at Rs.211.30 which is Rs.16.17 higher than it intrinsic value. The
ONGC is also priced Rs. 69.24 higher than its intrinsic value.
CHAPTER-V1
BIBLIOGRAPHY
81
BIBLIOGRAPHY
WEB REFERENCES
WWW.NSEINDIA.COM
WWW.BSEINDIA.COM
NEWSPAPERS
BUSSINESS LINES
ECONOMIC TIMES
THE HINDU
82
BOOKS
GLOSSARY
1. EARNING PER SHARE(EPS)=EARNINGS AFTER INTERESTANDTAX(EAIT)PREF.DEV
NO OF EQUITY SHARES
HIGHER THE BETTER
2. DIVIDEND PAY OUT RATIO=(DIVIDEND PER SHARE/NO OF EQUITY
SHARES)*100
A HIGH DPR INDICATES A LIBERAL DISTRIBUTION POLICY AND A LOW
DPR REFLECTS CONSERVATIVE DISTRIBUTION POLICY OF THE
COMPANY
3. P/E RATIO=MARKET PRICE OF SHARE/EARNING/ PER SHARE
A HIGH P/R REFLECTS HIGH EARNINGS POTENTIAL OF THE COMPANY
AND VICE VERSA
4. RETURN ON NETWORTH=[NET PROFIT/SHARE HOLDERS FUNDS]*100
5. TOTAL ASSETS TURNOVER RATIO=SALES/TOTALASSETS
6. GROSS PROFIT MARGIN=[GP/NETSALES]*100
7. NET PROFIT RATIO=[NET PROFIT/NET SALES]*100
8. BOOK VALUE PER SHARE=NET WORTH/ NO OF EQUITY SHARES
9. GROWTH IN PROFITABILITY=(CURRENT YEAR PAT/BASE YEAR PAT)*100
83
84