Value a regulated water utility from its regulated asset base, express the answer as a multiple of that base, and explain what the premium means.

Alvasa is worth about Rs 2,667 crore, 1.33x its Rs 2,000 crore asset base. Year 1 cash flow is the Rs 200 crore allowed return plus Rs 100 crore of depreciation less Rs 180 crore of capex, Rs 120 crore, growing 4% and discounted at 8.5%. The Rs 667 crore premium is the present value of the 1.5 points by which the allowed return beats WACC; at an allowed return of 8.5% the business would be worth exactly its base.

Think of a landlord whose rent is set by a rent board: the board allows a return on what the building cost, plus money to keep it repaired. Alvasa's cash flow each year is the allowed return on the base plus the depreciation it recovers through the tariff, less the capex it must spend to replace assets and grow the base. On Rs 2,000 crore that is Rs 200 crore of return plus Rs 100 crore of depreciation, less Rs 180 crore of capex (Rs 100 crore to replace what depreciated and Rs 80 crore to grow the base 4%), leaving Rs 120 crore. Notice that depreciation and replacement capex cancel: free cash flow is simply the base times the allowed return less the growth rate, 6% of Rs 2,000 crore.

Because every line scales with the base, the whole valuation collapses to one ratio. Cash flow of (return less growth) times the base, growing at the growth rate and discounted at WACC, gives a value of the base times (return less growth) over (WACC less growth): 6% over 4.5%, or 1.333x. That is Rs 2,667 crore. The regulated asset baseThe value of the assets of a utility that the regulator recognises when setting tariffs; the allowed return is earned on this figure, not on market value. works like book value for a bank: the market pays a premium or discount to it depending on whether the allowed return beats the cost of capital.

Rewrite the answer as base plus something. The Rs 667 crore premium is exactly the present value of Alvasa earning 1.5 points more than its cost of capital on a growing base: Rs 30 crore in year 1, growing 4%, discounted at 8.5%, is Rs 667 crore. So the premium is a bet on the regulator, not on the pipes. If the next tariff review cut the allowed return to 9%, the multiple would fall to 1.11x; at 8.5% it would be 1.0x and Alvasa would be worth the base and nothing more. Growth cuts the other way: a higher growth rate raises the value only while the spread is positive, because each new rupee of base earns the same premium return.

Close with what the interviewer wants to hear. The multiple of 1.33x is a statement about regulation: it says the market expects Alvasa to keep earning 10% against an 8.5% cost of capital for a long time. A buyer paying that premium should ask when the next review is, how the regulator has treated past reviews, and whether the WACC assumption is itself the regulator's or the market's. The limit: this is a steady-state formula. Real tariff periods, capex lumps and under-recoveries of depreciation all push the real number around it, and a rise in interest rates lifts WACC before the regulator lifts the allowed return.