deepti project

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RELIANCE ENERGY LTD 1

Chapter 1

Introduction

Indian Institute of Finance 2005-07


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Introduction

Electricity is an essential requirement for all facets of our life. It has been recognized as a

basic human need. It is a critical infrastructure on which the socio-economic development

of the country depends. Supply of electricity at reasonable rate to rural India is essential for

its overall development. Equally important is availability of reliable and quality power at

competitive rates to Indian industry to make it globally competitive and to enable it to

exploit the tremendous potential of employment generation. Services sector has made

significant contribution to the growth of our economy. Availability of quality supply of

electricity is very crucial to sustained growth of this segment.

Electric power is something that any and every economy requires not just to grow, but also

to sustain. There is hence no rocket science to the fact that development in the electric

power industry of a country is a significant cause of overall economic development. When

we extent this logic to the Indian context, the argument is even more compelling. Given

that the Indian industry is growing at a rate of 6% per year in an era where double-digit

GDP growth targets are being set, the role of electric power assumes great importance. The

situation thus offers a huge potential for both domestic and overseas private players.

Electricity is one of the key inputs for the over all socio-economic development of the

country. The basic responsibility of the power supply industry is to provide adequate

electricity at economic cost, while ensuring reliability and quality of the supply. The power

industry in India has been characterized by energy shortages. In fiscal year 2004, demand

for electricity exceeded supply by an estimated 7.1% in terms of total requirement and

11.2% in terms of peak demand requirements. Although power generation capacity has

increased substantially in the recent years, it has not kept pace with the growth in demand

and growth of the economy in general.



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Table 1 Trends in growth of physical output in infrastructure sectors (in per cent)

* Provisional

Source-Economic survey 2005-07/chapter 93

Supply and Demand:

Although electricity generation capacity has increased substantially in recent years, the

demand for electricity in India is still substantially higher than the available supply. In the

fiscal year 2004, India faced an energy shortage of approximately 7.1% of total energy

requirements and 11.2% of peak demand requirements. He following table presents data



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showing the gap between the total requirement foe electricity versus the total amount of

electricity made available from 2000 to 2004.

Year Requirements Availability Surplus/Deficit (+/-)

(Million Units) (Million Units) (Million Units) (%)2001

2002

2003

2004

2005

480,430

507,216

522,537

545,983

559,264

450,494

467,400

483,350

497,890

519,398

-29,836

-29,816

-39,817

-48,093

-39,866

-6.2%3

-7.8%

-7.5%

-8.8%

-7.1%

Table 2: Actual Power Supply Position (2001 to 2005)

Source-PMI Research Bulletin-2005

Power Generation:

As of March 31, 2005, Indias power system had an installed generation capacity of

approximately 112,058 MW. Thermal Power Plants powered by coal, gas, naphtha or oil

accounted for approximately 69% of the total power capacity in India as of March 31,

2005, hydroelectric stations for approximately 26% and others (including nuclear stationsand wind power) accounted for approximately 5%. The CPSUs accounted for

approximately 31% of the total power generation capacity as of March 31, 2005, the

various SEBs accounted for 56% and private sector companies accounted for

approximately 13%.

Consumption:

The end users of power can be broadly classified into industrial (representing

approximately 34% of sales), agricultural (representing approximately 25% of sales),

domestic (representing approximately 25% of sales), and commercial consumers

(representing approximately 7% of sales). The balance of the sales goes to various other

consumers. The following table compares per capita electricity consumption in India, other

countries and the world average consumption as in 2000.



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Installed Capacities

The following table presents the installed generation capacity of Indias electricity

generators by type of generation in the year 2005:

Table 3: Trends in the power sector (utilities only)

*Provisional

@ April-December

Source-Economic survey 2006-07

Transmission and Distribution (T&D):

The transmission of electricity is defined as bulk power over along distance, generally

132KV and above. The entire country has been divided into four regions of transmission

system, namely northern region, eastern region, western region, southern region. Theinterconnected transmission system within each region is also called the regional grid.

The Government of India has an ambitious mission ofPOWER FOR ALL BY 2012.

This mission would require that our installed generation capacity should be at least 2,



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00,000 MW by 2012 from the present level of 1, 14,000 MW. To be able to reach this

power to the entire country an expansion of the regional transmission network and inter

regional capacity to transmit power would be essential. The latter is required because

resources are unevenly distributed in the country and power needs to be carried great

distances to areas where load centers exist.

In India, the T&D system is the three-tier structure comprising regional grids, state grids

and distribution networks. The distribution network and the state grids are owned and

operated by SEBs or state government through SEBs. Most of the inter-state transmission

links are owned and operated by POWERGRID. In order to facilitate the transfer of power

between neighboring states, states grids are interconnected to form regional grids. Because

peak demand does not occur simultaneously in all states, situations may arise in which

there is surplus power in one state while another state faces deficit.

Power Trading:

The Electricity Act recognized power trading as a distinct activity from generation,

transmission and distribution. Power trading involves the exchange of power from

suppliers with surpluses to suppliers with deficits. Seasonal diversity in generation and

demand, as well as the concentration of power generation facilitates in the fuel rich eastern

region of India, has created ample opportunities for trading of power. Recent regulatory

developments include the announcement of rules and provisions for the open

access and licensing related to interstate trading in electricity. Under the rules notified, the

regulatory intention is the promotion of competition. Several entities have started trading

operations or have applied for trading licenses. Current participants in the power trading

business include, among others, PTC, NTPSs subsidiary NTPC Vidyut Vyapar Nigam

Limited and Tata Power Trading Company Private Limited.

Rural Electrification

Rural Electricity involves supply of energy for two types of programmes:



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a. Production oriented activities like minor irrigation, rural industries etc.;s

b. Electrification of villages.

While the emphasis is laid on exploration of ground water potential and energisation of

pump sets/tube wells, which has a bearing on agricultural production, the accent in respect

of areas covered under the Revised Minimum Needs Programme (RMN P), is on village

electrification.

Rural Electricity Supply Technology (REST) Mission

The Rural Electrification Supply Technology (REST) Mission was set up in September

02. The base objective of formation of REST mission is to accelerate electrification of all

villages and households progressively by year 2012 through local renewable energysources and decentralized technologies including through the conventional grid connection.

The Mission is also to identify technologies that could be used in providing affordable and

reliable power supply to rural areas and effect implementation through distributed

generation schemes, wherever feasible.

Current Status of Rural Electrification

Out of estimated 586,000 villages about 140,000 - 150,000 remain to be electrified.

Eight States have achieved 100% village electrification Andhra Pradesh, Goa, Haryana,

Maharashtra, Kerala, Punjab, Tamil Nadu and Nagaland

These States constitute 18% of villages in the country.

States Villages to be

Electrified

Percentage

Uttar Pradesh 40,389 42%



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Bihar 20,449 53%

West Bengal 7,694 20%

Uttranchal 2,.785 18%

Jharkhand 22,920 78%

Orissa 9,682 21%

Assam 5,640 23%Meghalaya 2,754 50%

Table 4: Eight States with substantial number of villages to be electrified

Source;www.powermin.nic.in/Reporton rural electrification program

PROBLEMS BEING FACED BY INDIAN POWER SECTOR

The achievement of increasing installed power capacity from 1362 MW to over 100,000MW since independence and electrification of more than 500,000 villages is impressive.

However, it is a matter of concern that the annual per capita consumption, at about 350

kWh is among the lowest in the world. Still many households in a large number of villages

have no access to electricity. The end users of electricity like

Since independence, generating capacity has increased from 1362 to over 100,000

MW however there are widespread shortages of power in almost all parts of the

country.

Households, farmers, commercial establishments, industries etc. are confronted with

frequent power cuts both scheduled and unscheduled. Power cuts, erratic voltage levels and

wide fluctuations in the frequency of supply have added to the 'power woes' of the

consumer. The consumers are resorting to captive power supply arrangements of varioustypes ranging from 300 Mega Watts (industry) to 250 Watts (households).

Almost every shop in an urban market place has a generator set. Most establishments have

battery operated inverters and diesel generation sets. Most urban households have voltage

stabilisers for different appliances. In fact the money spent by the domestic consumer on

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these standby power supply (DG sets / Inverters) and power-conditioning (stabilisers)

arrangements could be among the highest in the world. The same money could be more

gainfully invested through corporate investments in power generation, transmission and

distribution with assured returns on investments

The major reasons for inadequate, erratic and unreliable power supply are:

Inadequate power generation capacity;

Lack of optimum utilisation of the existing generation capacity;

Inadequate inter-regional transmission links;

Inadequate and ageing sub-transmission & distribution network leading to power

cuts and local failures/faults;

Large scale theft and skewed tariff structure;

Slow pace of rural electrification;

Inefficient use of electricity by the end consumer.

Slow Capacity Addition

In 1947, India had installed capacity of 1362 MW. It reached a level of 20117 MW in

1976. And as on March 2000, we have and installed capacity of 96949 MW. The demand

has always outstripped the supply position during these years.

Poor Utilization of Existing Capacities

The All India average Plant Load Factor is 67%. This is mainly because of poor

performance in the State sector. Against this Central performance is much higher, the

CPSU-NTPC has recorded a PLF of more than 80% during the year. The All India PLF

was 45% in 1980-81.

High Transmission and Distribution Losses



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The present level of transmission and distribution loss is very high. The All India T&D loss

is around 23% and the losses in some state are much higher. Losses in Delhi are as high as

50%. Whereas in developed countries, T&D losses are in the range of 5% to 14%. While a

part of T&D losses are due to technical deficiencies in the system and the large spread of

low voltage distribution in rural area, a large portion of the line losses is due to theft &

pilferage compounded by connivance on the part of the line personnel.

Hydro Thermal Mix

In spite of governments intention of maximizing exploitation of the hydro potential of

over 84000 MW in India, the hydro thermal mix has changed adversely from around 44:54

in 1970-71 to around 25:72 in 1999-2000.

Unrealistic Tariff

There are too many subsidies and in many cases sales price of electricity is much lower

than the cost than its cost to the State Electricity Boards. In the agricultural sector, the

subsidies are the highest.

Renovation and Modernization (R & R)

Every plant after a certain life of operation requires renovation and modernization effort to

increase the utility life of the plant. Of late, there is lot of awareness on this account and

efforts are being put towards this area to get more from the existing capacities.

Poor Financial Health of State Electricity Boards



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The State Electricity Boards are facing severe financial crunch. Many of the SEBs are

running into losses. They are short of funds to add capacities and take up renovation and

modernization programs.

Resettlement & Rehabilitation (R & R)

The setting up of large hydro and thermal plants often necessitates clearing of large tracts

of land, affecting the lives of people, flora and fauna. Since the displacement of people

becomes unavoidable, the resettlement and rehabilitation of the displaced people becomes a

major issue. This is more important for hydro power projects, as land area is large. This has

resulted in delays of many projects.

Reliance Energy

Reliance Energy Ltd is India's leading integrated power utility company in the private

sector. It has a significant presence in generation, transmission and distribution of power in

Uttar Pradesh, Maharashtra, Goa and Andhra Pradesh.

With the ushering in of the power sector reforms and in the new environment of

opportunity for the power sector, REL is a key player in this transformation process.



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Reliance's gas finds in KG-D6 block in Krishna Godavari basin which constitutes 60% of

India's present total gas production, will provide an enormous opportunity to scale up

power generation capacities in India. With the new gas find, REL has the unique advantage

of integration from 'well head to wall socket'. This will help the company position itself as

a global integrated energy player under the Reliance banner.

REL and its affiliate power companies rank among the top 25 listed private sector

companies on major financial parameters. REL is part of the Reliance industries-India's

private sector company ranked among the world's 175 largest companies in terms of net

profit and the 500 largest companies in terms of sales.

Infrastructure and services

Generation-Creating the Power Capability

The Generation division has proven expertise in designing, engineering, erection,

installation, commissioning, operations and maintenance of power projects.

The division implements project plans for in house power projects and supports ventures

undertaken by other affiliate companies.

The division is fully integrated and has in house capabilities to address every aspect of

power projects including:

Mechanical

Civil

Electrical

Instrumentation &

Environmental

The division also provides engineering consultancy to external agencies and projects.

The 940.59 MW Generation capacity of the Division comes from five projects:



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Dahanu TPS the 2x250 MW multi fuel based thermal power station at Dahanu

near Mumbai.

7.59 MW Wind Farm Project at Jogimatti in the district of Chitradurga in

Karnataka.

BSES Kerala Limited: The 165 MW combined cycle power station at Kochi,

Kerala.

BSES Andhra Power Limited: The 220 MW combined cycle power plant at

Samalkot in Andhra Pradesh

Goa Power Station : The 48 MW naphtha based combined cycle power plant at

Goa.

Transmission

The Transmission department has successfully implemented and operated a 2 x 220 kV

transmission system. It has been responsible for the laying of the double circuit

transmission system from Dahanu to Mumbai. It has planned, constructed and

commissioned two modern 200 kV receiving stations having a capacity of 300 MVA each

at Ghodbunder, & Versova . It has also commissioned a 400 MVA station at Aarey for

receiving power from the Dahanu plant.

It is one of the select few electricity companies to commission a network of 4 circuit

transmission towers for economical and efficient power transmission. The Engineering cell

of the department co ordinates the engineering activities of the company's transmission

network.

The Transmission Division is an intermediary between Generation & Distribution Division

and is responsible for transmission of power at 220 kV from DTPS to the Company's areaof supply in Mumbai Suburbs.



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Distribution

Seven decades of experience and continuous investment in modernizing its distribution

infrastructure have helped the company achieve the enviable distinction of operating its

network with 99.99% reliability!

The efforts made towards achieving higher levels of efficiency have reduced distribution

losses to 13.4% - The lowest in the country! Today the company caters to 5 million

satisfied customers!

Reliance Energy Limiteds Mumbai operations cover a population of 9.0 million within an

area of about 384 sq. kilometers. The Distribution network handled and sold 5,879.66 MUs

in the year 2002-2003. Reliance Energy Limited continually upgrades its distribution

network. This is accomplished through a process of decentralized operation in supply

management to maintain very high on-line reliability.

Stock Price Movement of Reliance



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Daily Return of Reliance vis-a-vis

-0.08

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

0.08

0.1

0.12

1 11 21 31 41 51 61 71 81 91 101111121131141151161171181191201211221231241251

Days

Return

R etur n o f N S E R eturn o f R el ianc



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Reliance is the supplier of electricity to the metro resident people and major

revenues are generated from the retail consumer. Reliance has grown in the

subsequent years in residential but it has not shown a relevant increase in the

commercial and industrial supply of power, the company is planning to increase

the generation of power from different sources to meet the demand for its

different types of consumers.



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Company Overview-NTPC

National Thermal Power Corporation Limited (NTPC) is a premier thermal power

generating company of India. It was incorporated in the year 1975 with the

objective of planning, promoting and organizing an integrated development of

thermal power in the country. At present, Government of India holds 89.5% of the

total equity shares of the company and the balance 10.5% is held by FIIs,

Domestic Banks, public and others.

National Thermal Power Corporation. The Group's principal activities are

engineering, construction and operation of power generating plants and providing

consultancy to power utilities in India and abroad. The Group has installed

capacity of 21,749 MW through its 13 coal based (17,480 MW), 7 gas based

(3,955 MW) and 3 Joint Venture Projects (314 MW). The ash produced at its coal

stations are used in cement, concrete, cellular concrete and building material.

The Group has generated 149.2 billion units of electricity in 2004.

NTPC is also expected to form various new Joint Ventures with the following

companies:

Indian Oil Corporation Ltd (IOCL), with the objective of setting up a combinedpower stations based on refinery residue/ Naphtha and other petroleum

products.

Indian Railways, with the objective of setting up power stations to meet

traction and non-traction power requirements of Indian Railways.

Tamil Nadu Electricity Board, with the objective of setting up a1000 MW coal

based power station at Ennore in Tamil Nadu utilizing the existing infrastructure

facility at Ennore

NTPC has also been trying to diversify in the areas related to NTPCs core

business of power generation such as Hydro Power, Power Distribution, Power

Trading, Coal Mining, LNG, etc so as to broad base the business and to ensure

growth. The priority sectors identified by NTPC in the concern are:



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Horizontal Diversification-Hydro Power

Government is laying trust on adding hydro stations so as to meet the domestic

demand for power and to control pollution. This has provided NTPC with an

opportunity to horizontally diversify and set up hydro electric power stations

towards the due need of operating peak load demands and thermal for base

load.

In 1997 NTPC started the preliminary activities to tap a part of the abundant

hydroelectric potential of the country by identifying suitable projects for

development. Northern Region and more specifically Himachal Pradesh and

Uttar Pradesh were targeted for initial entry in hydro sector. NTPC's venture in

hydro sector became a reality when Koldam Project, a green field Hydro Electric

project of 800 MW capacities in the State of Himachal Pradesh, was formally

assigned to NTPC on 26th Feb. 2000.

An MOU has been signed with Govt. of Uttranchal on 31.12.02 for

implementation of Lohari-Nagpala(4x130MW) and Tapovan Vishnugad

(360MW)Hydro Electric power Project in the state of Uttaranchal on BOOMbasis, subject to techno-commercial viability of the project, and clearance of

MOEF.

In order to develop small and medium Hydro Electric Power Project up to 250

MW capacity a wholly owned subsidiary company named NTPC Hydro Ltd. has

been incorporated on 12th December 2002.

More hydro projects are being explored to find out the techno-economic viability

for development by NTPC. The company intends to add at least 3000 MW

capacities through hydro projects by the end of 10th Plan.

Vertical (Forward) Integration-Distribution and Power Trading



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In order to diversify along the power value chain, NTPC has gone in for

distribution and power trading to ensure forward linkages and also enhance

revenue channels. To acquire, establish and operate electrical systems etc. for

distribution and supply of electrical energy to consumers, a subsidiary company

named as NTPC Electric Supply Company Ltd. (NESCL) has been incorporated.

In order to undertake business of sale and purchase of electric power, a

subsidiary company known as NTPC Vidyut Vyapar Nigam Ltd. (NVVNL) has

also been incorporated.

Vertical (Backward) Integration-Coal Mining and LNG

Coal Mining:

The policy changes in coal sector provide an opportunity to NTPC to enter

captive coal mining business. NTPC is contemplating captive mines in North

Karanpura area of Central Coal-fields Ltd (CCL) and Talcher area of Mahandi

Coal-fields Ltd (MCL). Central Mine Planning & Design Institute Ltd (CMPDIL) (a

subsidiary of Coal India Ltd), Ranchi is being appointed as a consultant for

assisting and guiding NTPC in various activities of captive mining.

Coal Washeries:

NTPC is intending to set up coal washeries in the following three coal mine

areas:

Amlori area under Northern Coal-fields Ltd. (NCL)

Talcher area under Mahandi Coal-fields Ltd. (MCL)

North Karanpura under Central Coal-fields Ltd. (CCL)

Feasibility studies for Amlori area have already been completed in December

2002. NTPC has appointed Central Mine Planning & Design Institute Ltd.

(CMPDIL) (a subsidiary of Coal India Ltd), Ranchi, India as the consultant for the

feasibility studies.



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LNG:

NTPC is contemplating procurement of LNG fuel/Natural Gas for expanding its

gas based power projects at Anta, Auraiya, Kawas & Jhanor - Gandhar in North

India with cumulative capacity addition of 2600 MW and at Kayamkulam in South

India by 1950 MW. Fuel requirement for North India is approximately 3.0 MMTPA

and for South India is 2.0 MMTPA. Accordingly, LNG fuel/Natural Gas terminals

have been planned, one in North India and one in South India, to be

commissioned by prospective suppliers.

NTPC intends to keep options for 26% equity stake in regasification terminal and

may seek 10% equity in liquefaction terminal.

Step Towards Globalization

NTPC is exploring the possibility of setting up a Gas Based Combined Cycle

Power Plant in Bangladesh through Joint Venture with Bangladesh Power

Development Board (BPDB) and Petro Bangla.

NTPC has signed an MOU with Black and Veatch (USA) for rendering services in

the areas of Engineering, Project Management, Operation and Maintenance,

Quality Assurance etc.

NTPC and BHEL have joined hands to work as consortium partners to set up a

500MW integrated water and power project with 30MGD of desalination plant in

Oman on BOO basis.

NTPC is Indias largest power generation company of India. As on March 31,

2005 the total installed capacity of NTPC was 20.1% (including capacities of

Joint Venture companies) of Indias total installed capacity, and it contributed

27.1% of the total power generation of India during the last fiscal year.

NTPC generated a total of 159.11 billion units of electricity registering an

increase of 6.67% over previous years generation. 136.11 billion units or 85.54%



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of total generation was through coal-fired plants and 23 billion units or 14.46% of

total generation was through gas fired plants.

Power Trading Corporation of India Limited

Power Trading Corporation of India Limited was incorporated in 1999 to act as an

entity, which could undertake trading of power to achieve economic efficiency

and security of supply. PTC India Ltd has a two-fold mandate; to develop a full

fledged, efficient and competitive market mechanism for trading in power and to

facilitate the development of generation projects including through privateinvestment, both resulting in reliable, economic and quality power in the long

term. A vibrant power market, which is deep and liquid, needs to be developed in

the long term, and PTC India Ltd would continue to play a frontrunner's role

towards this objective and strive to add value to its customers' operations through



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providing services that serve their evolving needs. The main objective for

establishing PTC India Ltd was to develop power market for optimal utilization of

energy, to Promote power trading to optimally utilize the existing resources, to

Catalyze development of Power Projects particularly environment friendly hydro

projects and to Promote exchange of power with neighboring countries.

Various services provided by PTC India Ltd are:

Acting as an intermediary providing single window service after identifying the

Buyers and Sellers

Providing end to end marketing strategies for the power generated from

power projects

Studying the transmission feasibility for transfer of Power including transfer

through displacement

Facilitate sale of surplus power from Captive Power Plants

Finding alternative buyer(s) in the event of default

Acting as the nodal agency to facilitate Cross Border Trading

Coordination with agencies for open access, dispatch, metering, billing,

energy accounting & revenue realization

Facilitating the development of Power projects which can generate electricity

at competitive tariff

Providing advisory services

PTC India Ltd has been aggressively looking for CPPs across the country, which

has surplus power available with them for sale. PTC India Ltd has entered into

MoUs with such CPPs for purchase of surplus power available with them and is

providing full assistance to such CPPs in getting their petitions filed for openaccess in the State system before respective SERCs. PTC India Ltd is acting as

a single window service provider to such CPPs and is also making all out efforts

to get competitive tariff to such CPPs. PTC India Ltd derives its competencies

from the fact that it is the pioneer in starting power trading in India, is the leader

in the power trading market and has negotiated steep learning curves in its



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efforts to create a commercially vibrant power market in the country. PTC India

Ltd has also had a unique track record of bringing innovations in sync with the

needs of its clients, thereby providing a win-win situation for all. Moreover, PTC

India Ltd is able to provide the security of payments to its suppliers; this assumes

great importance in a sector, which has been marred by the high credit risk of

almost all the state utilities. PTC India Ltd has continually proven its expertise in

the field of power trading and this has translated into its client list covering all the

state utilities in all the five regions of the country. Due to its market acceptability,

PTC India Ltd is also in a position to sell surplus power from a CPP to its various

customers viz. SEBs/ Distribution Companies, High-Tension consumers etc. at a

market driven competitive rate ensuring good return to CPPs as compared to

sale of power to the respective SEBs/ State Utilities where they are located.

The main shareholders of PTC India Ltd are:

Power Grid Corporation of India Ltd.

Power Finance Corporation Ltd.

National Thermal Power Corporation Ltd.

National Hydro-Electric Power Corporation Ltd.

Damodar Valley Corporation

Financial Institutions: IDBI, IDFC, IFCI, GIC, LIC

Tata Power Company

Others/ Public at Large

The authorized capital of the company is Rs. 750 cr. and the present paid-up

equity capital base is Rs. 150 cr.

Equity Structure



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Source: www.ptcindia.com

Note- For shareholding Patten, balance sheet, p & l and cash flow statement,

please refer to Annexure 5, 6, 7 & 8 respectively.

Power Finance Corporation

Power Finance Corporation was established in 1986 as a Development Financial

Institution (DFI) for the development of power sector. Since then, PFC has been

playing an increasingly important role in mobilizing financial resources from

within and abroad at optimum cost and in providing various kinds of financial

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assistance to power projects. As a DFI, PFC also focuses on the institutional

development of its borrowers-State Power Utilities in particular. Reserve Bank of

India registered the corporation as a Non-Banking Financial Institution in

February 1997. PFCs funding criteria are based on borrowers credit worthiness

and project viability. A modest beginning saw the corporation makes a

disbursement of Rs. 1010 million in 1987. In the year gone by (2004-05), PFC

disbursed Rs. 94 billion.

Government has 100% ownership in PFI and no the government gives further

budgetary support to it. Later on in 1997-98 it was registered as a non banking

entity by RBI and in May 2002 Ministry of Power recommended the grant of

Navratna status to PFC. The role of PFC is:

Pivotal Development Financial Institution for the power sector excluding

rural electrification.

Catalyst to bring about institutional improvements and reforms in the

power sector.

Mobilization of resources, internal and external, at optimum cost.

Extend financial assistance and encourage flow of investment to the

power and associated sectors.

PFC disbursed around Rs. 16525 Crores during 9th plan and Rs.33000

Crores in the first three years of 10 th plan.

PFC endeavors to achieve 20% share of Indias power sector investment

for the 10th and 11th plan period.

PFCs borrowers profile is:

State Power Utilities State Power/ Electricity Departments

Central Power Utilities

Joint Sector Power Utilities

Private Sector Power Utilities



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Co-operative Societies

Municipal Bodies

Power Equipment Manufacturers

Independent Power Producers

PFCs priorities and extent of funding is:

Category of Schemes Extent of

Financing

for Reforming

Utilities (%)

Extent of

Financing

for Private Sector

Borrowers (%)

Studies, Consultancy & Training 100 50

R&D 90 50Meters, Computerization 80 50Transmission and Urban Distribution 80 50R&M, R&U of Generation &

Transmission

80 50

Small hydro, Captive & Co-generation 80 50Medium & Large Hydro Generation 80 25Thermal Generation 80 20

Performance Highlights (2005-06)

Cumulative Sanctions More than Rs. 743 billionCumulative Disbursements More than Rs. 500 billion

Net Profit Rs. 9.83 billion

Recovery Rate 99% (Nil NPAs)



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Growth in Operations

Financial results



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Capital structure

Source: www.pfcindia.com

Note for selected financial performance and statements of PFC please refer to

Annexure 9, 10, 11 & 12 respectively.

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Government has 100% ownership in PFI and no further budgetary support is

given to it by the government. Later on in 1997-98 it was registered as a non

banking entity by RBI and in May 2002 Ministry of Power recommended the grant

of Navratna status to PFC. The role of PFC is:

Pivotal Development Financial Institution for the power sector excluding

rural electrification.

Catalyst to bring about institutional improvements and reforms in the

power sector.

Mobilization of resources, internal and external, at optimum cost.

Extend financial assistance and encourage flow of investment to the

power and associated sectors.

PFC disbursed around Rs. 16525 Crores during 9 th plan and Rs.33000

Crores in the first three years of 10th plan.

PFC endeavors to achieve 20% share of Indias power sector investment

for the 10th and 11th plan period.



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Chapter 2

Objective



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Objective

Power sector is an important ingredient for the growth of any economy. Industrial

growth and economic growth cannot be thought of without sustainable power

supply. National Thermal Power Corporation (NTPC) in India is ensuring this

smooth flow of power supply since 1995 and has contributed effectively in the

growth of this nation.

During the last 30 years of its operation NTPC has been able to build up a

position of market leader in the Indian power sector but it wont be able to add a

global perspective to its business if it continues in the similar manner. NTPC

needs to grow; it needs to add more value to its product and needs to get closer

to its customers. That is why there is an urgent need to figure out those issues

which are acting as a barrier in the way of NTPC becoming a global leader in

power generation. Here in my project I have tried to figure out these issues and

tried to provide solution in the manner which might help NTPC in making its

presence felt globally.

My main objective of this project was to analyze performance of NTPC vis--vis

other PSU players like Power Finance Corporation, Power Trading Corporation

of India and National Hydro Power Corporation so that I can get an insight intothe actual condition of these organizations.

Further I have mentioned some global companies, which are also Public Sector

Undertakings, but still they have grown into global giants by applying modern

techniques and practices. The main rationale behind my mentioning these

companies was that that these companies have close resemblance with NTPC in

terms of origination and business operation but still they have become global

players despite of any hindrances they might have faced due to the government

policies in their countries. I have not only mentioned the performance of these

companies but have also tried to show through a model, how NTPC can be one

of them by maintaining its desired structure.



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Later with the objective of making NTPC a global player, I have suggested further

consolidation by means of mergers and acquisitions. Here I have shown forward

integration where I have tried to formulate a strategy of possible merger between

NTPC and PTC. Further I have supported my rationale with the help of a deal

structure and future shape of the acquiring company.

Thus, my overall objective is to evaluate the possibilities through which NTPC

can become a global player and make its presence felt globally.



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Chapter 4

Methodology



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Methodology

NTPC is the largest thermal power generating organization in India but it has

not been able to make its presence felt globally. There are various fronts where

it is lacking. This project is an effort to find out ways to consolidate the position

of NTPC and also to find out solutions to the problems faced by NTPC. Various

phases are involved in the completion of this project.

These are:

1. Data gathering phase: This phase involves finding the information about thevarious policies of the government regarding the power sector and finding out

the details of the functioning of NTPC, its relative position in India and in the

world. This phase also involves gathering information about various global

players in the field of power generation. Here I have also tried to figure out the

problems faced by NTPC and how they can tackled.

2. Structuring phase: This phase includes a deep insight into the requirements

of NTPC for becoming a global player and finding out the companies which can

be merged with NTPC so that its size is increased and also it gets access into

other related products which will add value to NTPC. This phase also includes

qualitative comparison of NTPC with other global players.

3. Method Used: In this project I have first tried to find out government policies

which have an impact on NTPC, then tried to find out the strategies

implemented by NTPC to tackle the problems and the growth plans of NTPC.Then I have tried to figure out the companies which could be merged into NTPC

so that NTPC can gain cost effectiveness and get access to the related

products to improve its product line and also to increase its market. I have also



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done ratio analysis of NTPC, PTC and PFC to find out the financial position of

these companies and to see the benefits derived by NTPC by merging these

companies with itself. Then I have tried to prepare a model which can be used

by NTPC to consolidate its position and become a global player. Later on I have

showed a merger deal between PTC and NTPC with appropriated rationale for

this merger.

4. Documentation phase: This phase involves clearly writing all the findings in

a structured manner. And showing the merger as a feasible option with NTPC

for growing at a rapid speed with the required rationale for the merger and also

the details for the merger deal with the appropriate rationale for the merger of

PTC with NTPC.

5. Feedback interaction phase: This phase involves discussions with the

project guide and going through the project again and again to make the project

more comprehensive and a more valuable study.



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Chapter 5Analysis & Interpretation



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Growth of Power Sector



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Introduction

Industry Outlook

As per the estimates for Index of Industrial Production (IIP) released by Central

Statistical Organization, the electricity sector has grown at 5.2% during 2004-05

over the previous year 2003-04 as against the growth in General Index of 8.2%.

During the year, capacities amounting to 3,949 MW were added of which 2,934

MW came in Thermal Sector, 1,015 MW in Hydro. With this 10,773 MW of

capacity has been added in the first three years of the X Plan period (2002-2007)

out of the total target of 41,110 MW for the whole plan.

Generation of electricity during the year in the country was 587 BUs which as

compared to 558 BUs in the previous year registered an increase of 5%.

Capacity utilization as measured by Plant Load Factor (PLF) of generating

stations for coal-fired plants has increased to 74.8% in 2005 from 72.7% in 2004.

Per capita consumption of power in India is 592 Kwh per annum much lower than

the world average of over 2,000 kWh. Even at the current levels of consumption,

there is a wide gap between demand and supply of power and in fiscal 2005,there was a peak demand deficit of 11.7% and an energy deficit of 7.3%. The

following table presents data showing the gap between the total requirements of

electricity versus the total amount of electricity made available in the last five

years:

(In million units)

Fiscal Year Requirement Availability Surplus/Deficit (+/-)

Units %

2001 507216 467400 -29816 -7.8

2002 522537 483350 -39817 -7.5

2003 545983 497890 -48093 -8.8

2004 559264 519398 -39866 -7.1

2005 591373 548115 -43258 -7.3



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Opportunities

Considering the existing demand-supply gap and the expected increase in per

capita consumption in view of the overall growth targets for the economy, the

16th electric Power Survey has projected a peak load demand of 157,107 MW

and an energy demand of 975.2 billion units by the end of March, 2012. To meet

this projected growth in peak demand, India would require 212,000 MW of

generating capacity by 2012. Also, Electricity Act 2003 has opened up several

opportunities for existing power sector players like NTPC. These opportunities

are in the area of direct supply to large customers, retail supply, distribution,

trading, etc. The enabling framework put in place by the Act and the built in

reform thrust would lead to better cash flows for the States. This, in turn, would

result in better realisations and better paying capacity of NTPCs customers. All

these factors provide enough opportunities for NTPC to pursue aggressive plans

in its core area of generation.

Risks And Concerns

Fuel Supply constraint

Coal

Coal mines are not being developed or expanded at required pace in comparison

to the pace at which capacities are being added. This may lead to situations

where some of the power stations may have difficulty in operating at full capacity

due to scarcity of coal. However, the shortages in coal supplies are considered

temporary and are not expected to affect current levels of capacity utilisation.

Also, coal companies are expected to put up capacities as per requirement.

Further, developing coal mining blocks and import of coal to augment supplies

are options, which have been initiated by NTPC to mitigate the risk. An order has



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been placed with MMTC for importing 2.1 MT of coal, against which, coal

supplies have already commenced.

Gas

Availability of gas and its pricing is a key concern. However, the recent gas finds

in India and the prospective supplies of gas in liquefied form from off-shore fields

provide opportunities to tie-up gas for existing and upcoming gas power projects.

The company is adopting various strategies such as procuring gas through

international competitive bidding process, exploring the possibilities of

participating in the Gas / LNG value chain abroad. In this regard the company

has also submitted offer to the Government of India for allocation of blocks for

exploration of oil and natural gas under the New Exploration Licensing Policy

which may unfold an opportunity for securing gas at an affordable price. Besides

these efforts towards long term security in gas supplies , to augment the present

requirements , additional gas supplies have been tied up with GAIL from Panna

Muktha Tapthi gas fields and Gujarat State Petroleum Corporation and re-

gasified LNG from GAIL and BPCL.

Industry Scenario for all the power sector companies

The generating capacity in India at the end of FY05 stood at 1,22,275 MW

(excluding captive capacities of around 25,000 MW). Out of this, India utilises a

poor 66% due to inefficient transmission and distribution causing a lot of power

shortage. As a result, it has become necessary to resort to power cuts and other

regulatory measures to ration power supply. Currently central institutions like

National Thermal Power Corporation (NTPC) and the State Electricity Boards

(SEBs) dominate the power scene in India. India has adopted a blend of thermal,

hydel and nuclear sources with a view to increasing the availability of electricity.

Thermal plants at present account for 70% (85,590 MW) of the total power

generation, hydro-electricity plants contribute 26% and the rest come from

nuclear and wind.



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Average transmission and distribution losses (T&D) exceed 25% of total power

generation compared to less than 15% for developing economies. The T&D

losses are due to a variety of reasons, viz., substantial energy sold at low

voltage, sparsely distributed loads over large rural areas, inadequate investment

in distribution system, improper billing, and high pilferage.

Further, the government plans to add 150,000 MW of generation capacity over

the next decade (including 100,000 MW thermal capacity and 50,000 MW hydro

capacity) in order to bridge the current demand-supply gap. This is almost 1.2

times the current generation capacity in the country. Also, if India has to achieve

a consistent 7% GDP growth, then power generation has to grow by around 10%

per annum.

In FY05, the total power generation figures stood at 520 bn units as compared to

519 bn units in FY04. The overall PLF for the year ended March 2005 stood at a

lower 51.4% as compared to 52.9% during FY04. A capacity addition of 3,487

MW was witnessed during FY05, almost 15% lower than the addition of 4,085

MW in FY04.

The per capita consumption of electricity was 606 kWh in FY05. While energy

demand deficit was recorded at 7.4%, peak demand deficit soared to 12.2%

during the fiscal.



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Performance of Undertakings under Ministry of Power

2002-03 2003-04

(provisional)NTPC Generation (BU) 141 149 +5.1%

PLF (%) 83.6 84.41 +0.8%Fresh Capacity Starts (MW) 1000 2710 +171%

Ash Utilization (lakh MT(%)) 57 (20%) 75 (23.5%) +3.5%

PFC Sanctions (Rs. Cr.) 14001 16472 +17.6%Disbursals (Rs. Cr.) 7338 8973 +22%Net Profits (Rs. Cr.) 1172 1601 +37%

PTC Sales Revenue (Rs. Cr.) 927 2378 +156%Energy Traded (MU) 4178 110029 +164%

NHPC Generation (MU) 9863 11045 +12%Net Profits (Rs. Cr.) 510 581 +14%Fresh Capacity Added (MW) 0 800Fresh Starts (MW) 800 2772 +246%

Various Policies and its Impact on the Functioning of

Power Sector companies



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Electricity is an essential requirement for all facets of our life. It has been

recognized as a basic human need. It is a critical infrastructure on which the

socio-economic development of the country depends. Supply of electricity at

reasonable rate to rural India is essential for its overall development. Equally

important is availability of reliable and quality power at competitive rates to Indian

industry to make it globally competitive and to enable it to exploit the tremendous

potential of employment generation. Services sector has made significant

contribution to the growth of our economy. Availability of quality supply of

electricity is very crucial to sustained growth of this segment.

Recognizing that electricity is one of the key drivers for rapid economic growth

and poverty alleviation, the nation has set itself the target of providing access to

all households in next five years. As per Census 2001, about 44% of the

households do not have access to electricity. Hence meeting the target of

providing universal access is a daunting task requiring significant addition to

generation capacity and expansion of the transmission and distribution network.

Indian Power sector is witnessing major changes. Growth of Power Sector in

India since its Independence has been noteworthy. However, the demand for

power has been outstripping the growth of availability. Substantial peak and

energy shortages prevail in the country. This is due to inadequacies in

generation, transmission & distribution as well as inefficient use of electricity.

Very high level of technical and commercial losses and lack of commercial

approach in management of utilities has led to unsustainable financial

operations. Cross-subsidies have risen to unsustainable levels. Inadequacies in

distribution networks have been one of the major reasons for poor quality of

supply.

Electricity industry is capital-intensive having long gestation period. Resources of

power generation are unevenly dispersed across the country. Electricity is a

commodity that can not be stored in the grid where demand and supply have to



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be continuously balanced. The widely distributed and rapidly increasing demand

requirements of the country need to be met in an optimum manner.

Electricity Act, 2003 provides an enabling framework for accelerated and more

efficient development of the power sector. The Act seeks to encouragecompetition with appropriate regulatory intervention. Competition is expected to

yield efficiency gains and in turn result in availability of quality supply of electricity

to consumers at competitive rates.

NTPC being a public sector unit and the largest electricity generator in the

country is subject to various policies formulated by the government. Be the policy

related to power supply or consumption of fuel or dividend policy or any thingelse it has its impact on the decisions and functioning of NTPC. Here in this

section I have considered few of the policies formulated by the Government of

India and tried to analyse their impact on NTPC and its growth pattern.

National Electricity Policy

National Electricity Policy (NEP) lays down creation of adequate generation

capacity with a spinning reserve of at least 5% by 2012. It also gives strong

thrust to hydro development. Main targets of National Electricity Policy (NEP)

are:

Availability of electricity to all households in five years

Demand to be fully met by 2012

Minimum lifeline consumption of 1 unit per household per day.

Along with all these issues NEP has also laid thrust on policy initiatives for saving

of the fuel. It clearly states that there should be policy initiatives like priority

allocation of captive coal mine blocks to power generation companies and



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allocation of profit gas share of the Government of India, under the Production

Sharing Contract, for the power sector to keep power tariffs at affordable levels.

Also, coal pricing mechanisms with greater transparency may be encouraged to

facilitate the process of making cost of power affordable. Even 100% FDI has

been allowed in all segments of power chain, including power trading.

NTPCs Strategies

NTPC has short and long-term strategies to not only deal with the issues and

challenges but to convert the challenges into opportunities of enhancing

corporate growth and strength and become a world-class integrated energy

utility.

Coal consumption by the power sector has gone up considerably driven

substantially by higher PLF of coal based thermal power stations. Massive

capacity expansion plans and increasing generation from existing plants indicate

substantial shortage of power grade coal in the future. Coal sector is taking steps

to speed up new coal mine developments in the 10th Plan. While, import of coal

for addressing the current shortfall may be a short-term measure, there is a need

to intensify mining activities with infusion of new participants, more capital and

new technologies. Therefore NTPC is importing coal for meeting the shortfall at

Talcher Stage-II, Farakka and Simhadri as a short-term measure.

The Company is also going for coal mining in order to enhance its fuel

security and mitigate fuel risk. It has been allotted one coal-mining block and

has applied for many more. NTPC has adopt modern mining practices and state-

of-the-art technologies. The Company has also identified coal pithead based

integrated power projects where the Company can draw coal from its own

mines for the power project. Applications for allocation of coal blocks for a few



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such projects have been recommended by Ministry of Power to Ministry of Coal.

Further these arrangements are supplemented with the reliable and cost

competitive gas/ LNG supply arrangements.

NTPC is also looking at forward integration as one of the viable options. It has

plans to acquire parallel distribution licenses in the related projects, like

distribution and trading. The target behind this is to increase the Power Trading

volume substantially. All the forward and backward integration initiatives are

primarily aimed at strengthening the core business of power generation. Assured

availability of coal and gas is the key to the Companys success and long-term

sustainability as well as competitiveness.

NTPC is also laying thrust on hydro power in order to achieve operational and

commercial synergy.

One Time Settlement Plan

Government had come out with a policy called One Time Settlement Plan,

where by all the receivables due to the power generating companies from the

SEBs would be converted into bonds backed by the government. This policy

helped all the power generating companies as they were able to recover their

dues and hence their sales figure improved. NTPC had also gained a lot from

this policy as it does not sell electricity directly to general public rather it sells

electricity to State Electricity Boards (SEBs). In the past, NTPC was perennially

exposed to the problem of large receivables from weak SEBs. NTPC has

benefited from the Settlement Scheme as per the Ahluwalia Committees

recommendations whereby the sundry debtor levels dropped from Rs. 12, 440

crores (237 days of sales) in FY2002-03 to Rs. 470 crores (9 days of sales) in

FY2003-04. The outstanding payments to Central Power Sector Utilities (CPSUs)

by the SEBs as on September 30, 2001 along with 40% of the surcharge (60%

waiver of surcharge) has been converted into State Govt. backed 8.5% tax Free



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Bonds. As per the scheme, the State Governments were asked to issue bonds

worth Rs. 16,410 crores to NTPC in lieu of past debts of the SEBs. NTPC has

entered into a bi-partite agreement with Delhi on similar lines for its dues to the

tune of Rs. 1,060 Crores. As a result, receivables from weak state electricity

boards have been converted into interest-bearing investments. These

investments are potentially liquid, subject to annual sell-off caps. Prospectively,

SEBs are required to open LCs with commercial banks in favour of NTPC,

covering 105% of the average monthly billing for the preceding 12 months of

sale. To that extent, the payment for power sold to the financially weak SEBs is

secured. In FY2003-04, NTPC realised 100% amounts for the power sold to

SEBs as a result of this arrangement.

Fuel / Energy mix for capacity addition

Currently, coal has a dominant share in the power generation capacities in India.

This is also reflected in the high share of coal-based capacities in NTPCs current

portfolio. With high uncertainties involved in Domestic gas/ LNG, both in terms of

availability and prices, NTPC is continuing to set up large pit-head coal based

projects, including few integrated coal cum power projects. To reduce the

dependence on fossil fuels, there is a need to push for renewable sources of

power in the sector. Therefore NTPC is trying to avail opportunities to add

hydropower to its portfolio subject to competitive tariffs. A first step in this

direction has already been taken with the investment in Koldam Hydro Power

Project. NTPC is also continuously closely monitoring developments on nuclear

front also and is open to setting up around 2000 MW of Nuclear power

generation capacity, possibly through a Joint Venture. As a leader in power

generation, NTPC is also considering other energy sources such as biomass,

cogeneration, fuel cells, etc for future development thereby reducing the

dependence on thermal fuels.



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While a decision on the fuel/energy mix for NTPC in the future would be largely

governed by their relative tariff-competitiveness, the fuel mix in 2017 may be

different from the existing portfolio, though not very significantly.

Diversification along the Value Chain

NTPC has achieved the distinction of being the largest thermal generating

company in India. In the past, this focus was adequate as the industry was highly

regulated with limited diversification opportunities. Over last few years, the

country has been facing acute shortages, both in coal and gas, severely affecting

optimum utilisation of its power stations and these shortages are likely to

continue in future as well. This is in spite of the fact that India is one of the largest

producers of coal in the World. To safeguard its competitive advantage in power

generation business, NTPC has moved ahead in diversifying its portfolio to

emerge as an integrated power major, with presence across entire energy value

chain. In fact, to symbolise this change, NTPC has taken on a new identity and a

new name NTPC Limited. NTPC has recently diversified into coal mining

business primarily to secure its fuel requirements and support its aggressive

capacity addition program. In addition, NTPC is also giving thrust on

diversification in the areas of power trading and distribution. Diversification would

also allow NTPC to offer new growth opportunities to its employees while

leveraging their skills to capitalise on new opportunities in the sector.

Establishing a Global Presence

To become a truly global company serving global markets, it is essential for

NTPC to establish its brand equity in overseas markets. NTPC is continuously

focusing on offering Engineering & Project Management Services, Operations &

Maintenance services, and Renovation & Modernization services in the

international market.

Establishing a successful services brand would be a precursor to taking higher

investment decisions in different markets. Going forward, NTPC will also



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continue to evaluate various options for strengthening its presence in global

markets including setting up power generation capacity, acquisition of gas blocks

etc.

Circa 2017: NTPCs corporate profile

NTPC aims to successfully diversify its generation mix, diversified across the

power value chain and entered overseas markets by the year 2017. As a result

NTPC would have altered its profile significantly. Elements of the revised profile

that NTPC would seek to achieve are:

Amongst top five market capitalisation in the Indian market

An Indian MNC with presence in many countries

Diversified utility with multiple businesses

Setting benchmarks in project construction and plant availability &

efficiency

Preferred employer

Have a strong research and technology base

Loyal customer base in both bulk and retail supply

A leading corporate citizen with a keen focus on executing its social

responsibility

Policy hindrances in the way of NTPC

THE NTPC, India's biggest power utility, was established in 1975 to strengthen

regional grids. It utilises coal near the pitheads for power generation, the

reasoning being that generation at such locations is a cheaper alternative to

transporting coal or transmitting power across the country. Most of the funding for

its projects have come from the multilateral agencies, primarily the World Bank.



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However, immediately after the new power policy was announced in 1991, The

NTPC was not allowed to bid for Independent Power Projects (IPPs). Some of

the projects allotted to it earlier were handed over to private developers. During

the same year, the World Bank, the primary agency in respect of the funding of

NTPC power projects, refused funding, alleging that the company was in poor

financial health.

The NTPC now has 12 coal-based and seven gas-based power projects. The

use of coal, the cheapest and most abundant resource for power generation, has

enabled it to sell power at the cheapest rate in the country. The average cost of

power generated by it is a rupee a unit; at Korba in Madhya Pradesh it is only 64

paise. The Plant Load Factor (PLF), indicating the extent of capacity utilisation ofa power plant, is far higher than the national average. Last year, the average PLF

of its power plants was 77 per cent, despite the poor performance of plants in the

eastern region where the PLF was 43 per cent. To improve the situation, there

are plans to evacuate surplus power from the eastern region to the northern and

western regions.

The NTPC's first 200 MW unit for the 2000 MW Singrauli power project in Uttar

Pradesh was commissioned in 1982. By 1983-84 it had a capacity of 1000 MW,

but the real spurt in growth came between 1987-88 and 1989-90, when 6713 MW

of capacity was added. By this time the mega projects at Singrauli (2000 MW),

Korba (2100 MW), Ramagundam (2100 MW), and Rihand (1000 MW) were fully

completed. Since then, however, capacity has not expanded at the same pace

(see chart). It now has an installed generating capacity of 16795 MW - about 19

per cent of the entire power generating capacity in India. However, it produces

about 25 per cent of the electricity generated in the country.

The restructuring of the power sector and the 'rationalisation' of tariffs that

accompanies it, is now being implemented at the level of SEBs. The NTPC is

also likely to follow such a course. This will provide the Corporation avenues for

rapid growth in revenue.



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SEBs' arrears to the NTPC have mounted. The arrears now stand at Rs. 3,800

crores, and, inclusive of surcharge, the amount is Rs. 6,200 crores. The NTPC,

the largest corporate recipient of World Bank funding, has been told by the Bank

that fresh assistance will become available only if the dues from the SEBs are

cleared.

Some of the SEBs, such as those in Andhra Pradesh and Orissa, are being

restructured through the creation of separate companies for generation,

transmission and distribution. A more moderate option advocated by critics of

such a course is a modest increase in tariffs, which, they argue, will bring down

the losses of SEBs. The NTPC recently indicated that it would prefer to be freed

from the administered price mechanism (APM) that governs its sale price to

SEBs. Its demand is similar to that planned for the oil companies after price

deregulation. The NTPC has been allowed to set tariffs at levels that guarantee it

a 16 per cent rate of return on new power plants. The Navaratna status is likely

to help the company proceed with plans to break up the company into separate

subsidiaries, each operating as a profit centre. The reasoning is that the loss-

making units will be separated from the profit-generating units.

The company's projects in Kayamkulam in Kerala, in Yamunanagar in Haryana,

in Mangalore (where the controversial Cogentrix project is now located) and

another controversial project, the Ib Valley project in Orissa, were all handed

over to private developers after the Government announced its new power policy.

The projects in Kerala and Haryana are now back with the NTPC because no

private promoter wanted to undertake them.

Despite its aborted partnership with Spectrum Technology for the Kakinada

project, the NTPC is now keen on forming a joint venture with a company

specialising in the lucrative renovation and modernisation (R&M) business in the

power sector. Asked whether an alliance with BHEL may have been preferable,



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The NTPC plans to add 6270 MW of generating capacity during the Ninth Plan

period and a further 8000 MW during the Tenth Plan, aiming for a total capacity

of over 30000 MW by the end of the Tenth Plan period. The outlay for projects in

the Ninth Plan is estimated to be Rs. 19,000 crores. Of the additional capacity in

the Ninth Plan, 3920 MW of capacity are in coal-based projects and the

remaining for projects utilising gas and other fuels. About 40 per cent of the funds

for the projects are expected to be raised in foreign currency from multilateral

agencies and a further 10 per cent in the form of suppliers' credit if equipment is

sourced from the multinational power equipment companies.



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Financial Analysis

National Thermal Power Corporation

Strategic Analysis of the Company

Company and its Mission

NTPC was set up by Ministry of Power in 1975 by observing the countries huge

demand for electricity. Till today NTPC is contributing about 27% of the total



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Future Outlook

Power sector has not been given its required due in the past years. Today when

India has to compete with other developed nations it is planning to boost the

growth of this sector as much as possible.

Market leaders like NTPC have enough potential to gain momentum in such a

supportive environment. Company is planning to develop ultra mega power

projects of 4000 MW capacity and company is also looking to venture into other

renewable sources of energy like nuclear power. To avoid the shortage of raw

material company is initiating its projects near the pit heads and also acquiring

lots of captive coal mines.

Company is planning to have joint ventures with private players for supply of fuel

especially gas (recently it has made an agreement with Reliance for the supply of

gas) Company is also planning to go for a joint venture with private players for

exploration of gas and coal under the National Exploration Licensing Policy-VI

(NELP-VI).

Thus company is all set to take advantage of supportive government policies and

industry growth in order to become a global player in power sector.

S.W.O.T Analysis of NTPC

Strength Weight age Weakness Weight age

Largest power utility 75 Long gestation period 70



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Trained Manpower 70 PSU work culture 50Diversification 50 Social responsibility 40Better capacity utilization 80 Compulsory obligations 60Government Support 70 Absence in distribution 80Market Leader 75 High Adm. Cost 70

Total 340 310

Change = +30

Opportunity Weightage Threat Weightage

Supportive power policy 60 Entry of private player 90Huge Demand 90 Low cost supply to SEBs 40Restriction on FDI 60 Availability of raw material 70

Access to global debt market 70 Privatization 40

Total 280 240

Change = +40Total Change = +70

So the SWOT analysis of NTPC is giving positive results with very high margin

i.e. 70% which shows firms competence and efficiency.

Note- the weights are assigned out of 100.

Analysis

Strengths

NTPC is the largest thermal power generating company in India with total

installed capacity 20.1% of Indias total installed capacity and contributed to

about 27.1% of the total power generation in India during the year 2004-05.



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NTPC has a highly trained manpower. The total strength of employees of the

corporation stood at 23385 as on March,2005 and the overall Man-MW ratio for

the year was 0.91.NTPC continuously trains its employees through various

training programmes for their continuous growth.

NTPC has diversified into coal mining, coal washeries and has also started a

company by the name of NEECO. Hence it can be said that NTPC is trying to

diversify its business.

The plant load factor for thermal plants of NTPC during the year 2004-05 was

87.5% as compared to 84.4% last year and for gas plants the plant load factor

was 65.3%.

NTPC, being a public sector unit, has a very strong government support and this

gives NTPC an upper hand as compared to other players in this area. And NTPC

is also a market leader as far as the power generation is concerned specifically

thermal power generation.

Weaknesses

Establishments of power projects take a long time and same is the case with

NTPC. NTPC has started with the establishment of hydro plants but still they arenot complete and would take another two to three years to start functioning.

NTPC faces the same problem as most of the PSUs, that is, it takes lots of time

to finish some work, file keeps on moving from one table to another and toll the

time the project is finalized lots of time is wasted.

And being a government entity it has to fulfill certain social responsibilities like

taking care that the environment does not get polluted and to develop the area

around the NTPC plant premises, etc. And it even has certain compulsory

obligations like for example it had to overtake Dhabol Power Plant (which is loss

making) as government had asked it to do so.



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Absence of a strong place in the distribution sector is also harming the business

of NTPC as it cannot get in direct touch with its customers. Though it has started

a distribution company in 2001 but still it does not have that much of presence in

the Indian market.

NTPC has a very large number of employees and it remunerations are among

the highest in the PSU sector and it also provides almost all the possible facilities

to its employees, which makes the administrative cost for NTPC very high.

Opportunities

Government is giving a lot of thrust on the development of the power sector and

this is very helpful for NTPC as it can find more avenues to grow. And secondly

there is a very large demand for electricity and shortage of electricity supply. So

this also provides NTPC with an opportunity to grow further. Apart from this

though 100% FDI is allowed in the power sector by automatic route but still there

are certain government regulations which are a hindrance in this process. And

since NTPC is a public sector unit and even cash rich this situation will help

NTPC a lot. And NTPC being a large company has an access to global debt

market for funds from where it can get funds at low interest rates hence helpingNTPC to maintain low cost of capital.

Threats

The major threat for NTPC is the entrance of private players like TATA Power,Reliance Energy, etc. in the Indian power sector. And for this NTPC has to grow

at a very fast pace if it wants to retain its market leader position for long.



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Another problem for NTPC is that it has to supply power to SEBs at a low cost

even when the cost of generation is high and this at times leads to losses and

this is because of the government policies.

Another major problem with NTPC is the acute shortage of raw material, that is,

coal. And because of this NTPC is trying to venture into other power generation

methods like hydro power generation, gas projects and even into nuclear plants.

But this will take a long time as the gestation period for establishing a plant and

making it operational is long. So till the shortage of fuel will be NTPCs major

concern.

Analysis of the return of the NTPC stock

NTPCs had come out with its Initial Public Offering in October 2004 and since

then its stock had been performing very well.

I have considered the stock price of NTPC from October 1, 2005 to March 31,

2006 and have taken out its return and beta. For comparison I have taken the

returns of NSE of the same period.



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During this period the average return of NTPC stock was 0.21% and its beta was

0.60. For stock price of last 6 months see Annexure 12

The same is depicted in the graph given below.

-0.06

-0.04

-0.02

0

0.02

0.04

0.06

1 10 19 28 37 46 55 64 73 82 91 100 109 118

Return NSE

Return

NTPC Return NTPC

Return of NSE

Linear (Return of NSE)

Analysis

NTPCs stock is one the most stable stock in the stock market and its clearly

shown by its beta which is 0.60. It clearly suggests that NTPCs stock risk is

almost half the risk of the market, or we can say slightly more as it is more that

0.50. This stock can also act as a portfolio stabilizer due to its low volatility. The

trading volume in the stock has been significant.



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Common Size Balance Sheet

2005-06 2004-05 2003-04 2002-03 2001-02

SOURCES OF FUNDS

Shareholder's Funds

Capital 13.93% 15.16% 17.56% 19.42% 21.22%

Reserves and Surplus 56.64% 53.82% 52.95% 51.80% 52.15%

70.57% 68.98% 70.41% 71.22% 73.37%Deferred Revenue-onaccountof advance againstdepreciation 0.57% 0.31% 0.06%Development Surcharge

Fund 0.73%Loan Funds

Secured Loans 7.50% 8.89% 9.21% 4.09% 5.34%

Unsecured Loans 21.36% 21.09% 20.32% 24.69% 21.29%

28.86% 29.98% 29.53% 28.78%Deferred Tax Liability(Net) 8.54% 10.14% 9.92%

Less: Recoverable 8.54% 10.14% 9.92%

0.00% 0.00% 0.00% 0.00% 0.00%

TOTAL 100% 100% 100% 100% 100%

APPLICATION OF FUNDS

Fixed Assets

Gross Block 72.81% 77.67% 81.80% 81.75% 86.69%

Less: Depreciation 35.12% 36.42% 37.42% 37.81% 37.66%

Net Block 37.69% 41.24% 44.39% 43.94% 49.03%

Capital Work in Progress 11.33% 10.89% 11.52% 12.93% 7.58%Construction Stores &

Advances 5.44% 3.60% 2.75% 3.36% 2.79%

54.46% 55.78% 58.65% 60.23% 59.39%

Investments 35.13% 33.64% 8.19% 10.01% 9.14%Current Assets, Loans &Advances

Inventories 3% 3.37% 3.96% 5.01% 4.99%

Sundry Debtors 2.32% 0.91% 27.78% 28.66% 25.61%

Cash & Bank Balance 10.27% 1.18% 1.22% 2.99% 1.04%

Other Current Assets 1.64% 15.53% 5.62% 1.37% 7.32%



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Loans & Advances 4.57% 5.29% 4.80% 3.66% 10.04%

21.80% 26.28% 43.38% 41.71% 48.99%Less: Current Liabilities&

Provisions

Liabilities 8.84% 12.66% 7.64% 7.92% 44.18%Provisions 2.56% 3.05% 2.60% 4.04%

11.40% 15.70% 10.24% 11.97% 17.55%

Net Current Assets 10.41% 10.58% 33.13% 29.74% 31.44%

Miscellaneous Expenditure(to the extent not written offor adjusted) 0.02% 0.02% 0.02%

TOTAL 100% 100% 100% 100% 100%



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Common Size Income Statement

2005-06 2004-05 2003-04 2002-03 2001-02

INCOME

Sales 100% 100% 100% 100% 100%

Energy Internally Consumed 0.11% 0.10% 0.10% 0.10% 0.13%

Provisions Written Back 2.76% 5.12% 2.09% 0.06% 1.91%

Other Income 10.46% 32.53% 2.12% 3.77% 4.83%

Total 113.30% 137.75% 104.31% 103.93% 106.87%

EXPENDITURE

Fuel 60.88% 64.80% 57.91% 58.37% 52.38%

Employee's remuneration &Benefits 3.92% 4.69% 4.31% 4.51% 4.03%

Generation, administration &other expenses 5.37% 5.21% 5.71% 6.53% 5.31%

Depreciation 8.69% 10.73% 8.03% 7.34% 12.25%

Provisions 0.03% 3.10% 2.92% 1.03% 5.25%

Interest & Finance Charges 7.52% 17.88% 5.21% 4.87% 5.76%

Total 86.41% 106.40% 84.08% 83.05% 84.97%

Profit before Tax & Prior

Period Adjustments 26.92% 31.34% 20.13% 20.78% 21.90%Prior Period Income/ Exp.(net) -0.04 0.01% 0.42% 0.00% 0.42%Extraordinary item-CapitalReciepts 0.28%

Profit Before Tax 26.97% 31.25% 19.71% 21.06% 21.48%

Provision for Current Tax 4.46% 4.61% 5.91% 5.78% 7.09%

Less: Income tax recoverable 3.26% 1.27% 5.14% 4.59% 5.29%

1.20% 3.34% 0.77% 1.19% 1.79%

Profit after Current Tax 25.76% 27.91% 18.94% 19.87% 19.68%

Provision for deferred tax -0.76% 4.19% 1.86%

Less: Deferred TaxRecoverable -0.76% 4.19% 1.86%

Profit after Tax 25.76% 27.91% 18.94% 19.87% 19.68%



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Chart No. 1

Chart No. 2

Recievables Turnover Ratio

0

5

10

15

20

25

30

2004-05 2003-04 2002-03 2001-02 2000-01

Years

Series1


Quick Ratio

0

0.5

1

1.5

2

2.5

3

3.5

4

2000-01 2001-02 2002-03 2003-04 2004-05

Years

Series1


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Chart No. 3

Chart No. 4


Average Recievables Collection Period

0

50

100

150

200

250

2000-01 2001-02 2002-03 2003-04 2004-05

Years

Days

Series1


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Net Profit Margin

0

5

10

15

20

25

30

2000-01 2001-02 2002-03 2003-04 2004-05

Years

Percentage

Series1

Chart No. 5

Cash Flow Coverage Ratio

0

5

10

15

20

25

30

2004-05 2003-04 2002-03 2001-02 2000-01

Years

Series1

Chart No. 6



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Growth Rate

0

2

4

6

8

10

12

14

2

deepti project

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