working capital and analysis of financial management

1.1 INTRODUCTION TO STUDY

Working capital management is a significant fact of financial management due to the fact

that it plays a pivotal role in keeping wheels of business enterprise running. Shortage of

funds for working capital has caused many businesses to fail and in many cases, has

recorded poor growth. Lack of efficient and effective utilization of working capital leads

to earn low rate of return on capital employed or even compels to sustain losses. Working

capital is the flow of ready funds necessary working of the enterprise. It consists of funds

invested in current assets or those assets which in the ordinary course of business can be

turned into cash within a brief period without undergoing diminution in value and

without disruption of the organization.

Financial analysis is the process of identifying the financial strengths and weaknesses of

the firm by properly establishing relationships between the items of the balance sheet and

the profit and loss account. It refers to an assessment of the viability, stability and

profitability of a business, sub-business or project. The future plans of the firm should be

laid down in view of the firm’s financial strengths and weaknesses. Thus, financial

analysis is the starting point for making plans, before using any sophisticated forecasting

and planning procedures. Understanding the past is a prerequisite for anticipating the

future.

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1.2 OBJECTIVE OF THE PROJECT

To analyse factors that considers their (Tata Power) working capital requirement.

To understand Working Capital Policies.

To analyse Inventory management of Tata Power Company Limited

To study the general problems faced in Supply Chain

To analyse the financial statement of Tata Power

To do analysis of company’s performance

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1.3 COMPANY PROFILE

Company name Tata Power Company Ltd

Year of Establishment 1919

Chairman Mr. R N Tata

Industry Electricity generationElectricity transmissionElectricity distribution

Website http://www.tatapower.com

Production Capacity 2300MW

Annual Generation 14807 MUs

Tata Power Company Limited (TPC), India's largest integrated Electric Power Utility in

private sector with a reputation for reliability, incorporated in the year 1919 at Mumbai.

Tata Power Company Limited pioneered the generation of electricity in India nine

decades ago. The core business of Tata Power Company is to generate, transmit and

distribute electricity. The Company operates in two business segments: Power and Other.

The Power segment is engaged in generation, transmission and distribution of electricity.

The other segment deals with electronic equipment, project consultancy.

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In the year 2007, Tata Power Company Limited has signed a MoU with the Government

of Chhattisgarh for the setting up of a 1000 MW coal fired mega power plant in the State.

The company has roped in Korea-based Doosan Heavy Industries and Construction Ltd

for supercritical boilers for its Mundra ultra mega power project. The acquisition of

Coastal Gujarat Power Ltd was med by the company and a Special Purpose Vehicle

(SPV) formed for Mundra Ultra Mega Power Project (UMPP). Tata Power Company

Limited has signed an EPC contract for supply of five (5) 800 MW Steam Turbine

Generators with Toshiba Corporation for the first 4000 MW Ultra Mega Power Project

(UMPP) in India to be located at Mundra, Gujarat in August 2007.

As on February 2008, The Tata Power Company Limited (Tata Power) and Damodar

Valley Corporation (DVC) jointly completed its financing for the 1050 MW coal based

thermal power project, being set up in Dhanbad District of Jharkhand State. Recognising

the steady and stable performance in generating quality and reliable energy, the Central

Electricity Authority has awarded Tata Power's Bhira Hydro generation facility with the

Silver Shield award for the meritorious performance in March 2008. April of the year

2008, Tata Power completes the Signing of Financial Agreements for 4000 MW Ultra

Mega Power Project, coming up at Mundra, Gujarat. The cost of the project is estimated

at INR 17000 crores (USD 4.2 billion). Tata Power announced in September of the year

2008, it would acquire a 11.4 per cent stake in Geodynamics Ltd, an Australian company

specialising in geothermal energy, for Rs 165 crore.

Tata Power is surging ahead, lighting up lives through its activities from its inception.

The challenge of fulfilling the ever growing needs of power has been met by Tata Power

through efficient generation, transmission, distribution and constant up gradation of its

technology in every aspect.

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VISION

To be the most admired Integrated Power and Energy Company delivering

sustainable value to all stakeholders.

MISSION

We will become the most admired company delivering sustainable value by:

Being a Partner of Choice and exceeding stakeholder expectations.

Ensuring profitable growth and value to stakeholders.

Innovating and deploying cutting edge solutions based on eco-friendly

technologies.

Relentlessly pursuing opportunities, capitalising on synergies in the power and

energy value chain, and expanding our presence in related businesses of interest.

Being an Employer of Choice and creating a culture of empowerment and high

performance.

Caring for the safety of the environment and well-being of customers,

employees and communities.

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1.3.1 HIGHLIGHTS OF THE YEAR

Consolidated revenues from operations up by 61% at Rs. 17,587.53 crores.

Consolidated PAT at Rs. 1,218.74 crores rose an increase of 16%.

Annual Generation highest at 14807 MUs.

Commissioned 250 MW ‘Unit 8’ at the Trombay Thermal Power Station.

Commissioned 90 MW in Haldia.

Commissioned additional 80.6 MW wind power capacity in Gujarat, Karnataka

and Maharashtra.

Financial Highlights

The Company’s revenues from operations increased 22.3% to Rs. 7, 236.23 crores

as compared to Rs. 5,915.91 crores in the previous year.

Profit After Tax (PAT) stood at Rs. 922.20 crores as against Rs. 869.90 crores for

the previous year, a growth of 6%, the highest so far.

Net Profit after Tax and Statutory Appropriations stood at Rs. 967.50 crores as

against Rs. 811.31 crores for the previous year, an increase of 19.25%.

Dividend recommended at Rs. 11.50 per share, the highest ever so far.

The Company’s consolidated revenues from operations increased 61.49% to Rs.

17,587.53 crores as compared to Rs. 10,890.86 crores in the previous year.

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The consolidated PAT for the year stood at Rs. 1,218.74 crores as against Rs.

1,055.07 crores for the previous year, a rise of 15.51%.

Tata Power Trading Company Limited (TPTCL): TPTCL’s revenues increased

146.2% to Rs. 2,171.93 crores from Rs. 882.12 crores in the previous year. PAT

also increased to Rs. 7.63 crores from Rs. 4.30 crores in the previous year.

Powerlinks Transmission Limited (Powerlinks): The revenues of Powerlinks, the

first public-private joint venture in power transmission in India increased 3.65%

to Rs. 254.49 crores from Rs. 245.52 crores in the previous year. PAT also

increased to Rs. 65.34 crores from Rs. 58.41 crores in the previous year.

North Delhi Power Limited (NDPL): NDPL’s revenues increased 7.90% to Rs.

2,467.87 crores from Rs. 2,287.23 crores in the previous year. PAT for the current

year is lower

at Rs. 171.47 crores as compared to Rs. 281.58 crores in the previous year

primarily on account of an exceptional credit of Rs.182 crores in the previous

year.

Operational Highlights of the Year

The Company generated 14,807 Million Units (MUs) of power from all its power

plants during the year as compared to 14,717 MUs in the previous year.

The Trombay Thermal Power Station generated 9,845 MUs during the year as

compared to 10,002 MUs generated in the previous year, a decrease by 1.57%.

The generation was lower on account of major overhaul of Unit 6 and Unit 7.

The three hydro stations collectively generated 1,151 MUs during the year, as

against 1,489 MUs generated in the previous year, a decrease of 22.7%. The

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generation was lower on account of the restriction imposed by Krishna Water

Tribunal Award.

The Jojobera Thermal Power Station recorded a generation of 3,009 MUs during

the year as compared to 2,862 MUs in the previous year, an increase of 5.12%.

The power station achieved the highest ever generation, crossing the 3,000 MU

mark for the first time while surpassing the previous record of 2,862 MUs in

FY08.

The Belgaum Independent Power Plant (IPP) generated 447 MUs during the year

as compared to 237 MUs in the previous year, an increase of 88.61% due to

increased demand from Karnataka Power Transmission Corporation Ltd.

In a major expansion of distribution network, power supply has been made

available to 2,366 new consumers and 34 new consumer sub stations were

commissioned.

New Projects

250 MW expansion Project at Trombay, Unit 8:

The 250 MW Unit 8 imported coal based plant at Trombay was commissioned

during the year and started commercial operations from end March 2009.

120 MW Power Project at Haldia:

During the year, the Company commissioned Units 1 and 2 of 45 MW each. The

30 MW Unit 3 is scheduled to be commissioned in Q1 of FY10.

Captive Power Projects for Tata Steel:

Industrial E nergy Limited (IEL), a joint venture between Tata Power (74%) and

Tata Steel (26%) is implementing the following projects:

120 MW Power House # 6 for Tata Steel Works, Jamshedpur:

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The 120 MW power plant being constructed at Tata Steel works, Jamshedpur for

use by Tata Steel was inaugurated in May 2009. The Gas based Power House # 6,

will be supplying the entire generated capacity to Tata Steel Limited thereby

meeting the increasing demand for power for the Company’s Jamshedpur works.

Unit 5 at Jojobera:

A 120 MW power plant is being constructed at the Company’s existing site at

Jojobera. IEL has placed orders for major equipment and construction work is in

full swing. The project is expected to be commissioned in the third quarter of

FY10.

4,000 MW, Mundra Ultra Mega Power Project on Fast Track

1,050 MW Maithon Joint Venture Project between the Company (74%) and

Damodar Valley Corporation (DVC) (26%)

Wind Farm Projects:

During the year, the Company commissioned additional 80.6 MW wind power

capacity. This included 36 MW at Gadag (Karnataka), 29.6 MW at Samana

(Gujarat) and 15 MW at Sadawaghapur (Maharashtra). The collective generation

by these wind farms was 177 MUs during the year as against 127 MUs generated

in the previous year.

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1.3.2 REWARDS & RECOGNITION

Greentech Safety Award 2009 in Gold Category in Power Sector for Trombay

Thermal Power Station.

Civic Award in the category social development instituted by Bombay Chambers

for the Year 2007-08.

First prize in ash management from Jharkhand State Pollution Control Board

for Jojobera Thermal Power Station.

Bhira and Bhira Pump Storage Scheme adjudged as second best performing

station (Silver Shield) in the country for the year 2007-08. This is the second

consecutive year Bhira division has won this award.

Power Deal of the Year by Power Finance International (PFI) in their year book

2009 for the 4,000 MW Ultra Mega Power Project (UMPP) at Mundra.

Power Deal of the Year by the Infrastructure Journal Awards 2008 for Mundra

UMPP.

Green Governance Award from Bombay Natural History Society for CSR

activities, for the year 2007-08.

ICAI Awards (Gold Shield) for Excellence in Financial Reporting for the

Annual Report and Accounts of the organization for the year ended March 31,

2008 in the ‘Infrastructure & Construction Sector’.

National Par Excellence, Excellence and Distinguished awards won at NCQC,

Vadodara by our 10 Quality Circle teams.

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REVIEWS

1. Padachi Kesseven’s (2006) analysis says that a well designed and implemented

working capital management is expected to contribute positively to the creation of a

firm’s value The purpose of this paper is to examine the trends in working capital

management and its impaction firms’ performance. The trend in working capital

needs and profitability of firms are examined to identify the causes for any significant

differences between the industries. The dependent variable, return on total assets is

used as a measure of profitability and the relation between working capital

management and corporate profitability is investigated for a sample of 58small

manufacturing firms, using panel data analysis for the period 1998 –2003. The

regression results show that high investment in inventories and receivables is

associated with lower profitability. The key variables used in the analysis are

inventories days, accounts receivables days, accounts payable days and cash

conversion cycle. A strong significant relationship between working capital

management and profitability has been found in previous empirical work. An analysis

of the liquidity, profitability and operational efficiency of the five industries shows

significant changes and how best practices in the paper industry have contributed to

performance. The findings also reveal an increasing trend in the short-term

component of working capital financing.

2. Lazaridis Dr Ioannis, Tryfonidis Dimitrio’s (2004) analysis says that the relationship

of corporate profitability and working capital management. We used a sample of 131

companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004.

The purpose of this paper is to establish a relationship that is statistical significant

between profitability, the cash conversion cycle and its components for listed firms in

the ASE. The results of our research showed that there is statistical significance

between profitability, measured through gross operating profit, and the cash

conversion cycle. Moreover managers can create profits for their companies by

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handling correctly the cash conversion cycle and keeping each different component

(accounts receivables, accounts payables, inventory) to an optimum level.

3. Shelton Fred (2002) studied that Working capital, an important liquidity indicator,

has historically been a major benchmark of the surety and credit-granting institutions.

In today’s environment, because of the tight bond and credit markets, both institutions

are scrutinizing the amount and quality of working capital more than ever. The fewer

resources that need to be invested in working capital, after recognizing liquidity risk,

the better.

4. Weinraub Herbert, Visscher Sue (1998) studies that this study looked at ten diverse

industry groups over an extended time period to examine the relative relationship

between aggressive and conservative working capital practices. Results strongly show

that the industries had significantly different current asset management policies.

Additionally, the relative industry ranking of the aggressive/conservative asset

policies exhibited remarkable stability over time. Industry policies concerning relative

aggressive/conservative liability management were also significantly different.

Interestingly, it is evident there is a high and significant negative correlation between

industry asset and liability policies. Relatively aggressive working capital asset

management seems balanced by relatively conservative working capital financial

management.

5. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting

process. It has shown that it is reasonable to expect that the cost of capital will

increase at the same rate as the rate of inflation on an ex ante basis, and that this

increase will be a multiplicative relationship. In addition, the paper has shown that the

capital budgeting process is not neutral with respect to inflation, even if output prices

rise at the same rate as costs. Of critical importance is the degree of net working

capital as a proportion of the overall financing required, the higher the net working

capital the greater being the impact of inflation on capital spending. Finally, it would

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appear that corporate financial behavior is influenced by inflation. Inflation will cause

the firm to reduce its capital budget, to attempt to reduce net working capital, and to

alter the debt/asset ratio using short term debt, thus driving up short term rates

relative to long term rates.

6. Schwartz (2008), Studies the business of NAILD distributor through this article. The

NAILD is an organisation supporting lighting distributors in the US with publications,

training, and conferences. According to him, recent changes and trends in the lighting

market provide new opportunities. The keys to taking advantage of the opportunities

is to understand the market, know where to get more information, provide updates to

your customers, and turn information into active marketing and promotional efforts.

The Energy Independence and Security Act of 2007 add to the programs and efforts

introduced in EPACT 2005. A key component of the ENERGY STAR qualified light

fixtures program is the Advanced Lighting Package (ALP). As market trends and

legislation move purchasers away from inefficient technologies and towards energy-

efficient products, NAILD distributors that become ENERGY STAR Partners have

an opportunity to increase sales and profits.

7. Kumar, Khetan & Thapa (2005) highlights that India has set itself an ambitious

target of more than doubling per-capita electricity consumption by 2011. Indian

power sector, with current electricity shortages of over 11% of peak and 7% of

energy, will be one of the key determinants to future growth. The Indian government

has worked steadily to liberalise the sector and initiated reforms that culminated in

the Electricity Act 2003. The Act brought together structural and regulatory reforms

designed to foster competitive markets, encourage private participation and transform

the state’s role from service provider to regulator. The Act afforded consumers the

ability to directly source their electricity from suppliers using existing networks and

recognised trading as a separate line of business. Despite the potential offered by the

India’s power sector, investors have long been weary of the sector’s bureaucracy and

regulatory complexity. With a critical mass of progress in regulatory reforms and

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soaring economic growth, the Indian power sector is now primed for take off. How

India deals with the remaining challenges of the restructuring process and emerging

fuel shortages will dictate what happens in the years to come.

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RESEARCH METHODOLOGY

Research comprises of defining & redefining problems, formulating hypothesis or

suggested solutions, collecting, organizing & evaluating data, making deductions &

reaching conclusions. In research design we decide about:

Type of data

From whom to get data

How to analyze data

How to make report

DATA TYPE

Data collected was both Primary and Secondary in nature

RESEARCH DESIGN

STEP 1 - To study the Financial Statement of Tata Power Company.

STEP 2 – Data Analysis of working capital through Estimation of Working Capital.

STEP 3 – Analysis of Inventory Management of Tata Power Company.

STEP 4 – Comparison of Tata Power Company Limited with NTPC

DATA COLLECTION

The information is collected through the PRIMARY SOURCES like:

Interviewing the employees of the department.

Getting information from MIS department.

Discussion with the head of the department Mr. A. M. Dharam (Sr. Manager. Fuel

Procurement)

Data was collected from following SECONDARY SOURCES like

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1. Corporate department

a) Fuel Procurement department

b) Finance department

2. Accounting Department

3. MIS Department

The collected information was edited & tabulated for the purpose of analysis.

TOOLS USED FOR PROJECT

While making the project file various tools were used. These tools helped in doing the

work. These are:-

Microsoft Excel

Microsoft Word

Various analysis tools like Bar Graphs, Pie Graphs, tables

LIMITATIONS OF STUDY

In the due course time, the main limitation was with searching the data. The data was not

completed in the main files of Tata Power Company Limited. The training period of six

weeks was too short to study the organization in detail. In some cases budgets are

available but actual figures are not available for comparison. Tata Power Company

Limited is a big unit so it was very difficult to study the whole budgeted data.

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4.1 COMPUTATION OF WORKING CAPITAL

The two components of working capital (WC) are current assets (CA) and current

liabilities (CL). They have a bearing on the cash operating cycle. In order to calculate

working capital needs, what is required is the holding period of various types of

inventories, the credit collection period and the credit payment period . Working capital

also depends on the budgeted level of activity in terms of productivity / sales. The

calculation of WC is based on the assumption that the productivity is carried on evenly

throughout the year and all costs accrue similarly. As the working capital requirements

are related to the cost excluding depreciation and not to the sale price, WC is computed

with reference to cash cost. The cash cost approach is comprehensive and superior to the

operating cycle approach based on holding period of debtors and inventories and payment

period of creditors.

Estimation of Current Assets –

Raw Material Inventory: The investment in raw materials inventory is estimated on the

basis of,

Raw material inventory = Budgeted Cost of raw Average inventory

Production X material(s) X holding period

(in units ) per unit ( months/days )

12 months / 365 days

For 2008,

Trombay

The investment in Coal

= 2030000(MT) X 2907 (Rs /MT) X 30days = Rs.48.5 crores

365 Days

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The investment in Oil

= 1035000 (MT) X 25194 (Rs /MT) X 20days = Rs.142.88 crores

365 Days

The investment in Gas

= 219000 (MT) X 4547 (Rs /MT) X 12days = Rs.3.27 crores

365 Days

Jojobera


= 1883771.75(MT) X 1422 (Rs /MT) X 30days = Rs.22.1 crores

365 Days

Belgaum


= 41485.35(MT) X 26594.69 (Rs /MT) X 20days = Rs.6.1 crores

365 Days

Debtors: The WC tied up in debtors should be estimated in relation to total cost price

(excluding depreciation), symbolically

Budgeted Cost of sales per Average debt

Credit sale X unit excluding X collection period

( in units ) depreciation ( months / days )


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For 2008,

5512 (Rs. in crores) X 87Days = Rs.1090.8* crores

365

* Tariff adjustment Rs. 223 Crores (excluded)

Railways, RCF Ltd. BARC, HPCL, Ordinance Factory, BMC Bhandup Complex,

BPCL, Mahindra & Mahindra and Mumbai Port Trust are debtors of the Tata

Power.

Cash and Bank Balances: Apart from WC needs for financing inventories and debtors ,

firms also find it useful to have some minimum cash balances with them . It is difficult to

lay down the exact procedure of determining such an amount. This would primarily based

on the motives for holding cash balances of the business firm , attitude of management

toward risk , the access to the borrowing sources in times of need and past experience ,

and so on .

For Tata Power Company Limited cash and bank balance is Rs.28.70 crores

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Estimation of Current Liabilities –

The working capital needs of business firms are lower to that extent such needs are met

through the current liabilities (other than bank credits) arising in the ordinary course of

business. The important current liabilities (CL), in this context are, trade creditors, wages

and overheads:

Trade Creditors:

Budgeted yearly Raw material Credit period

Production X requirement X allowed by creditors

( in units ) per unit ( months / days )


Note: proportional adjustment should be made to cash purchase of raw materials.

For 2008,

Trombay

For Coal

= 2030000(MT) X 2907 (Rs /MT) X 20days = Rs.32.33 crores

365 Days

For Oil

= 1035000 (MT) X 25194 (Rs /MT) X 30days = Rs.214.32crores

365 Days

For Gas

= 219000 (MT) X 4547 (Rs /MT) X 12days = Rs.3.27crores

365 Days

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Jojobera


= 1883771.75(MT) X 1422 (Rs /MT) X 20days = Rs.14.67 crores

365 Days

Belgaum


= 41485.35(MT) X 26594.69 (Rs /MT) X 30days = Rs.9.1 crores

365 Days

PT Adaro Indonesia, Samtan Mines Indonesia, HPCL, BPCL, IOC, and Gail are

creditors of the Tata Power.

Direct Wages:

Budgeted yearly Direct Labour Average time-lag in

Production X cost per unit X payment of wages

( in units ) ( months / days )


= 180.99(Rs. crores) X 3days = 1.48 crores

365

The average credit period for the payment of wages approximates to a half-a-month in the

case of monthly wage payment: The first days’ wages are , again , paid on the 30 th day of

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the month , extending credit for 28 days and so in . Average credit period approximates to half-a-

month.

Overheads (Other Than Depreciation and Amortization)

Budgeted yearly Overhead Average time lag in

Production X cost per unit X payment of overheads

( in units ) ( months / days )


= 232.79(Rs. crores) X 3 days = 2 crores

365

The amount of overheads may be separately calculated for different types of overheads.

In case of selling overheads, the relevant item would be sales volume instead of

production volume.

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Determination of Working Capital

Estimation of Current Assets Amount

(Rs. crores)

1. Minimum desired cash and bank balances 28.70

2. Inventories

Raw Material 222.85

3. Debtors 1090.8

{A} Total Current Assets 1342.35

Estimation of Current Liabilities

4. Creditors 273.69

5. Wages 1.48

6. Overheads 2

{B} Total Current Liabilities 277.17

{A - B} Net Working Capital 1065.18

Add margin for contingency 106.518

Net Working Capital Required 1171.698

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4.2 WORKING CAPITAL FINANCE

Line of Credit

A line of credit is an open-ended loan with a borrowing limit that the business can draw

against or repay at any time during the loan period. This arrangement allows a company

flexibility to borrow funds when the need arises for the exact amount required. Interest is

paid only on the amount borrowed, typically on a monthly basis. A line of credit can be

either unsecured, if no specific collateral is pledged for repayment, or secured by specific

assets such as accounts receivable or inventory. The standard term for a line of credit is 1

year with renewal subject to the lender’s annual review and approval. A line of credit is

designed to address cyclical working capital needs and not to finance long-term assets;

lenders usually require full repayment of the line of credit during the annual loan period

and prior to its renewal. This repayment is sometimes referred to as the annual cleanup.

Two other costs, beyond interest payments, are associated with borrowing through a line

of credit. Lenders require a fee for providing the line of credit, based on the line’s credit

limit, which is paid whether or not the firm uses the line. A second cost is the requirement

for a borrower to maintain a compensating balance account with the bank. Under this

arrangement, a borrower must have a deposit account with a minimum balance equal to a

percentage of the line of credit, perhaps 10% to 20%. If a firm normally maintains this

balance in its cash accounts, then no additional costs are imposed by this requirement.

However, when a firm must increase its bank deposits to meet the compensating balance

requirement, then it is incurring an additional cost. In effect, the compensating balance

reduces the business’s net loan proceeds and increases its effective interest rate.

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The lending terms for a line of credit include financial covenants or minimal financial

standards that the borrower must meet. Typical financial covenants include a minimum

current ratio, a minimum net worth, and a maximum debt-to-equity ratio.

The advantages of a line of credit are twofold. First, it allows a company to minimize the

principal borrowed and the resulting interest payments. Second, it is simpler to establish

and entails fewer transaction and legal costs, particularly when it is unsecured.

The disadvantages of a line of credit include the potential for higher borrowing costs

when a large compensating balance is required and its limitation to financing cyclical

working capital needs. With full repayment required each year and annual extensions

subject to lender approval, a line of credit cannot finance medium-term or long-term

working capital investments.

Accounts Receivable Financing

Loans secured by accounts receivable are a common form of debt used to finance

working capital. Under accounts receivable debt, the maximum loan amount is tied to a

percentage of the borrower’s accounts receivable. When accounts receivable increase, the

allowable loan principal also rises. However, the firm must use customer payments on

these receivables to reduce the loan balance. The borrowing ratio depends on the credit

quality of the firm’s customers and the age of the accounts receivable. A firm with

financially strong customers should be able to obtain a loan equal to 80% of its accounts

receivable. Additionally, a lender may exclude receivables beyond a certain age (e.g., 60

or 90 days) in the base used to calculate the loan limit. Older receivables are considered

indicative of a customer with financial problems and less likely to pay. Since accounts

receivable are pledged as collateral, when a firm does not repay the loan, the lender will

collect the receivables directly from the customer and apply it to loan payments. The

bank receives a copy of all invoices along with an assignment that gives it the legal right

to collect payment and apply it to the loan. In some accounts receivable loans, customers

make payments directly to a bank-controlled account (a lock box).

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Firms gain several benefits with accounts receivable financing. With the loan limit tied to

total accounts receivable, borrowing capacity grows automatically as sales grow. This

automatic matching of credit increases to sales growth provides a ready means to finance

expanded sales, which is especially valuable to fast-growing firms.

One disadvantage of accounts receivable financing is the higher costs associated with

managing the collateral, for which lenders may charge a higher interest rate or fees.

Factoring

Factoring entails the sale of accounts receivable to another firm, called the factor, who

then collects payment from the customer. Through factoring, a business can shift the

costs of collection and the risk of non-payment to a third party. In a factoring

arrangement, a company and the factor work out a credit limit and average collection

period for each customer. As the company makes new sales to a customer, it provides an

invoice to the factor. The customer pays the factor directly, and the factor then pays the

company based on the agreed upon average collection period, less a slight discount that

covers the factor’s collection costs and credit risk. In addition to absorbing collection

risk, a factor may advance payment for a large share of the invoice, typically 70% to

80%, providing the company with immediate cash flow from sales. In this case, the factor

charges an interest rate on this advance and then deducts the advance amount from its

final payment to the firm when an invoice is collected.

Factoring has several advantages for a firm over straight accounts receivable financing.

First, it saves the cost of establishing and administering its own collection system.

Second, a factor can often collect accounts receivable at a lower cost than a small

business, due to economies of scale, and transfer some of these savings to the company.

Third, factoring is a form of collection insurance that provides an enterprise with more

predictable cash flow from sales.

The disadvantages of factoring are costs may be higher than a direct loan, especially

when the firm’s customers have poor credit that lead the factor to charge a high fee.

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Furthermore, once the collection function shifts to a third party, the business loses control

over this part of the customer relationship, which may affect overall customer relations,

especially when the factor’s collection practices differ from those of the company.

Inventory Financing

Inventory financing is a secured loan, in this case with inventory as collateral. Inventory

financing is more difficult to secure since inventory is riskier collateral than accounts

receivable. Some inventory becomes obsolete and loses value quickly, and other types of

inventory, like partially manufactured goods, have little or no resale value. Loan amounts

also vary with the quality of the inventory pledged as collateral, usually ranging from

50% to 80%.

Lenders need to control the inventory pledged as collateral to ensure that it is not sold

before their loan is repaid. Two primary methods are used to obtain this control: (1)

warehouse storage; and (2) direct assignment by product serial or identification numbers.

Under warehouse arrangement, pledged inventory is stored in a public warehouse and

controlled by an independent party. A warehouse receipt is issued when the inventory is

stored, and the goods are released only upon the instructions of the receipt-holder. When

the inventory is pledged, the lender has control of the receipt and can prevent release of

the goods until the loan is repaid. Since public warehouse storage is inconvenient for

firms that need on-site access to their inventory, an alternative arrangement, known as a

field warehouse, can be established. Here, an independent public warehouse company

assumes control over the pledged inventory at the firm’s site. In effect, the firm leases

space to the warehouse operator rather than transferring goods to an off-site location.

Direct assignment by serial number is a simpler method to control inventory used for

manufactured goods that are tagged with a unique serial number. The lender receives an

assignment or trust receipt for the pledged inventory that lists all serial numbers for the

collateral. The company houses and controls its inventory and can arrange for product

sales. A release of the assignment or return of the trust receipt is required before the

31

collateral is delivered and ownership transferred to the buyer. This release occurs with

partial or full loan repayment.

While inventory financing involves higher transaction and administrative costs than other

loan instruments, it is an important financing tool for companies with large inventory

assets. This form of financing can be cost effective when inventory quality is high and

yields a good loan-to-value ratio and interest rate.

Term Loan

A term loan is a form of medium-term debt in which principal is repaid over several

years, typically in 3 to 7 years. Term loans have a fixed repayment schedule that can take

several forms. Level principal payments over the loan term are most common. In this

case, the company pays the same principal amount each month plus interest on the

outstanding loan balance. A second option is a level loan payment in which the total

payment amount is the same every month but the share allocated to interest and principle

varies with each payment. Finally, some term loans are partially amortizing and have a

balloon payment at maturity. Term loans can be either unsecured or secured; a business

with a strong balance sheet and a good profit and cash flow history might obtain an

unsecured term loan, but many small firms will be required to pledge assets. Moreover,

since loan repayment extends over several years, lenders include financial covenants in

their loan agreements to guard against deterioration in the firm’s financial position over

the loan term. Typical financial covenants include minimum net worth, minimum net

working capital (or current ratio), and maximum debt-to-equity ratios. Finally, lenders

often require the borrower to maintain a compensating balance account equal to 10% to

20% of the loan amount.

The major advantage of term loans is their ability to fund long-term working capital

needs. As discussed at the beginning of the chapter, businesses benefit from having a

comfortable positive net working capital margin, which lowers the pressure to meet all

short-term obligations and reduces bankruptcy risk. Term loans provide the medium-term

financing to invest in the cash, accounts receivable, and inventory balances needed to

32

create excess working capital. They also are well suited to finance the expanded working

capital needed for sales growth. Furthermore, a term loan is repaid over several years,

which reduces the cash flow needed to service the debt.

The disadvantages of term loans are that they come with higher interest rates and less

financial flexibility. Term loans carry a higher interest rate than short-term loans. When

provided with a floating interest rate, term loans expose firms to greater interest rate risk

since the chances of a spike in interest rates increase for a longer repayment period. Due

to restrictive covenants and collateral requirements, a term loan imposes considerable

financial constraints on a business. Moreover, these financial constraints are in place for

several years and cannot be quickly reversed, as with a 1-year line of credit.

Commercial Paper

In the global money market, commercial paper is an unsecured promissory note with a

fixed maturity of one to 270 days. Commercial Paper is a money-market security issued

(sold) by large banks and corporations to get money to meet short term debt obligations

(for example, payroll), and is only backed by an issuing bank or corporation's promise to

pay the face amount on the maturity date specified on the note. Since it is not backed by

collateral, only firms with excellent credit ratings from a recognized rating agency will be

able to sell their commercial paper at a reasonable price. Commercial paper is usually

sold at a discount from face value, and carries shorter repayment dates than bonds. The

longer the maturity on a note, the higher the interest rate the issuing institution must pay.

Interest rates fluctuate with market conditions, but are typically lower than banks' rates.

Commercial paper is a lower cost alternative to a line of credit with a bank. Once a

business becomes established, and builds a high credit rating, it is often cheaper to draw

on a commercial paper than on a bank line of credit. Nevertheless, many companies still

maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the

line of the credit that does not have a balance. While these fees may seem like pure profit

for banks, if the company ever actually needs to use the line of credit, it would likely be

in serious trouble and have difficulty repaying its liabilities.

33

It was introduced in India in 1990 with a view to enabling highly rated corporate

borrowers/ to diversify their sources of short-term borrowings and to provide an

additional instrument to investors. Subsequently, primary dealers and satellite dealers

were also permitted to issue CP to enable them to meet their short-term funding

requirements for their operations.

They are unsecured debts of corporates and are issued in the form of promissory

notes, redeemable at par to the holder at maturity.

Only corporates who get an investment grade rating can issue CPs, as per RBI

rules.

It is issued at a discount to face value

Attracts issuance stamp duty in primary issue

Has to be mandatorily rated by one of the credit rating agencies

It is issued as per RBI guidelines

It is held in Demat form

CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount

invested by a single investor should not be less than Rs.5 lakh (face value).

Issued at discount to face value as may be determined by the issuer.

Bank and FI’s are prohibited from issuance and underwriting of CP’s.

Can be issued for a maturity for a minimum of 15 days and a maximum upto one

year from the date of issue.

34

Sources of Working Capital for Businesses

Commercial banks are the largest financing source for external business debt, including

working capital loans, and they offer a large range of debt products. Commercial banks

are multistate institutions that increasingly focus on lending to small business with large

borrowing needs that pose limited risks.

Savings banks and thrift lenders are increasingly providing small business loans, and, in

some regions, they are important small business and commercial real estate lenders.

Commercial finance companies are important working capital lenders since, as non-

regulated financial institutions, they can make higher risk loans.

Asset-based lending in which a lender carefully evaluates and lends against asset

collateral value, placing less emphasis on the firm’s overall balance sheet and financial

ratios.

Trade credit extended by vendors is a fourth alternative for small firms. Trade credit

helps address short-term borrowing needs. Extending payment periods and increasing

credit limits with major suppliers is a fast and cost-effective way to finance some

working capital needs that can be part of a firm’s overall plan to manage seasonal

borrowing needs.

Business development corporations (BDCs) are a second alternative source for working

capital loans.

35

Venture capital firms also finance working capital, especially permanent working capital

to support rapid growth.

Government and non-profit revolving loan funds also supply working capital loans.

4.2.1 PRACTICES FOLLOWED IN TATA POWER

Tata Power uses the Inventory loan option as its financial instrument for working capital

loan. Generally Tata Power gets 75% of inventory value as loan amount. Tata Power

takes working capital loan from SBI, ICICI, IDBI and unsecured loan from HDFC, Kotak

Mahindra and Standard Chartered Bank.

Tata Power uses Cash-Credit facility and prefers it over short-term loan. Cash-Credit

Account is a primary method in which Banks lend money against the security of

commodities and debt. It runs like a current account except that the money that can be

withdrawn from this account is not restricted to the amount deposited in the account.

Instead, the account holder is permitted to withdraw a certain sum called "limit" or

"credit facility" in excess of the amount deposited in the account. Cash Credits are, in

theory, payable on demand. These are, therefore, counter part of demand deposits of the

Bank. Even though the interest rate on Cash-Credit facility is higher than that on short

term loan, the advantage is that one may repay the entire loan any time as against a short-

term loan where one has to pay a penalty for repaying the loan before the stipulated

period. Under Cash-Credit facility the Bank giving the facility has an obligation to keep

the committed amount with them. The statutory requirement for using the Cash-Credit

facility is that the user of the facility must use at least 60% of the allotted amount. The

interest rate on Cash-Credit facility is PLR+ where the amount above the PLR varies

from bank to bank.

Tata Power also uses Commercial Paper for its working capital funding.

36

4.3 INVENTORY MANAGEMENT

Major portion of the inventory is made-up by coal, oil, gas required for generation of

electricity. Tata Power imports all the coal required for generation of electricity from

Indonesia. Tata Power imports 50% of the total oil requirement from Singapore. Tata

Power has a Power generation plant at Trombay. Unit 5 and Unit 8 are coal fired

generation plant.

Overview of Inventory at Tata Power

Coal: Coal is the cheapest fuel amongst the three raw materials. Daily consumption of

coal at Trombay is 9000 MT per day. The contamination due to foreign particles is likely

to happen in coal, particularly in the bottom-most part in the coal yard at the plant

premises.

Oil: Oil is the most safest and stable alternate for coal. It’s a backup fuel. It is costliest

fuel amongst the three raw materials. Contamination due to foreign elements is at

minimum level.

Gas: Gas is cleanest source but the availability is scarce. There is likely variation in

pressure and supply due to problems from the off-shore end.

The major source for electricity generation is coal.

The trombay power plant is ranked 2nd for the safety and eco-friendly standards.

37

Overview of Supply Chain of Raw Materials

Supply cycle of coal: For 1 Shipment it takes 5 days for loading, 11 days for

transportation from Indonesia to India (Mumbai Port Trust), 5 days for unloading and 11

days for the vessel to return to Indonesia. One cycle takes 32 days. This is under ideal

conditions. During summers each shipment carries 70000 MT of coal and in monsoon

50000 MT of coal.

General problems faced in Supply Chain:

1. International Market: Companies enter into a contract with shipping companies

fixing the freight charges for a particular route. Now if the freight market is tight

there is likely unavailability of vessels. This causes delay in procuring the raw

material.

2. Likely threat of shipment being lost and piracy. Though the shipment is insured,

the raw material is lost.

3. Restrictions due to inadequate Infrastructure: Mumbai Port Trust has only 2

anchorages. This restricts the swift movement of loading and unloading. Most of

the big vessels keep waiting on the high seas. Also during low tide the barge

movement is restricted.

4. Political Instability of the source nation (Indonesia from where Tata Power

sources coal has politically fragile environment).

5. High Lead Time.

Generally all over the globe the Electricity companies maintain 60 - 90 days of inventory.

This is done by taking into account the safety, security and reliability factors. In case of

war or other calamities or instability of the nation from where we source the raw material

can throw our calculations out of the window. Singapore government maintains 60 days

of inventory. MERC guidelines also say to maintain inventory for 60 days. At Tata

38

Power, Coal inventory is hold for 30 days, Oil for 20 days and since we can’t store Gas,

JIT is automatically followed. Gas is utilized depending on the availability.

Tata Power sources the entire requirement of coal from Indonesia. The reason being, the

eco-friendly quality coal in the entire world is found in Indonesia only. The coal available

there is low in sulphur (less than 0.2% of sulphur) and low on ash (less than 3% of ash).

Indian coal has 35% to 40% ash. Since Environmental norms are adhered strictly, the

Trombay plant is ranked 2nd best in the world. In a way a big risk is being taken by Tata

Power to source the entire requirement from only one place.

Oil contracts are closed in one month advanced. The lead time is high.

Thus it is difficult to implement the Economic Order Quantity (EOQ) method for

inventory.

Factors Working in favour of Tata Power:

As we can’t store Electricity, there is no average holding period for finished goods.

Likewise there is no average holding period for Work-In-Progress (WIP) because once

the coal or oil is fired, it takes 3 to 4 hours to generate steam and it is fed to the turbines

and electricity is generated. As there is no holding period for Finished Goods and WIP.

The value of current assets reduces.

While calculating Tariff MERC takes into account the holding period of raw materials at

60 days. Now when Tata Power is able to maintain the holding period of below 60 days it

stands to gain. This also acts as source for working capital.

For cost accounting purpose the average cost method is used which evens out the

fluctuations in the coal prices in the international market.

Method to reduce working capital requirement

General Formula

39

Working Capital = [Raw Material Inventory + Work-In-Progress Inventory + Finished

Goods Inventory + Debtors + Cash and Bank balance] – [Creditors + Wages +

Overheads]

Formula applicable for Power Industry

Working Capital = [Raw Material Inventory + Debtors + Cash and Bank balance] –

[Creditors + Wages + Overheads]

Possible ways to reduce the working capital,

1. Raw Material: Tata Power holds inventory to for 30 days. It is now planning to

hold the coal inventory for 20 days and oil inventory for 15 days. This will

certainly reduce the current assets side but as discussed about the problems in

supply chain and the generally followed practice over the world, Tata Power is

certainly trading a risky path sacrificing safety and reliability.

2. Debtors: The Days Sales Outstanding (DSO) ratio for 2009 is 80 days. This

means it takes 80 days to realise the sale into cash. Tata Power needs to bring

down this ratio to 30 days or 45 days. This will help to reduce the working capital.

3. Tata Power can also reduce the Cash and Bank balance to statutory minimum

level.

4. Creditors: Currently Tata Power gets 30 credit period on Oil and 12 days on Gas.

Tata Power gets 15 days credit period on coal, thus the company can ask for

extension in credit period.

5. Wages: Paying the wages at 15th of every month earns a credit period of 15 days.

6. Overheads: The overhead expenses must be reduced by effective cost

management.

40

Ideally Tata Power must look forward to reduce working capital but without

compromising on the Raw material inventory. It is very crucial to maintain adequate

inventory and follow the internationally followed practice. Ample amount of raw material

will provide safety, security and reliability.

Working Capital in Tata Power varies according to demand. During winter the demand is

lower as compared to summer. Thus fewer units are generated and we save on the

working capital.

In monsoon we hold more inventory not because of demand but due to infrastructure problems associated with shipping industry which causes delay in procurement of raw material. Thus the actual quantity of raw material held in summer, monsoon and winter may vary for the same inventory holding period.

41

5.1 RATIO ANALYSIS – TATA POWER

Financial ratios are one of the most common tools of managerial decision making.

Financial ratios involve the comparison of various figures from the financial statements

in order to gain information about a company's performance. It is the interpretation,

rather than the calculation, that makes financial ratios a useful tool for business

managers. Ratios may serve as indicators, clues, or red flags regarding noteworthy

relationships between variables used to measure the firm's performance in terms of

profitability, asset utilization, liquidity, leverage, or market valuation.

There are basically two uses of financial ratio analysis:

o To track individual firm performance over time, and

o To make comparative judgments regarding firm performance.

Firm’s performance is evaluated using trend analysis—calculating individual ratios on a

per-period basis, and tracking their values over time. This analysis can be used to spot

trends that may be cause for concern, such as an increasing average collection period for

outstanding receivables or a decline in the firm's liquidity status. In this role, ratios serve

as red flags for troublesome issues, or as benchmarks for performance measurement.

Another common usage of ratios is to make relative performance comparisons. For

example, comparing a firm's profitability to that of a major competitor or observing how

the firm stacks up versus industry averages enables the user to form judgments

concerning key areas such as profitability or management effectiveness. Users of

financial ratios include parties both internal and external to the firm. External users

include security analysts, current and potential investors, creditors, competitors, and other

industry observers. Internally, managers use ratio analysis to monitor performance and

pinpoint strengths and weaknesses from which specific goals, objectives, and policy

initiatives may be formed.

44

5.1.1. Liquidity Ratio : Liquidity refers to the ability of a firm to meet its short-

term financial obligations when and as they fall due. The main concern of

liquidity ratio is to measure the ability of the firms to meet their short-term

maturing obligations. Failure to do this will result in the total failure of the

business, as it would be forced into liquidation. Liquidity Ratios are ratios that

come off the Balance Sheet and hence measure the liquidity of the company as on

a particular day i.e. the day that the Balance Sheet was prepared.

1 Current Ratio: The Current Ratio expresses the relationship between the

firm’s current assets and its current liabilities. Current assets normally include

cash, marketable securities, accounts receivable and inventories. Current

liabilities consist of accounts payable, short term notes payable, short-term

loans, current maturities of long term debt, accrued income taxes and other

accrued expenses (wages). This ratio is a rough indication of a firm's ability to

serve its current obligations. The number of times that short-term assets can

cover short-term debts. Generally, higher the current ratio, greater is the

"cushion" between current obligations and the firm's ability to pay them. The

stronger ratio reflects a numerical superiority of current assets over current

liabilities. However, the composition and quality of current assets is a critical

factor in the analysis of a firm's liquidity. If the ratio is too high then it

indicates inefficient use of capital as current assets generally have the lowest

return. A current ratio of 2:1 or more is considered satisfactory.

FY 05 FY 06 FY 07 FY 08 FY 09

Inventories (Rs. Crore) 297.03 442.26 396.42 473.61 644.14

Sundry Debtors

(Rs. Crore)

693.21 1058.23 1478.22 1414.52 1587.97

Cash & Bank balances

(Rs. Crore)

979.6 990.55 1367.72 28.7 45.5

Other Current Assets

(Rs. Crore)

12.87 18.06 29.03 59.36 48.53

45

Loans & Advances

(Rs. Crore)

552.67 463.94 770.4 1899.32 2355

Total Current Assets

(Rs. Crore)

2535.38 2973.04 4041.79 3875.51 4681.14

Total Current

Liabilities (Rs. Crore)

706.87 731.81 1125.72 1253.87 1419.33

Current Ratio (times) 3.59 4.06 3.59 3.09 3.3

The formula: Current Ratio = Total Current Assets/ Total Current Liabilities

Current ratio of Tata Power is well above the generally accepted thumb rule of

2:1 for all the Financial Years considered here. The company is in strong

position as far as liquidity is considered to meet its short term obligations.

In 2007 Tata Power Company Limited shows increase in current liabilities by 53.83%

because

a) Increase in sundry creditors by 58.09%

b) Sundry deposits increased by126% in 2007

c) Advance and progress payment increased by 126% as compared to 2006

46

d) In current assets the Term deposits with schedule banks as well as deposits

under Escro agreement with credit Suisse became nil in 2008

e) Margin Money deposit with a scheduled bank also became nil in 2008.

In current assets, TATA POWER COMPANY LIMITED has blocked high

part of funds (i.e. 13% of sales) in sundry debtors because collection period

of that company is longer. Whereas in NTPC has less debtors because of they

have good credit policy (their collection period is short).

2 Quick Ratio: This ratio is obtained by dividing the 'Total Quick Assets' of a

company by its 'Total Current Liabilities'. Sometimes a company could be carrying

heavy inventory as part of its current assets, which might be obsolete or slow

moving. Thus eliminating inventory from current assets and then doing the liquidity

test is measured by this ratio. The ratio is regarded as an acid test of liquidity for a

company. It expresses the true 'working capital' relationship of its cash, accounts

receivables, prepaid and notes receivables available to meet the company's current

obligations. The ratio will be lower than the current ratio, but the difference

between the two (the gap) will indicate the extent to which current assets consist of

stock. The ratio expresses the degree to which a company's current liabilities are

covered by the most liquid current assets. Generally, any value of less than one to

one implies a reciprocal dependency on inventory or other current assets to

liquidate short-term debt.

FY 05 FY 06 FY 07 FY 08 FY 09

Sundry Debtors

(Rs. Crore)

693.21 1058.23 1478.22 1414.52 1587.97

Cash & Bank

balances

(Rs. Crore)

979.6 990.55 1367.72 28.7 45.5

Other Current

Assets(Rs. Crore)

12.87 18.06 29.03 59.36 48.53

47

Loans &

Advances

(Rs. Crore)

552.67 463.94 770.4 1899.32 2355

Total Quick

Assets(Rs. Crore)

2238.35 2530.78 3645.37 3401.9 4037

Total Current

Liabilities

(Rs. Crore)

706.87 731.81 1125.72 1253.87 1419.33

Quick Ratio

(times)

3.16 3.46 3.24 2.71 2.84

The formula: Quick Ratio = Total Quick Assets/ Total Current Liabilities

Quick Assets = Total Current Assets (minus) Inventory

Quick ratio of Tata Power is well above the generally accepted thumb rule of

1:1 for all the Financial Years considered here. The company is in strong

position as far as liquidity is considered to meet its short term obligations.

48

1) Tata Power Company Limited shows increase in quick liabilities by 53.81% in

2007 because

a) Increase in sundry creditors by 58.09%.

b) Sundry deposits increased by 126% in 2007.

c) Advance and progress payment increased by 126% as compared

to 2006.

d) In quick assets (under cash and bank balance) the Term deposits

with schedule banks as well as deposits under Escro agreement

with credit Suisse got became in 2008. Margin Money deposit

with a scheduled bank also got became in 2008.

5.1.2. Asset Management Ratio : Asset Management Ratios attempt to measure

the firm's success in managing its assets to generate sales. For example, these

ratios can provide insight into the success of the firm's credit policy and inventory

management. These ratios are also known as Activity or Turnover Ratios. Asset

utilization ratios are especially important for internal monitoring concerning

performance over multiple periods, serving as warning signals or benchmarks

from which meaningful conclusions may be reached on operational issues.

1 Fixed Asset Turnover: The fixed assets turnover ratio measures the

efficiency with which the firm has been using its fixed assets to generate sales.

Generally, high fixed assets turnovers are preferred since they indicate a better

efficiency in fixed assets utilisation.

FY 05 FY 06 FY 07 FY 08 FY 09

Sales (Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

Fixed Assets 5465.84 5924.74 6229.71 6481.99 8985.86

49

(Rs. Crore)

Fixed Asset

Turnover (times) 0.72 0.77 0.76 0.91 0.81

The formula: Fixed Asset Turnover = Net Sales / Fixed Assets

Fixed Asset Turnover ratio improved steadily from financial year 2005 to

financial year 2008. But it declined in financial year 2009. In the situation we

see here, we will always find that whilst the business is growing, it is growing

in such a way that its ratios cannot stay constant. Here we have a 22%

increase in sales and a 39% increase in fixed assets which means that the fixed

asset turnover will get worse.

What this means is that whilst the business has invested heavily in new fixed

assets, turnover has not increased enough to reflect the new investments.

50

2 Total Asset Turnover: This ratio offers managers a measure of how well the

firm is utilizing its assets in order to generate sales revenue. An increasing

Total Asset Turnover would be an indication that the firm is using its assets

more productively. The asset turnover ratio simply compares the turnover

with the assets that the business has used to generate that turnover. In its

simplest terms, we are just saying that for every Rs. 1 of assets, the turnover is

Rs. X.

FY 05 FY 06 FY 07 FY 08 FY 09

Sales (Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

Total Assets

(Rs. Crore) 9307.67 9631.65 11429.47 12994.43 16076.31

Total Asset

Turnover (times) 0.42 0.47 0.41 0.46 0.45

The formula: Total Asset Turnover = Net Sales / Total Assets

In the financial year 2009 the turnover increased by 22% but the Total Assets

grew by 24% thus the decline is seen. In the financial year 2007 the turnover

51

increased by 9% whereas the Total assets grew by 19% because of which

there was a steep fall in the ratio. In the financial year 2006 the turnover

increased by 17% whereas Total assets grew by 3% which explains the steep

rise. In financial year 2009 the company must have made major investments

in its assets that have yet to generate their previous level of sales.

3 Inventory Turnover: Inventory is an important economic variable for

management to monitor since capital invested in inventory have not yet

resulted in any return to the firm. Inventory is an investment, and it is

important for the firm to strive to maximize its inventory turnover. The

inventory turnover ratio is used to measure this aspect of performance. This

ratio is obtained by dividing the 'Total Sales' of a company by its 'Total

Inventory'. The ratio is regarded as a test of Efficiency and indicates the

rapidity with which the company is able to move its merchandise. Inventory

turnover represents the average number of times per year that inventory "turns

over" or that all goods are sold from inventory. A higher, more rapid turnover

is generally favourable, with goods being sold more quickly. Rapid turnover

may result from good inventory management, but it can be a symptom of an

inventory shortage as well.

A lower, less rapid turnover may indicate overstocking or the presence of

obsolescent goods. Slow inventory turnover often coincides with liquidity

problems, since working capital is tied up in inventory. Slow inventory

turnover may also result from planned seasonal build-ups or from making a

large, bulk purchase to obtain a good price.

FY 05 FY 06 FY 07 FY 08 FY 09

Sales (Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

Inventories

(Rs. Crore) 297.03 442.26 396.42 473.61 644.14

52

Inventory

Turnover (times) 13.23 10.32 11.89 12.49 11.23

The formula: Inventory Turnover = Net Sales / Inventories

The inventory turnover ratio is nearly consistent over the years. In the

financial year 2009 the company was able to rotate its inventory in sales 11.23

times. The best ratio was achieved in fiscal year 2008 and was 12.49. The

reason for decline is that though sales grew by 22% the inventory increased by

36% thus the ratio reduced as compared to previous year.

4 Days Sales Outstanding: The average collection period measures the quality

of debtors since it indicates the speed of their collection. The shorter the

average collection period, the better the quality of debtors, as a short

collection period implies the prompt payment by debtors. The average

collection period should be compared against the firm’s credit terms and

policy to judge its credit and collection efficiency. An excessively long

collection period implies a very liberal and inefficient credit and collection

53

performance. The delay in collection of cash impairs the firm’s liquidity. On

the other hand, too low a collection period is not necessarily favourable, rather

it may indicate a very restrictive credit and collection policy which may

curtail sales and hence adversely affect profit.

FY 05 FY 06 FY 07 FY 08 FY 09

Sundry Debtors

(Rs. Crore) 693.21 1058.23 1478.22 1414.52 1587.97

Sales

(Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

DSO (Days) 64 85 114 87 80

The formula: DSO = Sundry Debtors / (Sales/365)

For the financial year 2009 the company takes approximately 80 days to

convert its accounts receivables into cash. This is an improvement over the

last 2 years where it was 114 days in fiscal year 2007 and 87 days in fiscal

year 2008.

54

The major factor contributing to increase in DSO is the Fuel Adjustment Charges

(FAC). MERC while calculating tariff assumes some amount for cost of

generation. Now if the actual amount of cost of generation exceeds the assumed

amount then MERC allows Tata Power to recover the difference from customers

only after 2 months. Because of this guideline the FAC charges for March will be

recovered in May and thus for the financial year ending at March the FAC

amount is booked in debtors account leading to rise in debtors account. This

causes the DSO to increase.

5.1.3. Debt Management Ratio : The degree to which an investor or business is

utilizing borrowed money. Companies that are highly leveraged may be at risk of

bankruptcy if they are unable to make payments on their debt; they may also be

unable to find new lenders in the future. Financial leverage is not always bad,

however; it can increase the shareholders' return on their investment and often

there is tax advantages associated with borrowing. These are extremely important

for potential creditors, who are concerned with the firm's ability to generate the

cash flow necessary to make interest payments on outstanding debt. Thus, these

ratios are used extensively by analysts outside the firm to make decisions

concerning the provision of new credit or the extension of existing credit

arrangements. It is also important for management to monitor the firm's use of

debt financing. The commitment to service outstanding debt is a fixed cost to a

firm, resulting in decreased flexibility and higher break-even production rates.

Therefore, the use of debt financing increases the risk associated with the firm.

Managers and creditors must constantly monitor the trade-off between the

additional risk that comes with borrowing money and the increased opportunities

that the new capital provides. Leverage ratios provide a means of such

monitoring.

55

1 Debt Equity Ratio: This ratio indicates the extent to which debt is covered

by shareholders’ funds. It reflects the relative position of the equity holders

and the lenders and indicates the company’s policy on the mix of capital

funds. Ratio is obtained by dividing the 'Total Liability or Debt ' of a company

by its 'Owners Equity / Net Worth'. The ratio measures how the company is

leveraging its debt against the capital employed by its owners. If the liabilities

exceed the net worth then in that case the creditors have more stake than the

shareowners.

FY 05 FY 06 FY 07 FY 08 FY 09

Secured Loans (Rs. Crore) 1059.07 946 1354.3 2331.09 3931.71

Unsecured Loans (Rs. Crore) 1800.94 1809 2279.06 706.18 1266.49

Debt (Rs. Crore) 2860.01 2755 3633.36 3037.27 5198.2

Share Capital (Rs. Crore) 197.92 197.92 197.92 220.72 221.44

Reserves & Surplus (Rs. Crore) 4363.13 4782.3 5259.42 7237.51 7888.45

Special Appropriation Towards

Project Cost (Rs. Crore) 533.61 533.61 533.61 533.61 533.61

Capital Contribution from Consumers

(Rs. Crore) 41.81 41.81 42.16 46.08 48.86

Equity (Rs. Crore) 5136.47 5555.64 6033.11 8037.92 8692.36

Debt Equity Ratio (%) 56 50 60 38 60

The formula:

Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth

56

The company has very less debt. For financial year 2009 for every Rs. 1 of

shareholders equity the company had a debt of 60 paise. This will work in

favour of company if it wishes to raise equity from market for its new projects

by debt funding. Supporting to it is the excellently maintained Current ratio.

2 Debt Asset Ratio: The debt/asset ratio shows how great a proportion of a

company's assets are financed through debt. If the ratio is less than one, than

the majority of the company's assets is financed using equity. If the ratio is

greater than one, the majority of the company's assets are financed using debt.

Highly leveraged companies have high debt/asset ratios and could be in

danger if creditors start to demand increased payment on debt. The debt/asset

ratio equals total liabilities divided by total assets.

FY 05 FY 06 FY 07 FY 08 FY 09

Secured Loans

(Rs. Crore) 1059.07 946 1354.3 2331.09 3931.71

Unsecured

Loans

1800.94 1809 2279.06 706.18 1266.49

57

(Rs. Crore)

Debt

(Rs. Crore) 2860.01 2755 3633.36 3037.27 5198.2

Total Assets

(Rs. Crore) 9307.67 9631.65 11429.47 12994.43 16076.31

Debt Asset

Ratio (%) 30 29 32 23 32

Debt Asset Ratio = Total Liabilities / Total Assets

For the past five years the debt asset ratio has been consistently below 1 which

indicates that the majority of the company's assets are financed using equity.

3 Times Interest Earned: The times-interest-earned (TIE) ratio, also known as

the EBIT coverage ratio, provides a measure of the firm's ability to meet its

interest expenses with operating profits. The higher this ratio, the more

financially stable the firm and the greater the safety margin in the case of

fluctuations in sales and operating expenses. This ratio is particularly

important for lenders of short-term debt to the firm, since short-term debt is

usually paid out of current operating revenue.

58

The formula: Times Interest Earned = EBIT / Interest Charges

FY 05 FY 06 FY 07 FY 08 FY 09

PBIT (Rs. Crore) 952.72 835.46 723.44 936.64 1140.94

Interest (Rs. Crore) 191.44 165.28 189.5 141.86 327.76

TIE (times) 4.98 5.05 3.81 6.6 3.48

Indicates how many times a company can cover its interest charges on a pre-

tax basis. Company has very sound TIE ratio over the five years considered.

59

5.1.4. Profitability Ratio : Profitability Ratios show how successful a company

is in terms of generating returns or profits on the Investment that it has made in

the business. If a business is liquid and efficient it should also be Profitable. A

company should earn profits to survive and grow over a long period of time. The

profitability ratios show the combined effects of liquidity, asset management

(activity) and debt management (gearing) on operating results. The overall

measure of success of a business is the profitability which results from the

effective use of its resources.

1 Operating Profit Margin: Operating profit for a certain period divided by

revenues for that period. Operating profit margin indicates how effective a

company is at controlling the costs and expenses associated with their normal

business operations. A business that has a higher operating margin than its

industry’s average tends to have lower fixed costs and a better gross margin,

which gives management more flexibility in determining prices. This pricing

flexibility provides an added measure of safety during tough economic times.

FY 05 FY 06 FY 07 FY 08 FY 09

PBIT (Rs. Crore) 952.72 835.46 723.44 936.64 1140.94

Sales (Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

Operating Profit

Margin (%) 24 18 15 15.8 15.7

The formula: Operating Profit Margin = Operating Profit / Sales

60

The operating profit margin over the years has been consistently between 20

% and 26 %. Major portion of operating expenses is constituted by fuel and

power purchase costs. Operating profit of Tata Power Company Limited is

15.83 % of its sales (where sales are considered 100%) which suggests that

operating expenses of Tata Power are high.

2 Net Profit Margin: The net profit margin ratio tells us the amount of net

profit per Rs.1 of turnover a business has earned. That is, after taking account

of the cost of sales, the administration costs, the selling and distributions costs

and all other costs, the net profit is the profit that is left, out of which they will

pay interest, tax, dividends and so on.

FY 05 FY 06 FY 07 FY 08 FY 09

PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2

Sales (Rs. Crore) 3930.44 4562.79 4715.32 5915.91 7236.23

Profit Margin (%) 14 13 15 15 13

The formula: Net Profit Margin = PAT / Sales

61

Over the years the Profit Margin ratio has shown a consistent trend, which

indicates that, the company has managed to keep its cost of sales, the

administration costs, the selling and distributions costs and all other costs to

minimum.

3 Return on Assets: Return on assets (ROA) measures how effectively the

firm's assets are used to generate profits net of expenses. This is an extremely

useful measure of comparison among firms’ competitive performance, for it is

the job of managers to utilize the assets of the firm to produce profits. Return

on assets comes from net profit after taxes divided by total assets. This ratio

is the key indicator of profitability for a firm. It matches operating profits

with the assets available to earn a return. Companies efficiently using their

assets will have a relatively high return while less well-run businesses will be

relatively low.

The ratio measures the percentage of profits earned per Rupee of Asset and

thus is a measure of efficiency of the company in generating profits on its

assets.

FY 05 FY 06 FY 07 FY 08 FY 09

62

PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2

Total Assets

(Rs. Crore) 9307.67 9631.65 11429.47 12994.43 16076.31

ROA (%) 6 6.3 6 6.7 5.7

The formula: Return on Assets = PAT / Total Assets

ROA must improve. Old and obsolete assets must be replaced with new

assets. Regular maintenance of assets should be undertaken.

63

4 Return on Equity: Return on net worth (return on equity) is obtained by

dividing net profit after tax by net worth. This ratio is used to analyze the

ability of the firm’s management to realize an adequate return on the capital

invested by the owners of the firm. Tendency is to look increasingly to this

ratio as a final criterion of profitability. Generally, a relationship of at least 10

percent is regarded as a desirable objective for providing dividends plus funds

for future growth.

FY 05 FY 06 FY 07 FY 08 FY 09

PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2

Equity (Rs. Crore) 5136.47 5555.64 6033.11 8037.92 8692.36

ROE (%) 10.7 10.9 11.5 10.8 10.6

The formula: Return on Equity = PAT / Equity

In the past five financial years the company has obtained more than 10%

returns on the capital invested. Tata Power being a Generation company and is

bound to MERC regulation, under MERC regulation the ROE is capped to

14%.

64

5.1.5. Market Value Ratio : Market Value Ratios relate an observable market

value, the stock price, to book values obtained from the firm's financial

statements.

1 Earnings per Share: Earnings Per Share is the Net Income (profit) of a

company divided by the number of outstanding shares. Earnings per Share are

the single most popular variable in dictating a share's price. EPS indicates the

profitability of a company. Earnings per share (EPS) tells an investor how

much of the company's profit belongs to each share of stock. The figure is

important because it allows analysts to value the stock based on the price to

earnings ratio (or P/E ratio for short).

FY 05 FY 06 FY 07 FY 08 FY 09

PAT (Distributable)

(Rs. Crore) 555.09 575.25 673.97 811.31 967.5

Average Outstanding

Shares 198128172 198128172 198128172 209945538 221427866

EPS (Rs.) 28.02 29.03 34.02 38.64 43.69

65

EPS has been steadily rising from 2005 to till date which indicates that the

company is making fairly good amount of profits.

66

5.2 COMPANY COMPARISON

NTPC

NTPC (Formerly National Thermal Power Corporation), India's largest power

company, was set up in 1975 to accelerate power development in India. Today, it has

emerged as an ‘Integrated Power Major’, with a significant presence in the entire value

chain of power generation business. NTPC ranked 317th in the ‘2009, Forbes Global

2000’ ranking of the World’s biggest companies. With a current generating capacity of

30,644 MW, NTPC has embarked on plans to become a 75,000 MW company by 2017.

It is an Indian public sector company listed on the

Bombay Stock Exchange although at present the

Government of India holds 89.5% of its equity. The

company's plants (including joint ventures) have a

combined capacity of more than 30,240 MW and

feed distribution grids throughout India; prices are

determined by India's Electricity Act.

NTPC's core business is engineering, construction and operation of power generating

plants and providing consultancy to power utilities in India and abroad.

State-run NTPC, which generates almost 29% of India's power supply, has 22 coal and

gas-fired power plants and interests in four more through its SAIL Power Supply joint

venture.

Tata Power

The Tata Power Company Ltd (Tata Power) was incorporated in 1919. In 2000, The

Andhra Valley Power Supply Co and The Tata Hydro-Electric Power Co Ltd merged

with Tata Power. Tata Power’s core business is to generate, distribute, and transmit

electricity.

67

Tata Power is engaged in generation, distribution, and transmission of power, operating

in Maharashtra, Karnataka, and Jharkhand. The company has a thermal power station at

Trombay, Mumbai and Jojobera, Jharkhand. It has three hydro power plants at Bhira,

Bhivpuri, and Khopoli in Maharahstra. It has an independent power plant at Belgaum,

Karnataka and a wind farm at Ahmednagar, Maharashtra.

68

COMPANY COMPARISON

5.2.1. Liquidity Ratios:

1 Current Ratio :

Company Name FY 05 FY 06 FY 07 FY 08

Tata Power 3.59 4.06 3.59 3.09

NTPC 2.47 3.2 4.17 4.6

Both the companies have a very healthy current ratio and they are in a financially

sound position to meet their short term obligations.

1) The current ratio of NTPC shows improvement because current assets are

increased in 2007 by 41.07%. It means NTPC is good in meeting their short

term debts. because

f) sundry debtors increased by 44.31%

69

g) cash and bank balance increased by 51.17% due to increase in Term

Deposit by 51.51% as well as increase in current account by 453%.

h) But loans and advances decreased by 86.54%

Short term solvency of NTPC is good. NTPC has adequate working capital. But this

is also signifies the NTPC has blocked a high part of funds in Working Capital.

2) At the same time in 2007 Tata Power Company Limited shows increase in current

liabilities by 53.83% because

a) Increase in sundry creditors by 58.09%

b) Sundry deposits increased by126% in 2007

c) Advance and progress payment increased by 126% as compared to 2006

d) In current assets the Term deposits with schedule banks as well as deposits

under Escro agreement with credit Suisse became nil in 2008

e) Margin Money deposit with a scheduled bank also became nil in 2008.

3) In current assets of Tata Power Company Limited has blocked high part of

funds (i.e. 13% of sales) in sundry debtors because collection period of that

company is longer. Whereas in NTPC has less debtors because of they have good

credit policy (their collection period is short).

70

2 Quick Ratio :


Tata Power 3.16 3.46 3.24 2.71

NTPC 2.13 2.73 3.01 4.12

Both the companies have a very healthy quick ratio and they are in a financially

sound position to meet their short term obligations.

2) The quick ratio of NTPC shows improvement because quick assets is increased

in 2008 by 42.67% because

a) sundry debtors increased by 138%

b) cash and bank balance increased by 51.17% in 2007 due to

increase in Term Deposit by 51.51% as well as increase in

current account by 453%.

c) But loans and advances decreased by 890% in 2008

3) at the same time Tata Power Company Limited shows increase in quick liabilities

by 53.81% in 2007 because

a) increase in sundry creditors by 58.09%

71

b) Sundry deposits increased by 126% in 2007

c) Advance and progress payment increased by 126% as compared

to 2006

d) In quick assets (under cash and bank balance) the Term deposits

with schedule banks as well as deposits under Escro agreement

with credit Suisse got became in 2008

e) Margin Money deposit with a scheduled bank also got became in

2008.

72

5.2.2. Asset Management Ratios:

1 Inventory Turnover Ratio :


Tata Power 13.23 10.32 11.89 12.49

NTPC 13.01 11.17 13 13.86

1. NTPC leads Tata Power in Inventory Turnover ratio which means that NTPC’s

inventory turns over more times than that of Tata Power.

2. It indicates that 13 times NTPC can replace its inventory or NTPC has 13 times

cycling of inventory during the 2008. It means NTPC are more efficient in

inventory management.

3. But it also signifies that NTPC has lower level of inventory (3% of sales) as

compare to TCS which invites problems of frequency stock outs and loss of

sales and customer goodwill. At the same time Tata Power Company Limited

has good volume of inventory.

2 Days Sales Outstanding :

73


Tata Power (days) 64 85 114 87

NTPC (days) 22 12 14 29

1) Days sales outstanding of NTPC is much better than Tata Power which indicates

that they have an effective credit policy as compared to the credit policy of Tata

Power.

2) The debtors’ collection period is 29 days for NTPC while it is 87 days for Tata

Power Company this shows NTPC has good credit policy which helps to have a

low working capital. It means Receivable cycle of Tata Power is longer.

3) The longer period of Tata Power indicates leniency of the credit policy or

slackness of collection machinery.

74

5.2.3. Profitability Ratios:

1 Operating Profit Margin :


Tata Power (%) 24.2 18.3 15.3 15.8

NTPC (%) 31.8 28.7 30.9 31.1

High operating profit margin of NTPC indicates profitability of entire business

after meeting all operating costs including direct and indirect costs of

administrative and distribution expenses. The low operating profit margin of Tata

Power indicates higher operating costs. Major portion of operating expenses is

constituted by fuel and power purchase costs. Operating profit of Tata Power

Company Limited is 15.83 % of its sales (where sales is considered 100%) and

that of NTPC is 31.14% of its respective sales (where sales is considered 100%)

which suggests that operating expenses of Tata Power Company Limited are

higher than that of NTPC.

75

2 Net Profit Margin :


Tata Power (%) 14 13.4 14.7 14.7

NTPC (%) 25 22 21 20

NTPC clearly leads Tata Power here but the trend is a declining one as compared to

Tata Powers which is consistent straight line with slight increase. Net Profit margin

will always be lower than Operating profit margin.

76

3 Return on Assets :


Tata Power (%) 6 6.3 6 6.7

NTPC (%) 8.8 8.1 8.5 8

NTPC has higher ROA than Tata Power which means it generating profits on its

assets more efficiently than Tata Power.

77

4 Return on Equity :


Tata Power (%) 10.7 10.9 11.5 10.8

NTPC (%) 13.9 12.9 14.1 14.1

NTPC leads Tata Power in ROE but both the companies are having ROE well

above the generally accepted rule of having at least 10% ROE. ROE is regulated

by MERC and for Generation Company it is capped to 14%.

For the year 2008 the authorised capital of NTPC was Rs. 10,000 Crore and the

Issued, Subscribed and Paid-up capital was Rs. 8,245.5 Crore. For Tata Power

Company Limited the authorised capital for the same period was Rs. 529 Crore

and the Issued, Subscribed and Paid-up capital was Rs. 220.72 Crore.

78

5.2.4. Debt Management:

1 Debt Equity Ratio :


Tata Power (%) 56 50 60 38

NTPC (%) 41 45 50 52

Both Tata Power and NTPC have Debt Equity ratio below 1. Both companies

have current ratio above the generally accepted norm. Thus both the companies

are having good financial status and can easily raise capital via debt funding. The

ideal debt equity ratio is 2:1, thus Tata Power Company Limited can fund their

projects by way of debt financing.

79

2 Times Interest Earned :


Tata Power 4.98 5.05 3.81 6.60

NTPC 4.35 4.26 5.43 6.43

Amount available to cover the interest payment as and when they are due is

Times Interest Earned. For financial year 2008 both the companies have nearly 6

times the interest amount, thus they can easily make the interest payments and

the lender need not worry of defaulting.

80

3 Debt Asset Ratio :


Tata Power (%) 31 29 32 23

NTPC (%) 26 28 30 30

For both the companies the ratio is less than 1 which indicates that in both the

companies the assets are equity funded.

81

LIMITATIONS

Working capital and Analysis of Financial Statements is powerful tool of determining

company’s strength and weakness. But the analysis is based on the information available

in the financial statements, which are as follows:

It is only a study of interim report.

Working capital study is only based upon monetary information and non-

monetary factors are ignored.

It does not consider change in price level.

As working capital is prepared on the basis of going concern, it does not give

extract position. Thus accounting concept and conventions causes a serious

limitation to financial analysis.

Analysis is only a mean and not an end in itself. Different people may interpret

the same analysis in different ways.

Due to non availability of annual report of 2009 we could not compare NTPC and

Tata Power.

82

RECOMMENDATIONS AND SUGGESTIONS

Tata Power Company Limited can match the gigantic NTPC if it undertakes

certain measures to utilize the resources in an optimum manner.

Considering the Liquidity part, both the companies have the current and the quick

ratios well above the generally accepted norm. Both are financially stable to meet

the short term obligations.

Under Asset Management, Tata Power needs to improve the day’s sales

outstanding ratio. A large part of its working capital is blocked by debtors. Tata

Power needs to revise its credit policy and improve its collection mechanism.

Efforts are needed to be taken to increase the operating profit and the net profit by

reducing operating expenses. Hedging can be tried as an option against rising fuel

price. This might help to control the operating expenses.

Efforts must be taken to use the assets in optimum way to get better returns.

Regular maintenance, replacing the old obsolete assets with new assets will

facilitate optimum utilization.

Efforts must be taken to improve ROE. But ROE is regulated by MERC. As

stipulated by MERC the ROE for generation is 14%, for Transmission is 14% and

for Distribution is 16%. Thus Tata Power is bound to this rule.

With a healthy current ratio and quick ratio, the debt equity ratio can be raised up

to the generally accepted norms and all the upcoming projects can be debt funded.

Also the funding of assets can be done by debt financing.

84

CONCLUSION

Summarizing the overall project work done during these 2 months, it can be said that the

project was a good learning experience. Through it, I got an opportunity to communicate

with entire staff of Finance department as well as MIS department. The entire staff of

finance department was very cooperative and they helped me in all the phases of my

project. I also got the opportunity to learn about inventory management at the same time

problems faced by the Tata Power Company.

These two months has given me an opportunity to conceptualize and implement a new

initiative. I learned how to interpret working capital and ratio analysis with the help of

guidance given by Mr. Amit Kundu Head of Accounts Department.

There were lot of difficulties in the beginning of the project but slowly it got the grip on

the road towards future.

86

BIBLIOGRAPHY

WEBSITES:

www.allbusiness.com

www.moneycontrol.com

www.capitalmarket.com

www.investopedia.com

www.indexmundi.com

www.energywatch.org.in

www.ntpc.co.in

WEB PAGES:

http://www.allbusiness.com/accounting-reporting/reports-statements-cash/391085-1.html

http://www.moneycontrol.com/india/stockpricequote/powergenerationdistribution/tatapowercompany/15/05/balancesheet/marketprice/TPC

http://www.investopedia.com/terms/b/balancesheet.asp

http://www.excelsia.ch/htmlgb/blog/index.php?entry=entry090108-234052

http://www.indexmundi.com/India/electricity_production.html

http://www.topnews.in/business-news/power-sector.html

http://www.tatapower.com/investor-relations/pdf/Financial-statistics-2008-09.pdf

http://www.sebi.gov.in/dp/ntpc.pdf

ARTICLES & MAGAZINES

http://www.ibef.org/Attachment/Investment%20opportunities%20in%20Power

%20Sector.pdf

Annual Report of Tata power Company

88

Annual Report of NTPC

LITERATURE REFERENCE:

Brigam and Houston – Financial management

Prasanna Chandra – Financial Management

Augustine .A(2007), “Modeling Indian Power Sector”, pp: 173-181.

www.cs.utexas.edu/~achal/IndianPowerSector.pdf

Banerjee. R (2004), “Comparison of options for distributed generation in India”,

Journal of Energy Policy, Elsevier - Article in Press, 6th June, 2004, Vol – 37 (1),

pp: 1-11.

http://www.whrc.org/Policy/COP/India/Banerejee_Energy%20Policy%20(in

%20press).pdf

Kumar. S, A. Khetan & B. Thapa (2005),“Indian Power Sector – Emerging

Challenges to Growth”. Reprinted from World Power, pp: 1-5.

http://www.icfi.com/Markets/Energy/doc_files/indian-power-sector.pdf

89

Excel Sheet

Calculations for Company Comparison

Liquidity Ratios

Current Ratio

TPC FY 05(Rs. crores)

FY 06(Rs. crores)

FY 07(Rs. crores)

FY 08(Rs. crores)

Inventories 297.03 442.26 396.42 473.61Sundry Debtors 693.21 1058.23 1478.22 1414.52Cash & Bank balances 979.6 990.55 1367.72 28.7Other Current Assets 12.87 18.06 29.03 59.36Loans & Advances 552.67 463.94 770.4 1899.32Total Current Assets 2535.38 2973.04 4041.79 3875.51Total Current Liabilities

706.87 731.81 1125.72 1253.87

Current Ratio 3.59 4.06 3.59 3.09

NTPC FY 05(Rs. crores)

FY 06(Rs. crores)

FY 07(Rs. crores)

FY 08(Rs. crores)

Inventories 1781.9 2340.5 2510.2 2675.7Sundry Debtors 1374.7 867.8 1252.3 2982.7Cash & Bank balances 6078.3 8471.4 13314.6 14933.2Other Current Assets 976.4 1016.1 1058.0 921.8Loans & Advances 2699.3 3028.7 4047.6 4035.4Total Current Assets 12910.6 15724.5 22182.7 25548.8Total Current Liabilities

5230.6 4910.2 5323.5 5548.3

Current Ratio 2.47 3.2 4.17 4.6

Quick Ratio

91

TPC FY 05 (Rs. crores)

FY 06 (Rs. crores)

FY 07 (Rs. crores)

FY 08 (Rs. crores)

Sundry Debtors 693.21 1058.23 1478.22 1414.52Cash & Bank balances 979.6 990.55 1367.72 28.7Other Current Assets 12.87 18.06 29.03 59.36Loans & Advances 552.67 463.94 770.4 1899.32Total Quick Assets 2238.35 2530.78 3645.37 3401.9Total Current Liabilities

706.87 731.81 1125.72 1253.87

Quick Ratio 3.16 3.46 3.24 2.71

NTPC FY 05(Rs. crores)

FY 06(Rs. crores)

FY 07(Rs. crores)

FY 08(Rs. crores)

Sundry Debtors 1374.7 867.8 1252.3 2982.7Cash & Bank balances 6078.3 8471.4 13314.6 14933.2Other Current Assets 976.4 1016.1 1058.0 921.8Loans & Advances 2699.3 3028.7 4047.6 4035.4Total Quick Assets 11128.7 13384 19672.5 22873.1Total Current Liabilities

5230.6 4910.2 5323.5 5548.3

Quick Ratio 2.13 2.73 3.01 4.12

Asset Management Ratios

Inventory Turnover

92

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Sales 3930.44 4562.79 4715.32 5915.91Inventories 297.03 442.26 396.42 473.61Inventory Turnover 13.23 10.32 11.89 12.49

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Sales 23188.5 26145.2 32635.8 37097.4Inventories 1781.9 2340.5 2510.2 2675.7

Inventory Turnover 13.01 11.17 13 13.86

Days Sales Outstanding

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Sundry Debtors 693.21 1058.23 1478.22 1414.52Sales 3930.44 4562.79 4715.32 5915.91DSO (Days) 64 85 114 87

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Sundry Debtors 1374.7 867.8 1252.3 2982.7Sales 23188.5 26145.2 32635.8 37097.4DSO (Days) 22 12 14 29

Profitability Ratios

Operating Profit Margin

93

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PBIT 952.72 835.46 723.44 936.64Sales 3930.44 4562.79 4715.32 5915.91Operating Profit Margin (%) 24 18 15 15.8

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PBIT 7376.5 7510 10097.8 11552.8Sales 23188.5 26145.2 32635.8 37097.4Operating Profit Margin (%)

31.8 28.7 30.9 31.1

Net Profit Margin

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PAT 551.36 610.54 696.8 869.9Sales 3930.44 4562.79 4715.32 5915.91Profit Margin (%) 14 13 15 15

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PAT 5807 5820.2 6864.7 7414.8Sales 23188.5 26145.2 32635.8 37097.4Profit Margin (%) 25 22 21 20

Return on Assets

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)

94

PAT 551.36 610.54 696.8 869.9Total Assets 9307.67 9631.65 11429.47 12994.43ROA (%) 6 6.3 6 6.7

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PAT 5807 5820.2 6864.7 7414.8Total Assets 65948.3 71737.1 80768.8 89388.0ROA (%) 8.8 8.1 8.5 8

Return on Equity

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PAT 551.36 610.54 696.8 869.9Equity 5136.47 5555.64 6033.11 8037.92ROE (%) 10.7 10.9 11.5 10.8

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PAT 5807 5820.2 6864.7 7414.8Equity 41776.1 44958.7 48596.8 52638.6ROE (%) 13.9 12.9 14.1 14.1

Debt Management Ratios

Debt Equity Ratio

95

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Secured Loans 1059.07 946 1354.3 2331.09Unsecured Loans 1800.94 1809 2279.06 706.18Debt 2860.01 2755 3633.36 3037.27Share Capital 197.92 197.92 197.92 220.72Reserves & Surplus 4363.13 4782.3 5259.42 7237.51Special Appropriation Towards Project Cost 533.61 533.61 533.61 533.61Capital Contribution from Consumers 41.81 41.81 42.16 46.08Equity 5136.47 5555.64 6033.11 8037.92Debt Equity Ratio (%) 56 50 60 38

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Secured Loans 4440.7 5732.7 6822.9 7314.7Unsecured Loans 12647.1 14464.6 17661.5 19875.9Debt 17087.8 20197.3 24484.4 27190.6Share Capital 8245.5 8245.5 8245.5 8245.5Reserves & Surplus 33530.8 36713.2 40351.3 44393.1Equity 41776.3 44958.7 48596.8 52638.6Debt Equity Ratio (%) 41 45 50 52

Times Interest Earned

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PBIT 952.72 835.46 723.44 936.64Interest 191.44 165.28 189.5 141.86TIE 4.98 5.05 3.81 6.6

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)PBIT 7376.5 7510 10097.8 11552.8Interest 1695.5 1763.2 1859.4 1798.1TIE 4.35 4.26 5.43 6.43

Debt Asset Ratio

TPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)

96

Secured Loans 1059.07 946 1354.3 2331.09Unsecured Loans 1800.94 1809 2279.06 706.18Debt 2860.01 2755 3633.36 3037.27Total Assets 9307.67 9631.65 11429.47 12994.43Debt Asset Ratio (%) 0.3 0.29 0.32 0.23

NTPCFY 05

(Rs. crores)FY 06

(Rs. crores)FY 07

(Rs. crores)FY 08

(Rs. crores)Secured Loans 4440.7 5732.7 6822.9 7314.7Unsecured Loans 12647.1 14464.6 17661.5 19875.9Debt 17087.8 20197.3 24484.4 27190.6Total Assets 65948.3 71737.1 80768.8 89388.0Debt Asset Ratio (%) 0.26 0.28 0.30 0.30

97

working capital and analysis of financial management

Documents

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