The Secret to Choosing the Right Power Company: Traditional and Value-Based Metrics Revealed

One of the most important aspects of infrastructure is power, which is essential for national welfare and economic progress. For the Indian economy to grow steadily, sufficient power infrastructure must exist and be developed.

The Indian Power Sector has evolved into a thriving and profitable industry. Given that India will expand by more than 7% over the next few years, the power demand will rise by around 10%. Power is one of the most important infrastructural elements, essential to national well-being and economic development.

For the Indian economy to grow steadily, enough electrical infrastructure must exist and be developed. The Ministry of Power has been working hard over the past several years to construct a unified national grid, strengthen the distribution network, and achieve universal household electrification to transform the nation from one with a power shortage to one with a surplus.

India is the third-largest producer and consumer of electricity worldwide, with an installed power capacity of 411.64 GW as of January 31, 2023. Regarding demand growth, energy mix, and market operations, the Indian electrical industry is projected to significantly transition in the current decade (2020-2029).

ABOUT THE COMPANIES

ADANI GREEN

Adani Green Energy Limited (AGEL) is one of the largest renewable energy companies in the world, with a total installed capacity of 20.434 GW (as of November 9, 2023). It is a subsidiary of the Adani Group, a multinational conglomerate interested in infrastructure, logistics, energy, and resources.

AGEL develops, builds, owns, operates, and maintains utility-scale grid-connected solar and wind farm projects. The company has a diversified portfolio of assets across India, with a presence in 12 states.

Solar energy: AGEL is the world's largest solar power producer, with a total installed capacity of 15.4 GW. The company has several large-scale solar projects in operation across India, including the Kamuthi Solar Power Project, one of the world's largest solar photovoltaic plants.

Wind energy: AGEL has a total installed wind power capacity of 5.034 GW. The company has several large-scale wind projects in operation across India, including the Jaisalmer Wind Power Project, which is one of the largest wind farms in Asia.

NTPC

NTPC Limited is a state-owned electricity generation and transmission company in India. It is the largest power-generating company in India, with an installed capacity of 73,824 MW (including JVs), and plans to become a 130 GW company by 2032.

NTPC's operations are divided into three segments:

Power generation: NTPC generates electricity from a mix of thermal, hydropower, nuclear, and renewable sources. The company's thermal power plants are located across India. Its hydropower plants are in Himachal Pradesh, Uttarakhand, and Arunachal Pradesh. Its nuclear power plant is located in Tamil Nadu. Its renewable power projects are located in various parts of India.

Transmission: NTPC owns and operates a transmission network of over 24,000 kilometers. The company's transmission lines connect its power plants to demand centers across India.

Trading: NTPC is a leading power trader in India. The company buys and sells power across the country, helping to balance supply and demand.

Power Grid

Power Grid Corporation of India Limited (POWERGRID), is a Schedule 'A', 'Maharatna' Public Sector Enterprise of the Government of India. It was incorporated on 23rd October 1989 and is engaged mainly in the business of bulk power transmission across India. The company has a wide network of Extra High Voltage (EHV) and High Voltage (HV) transmission lines, substations, and towers across the country. Power Grid is a key player in the Indian power sector and is committed to providing reliable and affordable power to the country.

Power Grid is India's largest power transmission utility, with a transmission network of over 168,140 circuit kilometers and 252 EHVAC and HVDC substations, with a total transformation capacity of 422,430 MVA as of 31 January 2021. The company's interregional capacity is 75,050 MW.

Power Grid is also involved in the business of consultancy, telecom, and energy efficiency. The company has a strong track record of performance and has been awarded numerous awards, including the "Best Public Sector Enterprise Award" from the Government of India.

JSW Energy

JSW Energy is one of India's leading private sector power producers, whose mission is to be a "leading full-service integrated power company in the Indian power sector with a presence across the value chain" and vision is to "provide sustainable and reliable power solutions to meet the growing energy needs of India." It is generating over 6,677 megawatts (MW) of electricity from a mix of thermal, hydropower, wind, and solar sources. The company has a diversified portfolio of assets across India and South Africa, including seven operational power plants, two under construction, and stakes in several natural resource companies.

Operations

Power generation: JSW Energy generates electricity from a mix of thermal, hydropower, wind, and solar sources. The company's thermal power plants are in Karnataka, Maharashtra, and Andhra Pradesh. Its hydropower plants are located in Himachal Pradesh and Uttarakhand. Its wind and solar power projects are located in various parts of India.

Transmission: JSW Energy owns and operates a transmission network of over 1,000 kilometers. The company's transmission lines connect its power plants to demand centers across India.

Trading: JSW Energy is a leading power trader in India. The company buys and sells

power across the country, helping to balance supply and demand.

TATA Power

Tata Power Company Limited, founded in 1910 as Tata Hydro-Electric Power Supply Company, is an Indian electric utility and electricity generation company based in Mumbai, India. It is a subsidiary of Tata Group. India's largest integrated power company has an installed electricity generation capacity of 14,076 MW. Tata Power has a diversified portfolio of power plants, with thermal, hydropower, wind, and solar power plants. The company also has a presence in transmission and distribution of electricity.

Tata Power is a pioneer in the Indian power sector. The company was the first to set up a hydroelectric power plant in India and the first to commission a supercritical thermal power plant in India. Tata Power is also a leader in renewable energy, with a significant portfolio of wind and solar power projects. Tata Power is a leading player in the Indian power sector and is well-positioned for future growth.

WHY CHOOSING THESE COMPANIES

• Size and market share: These companies with a larger market share are typically more stable and profitable, making them a good choice for VBM estimation.

• Financial performance: They have a strong track record of financial performance, such as high revenue growth, profitability, and cash flow, and are also good candidates for VBM estimation.

• Industry trends: They are well-positioned to benefit from industry trends, such as the transition to renewable energy, and are also good choices for VBM estimation.

• Management quality: They have a strong management team with a track record of success and are more likely to be successful in the long term, making them good candidates for VBM estimation.

• Diversification: The chosen companies have a diversified portfolio of assets, including both thermal and renewable energy projects, are less exposed to risk and are therefore more attractive for VBM estimation.

• Regulatory environment: they operate in a supportive regulatory environment are more likely to be successful, making them good candidates for VBM estimation.

• Government support: they have received support from the government, either through subsidies or tax breaks, are more likely to be successful, making them good candidates for VBM estimation.

The companies we have chosen are well-established and profitable, with a strong track record of financial performance. They are also well-positioned to benefit from industry trends, such as the transition to renewable energy. They all have experienced management teams and operate in a supportive regulatory environment.

VALUE-BASED METRICS AND INTERPRETATION

Economic value added (EVA): EVA measures the excess return a company generates over its cost of capital. EVA is calculated by subtracting the company's cost of capital from its operating profits. NTPC's Economic Value Added (EVA) fluctuates, with a dip in 2020, suggesting challenges in covering its cost of capital. However, positive EVAs in subsequent years indicate a rebound in value creation. Power Grid consistently generates positive EVAs, showcasing sustained profitability and efficient capital utilization. A significant surge in Power Grid's EVA in 2022 suggests enhanced financial performance. Despite fluctuations, both companies generally demonstrate the ability to create economic value over the analyzed period. Both Adani Green Energy and JSW Energy exhibit consistently negative Economic Value Added (EVA) from 2019 to 2023, indicating that their operating income falls short of covering expenses and the cost of capital, thereby eroding shareholder value. Adani Green's worsening EVA, declining from -$588.22 in 2019 to -$1,687.03 in 2023, suggests a deteriorating financial performance possibly influenced by factors like rising input costs, heightened competition, and project delays. Similarly, JSW Energy's negative EVA trend, decreasing from -$589.30 in 2019 to -$760.92 in 2023, reflects financial challenges driven by factors such as fuel cost increases, weak electricity demand, overcapacity, and operational inefficiencies. Both companies face significant hurdles impacting their ability to generate positive shareholder value.

Residual income (RI): RI measures a company's earnings over and above its cost of capital. RI is calculated by subtracting the company's cost of capital from its net income.

Residual income of NTPC (an increase of 38.01% in 2021, and 15.96% in 2023 and a slight decrease of 2% in 2023), TATA power(55.09%,81.12%), power grid (an increase of 9.52%,8.36% and 34.16% in years 2020,2021,2022, respectively )and Adani green(an increase of 254.23%,50.60% and 54.89% in years 2021,2022, 2023respectively) has increased most. The RI for JSW energy has shown fluctuations (an increase of 37.04% from 2019 to 2020, a decrease of 32.19% from ’20 to ’21, an increase of53.12% from 2021 to 2022, and again a decrease of 18.06% from 2022 to 2023)

An increase in residual income is a positive sign for these companies, which indicates that the company is generating more earnings than it needs to cover its cost of capital.

This increase indicates the company is well-managed and on track to generate shareholder value. Increasing residual income means that these companies are likely to be good investments.

CFROI (Operating Cash Flow/(Total Assets - Total Current Liabilities)

NTPC’s CFROI increased to 16.98% in 2021, fell to 13.12% in 2022, and increased to 6.11% in 2023. Adani Green’s CFROI decreased from 13.94 % in 2019 to 12.75% in 2020 and further to 6.98% in 2021 and 6.56%in 2022, which means that the company is generating less cash flow from its investments than it costs to maintain and operate its assets. But then it increased to 12.23% in 2023, which can be due to Increased revenue that the company might be generating due to higher prices or increased demand, Reduced costs, Improved efficiency, and /or New investments.

Power Grid’s CFROI increased from 11.39% in 2019 to 14.25% in 2020, then decreased to 13.59% in 2021, and again increased to 15.29% and a further 20.67% in 2022 and 2023, respectively.

TATA Power’s CFROI increased from 9.33% in 2019 to 14.91% in 2020, then decreased to 12.33% and further to 9.01% and 8.49% in 2021, 2022, and 2023. JSW Energy’s CFROI increased from -0.87% in 2019 to 0.78% and further to 16.98% in 2020 and 2021, respectively, and then again decreased to 13.12% and 6.11% in 2022 and 2023, respectively.

There are no particular upward or downward trends in CFROI. It fluctuates. A fluctuating increase and decrease in CFROI for our companies can be interpreted in several ways.

Industry cyclicality: the power demand fluctuates with the economy. When the economy grows, power demand increases and CFROI for power companies tends to improve. However, when the economy slows down, power demand decreases, and CFROI for power companies tends to decline, hence the results.

Changes in fuel prices: Fuel prices are a major component of the cost of generating electricity. When fuel prices are high, CFROI for power companies tends to decline. However, when fuel prices are low, CFROI for power companies tends to improve.

In conclusion, the Indian Power Sector stands at a pivotal juncture, poised for significant growth and transformation. Key players like Adani Green, NTPC, Power Grid, JSW Energy, and Tata Power showcase resilience and adaptability in the dynamic energy landscape. Their financial performance, diversification strategies, and response to industry trends position them as potential value creators. The analysis of VBM metrics, including EVA, RI, and CFROI, provides insights into their operational efficiency and financial health. While the fluctuating CFROI suggests sensitivity to economic cycles and fuel prices, the overall upward trend in residual income signifies robust management and potential for shareholder value. As India advances towards sustainable energy, these companies play a vital role in shaping the power industry's future.