OVERVIEW,OF,INDIAN,POWER,SECTOR

Power,is,one,of,the,important,sectors,of,any,economy,which,define,its,growth.,In,India,the,powe
r,sector,has,shown,a,significant,growth,since,the,process,of,planned,development,of,the,econo
my,began,in,1950.,Hydropower,and,coal,based,thermal,power,have,been,the,main,sources,of,generation,of,electricity.,N
uclear,power,development,is,at,slower,pace,which,was,introduced,in,late,sixties.,The,concept,of
,operating,power,systems,on,a,regional,basis,crossing,the,political,boundaries,of,states,was,intr
oduced,in,the,early,sixties.,In,spite,of,the,overall,development,that,has,taken,place,,the,gap,bet
ween,supply,and,demand,still,remains,huge,due,to,growth,in,demand,for,power,,outstripping,the
,growth,in,generation,and,generating,capacity,addition.
.
The,installed,generation,capacity,in,the,Power,Utilities,in,the,country,as,on,30.06.2009,was,150
323.41,MW.,Region-wise,and,Category-wise,break-up,of,installed,capacity,is,given,below:
(All,figures,in,MW)
S.,NO. Region

Hydro,(Renewable) Thermal

Nuclear R.E.S.,@,(MNRE) Total

Northern

13425.15

22351.68 1180.00

1766.37

38723.20

Western

7448.50

33718.20 1840.00 4023.62

47030.32

Southern

10993.18

22072.02 1100.00

7047.90

41213.10

Eastern

3933.93

16863.58 0.00

227.41

21024.92

N.,Eastern 1116.00

968.74

0.00

171.00

2255.74

Island

0.00

70.02

0.00

6.11

76.13

All,India

36916.76

96044.24 4120.00 13242.41

150323.41

@,=,Renewable,Energy,Sources,(RES),includes,Small,Hydro,Project,(SHP),,Biomass,Gas,
(BG),,Biomass,Power,(BP),,Urban,&,Industrial,waste,Power,(U&l),and,Wind,Energy,

SIZE,OF,POWER,INDUSTRY
The,total,installed,capacity,in,India,is,calculated,to,be,145,554.97,mega,watt,in,which,75,837.93
,mega,watt,(52.5%),is,from,State,,48,470.99,mega,watt,
(34%),from,Centre,,and,21,246.05,mega,watt,(13.5%),is,from,Private,sector,initiative.

Generation,capacity,of,141,GW;,663,billion,units,produced,(1,unit,=,1kwh)January,2008.,CAGR,of,5%,over,the,last,5,years

India,has,the,fifth,largest,electricity,generation,capacity,in,the,world.,Low,per,capita,cons
umption,at,631,units;,less,than,half,of,China

Transmission,&,Distribution,network,of,6.6,million,circuit,km,-,the,third,largest,in,the,worl
d

Coal,fired,plants,constitute,54%,of,the,installed,generation,capacity,,followed,by,25%,fro
m,hydel,power,,10%,gas,based,,3%,from,nuclear,energy,and,8%,from,renewable,source
s,

GROWTH,OF,INDIAN,POWER,SECTOR
,
Power,development,is,the,key,to,the,economic,development.,The,Power,Sector,has,been,recei
ving,adequate,priority,ever,since,the,process,of,planned,development,began,in,1950.,The,Powe
r,Sector,has,been,getting,1820%,of,the,total,Public,Sector,outlay,in,initial,plan,periods.,Remarkable,growth,and,progress,ha
ve,led,to,extensive,use,of,electricity,in,all,the,sectors,of,economy,in,the,successive,five,years,pl
ans.,India,has,installed,power,generation,capacity,of,150323.41,MW,as,on,June,30,,2009,,whic
h,is,about,108,times,the,installed,capacity,in,1947,
(1362,MW).,Electricity,generation,growth,has,been,steadily,improving,year,after,year,,and,in,the
,year,200809,,the,total,electricity,generation,was,about,723.55,billion,units,of,energy.,However,,despite,this
,the,per,capita,electricity,consumption,in,the,country,was,merely,704.2,KWh/Year,in,200708,according,to,Ministry,of,Power,and,is,projected,at,1000,KWh,by,the,year,2012.

KEY,PLAYERS,

Key,players,currently,operating,in,the,Indian,power,sector,are,National,Thermal,Power,Corporat
ion,Limited,,Tata,Power,,Nuclear,Power,Corporation,of,India,Limited,,North,Eastern,Electric,Pow
er,Corporation,Limited,,Power,Grid,Corporation,of,India,,etc.
,
Major,players,in,the,Power,sector,can,be,broadly,divided,into,public,,private,and,international,pri
vate,sectors.

G,-,Generation,T,-,Transmission,D,,Distribution
Source:,Ministry,of,Power,,Capitaline
POLICY

100%,FDI,permitted,in,Generation,,Transmission,&,Distribution,-,the,Government,is,kee
n,to,draw,private,investment,into,the,sector

Policy,framework:,Electricity,Act,2003,and,National,Electricity,Policy,2005

Incentives:,Income,tax,holiday,for,a,block,of,10,years,in,the,first,15,years,of,operation;,w
aiver,of,capital,goods',import,duties,on,mega,power,projects,
(above,1,000,MW,generation,capacity)

Independent,Regulators:,Central,Electricity,Regulatory,Commission,for,central,PSUs,an
d,inter-state,issues.,Each,state,has,its,own,Electricity,Regulatory,Commission

BLUEPRINT,OF,MINISTRY

The,Ministry,of,Power,has,set,a,goal,-,Mission,2012:,Power,for,All.
A,comprehensive,Blueprint,for,Power,Sector,development,has,been,prepared,encompassing,an
,integrated,strategy,for,the,sector,development,with,following,objectives:

Sufficient,power,to,achieve,GDP,growth,rate,of,8%

Reliable,of,power

Quality,power

Optimum,power,cost

Commercial,viability,of,power,industry

Power,for,all

Strategies,To,Achieve,The,Objectives:,
Power,Generation,Strategy,with,focus,on,low,cost,generation,,optimization,of,capacity,utilization
,,controlling,the,input,cost,,optimisation,of,fuel,mix,,Technology,up,gradation,and,utilization,of,N
on,Conventional,energy,sources,
Transmission,Strategy,with,focus,on,development,of,National,Grid,including,Interstate,connect
ions,,Technology,up,gradation,&,optimization,of,transmission,cost.
Distribution,strategy,to,achieve,Distribution,Reforms,with,focus,on,System,up,gradation,,loss,r
eduction,,theft,control,,consumer,service,orientation,,quality,power,supply,commercialization,,D
ecentralized,distributed,generation,and,supply,for,rural,areas
Regulation,Strategy,aimed,at,protecting,Consumer,interests,and,making,the,sector,commercia
lly,viable
Financing,Strategy,to,generate,resources,for,required,growth,of,the,power,sector,Conservatio
n,Strategy,to,optimise,the,utilization,of,electricity,with,focus,on,Demand,Side,management,,Loa
d,management,and,Technology,up,gradation,to,provide,energy,efficient,equipment,/,gadgets.

Communication,Strategy,for,political,consensus,with,media,support,to,enhance,the,general,pu
blic,awareness.

Roadblocks,in,Power,Sector,Development
1. Absence,of,a,clear,cut,policy,and,focus:,The,government,took,initiatives,like,mega,proje
cts,,naptha,etc,but,these,were,not,taken,to,the,end,and,implemented,completely.,This,w
as,due,to,lack,of,focus,on,part,of,the,government.,
2. Poor,financial,health,of,the,State,Electricity,Boards,and,their,inexperience,to,operate,in,t
he,changed,market,environment:,Most,of,the,State,Electricity,boards,today,are,in,poor,fi
nancial,condition,and,hence,not,fit,to,handle,the,power,requirements,of,the,country.,
3. Unavailability,of,fuel:,It,is,one,of,the,major,roadblocks,in,the,development,of,power,secto
r,in,India.,Fuel,is,not,easily,available,and,in,India,it,is,scarcer.,Hence,the,unavailability,is,
a,major,concern
4. Delay,in,land,acquisition,,environmental,clearances,and,other,approvals,are,an,area,of,c
oncern,when,the,private,companies,are,concerned.,The,bureaucracy,brings,another,maj
or,roadblock,for,any,private,company,entering,any,sector,,not,just,power,sector.
5. ,
More,dependence,on,imported,coal,due,to,low,growth,in,domestic,coal,mining.,In,India,t
he,majority,of,power,is,still,generated,by,coal.,With,low,growth,in,coal,mining,in,the,coun
try,,the,thermal,power,plants,are,depending,more,on,imported,coal,which,the,companies
,can,be,vary,of.
6. Slow,pace,of,opening,up,of,the,distribution,activities,to,private,sector.,Although,the,gover
nment,has,shown,and,taken,initiatives,for,opening,up,the,sector,for,the,private,players.,
For,example:,the,opening,up,of,distribution,sector,is,being,taken,up,slowly,by,the,govern
ment.,Also,the,privatization,in,the,transmission,sector,needs,to,be,increased,to,nurture,
more,growth,in,the,sector.

The,two,companies,chosen,by,us,for,our,assignment,are,NTPC,which,is,the,benchmark,
company,in,the,Power,sector,reporting,the,highest,turnover,year,on,year,and,TATA,Power,Limit
ed,,another,major,player,in,power,production,and,transmission.,

NTPC,,Company,Overview
NTPC,Ltd,(NTPC),,a,Navratna,company,,was,incorporated,in,1975.,The,companys,principal
business,comprises,generation,and,sale,of,bulk,power.,
Its,other,lines,of,business,include,consultancy,services,in,engineering,,project,management,,
construction,management,,operation,,and,maintenance,of,power,plants.,It,is,also,engaged,in,oil,
and,gas,exploration,,and,coal,mining.
NTPC,generates,power,through,15,coal-based,power,plants,with,22,895,MW,capacity,,7,gasbased,power,plants,with,3,955,MW,capacity,,and,4,JV,projects,with,1,054,MW,capacity.,It,sells,
power,to,bulk,consumers,,mainly,SEBs.

The,salient,features,of,NTPCs,depreciation,policy,are,as,follows:
(i),Depreciation,is,charged,on,straight,line,method,at,the,rates,specified,in,Schedule,XIV,of,th
e,Companies,Act,,1956,except,for,the,following,assets,at,the,rates,mentioned,below:
a),Kutcha,Roads,47.50,%
b),Personal,computers,and,Laptops,including,peripherals,
c),Photocopiers,and,Fax,Machines,
d),Air,conditioners,,Water,coolers,and,Refrigerators,
Depreciation,on,additions,to/deductions,from,fixed,assets,during,the,year,is,charged,on,prorata,basis,from/up,to,the,month,in,which,the,asset,is,available,for,use/disposal.
1. Assets,costing,up,to,Rs.5000/-,are,fully,depreciated,in,the,year,of,acquisition.
2. Cost,of,software,recognized,as,intangible,asset,,is,amortised,on,straight,line,method,
over,a,period,of,legal,right,to,use,or,3,years,,whichever,is,earlier.

3. Where,the,cost,of,depreciable,assets,has,undergone,a,change,during,the,year,due,to,in
crease/decrease,in,long,term,liabilities,on,account,of,exchange,fluctuation,,price,adjustment,,change,in,duties,or,similar,factors,,the,unamortised,balance,of,such,asset,is,
charged,prospectively,over,the,residual,life,determined,on,the,basis,of,the,rate,of,
depreciation.

Analysis,of,depreciation,policy
i.

The,depreciation,has,been,sufficient,enough,for,replacement,of,the,asset.,Looking,at,the
,annual,report,we,find,that,the,rate,of,depreciation,is,sufficient,enough,to,cover,the,value
,of,the,asset,over,its,useful,life.,

ii.

Depreciation,has,been,charged,largely,through,SLM.,As,a,result,of,this,the,company,is,a
ble,to,report,higher,profits,then,what,would,otherwise,have,been,had,it,used,WDV,metho
d.,

iii.

The,depreciation,method,used,by,the,company,for,different,assets,has,remained,consist
ent,over,the,observed,period,of,5,years.,

iv.

There,is,a,significant,difference,in,depreciation,rates,used,by,company,
(prescribed,by,companies,act),and,the,rates,prescribed,by,the,IT,act,for,tax,purposes.,T
his,can,be,seen,in,the,deferred,tax,liability,amount,of,Rs.,513.5,Crores.

TATA,POWER,,Company,Overview
The,Tata,Power,Company,Ltd,(Tata,Power),was,incorporated,in,1919.,
In,2000,,The,Andhra,Valley,Power,Supply,Co,and,The,Tata,HydroElectric,Power,Co,Ltd,
merged,with,Tata,Power.,
Tata,Powers,core,business,is,to,generate,,distribute,,and,transmit,electricity.
Tata,Power,is,engaged,in,generation,,distribution,,and,transmission,of,power,,operating,in
Maharashtra,,Karnataka,,and,Jharkhand.,

The,salient,features,of,Tata,Powers,depreciation,policy,are,as,follows:
(i),Depreciation,for,the,year,in,respect,of,assets,relating,to,the,electricity,business,of,the,
Company,as,Licensee,has,been,provided,on,straight,line,method,in,terms,of,the,repealed,
Electricity,(Supply),Act,,1948,on,the,basis,of,central,government,notification,,except,that,

computers,acquired,on,or,after,1st,April,,1998,are,depreciated,at,the,rate,of,33.40%,p.a.,on,the,
basis,of,approval,obtained,from,the,State,Government,.
(ii),In,respect,of,assets,relating,to,the,other,business,of,the,Company,,depreciation,has,been,
provided,for,on,written,down,value,basis,at,the,rates,and,in,the,manner,prescribed,in,Schedule,
XIV,to,the,Companies,Act,,1956,,except,in,the,case,of,technical,knowhow,which,is,written,off,on
,a,straight,line,basis,over,a,period,of,six,years.
(iii),Assets,costing,less,than,Rs.,5,000/-,are,depreciated,at,the,rate,of,100%.
(iv),Leasehold,Land,is,amortised,over,the,period,of,the,lease.
(v),Depreciation,on,additions/deletions,of,assets,is,provided,on,pro-rata,basis.

Analysis,of,depreciation,policy
i.

The,depreciation,has,been,sufficient,enough,for,replacement,of,the,asset.,Looking,at,the
,annual,report,we,find,that,the,rate,of,depreciation,is,sufficient,enough,to,cover,the,value
,of,the,asset,over,its,useful,life.,

ii.

For,assets,relating,to,the,electricity,business,company,has,charged,depreciation,on,a,
straight,line,basis,whereas,for,assets,pertaining,to,other,businesses,the,company,has,
charged,depreciation,at,the,written,down,value,method.,,Since,large,amount,of,
depreciation,is,being,charged,through,SLM,it,is,able,to,report,greater,profits,then,if,the,
company,was,WDV,method.,

iii.

The,depreciation,method,used,by,the,company,for,different,assets,has,remained,
consistent,over,the,observed,period,of,5,years.,

iv.

There,is,a,significant,difference,in,depreciation,rates,used,by,company,(prescribed,by,
companies,act),and,the,rates,prescribed,by,the,IT,act,for,tax,purposes.,This,can,be,seen
,in,the,deferred,tax,liability,amount,of,Rs.,113.59,Crores.

Method,of,inventory,valuation,followed,by,the,company
Tata,Power
i.

Inventories,of,stores,,spare,parts,,fuel,and,loose,tools,are,valued,at,or,below,cost.,Cost,is,
ascertained,on,weighted,average,basis.,

ii.

Workinprogress,and,property,under,development,are,valued,at,lower,of,cost,and,net,
realizable,
value.,Cost,includes,cost,of,land,,material,,labour,,manufacturing,and,other,overheads.

There,has,been,no,significant,in,the,inventory,valuations,methods,followed,by,the,company,in,
the,past,few,years.
,
NTPC
i.
ii.

Inventories,are,valued,at,the,lower,of,cost,,determined,on,weighted,average,basis,,and,net
,realizable,value.,
The,diminution,in,the,value,of,obsolete,,unserviceable,and,surplus,stores,and,spares,is,as
certained,on,review,and,provided,for.

There,has,been,no,significant,in,the,inventory,valuations,methods,followed,by,the,company,in,
the,past,few,years.
Major,Accounting,Policies
The,following,table,gives,a,comparative,analysis,of,the,two,companies,on,the,basis,of,the,accou
nting,policies,followed,by,them.
Basis

Tata,Power
NTPC
The,financial,statements,have,been,
Preparatio prepared,and,presented,under,the,hi The,financial,statements,are,prepared,on,accrual,b
n,of,accoustorical,cost,convention,,on,the,accr asis,of,accounting,under,historical,cost,convention
ual,basis,of,accounting,and,in,accor ,in,accordance,with,generally,accepted,accounting
nts
dance,with,the,generally,accepted,a ,principles,in,India,and,the,relevant,provisions,of,t
ccounting,principles,in,compliance, he,Companies,Act,,1956,including,accounting,sta
with,the,relevant,provisions,of,the, ndards,notified,there,under.
Companies,Act,,1956.

Leases

Finance,Lease:,Assets,taken,
on,finance,lease,are,account
ed,for,as,fixed,assets,in,acco
rdance,with,Accounting,Sta
ndard,
(AS,19),,Leases.,Accordi
ngly,,the,assets,are,accounte
d,at,fair,value.,Lease,payme
nts,are,apportioned,between,
finance,charge,and,reduction

Assets,taken,on,lease,are,capitalized,at,fair
,value,or,net,present,value,of,the,minimum
,lease,payments,,whichever,is,lower.
Depreciation,on,the,assets,taken,on,lease,is
,charged,at,the,rate,applicable,to,similar,ty
pe,of,fixed,assets.
If,the,leased,assets,are,returnable,to,the,les
sor,on,the,expiry,of,the,lease,period,,depre
ciation,is,charged,over,its,useful,life,or,lea
se,period,,whichever,is,shorter.

Investmen
ts

Foreign,E
xchange,
Transacti
ons

,in,outstanding,liability.
Operating,Lease:,Assets,tak
en,on,lease,under,which,all,r
isks,and,rewards,of,ownersh
ip,are,effectively,retained,by
,the,lessor,are,classified,as,o
perating,lease.,Lease,payme
nts,under,operating,leases,ar
e,recognised,as,expenses,on,
straight-line,basis.
Long,term,investments,are,c
arried,at,cost,,less,provision,
for,diminution,other,than,te
mporary,,if,any,,in,the,value,
of,such,investments.,
Current,investments,are,carr
ied,at,lower,of,cost,and,fair,
value.

Transactions,denominated,in
,foreign,currencies,are,recor
ded,at,the,exchange,rate,pre
vailing,on,the,date,of,the,tra
nsaction.,
All,monetary,assets,and,mo
netary,liabilities,in,foreign,c
urrencies,other,than,net,inve
stments,in,nonintegral,foreign,operations,a
re,translated,at,the,relevant,r
ates,of,exchange,prevailing,
at,the,year,end,and,exchange
,differences,are,recognised,i
n,the,Profit,and,Loss,Accou
nt.,
Exchange,differences,relatin
g,to,monetary,items,that,are,
in,substance,forming,part,of,
the,Companys,net,investme
nt,in,nonintegral,foreign,operations,a
re,accumulated,in,Exchange,
Translation,Reserve,Accoun
t.,
In,respect,of,foreign,exchan

Lease,payments,are,apportioned,between,t
he,finance,charges,and,outstanding,liabilit
y,in,respect,of,assets,taken,on,lease.
Leasehold,buildings,are,amortised,over,the
,lease,period,or,30,years,,whichever,is,low
er.,Leasehold,land,and,buildings,,whose,le
ase,period,is,yet,to,be,finalised,,are,amortis
ed,over,a,period,of,30,years.
Current,Investments,are,valued,at,lower,of,
cost,and,fair,value,determined,on,an,indivi
dual,investment,basis.,
Long,term,investments,are,carried,at,cost.,
Provision,is,made,for,diminution,,other,tha
n,temporary,,in,the,value,of,such,investme
nts.,
Premium,paid,on,long,term,investments,is,
amortised,over,the,period,remaining,to,mat
urity.
Foreign,currency,transactions,are,initially,r
ecorded,at,the,rates,of,exchange,ruling,at,t
he,date,of,transaction.,
At,the,balance,sheet,date,,foreign,currency
,monetary,items,are,reported,using,the,clos
ing,rate.,Nonmonetary,items,denominated,in,foreign,cur
rency,are,reported,at,the,exchange,rate,ruli
ng,at,the,date,of,transaction.,
Exchange,differences,
(loss),,arising,from,translation,of,foreign,c
urrency,loans,relating,to,fixed,assets/capita
l,work-inprogress,to,the,extent,regarded,as,an,adjust
ment,to,interest,cost,are,treated,as,borrowi
ng,cost.,
Exchange,differences,arising,from,settleme
nt,/,translation,of,foreign,currency,loans,
(other,than,regarded,as,borrowing,cost),,de
posits,/,liabilities,relating,to,fixed,assets,/,c
apital,work-inprogress,in,respect,of,transactions,entered,
prior,to,01.04.2004,,are,adjusted,in,the,carr
ying,cost,of,related,assets.,Such,exchange,
differences,arising,from,settlement,/,transl
ation,of,long,term,foreign,currency,moneta

ge,contracts,,the,premium,or
,discount,arising,at,the,incep
tion,of,such,a,contract,is,am
ortised,as,expense,or,income
,over,the,life,of,the,contract.

ry,items,in,respect,of,transactions,entered,
on,or,after,01.04.2004,are,adjusted,in,the,c
arrying,cost,of,related,assets.,
Other,exchange,differences,are,recognized,
as,income,or,expense,in,the,period,in,whic
h,they,arise.

COMPANY,COMPARISION:,COMMON,SIZE,ANALYSIS
NTPC
Year
SOURCES,OF,FUNDS,:
Share,Capital
Reserves,Total
Equity,Share,Warrants
Equity,Application,Money
Total,Shareholders,Funds
Secured,Loans
Unsecured,Loans
Service,Line,&,Sec.Dep.,from,Cust.
Total,Debt
Total,Liabilities
APPLICATION,OF,FUNDS,:
Gross,Block
Less:,Accumulated,Depreciation
Net,Block
Lease,Adjustment
Capital,Work,in,Progress
Investments

,,,,,,,,,,
Mar,09

Mar,08

Mar,07

Mar,06

Mar,05

8.72709
6
54.6861

10.1542
3
56.3608
8
0
0
66.5151
1
9.00796
3
24.4769
3
0
33.4848
9
100
0
65.7220
3
33.5879
6
32.1340
7
0
27.6817
5
18.8013

11.1821
7
55.6131
9
0
0
66.7953
7
9.25290
8
23.9517
3
0
33.2046
3
100
0
68.7940
7
34.0112
8
34.7827
9
0
22.8365
6
21.8263

12.5699
7
56.6399
6
0
0
69.2099
3
8.73929
8
22.0507
7
0
30.7900
7
100
0
70.1857
4
34.9866
2
35.1991
3
0
20.7845
5
29.4055

13.9278
6
57.2083
5
0
0
71.1362

0
0
63.4131
9
9.49348
9
27.0933
2
0
36.5868
1
100
0
65.9948
6
31.1333
6
34.8615
0
27.9471
3
14.8002

7.50099
2
21.3628
0
28.8638
100
0
72.8126
8
35.1197
2
37.6929
6
0
16.7651
2
35.1303

Current,Assets,,Loans,&,Advances
Inventories
Sundry,Debtors
Cash,and,Bank
Loans,and,Advances
Total,Current,Assets
Less:,Current,Liabilities,and,Provisio
ns
Current,Liabilities
Provisions
Total,Current,Liabilities
Net,Current,Assets
Miscellaneous,Expenses,not,written,of
f
Deferred,Tax,Assets
Deferred,Tax,Liability
Net,Deferred,Tax
Total,Assets
Contingent,Liabilities

4
0
3.43283
8
3.79354
3
17.2219
8
9.31345
4
33.7618
1
0

7
0
3.33179

6
0
3.44937
9
1.69831
3
18.0566
6
11.9558
6
35.1602
1
0

5
0
3.60215
7
1.32293

6
0
3.04299
7
2.32207

12.9143
5
10.0248
8
27.8643
2
0

10.2671
4
8.16921
9
23.8014
2
0

7.93128

7.21949

3.43929
4
11.3705
7
22.3912
4
0

7.14718
5
2.96960
9
10.1167
9
21.3829
4
0

7.48542
6
5.76796
4
13.2533
9
14.6109
3
0

8.83524
9
4.55444
5
13.3896
9
10.4117
3
0

1.97869
2
1.97879
8
-0.00011
100
8.28764
5

1.84994
1
1.85006
4
-0.00012
100
6.46124
6

1.43508
3
1.43521
9
-0.00014
100
5.78603
4

1.43787
5
1.43802
7
-0.00015
100
4.82676

1.10453
3
1.10470
2
-0.00017
100
3.32221
3

3.67315
8
18.3900
5
6.10473
1
31.4997
3
0

7.38629
7
14.6057
9
20.5544
2
0

TATA,POWER
,,,Year
,,SOURCES,OF,FUNDS,:
,Share,Capital,
,,Reserves,Total,
,,Equity,Share,Warrants
,,,Equity,Application,Money
,,Total,Shareholders,Funds
,,Secured,Loans,
,Unsecured,Loans,

Mar,09, Mar,08, Mar,07, Mar,06, Mar,05,

1.59
60.98
0
0
62.58
28.30
9.12

1.98
70.20
0.55
0
72.73
20.93
6.34

2.05
60.37
0
0
62.41
14.01
23.58

2.38
64.47
0
0
66.85
11.38
21.77

2.48
61.76
0
0
64.23
13.24
22.52

,,,Service,Line,&,Sec.Dep.,from,Cust.
,,Total,Debt
,,Total,Liabilities,
,,APPLICATION,OF,FUNDS,:
,Gross,Block,
,,Less:,Accumulated,Depreciation,
,Net,Block,
,,,Lease,Adjustment
,Capital,Work,in,Progress
,,Investments,
,,Current,Assets,,Loans,&,Advances
,Inventories,
,,Sundry,Debtors,
,Cash,and,Bank
,,Loans,and,Advances,
,,Total,Current,Assets
,,,Less:,Current,Liabilities,and,Provision
s
,,Current,Liabilities,
,Provisions,
,,,Total,Current,Liabilities
,,Net,Current,Assets
,,Miscellaneous,Expenses,not,written,off,
,,Deferred,Tax,Assets
,,,Deferred,Tax,Liability
,,Net,Deferred,Tax
,,,Total,Assets
,Contingent,Liabilities

0
37.42
100.00
0
64.69
27.32
37.37
0
5.48
39.19
0
4.64
11.43
0.33
17.30
33.70
0

0
27.27
100.00
0
58.21
31.22
26.99
0
15.10
39.78
0
4.25
12.70
0.26
17.59
34.80
0

0
37.59
100.00
0
64.45
33.10
31.35
0
8.08
36.93
0
4.1
15.28
14.15
8.29
41.82
0

0
33.15
100.00
0
71.29
35.16
36.13
0
2.55
41.06
0
5.32
12.73
11.92
5.8
35.77
0

0
35.77
100.00
0
68.35
33.23
35.12
0
5.47
43.81
0
3.71
8.71
12.25
6.88
31.56
0

10.22
4.69
14.91
18.79
0
0.66
1.48
-0.82
100.00
73.47

11.26
5.26
16.52
18.28
0.02
0.73
0.9
-0.17
100.00
75.87

11.65
6.53
18.18
23.63
0.06
0.65
0.71
-0.06
100.00
14.05

8.81
7.09
15.90
19.88
0.19
0.75
0.56
0.19
100.00
18.58

8.84
7.26
16.10
15.46
0.28
0.66
0.8
-0.14
100.00
3.48

ANALYSIS:
Total,shareholders,funds,for,both,companies,form,nearly,the,same,percentage,of,the,total,asset
s.,This,indicates,similarity,in,debt,to,equity,ratios.,Capital,work,in,progress,for,NTPC,has,been,s
teadily,increasing,from,2005,to,2009,as,a,percentage,of,total,assets,,indicating,the,companys,g
reater,capital,expenditure,and,building,fixed,assets.,Current,assets,for,both,companies,are,abo
ut,one,third,of,total,assets,,which,seems,to,be,the,industry,norm.
Contingent,liabilities,for,TATA,power,shoot,up,suddenly,in,2008,to,about,75,percent,of,total,asse
ts.,This,is,unnatural,and,should,be,looked,into,,as,to,the,reason,behind,the,spike.,A,contingent,li
ability,for,NTPC,has,been,fairly,low,over,the,years.,

One,stark,difference,is,the,high,amount,of,unsecured,loans,compared,to,secured,loans,in,case,
of,NTPC,,whereas,Tata,Power,has,a,higher,percentage,of,secured,loans.,Normally,we,would,ex
pect,to,see,more,secured,long,term,loans,than,unsecured,long,term,loans.,This,seems,to,be,an,
exception,for,NTPC,probably,because,of,its,status,as,a,PSU.,
While,loans,and,advances,for,NTPC,declined,from,11%,to,6%,from,2007,to,2008,,for,Tata,Powe
r,,it,increased,from,8%,to,17%.,This,shows,a,more,conservative,approach,for,NTPC.

COMMON,SIZE,P/L,STATEMENTS
Tata,Power:
,,,Year
,,INCOME,
,Operating,Income,
,,,Excise,Duty
,,Net,Operating,Income
,,Other,Income,
,Stock,Adjustment,
,,,Total,Income
,,EXPENDITURE,:
,Electricity,&,Fuel,Expenses,
,,Operating,Expenses
,Employee,Cost,
,,Selling,&,Administration,expenses,
,Miscellaneous,Expenses
,,Less,:,Preoperative,Expenses,Capitalised,
,,Total,Expenditure
,,,Operating,Profit
,Interest,
,,,Gross,Profit
,,Depreciation
,,,Profit,Before,Tax
,Tax
,,Deferred,Tax
,,Reported,Net,Profit
,,Extraordinary,Items,
,,Adjusted,Net,Profit
,,Adjustment,below,net,profit,
,,P,&,L,Balance,brought,forward

Mar,09,
,
100.01
0.01
100.00
8.82
0.00
108.82
0.00
72.88
4.87
4.24
1.69
1.00
0.21

Mar,08,
,
100.00
0.00
100.00
8.69
-0.01
108.68
0.00
71.82
5.45
4.34
1.96
1.15
0.18

Mar,07
,
100.00
0.00
100.00
7.78
-0.18
107.60
0.00
71.38
6.44
4.18
2.23
0.86
0.11

Mar,06
,
100.01
0.01
100.00
8.08
0.20
108.27
0.00
65.23
9.42
3.76
2.51
1.40
0.12

Mar,05
,
100.01
0.01
100.00
10.46
-0.21
110.25
0.00
57.93
9.59
3.90
3.55
2.53
0.52

84.48
24.33
4.50
19.83
4.52
15.32
1.27
1.31
12.66
3.17
9.50
0.00
28.91

84.53
24.15
2.93
21.22
4.89
16.32
1.36
0.22
14.65
5.03
9.62
0.00
33.07

84.99
22.62
4.05
18.56
6.18
12.39
-2.90
0.46
14.74
0.71
14.03
0.00
35.26

82.21
26.06
3.62
22.45
6.09
16.35
3.44
-0.60
13.37
3.19
10.18
0.00
31.37

76.98
33.27
4.86
28.41
9.14
19.27
4.03
1.23
14.01
4.48
9.53
-0.01
30.43

,,Statutory,Appropriations,
,Appropriations,
,,,P,&,L,Balance,brought,forward
,,Dividend
,,,Preference,Dividend
,,Equity,Dividend,%
,,,Earnings,Per,Share-Unit,Curr
,,Book,Value-Unit,Curr

-0.62
11.25
30.94
3.51
0.00
1.58
0.55
5.25

0.99
11.28
35.46
3.91
0.00
1.77
0.64
5.93

0.48
7.97
41.55
3.98
0.00
2.01
0.71
6.17

0.77
7.49
36.47
3.69
0.00
1.86
0.65
5.86

-0.09
8.12
36.41
3.78
0.00
1.91
0.68
6.31

Mar,09
,
100.53
0.53
100.00
8.10
0.00
108.10
0.00
65.02
2.75
6.99
1.37
0.66
1.44

Mar,08
,
100.57
0.57
100.00
8.34
0.00
108.34
0.00
59.75
2.89
6.10
1.45
1.03
1.47

Mar,07
,
100.57
0.57
100.00
8.89
0.00
108.89
0.00
61.13
2.97
4.19
1.51
0.63
1.28

Mar,06
,
100.66
0.66
100.00
11.02
0.00
111.02
0.00
61.75
3.02
4.25
1.60
1.46
0.97

Mar,05
,
100.74
0.74
100.00
13.96
0.00
113.96
0.00
61.21
3.22
4.50
1.81
0.50
0.66

75.35
32.75
4.82
27.93
5.63
22.30
2.71
0.00
19.54
-0.05
19.59
0.00
0.05
0.00
19.55
0.04

69.74
38.60
5.19
33.41
5.77
27.65
7.61
0.00
19.99
-0.02
20.01
0.00
0.24
0.00
20.18
0.06

69.16
39.73
6.07
33.66
6.36
27.30
6.21
0.00
21.04
-0.02
21.06
0.00
0.23
0.00
20.99
0.28

71.11
39.91
7.52
32.39
7.66
24.72
2.87
0.00
21.77
-2.54
24.32
0.00
0.30
0.00
21.80
0.28

70.58
43.38
7.77
35.62
8.68
26.94
1.20
0.00
25.73
-0.07
25.80
0.00
0.25
0.00
25.63
0.36

NTPC:
,,,Year
,,INCOME,:
,Operating,Income,
,,,Excise,Duty
,,Net,Operating,Income
,,Other,Income,
,Stock,Adjustment,
,,,Total,Income
,,EXPENDITURE,:
,Electricity,&,Fuel,Expenses,
,,Operating,Expenses
,Employee,Cost,
,,Selling,&,Administration,expenses,
,Miscellaneous,Expenses
,,Less,:,Preoperative,Expenses,Capitalised,
,,Total,Expenditure
,,,Operating,Profit
,Interest,
,,,Gross,Profit
,,Depreciation
,,,Profit,Before,Tax
,Tax
,,Deferred,Tax
,,Reported,Net,Profit
,,Extraordinary,Items,
,,Adjusted,Net,Profit
,,Adjustment,below,net,profit,
,,P,&,L,Balance,brought,forward
,,Statutory,Appropriations,
,Appropriations,
,,,P,&,L,Balance,brought,forward

,,Dividend
,,,Preference,Dividend
,,Equity,Dividend,%
,,,Earnings,Per,Share-Unit,Curr
,,Book,Value-Unit,Curr

7.07
0.00
0.09
0.02
0.17

7.78
0.00
0.09
0.02
0.18

8.09
0.00
0.10
0.02
0.18

8.64
0.00
0.10
0.02
0.21

8.77
0.00
0.11
0.03
0.23

ANALYSIS:
NTPC,and,Tata,power,have,been,able,to,reduce,operating,expenses,over,the,years.,But,Tata,P
ower,has,brought,it,down,drastically,from,9%,to,about,4%.,
Operating,profit,margin,for,NTPC,has,dropped,from,42%,to,32%,over,the,years.,For,tata,power,
,it,has,stayed,constant,at,about,24%.,Interest,as,a,percentage,of,net,income,has,consistently,dr
opped,for,NTPC,,whereas,it,has,stayed,nearly,contant,for,tata,power.,This,shows,a,decrease,in,
dependence,on,loans,by,NTPC,as,interest,payments,are,directly,proportional,to,the,debt,of,a,co
mpany.,Depreciation,margin,also,has,consistently,dropped,as,a,percentage,of,net,income,for,bo
th,companies.,
PBT,margin,has,stayed,nearly,constant,for,Tata,Power,,and,in,the,case,of,NTPC,there,was,a,re
duction,in,2009.

NTPC,has,shown,a,positive,trend,in,earnings,before,tax,,as,can,be,seen.,Theres,been,a,dip,after,
2008,,which,can,be,attributed,to,the,recession.,

Tata,power,also,shows,a,positive,trend,in,earnings,before,tax.,Over,2001,to,2007,its,EBT,growth
,has,been,lower,than,that,of,NTPC.,But,in,2008,and,2009,,the,EBT,has,increased,steeply,,beating
,industry,trend,of,lower,EBTs,due,to,recession.

RATIO,ANALYSIS

Fixed,asset,turnover,ratio:
This,financial,ratio,is,used,to,determine,the,efficiency,of,use,of,the,fixed,assets.,It,is,the,ratio,of,
sales,to,the,total,fixed,assets.

Fixed,
Asset,
Turnover, Ratio
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

NTPC

0.7298 0.8556 0.7390 0.7256 0.6563 0.6999 0.7279 0.7680 0.7636 0.7073

Tata,Power

0.9801 0.9470 1.0002 1.1681 1.2179 1.2123 1.4210 1.2399 1.2667 1.2235

Tata,Power,has,consistently,been,having,better,fixed,asset,usage,efficiency,compared,to,NTPC
.,This,shows,NTPC,is,not,utilizing,its,fixed,assets,in,accordance,with,their,potential.,But,a,very,h
igh,turnover,ratio,can,also,mean,that,the,company,is,ill,prepared,for,scaling,up,operations,to,me
et,increased,demand,and,that,it,is,maintaining,bare,minimum,fixed,assets.

Total,asset,turnover,ratio:
This,financial,ratio,is,used,to,determine,the,efficiency,of,use,of,the,companys,assets.,It,is,the,ra
tio,of,sales,to,the,total,assets.

Total, Asset,
Turnover,
Ratio
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

NTPC

0.4887 0.5351 0.4452 0.4256 0.3661 0.3812 0.4075 0.4425 0.4568 0.4443

Tata,Power

0.4480 0.5273 0.5422 0.6028 0.6253 0.4921 0.5497 0.4889 0.5331 0.5242

Tata,Power,has,been,performing,better,here,as,well.,Total,asset,turnover,takes,into,account,the,
current,assets,as,well.,For,a,power,industry,,this,ratio,is,a,better,indicator,of,asset,utilization,effi
ciency,than,just,the,fixed,asser,turnover,ratio,because,current,assets,form,a,significant,portion,o
f,total,assets.,
Working,capital,turnover,ratio,
This,ratio,indicates,whether,or,not,working,capital,has,effectively,utilized,in,making,sales.,The,ra
tio,is,calculated,as,(Net,Sales)/,(Working,Capital).

Working,
Capital,
Turnover,
Ratio

2000

NTPC

1.6137 2.0406 1.4973 1.2845 3.4604 3.6608 2.7889 2.1530 2.1361 1.9841

Tata,Power

4.2441 2.6120 2.6730 4.5437 8.2485 3.1838 2.7652 2.0686 2.9158 2.7901

2001

2002

2003

2004

2005

2006

2007

2008

This,ratio,indicates,how,quickly,and,efficiently,working,capital,is,being,utilized,to,generate,reve
nue.,This,ratio,should,not,be,viewed,in,isolation,but,with,respect,to,that,of,the,industry.,Tata,pow

2009

er,has,performed,better,in,this,regard,with,higher,turnover,ratios,over,the,years.,The,lower,turno
ver,of,NTPC,shows,that,it,is,utilizing,its,working,capital,less,efficieantly.
Debtors,Turnover,Ratio,,Debtors,constitute,an,important,constituent,of,current,assets,and,th
erefore,the,quality,of,debtors,to,a,great,extent,determines,a,firms,liquidity.,The,ratio,is,calculate
d,as,(Credit,Sales)/,(Average,accounts,receivable)

Debtors,Turnover,Ratio
NTPC
Tata,Power

2008
7.5723
5.8205

2009
8.0269
7.6857

Debtors,turnover,ratio,is,a,measure,of,how,quickly,the,company,is,able,to,recover,money,from,
debtors.,Tata,powers,ratio,has,increased,from,2008,to,2009.,This,shows,it,has,had,more,succe
sful,collections,from,debtors.,A,high,ratio,doesnt,necessarily,mean,its,good.,It,could,mean,that,t
he,company,is,following,strict,credit,policy,with,its,customers,which,might,lead,to,loss,of,market,
share.,This,ratio,should,be,viewed,with,respect,to,the,average,in,the,industry.

Current,Ratio,:

This,ratio,mainly,gives,an,idea,of,the,company's,ability,to,pay,back,its,short-term,liabilities,
(debt,and,payables),with,its,short-term,assets,

(cash,,inventory,,receivables).,The,higher,the,value,of,the,current,ratio,,more,capable,the,comp
any,is,of,paying,its,obligations.,An,ideal,current,ratio,is,2.,The,ratio,of,2,is,considered,as,safe,m
argin,of,solvency,due,to,the,fact,that,if,the,current,assets,are,reduced,to,half,,then,also,the,credi
tors,will,be,able,to,get,their,payments,in,full.,A,very,high,current,ratio,is,also,not,desirable,since,i
t,means,less,efficient,use,of,funds.

Current,Ratio 2000
NTPC
2.3898
Tata,Power
1.5689

2001
2.3869
2.0748

2002
2003
2004
2005
2006
2007
2008
2009
3.0555 3.7206 1.6610 1.7776 2.1024 2.4073 3.1136 2.9692
2.0712 1.6207 1.4352 1.9600 2.2506 2.2996 2.1070 2.2600

This,is,one,of,the,most,important,ratios,for,evaluating,a,companys,short,term,liquidity.,NTPC,ha
s,had,a,higher,ratio,for,about,half,the,years,compared,to,Tata,power.,A,high,ratio,is,desirable,as
,it,indicates,that,the,company,can,meet,its,short,term,liabilities.,But,too,high,a,ratio,can,mean,th
at,current,assets,arent,being,utilized,efficiently,,upto,their,potential.,This,ratio,should,not,be,vie
wed,independently,but,in,conjunction,with,the,industry,average.

Liquid,Ratio

Liquid,Ratio 2000
NTPC
2.1084
Tata,Power
1.3322

2001
2.1138
1.8183

2002
2.7087
1.8261

2003
3.3956
1.4032

2004
1.4503
1.1697

2005
1.5503
1.7293

2006
1.8306
1.9158

2007
2.1711
2.0741

2008
2.7843
1.8496

2009
2.6673
1.9490

Liquid,ratio,is,a,more,stringent,test,for,liquidity.,It,excludes,inventory,and,prepaid,expenses,as,a,
current,asset.,This,is,because,it,takes,time,for,conversion,of,these,assets,into,cash.,Inventory,n
eeds,to,be,converted,into,finished,goods,,then,sold,and,then,cash,has,to,be,realised,from,debto
rs.,,Both,companies,have,had,similar,raios,over,the,years,with,NTPC,having,higher,ratio,current
ly.,This,ratio,again,needs,to,be,viewed,with,respect,to,industry,average.

Super,
Quick,,
Ratio
NTPC
Tata,Power

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.0779 0.0568 0.2070 0.0999 0.0738 0.7668 0.9744 1.2363 1.8178 1.5146
0.0468 0.8533 0.2309 0.0831 0.0440 0.7608 0.7498 0.7781 0.0156 0.0220

This,is,not,a,important,measure,of,liquidity,,since,it,takes,only,cash,balances,into,account.,In,the,
power,sector,,where,project,timelines,can,run,into,many,years,,cash,should,be,invested,to,earn,g
ood,retuns.,The,high,ratio,of,NTPC,shows,that,its,been,conservative,by,holding,onto,cash,,especi
ally,since,2007.,Tata,powers,ratio,decreased,drastically,in,200809,probably,owing,to,investment,losses,during,thr,recession.
PROFITABILITY
Overall,Profitability,Ratio,
(ROI),,It,indicates,the,percentage,of,return,on,the,total,capital,employed,in,the,business.,It,is,c
alculated,as,(Operating,Profit,X,100)/,(Capital,Employed).

ROI

2000

NTPC

10.6887 10.9089 9.6867 8.3051

Tata,Power 8.4405

2001

8.0862

2002

2003

2004

2005

2006

2007

3.9121

7.9040 8.6490 10.8330 11.1903 8.4486

9.4210 12.1358 12.5253 6.8331 6.4295 4.3202

2008

5.6372

2009

5.7669

Return,on,investments,is,the,returns,on,total,investment,by,the,company.,This,includes,the,prefer
ence,and,normal,shareholders,and,also,creditors,who,made,long,term,loans,to,the,company,
(bondholders,,banks,etc).,NTPC,has,been,performing,better,than,Tata,power,since,2005.
Return,on,Equity(,ROE)
It,measures,the,net,income,as,a,percentage,of,the,shareholders,investments.net,income,after,t
ax,is,the,amount,available,to,shareholders,for,compensating,their,investment,and,the,risk,of,bei
ng,carried,by,them.,It,is,calculated,as,(PAT),/,(Net,Worth)

ROE

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

NTPC
Tata,
Power

14.9459 14.4604 12.3536 11.4382 14.5779 13.7889 12.8660 13.9688 13.7593 13.7235
12.8691 10.1281 14.3270 10.3840 10.3096 11.8367 10.4589 12.1140 10.9764 11.7708
Return,on,equity,is,the,retuns,to,the,common,shareholders,of,a,company.,NTPC,has,been,perfo
rming,consistently,better,in,this,regard,as,well.

Dividend,Payout,ratio

Dividend,
Payout,
Ratio

2000

NTPC

18.9807 20.0064 20.0002 19.6252 20.5729 34.0796 39.5251 38.3497 38.8323 36.1006

2001

2002

2003

2004

2005

2006

2007

2008

2009

Tata,Power 20.3273 25.2859 16.3355 26.2736 26.6368 24.4412 28.9832 25.7536 26.0954 24.9482
Dividend,payout,ratio,is,the,percentage,of,profits,after,tax,that,are,distributed,to,shareholders,as
,dividends.,NTPC,has,had,a,high,dividend,ratio,compared,to,tata,power.,This,shows,that,Tata,p
ower,has,been,reinvesting,its,profits,to,grow.,Whereas,NTPC,has,followed,a,more,liberal,policy,
by,distributing,higher,dividends.

SOLVENCY:
Debt,to,equity,ratio

Debt,
To,
Equity, Ratio 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
NTPC
0.4398 0.3797 0.4042 0.4190 0.4282 0.4058 0.4449 0.4971 0.5034 0.5770
Tata,Power
0.6722 0.6716 0.6589 0.5083 0.3409 0.5568 0.4959 0.6022 0.3750 0.5980
This,ratio,shows,how,much,a,company,has,relied,on,debt,as,a,source,of,financing.,As,we,see,,tat
a,power,has,consistently,been,having,a,higher,ratio,indicating,it,has,relied,on,debt,more,than,NT
PC.,NTPC,has,been,relatively,more,conservative,and,relied,on,owners,equity,more.
Interest,coverage,ratio:
A,ratio,used,to,determine,how,easily,a,company,can,pay,interest,on,outstanding,debt.,T
he,interest,coverage,ratio,is,calculated,by,dividing,a,company's,earnings,before,interest
,and,taxes,(EBIT),of,one,period,by,the,company's,interest,expenses,of,the,same,period:

Interest,
Coverage,
Ratio
NTPC
Tata,Power

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
3.5888 3.5597 4.4899 3.7485 0.5984 2.6704 2.8225 4.0301 4.7239 3.9460
2.3209 2.1208 1.8993 2.5322 2.9895 2.8542 3.2329 2.1797 3.6106 2.4440

This,ratio,shows,how,capable,is,a,company,in,meeting,its,interest,payments,on,long,term,loans.
,Lately,NTPC,has,been,having,better,ratios,than,Tata,power.,This,could,also,indicate,that,Tata,p
ower,has,been,taking,up,more,longter,debt,that,has,increased,interest,payment.

DU,PONT,ANALYSIS:
TATA,POWER:
Year
ROE(Return,on,equity)
Total,Asset,Turnover,Ratio
Financial,Leverage,Ratio
Net,Profit,Margin

2009
11.7708
0.524218
1.598019
0.140512

2008
10.97642
0.533143
1.375022
0.149729

2007
12.11398
0.488886
1.602237
0.154651

2006
10.45892
0.54968
1.495892
0.127197

2005
11.83673
0.492134
1.556805
0.154495

Return,on,equity,is,seperated,into,three,components,of,asset,turnover,ratio,,net,profit,and,financi
al,leverage.,The,increase,in,the,return,on,equity,from,2008,to,2009.,This,is,not,explained,by,eith
er,asset,turnover,or,net,profit,margin,,both,of,which,have,dropped.,The,increased,leverage,explai
ns,the,higher,ROE.,These,three,components,of,ROE,explain,the,effect,of,asset,utilization,efficie
ncy,,leverage,and,net,profit,margin,on,ROE.,An,increase,in,these,ratios,leads,to,an,increase,in,R
OE.

NTPC:
YEAR
ROE
Total,Asset,Turnover,Ratio
Financial,Leverage,Ratio
Net,Profit,Margin

2009
13.72%
0.44
1.58
0.20

2008
13.76%
0.46
1.50
0.20

2007
13.97%
0.44
1.50
0.21

2006
12.87%
0.41
1.44
0.22

2005
13.79%
0.38
1.41
0.26

ROE,remained,fairly,stable,over,the,years,,except,a,dip,from,2005,to,2006.,This,can,be,attribute
d,to,a,reduction,in,net,profit,margin,from,0.26,to,0.22.,An,increase,in,leverage,alone,cannot,ens
ure,a,higher,return,on,equity,,as,the,company,should,be,able,to,generate,sufficient,profits,by,usi
ng,the,borrowed,money.,Otherwise,itll,lead,to,a,reduction,in,the,asset,turnover,ratio,which,bala
nces,the,increase,in,leverage,,and,there,is,no,net,effect,on,ROE.

CASH,FLOW,POSITION:
TATA,POWER
YEAR
Cash,Flow,Summary
Cash,and,Cash,Equivalents,at,Beginning,of,the,yea
r
Net,Cash,from,Operating,Activities,
Net,Cash,Used,in,Investing,Activities,
Net,Cash,Used,in,Financing,Activities,
Net,Inc/(Dec),in,Cash,and,Cash,Equivalent
Cash,and,Cash,Equivalents,at,End,of,the,year

2009

2008

2007

28.7

1002.71 974.05

986.49 51.9

648.61
-2220.5
1588.71
16.8
45.5

1126.25
-2541.1
440.88
-974.01
28.7

296.86
144.46
-453.7
-12.44
974.05

421.2
-931.06
538.52
28.66
1002.71

2006

2005

444.09
-308.0
798.58
934.59
986.49

As,we,can,see,,the,operating,cash,flows,for,tata,power,are,inadequate,to,meet,its,investment,sp
ending.,From,2007,to,2009,,it,has,gone,in,for,lot,of,capital,expenditure,and,other,investment.,Th
e,financing,cashflows,has,been,positive,for,nearly,all,years.,This,is,because,the,company,has,g
one,in,for,raising,loans,as,a,form,of,financing.,The,negative,values,of,investing,cashflow,shows,
that,Tata,power,has,focussed,on,capacity,expansion,and,investing,in,other,assets.,

NTPC:
YEAR
Cash,Flow,Summary
Cash,and,Cash,Equivalents,at,Beginning,of,the,yea
r
Net,Cash,from,Operating,Activities,

2009

2008

2007

2006

2005

14933.2 13314.6 8471.4

6078.3 6635.1

9688.1

5972

9786

8065.3

5099.8

Net,Cash,Used,in,Investing,Activities,
Net,Cash,Used,in,Financing,Activities,
Net,Inc/(Dec),in,Cash,and,Cash,Equivalent
Cash,and,Cash,Equivalents,at,End,of,the,year

-7500.4
-849.3
1338.4
16271.6

-5818.7
-2348.7
1618.6
14933.2

-3145.8
-76.3
4843.2
13314.6

-2699
-879.7
2393.1
8471.4

-6413
757
-556.8
6078.3

NTPCs,cash,flow,statement,is,in,stark,contrast,with,that,of,Tata,power.,Here,,the,operating,cas
h,flows,in,all,years,are,more,than,sufficient,to,meet,both,investing,and,financing,activities.,The,n
egative,values,for,financng,activities,shows,that,NTPC,hasnt,gone,in,for,issuing,new,debt,or,eq
uity,,and,is,just,paying,out,interests,and,dividends.,The,negative,values,for,investing,activities,in
dicate,NTPC,,like,Tata,Power,,is,going,for,capacity,expansion,and,investing,in,other,assets.,

References:,
1.
2.
3.
4.
5.
6.
7.
8.

http://www.capitaline.com
PROWESS
www.tatapower.com
www.ntpc.org
www.wikipedia.com
http://info.shine.com
www.powermin.gov.in
http://www.infraline.com/powersector/

ANNEXURE,
NTPC,BALANCE,SHEET
,,,Year

Mar,0
9,

Mar,0
8,

Mar,0
7,

Mar,0
6,

Mar,0
5,

Mar,0
4,

Mar,0
3,

Mar,0
2,

Mar,0
1,

Mar,0
0,

,,SOURCES,OF,FUNDS,:
,Share,Capital,
,,Reserves,Total,
,,Equity,Share,Warrants
,,,Equity,Application,Mon
ey
,,Total,Shareholders,F
unds
,,Secured,Loans,
,Unsecured,Loans,
,,,Service,Line,&,Sec.Dep.
,from,Cust.
,,Total,Debt
,,Total,Liabilities,
,,APPLICATION,OF,FUN
DS,:
,Gross,Block,
,,Less:,Accumulated,Depr
eciation,
,Net,Block,
,,,Lease,Adjustment
,Capital,Work,in,Progress
,,Investments,

8,245
.50
51,66
8.30

8,245
.50
45,76
6.50

8,245
.50
41,00
8.00

8,245
.50
37,15
4.00

8,245
.50
33,86
8.20

7,812
.50
28,27
5.10

7,812
.55
23,72
7.30

7,812
.55
20,83
9.93

7,812
.55
18,00
8.24

7,812.
55
15,10
0.27

0
59,9
13.8
0
8,969
.60
25,59
8.20

0
54,0
12.0
0
7,314
.70
19,87
5.90

0
49,2
53.5
0
6,822
.90
17,66
1.50

0
45,3
99.5
0
5,732
.70
14,46
4.60

0
42,1
13.7
0
4,440
.70
12,64
7.10

0
36,0
87.6
0
4,584
.40
10,86
8.40

0
31,5
39.8
5
4,122
.60
9,093
.10

0
28,6
52.4
8
1,645
.50
9,935
.68

0
25,8
20.7
9
1,965
.47
7,839
.25

0
34,5
67.8
0
94,48
1.60

0
27,1
90.6
0
81,20
2.60

0
24,4
84.4
0
73,73
7.90

0
20,1
97.3
0
65,59
6.80

0
17,0
87.8
0
59,20
1.50

0
15,4
52.8
0
51,54
0.40

0
13,2
15.7
0
44,75
5.55

0
11,5
81.1
8
40,23
3.66

9,80
4.72
35,62
5.51

10,07
7.39
32,99
0.21

62,35
3.00

53,36
8.00

50,72
7.30

46,03
9.60

43,10
6.20

40,02
8.10

36,61
0.60

32,89
1.15

32,30
7.35

28,47
6.24

29,41
5.30
32,93
7.70

27,27
4.30
26,09
3.70

25,07
9.20
25,64
8.10

22,95
0.10
23,08
9.50

20,79
1.40
22,31
4.80

18,77
3.60
21,25
4.50

16,74
5.60
19,86
5.00

15,21
3.11
17,67
8.04

13,84
1.61
18,46
5.74

11,44
0.30
17,03
5.94

0
26,40
4.90
13,98
3.50

0
22,47
8.30
15,26
7.20

0
16,83
9.20
16,09
4.30

0
13,63
4.00
19,28
9.10

0
9,925
.20
20,79
7.70

0
7,495
.30
17,33
8.00

0
6,386
.30
3,667
.40

0
6,558
.38
4,028
.11

0
3,816
.53
3,991
.46

0
5,055.
27
901.5
9

3,243
.40
3,584
.20
16,27
1.60
8,799
.50
31,89
8.70

2,705
.50
2,982
.70
14,93
3.20
4,957
.20
25,57
8.60

2,543
.50
1,252
.30
13,31
4.60
8,816
.00
25,92
6.40

2,362
.90

1,738
.00

867.8
8,471
.40
6,576
.00
18,27
8.10

1,801
.50
1,374
.70
6,078
.30
4,836
.30
14,09
0.80

469.9

1,771
.20
12,43
4.90

609.1
10,88
4.60
13,70
1.60

544.7
5,527
.80
20,27
8.60

2,018
.34
11,53
2.82
1,204
.86
3,025
.32
17,78
1.34

1,839
.78
9,585
.14
382.9
5
4,271
.50
16,07
9.37

2,022.
69
8,208.
83
560.1
9
6,389.
08
17,18
0.79

7,493
.60
3,249
.50
10,74
3.10
21,15
5.60

5,803
.70
2,411
.40
8,215
.10
17,36
3.50

5,323
.50
5,446
.50
10,77
0.00
15,15
6.40

4,910
.20
3,783
.60
8,693
.80
9,584
.30

5,230
.60
2,696
.30
7,926
.90
6,163
.90

6,524
.40
1,724
.50
8,248
.90
5,452
.70

3,420
.15
2,030
.20
5,450
.35
14,82
8.25

3,145
.85
2,673
.60
5,819
.45
11,96
1.89

2,766
.23
3,970
.41
6,736
.64
9,342
.73

2,468.
80
4,720.
50
7,189.
30
9,991.
49

0
1,869
.50
1,869
.60

0
1,502
.20
1,502
.30

0
1,058
.20
1,058
.30

8.7

7.24

9.05

5.92

943.2

653.9

940.8

943.3

654

940.9

0.1

22,91
2.82
2,427.
83
7,649.
56

,,Current,Assets,,Loans,&,
Advances
,Inventories,
,,Sundry,Debtors,
,Cash,and,Bank
,,Loans,and,Advances,
,,Total,Current,Assets
,,,Less:,Current,Liabilities,
and,Provisions
,,Current,Liabilities,
,Provisions,
,,,Total,Current,Liabilities
,,Net,Current,Assets
,,Miscellaneous,Expenses
,not,written,of,
,,Deferred,Tax,Assets
,,,Deferred,Tax,Liability

,,Net,Deferred,Tax
,,,Total,Assets
,Contingent,Liabilities
,
http://www.capitaline
.com

-0.1
94,4
81.6
0
7,830
.30

-0.1
81,2
02.6
0
5,246
.70

-0.1
73,7
37.9
0
4,266
.50

-0.1
65,5
96.8
0
3,166
.20

-0.1
59,2
01.5
0
1,966
.80

-0.1
51,5
40.4
0
1,950
.80

-0.1
44,7
55.5
5
2,048
.30

0
40,2
33.6
6
1,420
.32

0
35,6
25.5
1
2,410
.68

0
32,99
0.21
2,142.
61

NTPC,PROFIT,AND,LOSS,STATEMENT
,,,Year

Mar,09
(12),

Mar,08
(12),

Mar,07
(12),

Mar,06
(12),

Mar,05
(12),

Mar,04
(12),

Mar,03
(12),

Mar,02
(12),

Mar,01
(12),

Mar,00
(12),

42,196.
80
221.6

37,302.
40
211.4

32,817.
30
185.6

26,904.
90
175.7

22,732.
40
167.4

18,868.
40
0

19,047.
50
0

17,911.
05
0

19,064.
95
0

16,123.
22
0

41,975.
20
3,400.0
0
0

37,091.
00
3,091.7
0
0

32,631.
70
2,901.5
0
0

26,729.
20
2,945.3
0
0

22,565.
00
3,151.2
0
0

18,868.
40
7,243.1
0
0

19,047.
50
1,028.6
0
0

17,911.
05
722.78
0

19,064.
95
1,279.2
2
0

16,123.
22
1,087.1
9
0

45,375.
20

40,182.
70

35,533.
20

29,674.
50

25,716.
20

26,111.
50

20,076.
10

18,633.
83

20,344.
17

17,210.
41

27,292.
30

22,160.
70

19,947.
60

16,504.
20

13,811.
30

12,284.
20

11,134.
40

10,582.
88

10,036.
52

8,141.7
7

1,152.9
0
2,934.3
0
574.9

1,073.7
0
2,261.0
0
536.3

969.1

807.8

726.9

632.6

628.3

637.81

608.73

540.08

1,367.1
0
494

1,136.5
0
429

1,016.4
0
408.1

960.2

899.2

884.87

813.01

654.94

323.2

239

300.65

242.17

201.07

278.5

380.8

207

390.3

113.7

744.1

783

348.26

1,246.2
4

1,032.8
8

604.6

546.8

416.5

259.8

149.1

115.4

-117.5

124.04

93.71

59.2

31,628.
30
13,746.
90
2,022.9
0
11,724.
00
2,364.5
0
9,359.5
0
1,137.2
0
0

25,865.
70
14,317.
00
1,923.6
0
12,393.
40
2,138.5
0
10,254.
90
2,823.2
0
0

22,568.
30
12,964.
90
1,982.1
0
10,982.
80
2,075.4
0
8,907.4
0
2,027.3
0
0

19,008.
00
10,666.
50
2,010.1
0
8,656.4
0
2,047.7
0
6,608.7
0
767.6

15,927.
30
9,788.9
0
1,752.3
0
8,036.6
0
1,958.4
0
6,078.2
0
271.2

14,828.
90
11,282.
60
3,369.7
0
7,912.9
0
2,023.2
0
5,889.7
0
628.9

13,801.
40
6,274.7
0
991.6

12,630.
43
6,003.4
0
868.03

10,511.
54
6,698.8
7
982.56

5,283.1
0
1,529.1
0
3,754.0
0
146.4

5,135.3
7
1,383.2
9
3,752.0
8
212.46

12,852.
96
7,491.2
1
1,091.7
6
6,399.4
5
2,325.6
4
4,073.8
1
340.01

0.1

8,201.3
0
-20.13

7,414.8
0
-8.58

6,864.7
0
-7.13

5,820.2
0
-679.9

5,807.0
0
-15.48

5,260.8
0
856.06

3,607.5
0
6.73

3,539.6
2
-2.61

3,733.8
0
-2.47

3,424.5
3
-3.55

8,221.4
3

7,423.3
8

6,871.8
3

6,500.1
0

5,822.4
8

4,404.7
4

3,600.7
7

3,542.2
3

3,736.2
7

3,428.0
8

,,INCOME,:
,Operating,Income,
,,,Excise,Duty
,,Net,Operating,Income
,,Other,Income,
,Stock,Adjustment,
,,,Total,Income
,,EXPENDITURE,:
,
Electricity,&,Fuel,Expe
nses,
,,Operating,Expenses
,Employee,Cost,
,,Selling,&,Administrati
on,expenses,
,
Miscellaneous,Expens
es
,,Less,:,Preoperative,Expenses,Ca
pitalised,
,,Total,Expenditure
,,,Operating,Profit
,Interest,
,,,Gross,Profit
,,Depreciation
,,,Profit,Before,Tax
,Tax
,,Deferred,Tax
,,Reported,Net,Profit
,,Extraordinary,Items,
,,Adjusted,Net,Profit

5,716.3
1
2,085.4
4
3,630.8
7
206.34

,,Adjustment,below,net
,profit,
,,P,&,L,Balance,brough
t,forward
,,Statutory,Appropriati
ons,
,Appropriations,

21.1

89.9

75.2

81.2

56.6

68.1

149.6

280.81

11.68

140.57

8,207.3
0
15.1

7,483.6
0
21.1

6,850.0
0
89.9

5,826.2
0
75.2

5,782.4
0
81.2

5,272.3
0
56.6

3,689.0
0
68.1

3,670.8
4
149.59

3,464.6
7
280.81

3,553.4
2
11.68

2,885.9
0
0

2,638.5
0
0

2,308.7
0
0

1,979.0
0
0

1,082.3
0
0

708

707.93

747

650

,,,Preference,Dividend

2,968.3
0
0

,,Equity,Dividend,%

36

35

32

28

24

13.85

9.06

9.06

9.56

8.32

,,,Earnings,Per,ShareUnit,Curr
,,Book,Value-Unit,Curr

9.34

8.4

7.85

6.67

6.72

6.56

4.57

453.07

468.17

424.26

72.66

65.5

59.73

55.06

51.07

46.19

40.37

3,667.4
9

3,305.0
4

2,932.8
2

,,,P,&,L,Balance,broug
ht,forward
,,Dividend

,
http://www.capitaline.c
om

TATA,POWER,BALANCE,SHEET
,,,Year

Mar,0
9,

Mar,0
8,

Mar,
07,

Mar,
06,

Mar,
05,

Mar,
04,

Mar,
03,

Mar,
02,

Mar,
01,

Mar,
00,

221.4
4
8,470.
92
0

220.7
2
7,817.
20
60.99

197.9
2
5,835
.19
0

197.9
2
5,357
.72
0

197.9
2
4,938
.55
0

197.9
2
4,852
.42
0

197.9
1
4,522
.33
0

197.9
1
4,034
.73
0

197.9
1
3,670
.15
0

115.5
4
1,741
.05
0

0.1

8,692
.36
3,931.
71
1,266.
49
0

8,098
.91
2,331.
09
706.1
8
0

6,03
3.11
1,354
.30
2,279
.06
0

5,55
5.64
946
1,809
.00
0

5,13
6.47
1,059
.07
1,800
.94
0

5,05
0.34
721.7
3
999.6
9
0

4,72
0.24
1,340
.37
1,058
.83
0

4,23
2.64
1,506
.54
1,282
.39
0

3,86
8.06
1,337
.96
1,259
.93
0

1,85
6.69
624.3
1
623.6
9
0

5,198
.20
13,89
0.56

3,037
.27
11,13
6.18

3,63
3.36
9,666
.47

2,75
5.00
8,310
.64

2,86
0.01
7,996
.48

1,72
1.42
6,771
.76

2,39
9.20
7,119
.44

2,78
8.93
7,021
.57

2,59
7.89
6,465
.95

1,24
8.00
3,104
.69

8,985.
86
3,795.
32
5,190.
54
0

6,482.
25
3,476.
76
3,005.
49
0

6,229
.71
3,199
.40
3,030
.31
0

5,924
.74
2,921
.72
3,003
.02
0

5,465
.84
2,657
.37
2,808
.47
0

5,534
.70
2,364
.36
3,170
.34
0

5,370
.79
2,034
.74
3,336
.05
0

4,975
.12
1,724
.57
3,250
.55
0

4,397
.42
1,446
.88
2,950
.54
0

1,637
.42
622.1
9
1,015
.23
0

761.1
6
5,443.
47

1,681.
74
4,430.
00

781.0
5
3,570
.15

211.8
1
3,412
.17

437.6
5
3,502
.92

306.3
9
2,728
.83

337.9
5
2,451
.83

556.0
5
1,882
.09

649.4
8
1,505
.19

403.7
9
1,354
.92

644.1

473.6

396.4

442.2

297.0

313.2

330.9

325.9

311.4

136.3

,,SOURCES,OF,FUNDS,:
,Share,Capital,
,,Reserves,Total,
,,Equity,Share,Warrants
,,,Equity,Application,Mon
ey
,,Total,Shareholders,Fun
ds
,,Secured,Loans,
,Unsecured,Loans,
,,,Service,Line,&,Sec.Dep
.
,from,Cust.
,,Total,Debt
,,Total,Liabilities,
,,APPLICATION,OF,FUNDS
,:
,Gross,Block,
,,Less:,Accumulated,Dep
reciation,
,Net,Block,
,,,Lease,Adjustment
,
Capital,Work,in,Progress
,,Investments,
,,Current,Assets,,Loans,
&,Advances
,Inventories,

,,Sundry,Debtors,
,Cash,and,Bank
,,Loans,and,Advances,
,,Total,Current,Assets
,,,Less:,Current,Liabilitie
s,and,Provisions
,,Current,Liabilities,
,Provisions,
,,,Total,Current,Liabilitie
s
,,Net,Current,Assets
,,Miscellaneous,Expenses
,not,written,of,
,,Deferred,Tax,Assets
,,,Deferred,Tax,Liability
,,Net,Deferred,Tax
,,,Total,Assets
,Contingent,Liabilities

1,587.
97
45.5

1,414.
52
28.7

718.2
1
51.9

2,973
.04

550.3
6
2,523
.62

609.6
8
1,693
.01

889.0
1
126.4
1
1,119
.77
2,466
.17

765.9
1
307.0
1
1,355
.07
2,753
.95

573.3
3
1,036
.27
598.6
8
2,519
.76

293.8
9
26.96

1,958.
68
3,875.
51

1,058
.23
990.5
5
482

696.6
3
979.6

2,403.
53
4,681.
14

1,476
.63
1,367
.72
801.5
6
4,042
.33

1,419.
33
651.9
9
2,071.
32
2,609.
82
0

1,253.
87
585.4
4
1,839.
31
2,036.
20
1.69

1,126
.26
631.5
8
1,757
.84
2,284
.49
6.17

731.8
1
589.2

706.8
7
580.7
1,287
.57
1,236
.05
22.71

1,067
.22
454.4
3
1,521
.65
944.5
2
28.52

1,056
.41
273.2
1
1,329
.62
1,424
.33
42.16

891.0
2
323.4
6
1,214
.48
1,305
.28
55.46

387.5

1,321
.01
1,652
.03
15.46

907.2
1
272.4
5
1,179
.66
513.3
5
15.61

91.13

81.22

63.25

62.68

52.5

86.31

67.71

205.5
6
114.4
3
13,89
0.56
10,20
5.10

100.1
6
-18.94

68.95

46.53

63.82

49.07

47.14

-5.7

16.15

11.32

37.24

20.57

11,13
6.18
8,449.
38

9,66
6.47
1,358
.37

8,31
0.64
1,543
.81

7,99
6.48
278.0
3

6,77
1.76
236.3

7,11
9.44
181.8
7

133.6
1
133.6
1
7,02
1.57
189.8
2

6,46
5.95
179.2
9

3,10
4.69
152.4

446.4
9
903.7
2

188.5
1
576.0
1
327.7
1
3.04

,
http://www.capitaline.c
om

TATA,POWER,PROFIT,AND,LOSS,STATEMENT
,,,Year

Mar,09(
12),

Mar,08(
12),

Mar,07(
12),

Mar,06(
12),

Mar,05(
12),

Mar,04(
12),

Mar,03(
12),

,Operating,Income,

7,282.28

5,937.36

4,725.92

4,568.67

3,935.63

4,237.05

4,292.40

,,,Excise,Duty

0.6

0.18

0.12

0.48

0.29

2.66

0.75

,,Net,Operating,Income

7,281.68

5,937.18

4,725.80

4,568.19

3,935.34

4,234.39

4,291.65

,,Other,Income,

642.05

516.08

367.71

369.06

411.44

179.87

165.73

,Stock,Adjustment,

-0.07

-0.74

-8.32

8.95

-8.08

-10.49

-11.98

,,,Total,Income

7,923.6
6

6,452.5
2

5,085.1
9

4,946.2
0

4,338.7
0

4,403.7
7

4,445.40

,
Electricity,&,Fuel,Expenses,
,,Operating,Expenses

5,306.97

4,263.86

3,373.49

2,979.71

2,279.68

2,258.36

2,469.49

354.81

323.28

304.18

430.29

377.26

273.19

187.92

,Employee,Cost,

309.06

257.8

197.67

171.97

153.51

189.66

139.5

,,Selling,&,Administration,e
xpenses,
,Miscellaneous,Expenses

123.3

116.43

105.61

114.76

139.64

206.11

183.4

72.85

68

40.68

64.17

99.52

132.5

133.41

,,Less,:,Preoperative,Expenses,Capitali

15.21

10.46

5.36

5.38

20.3

7.56

4.11

,,INCOME,:

,,EXPENDITURE,:

sed,
,,Total,Expenditure

6,151.78

5,018.91

4,016.27

3,755.52

3,029.31

3,052.26

3,109.61

,,,Operating,Profit

1,771.88

1,433.61

1,068.92

1,190.68

1,309.39

1,351.51

1,335.79

,Interest,

327.76

173.87

191.59

165.28

191.44

283.72

341.21

,,,Gross,Profit

1,444.12

1,259.74

877.33

1,025.40

1,117.95

1,067.79

994.58

,,Depreciation

328.85

290.5

291.92

278.34

359.62

333.95

318.04

,,,Profit,Before,Tax

1,115.27

969.24

585.41

747.06

758.33

733.84

676.54

,Tax

92.18

81.01

-137.12

157.05

158.42

223.66

198.37

,,Deferred,Tax

95.49

13.24

21.85

-27.47

48.55

-16.67

-58.25

,,Reported,Net,Profit

922.2

869.9

696.8

610.54

551.36

526.85

536.42

,,Extraordinary,Items,

230.59

298.81

33.56

145.6

176.19

26.83

25.19

,,Adjusted,Net,Profit

691.61

571.09

663.24

464.94

375.17

500.02

511.23

,,Adjustment,below,net,pro
fit,
,,P,&,L,Balance,brought,for
ward
,,Statutory,Appropriations,

-0.36

2,105.22

1,963.66

1,666.15

1,432.83

1,197.64

1,019.41

897.87

-45.3

58.59

22.83

35.29

-3.73

42.16

69.91

,Appropriations,

819.51

669.75

376.46

341.93

319.54

306.46

344.97

,,,P,&,L,Balance,brought,for
ward
,,Dividend

2,253.21

2,105.22

1,963.66

1,666.15

1,432.83

1,197.64

1,019.41

255.26

231.98

188.22

168.41

148.6

138.69

128.78

,,,Preference,Dividend

,,Equity,Dividend,%

115

105

95

85

75

70

65

,,,Earnings,Per,ShareUnit,Curr
,,Book,Value-Unit,Curr

40.21

38.19

33.59

29.66

26.8

25.72

26.27

382.06

352.27

291.77

267.76

248.36

245.02

229.85

,http://www.capitaline.com

CAPITAL BUDGETING
Capital budgeting, or investment appraisal, is the planning process used to determine
whether an organization's long term investments such as new machinery, replacement machinery,
new plants, new products, and research development projects are worth the funding of cash
through the firm's capitalization structure (debt, equity or retained earnings). It is the process of
allocating resources for major capital, or investment, expenditures. One of the primary goals of
capital budgeting investments is to increase the value of the firm to the shareholders.
Many formal methods are used in capital budgeting, including the techniques such as

Accounting rate of return

Average accounting return

Payback period

Net present value

Profitability index

Internal rate of return

Modified internal rate of return

Equivalent annual cost

Real options valuation

These methods use the incremental cash flows from each potential investment, or project.
Techniques based on accounting earnings and accounting rules are sometimes used - though
economists consider this to be improper - such as the accounting rate of return, and "return on
investment." Simplified and hybrid methods are used as well, such as payback period and
discounted payback period.

IMPORTANCE OF CAPITAL BUDGETING DECISIONS

1.

Long-term Implications of Capital Budgeting: A capital budgeting decision has its

effect over a long time span and inevitably affects the companys future cost structure and
growth. A wrong decision can prove disastrous for the long-term survival of firm. On the
other hand, lack of investment in asset would influence the competitive position of the
firm. So the capital budgeting decisions determine the future destiny of the company.

2.

Involvement of large amount of funds in Capital Budgeting: Capital budgeting

decisions need substantial amount of capital outlay. This underlines the need for
thoughtful, wise and correct decisions as an incorrect decision would not only result in
losses but also prevent the firm from earning profit from other investments which could
not be undertaken.

3.

Irreversible decisions in Capital Budgeting: Capital budgeting decisions in most of the

cases are irreversible because it is difficult to find a market for such assets. The only way
out will be scrap the capital assets so acquired and incur heavy losses.

4.

Risk and uncertainty in Capital budgeting: Capital budgeting decision is surrounded

by great number of uncertainties. Investment is present and investment is future. The
future is uncertain and full of risks. Longer the period of project, greater may be the risk
and uncertainty. The estimates about cost, revenues and profits may not come true.

5.

Difficult to make decision in Capital budgeting: Capital budgeting decision making is

a difficult and complicated exercise for the management. These decisions require an over
all assessment of future events which are uncertain. It is really a marathon job to estimate
the future benefits and cost correctly in quantitative terms subject to the uncertainties
caused by economic-political social and technological factors.

6.

Large and Heavy Investment: The proper planning of investments is necessary since all
the proposals are requiring large and heavy investment. Most of the companies are taking
decisions with great care because of finance as key factor.

7.

Permanent Commitments of Funds: The investment made in the project results in the
permanent commitment of funds. The greater risk is also involved because of permanent
commitment of funds.

8.

Long term Effect on Profitability: Capital expenditures have great impact on business
profitability in the long run. If the expenditures are incurred only after preparing capital
budget properly, there is a possibility of increasing profitability of the firm.

9.

Complicacies of Investment Decisions: Generally, the long term investment proposals

have more complicated in nature. Moreover, purchase of fixed assets is a continuous
process. Hence, the management should understand the complexities connected with each
projects.

10.

Maximize the worth of Equity Shareholders: The value of equity shareholders is

increased by the acquisition of fixed assets through capital budgeting. A proper capital
budget results in the optimum investment instead of over investment and under
investment in fixed assets. The management chooses only most profitable capital project
which can have much value. In this way, the capital budgeting maximize the worth of
equity shareholders.

11.

Difficulties of Investment Decisions: The long term investments are difficult to be taken
because decision extends several years beyond the current account period, uncertainties
of future and higher degree of risk.

12.

Irreversible Nature: Whenever a project is selected and made investments as in the form
of fixed assets, such investments is irreversible in nature. If the management wants to
dispose of these assets, there is a heavy monetary loss.