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Management Development Institute Gurgaon

Capital Budgeting practices in Power Industry of India

Sec C Group 6

Submitted by: Ashish Sharma (11P130)

Submitted to: Sandeep Goel Assistant Professor

Gurveen Singh Taneja(11P140) Julapalli Vinil Kumar Krishnendu Saha Madhur Paul Shovik Kar Udbhav Mishra (11P142) (11P144) (11P147) (11P169) (11P175)

Corporate Finance

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POWER SECTOR IN INDIA

India has the 5th largest power generation capacity in the world with an installed capacity of 152 MW as on 30th September, 2009 (Netscribes, Power Sector India, March 2009). However this is very low as compared to combined power consumption of the top 4 countries which is about 49% of the total power generated in the world. The average per capita consumption of electricity in India is estimated to be 704 kWh during 2008-09 which is fairly low when compared to that of some of the developed and emerging nations such US (~15,000 kWh) and China (~1,800 kWh). The world average stands at 2,300 kWh (CEA).

Another part of power sector is transmission. India has only the capability to transmit 13% of the power it generates. With continuous plans of increasing the generation capacity of India, the transmission capacity is also expected to augment on the same lines.

The final part of the power sector is the distribution of power. One of the major problems faced by this segment is the high transmission and distribution losses (T & D losses) which are much higher than the benchmarks set by the other developing or developed countries. However with separatization of all segments of a power company, greater concentration has been given to the distribution of power and better efforts made to reduce the inefficiencies of the system.

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CAPITAL BUDGETING The process in which a business determines a whether projects such as building a new plant or investing in a long-term venture are worth a pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are a assessed in order to determine whether the returns generated meet a sufficient target benchmark. It is also known as "investment appraisal".

Ideally, businesses should pursue all projects and opportunities that a enhance shareholder value. However, because the amount of capital available at any given time for new projects is limited, management needs to use capital budgeting techniques to determine a which projects will yield the most return over an applicable period of time.

Most small to medium sized companies have no idea how to approach a capital investments. They treat it as if it were an operating budget decision rather than a long-term, strategic decision that will impact their cash flow, efficiency of their a daily operations, income statement, and taxable income for a years to come. They need your help understanding the importance of and then making the right capital budgeting decisions.

Capital budgeting decisions relate to decisions on whether or not a client should invest in a long-term project, capital facilities and/or capital equipment/machinery. Capital budget decisions have a major effect on a firm's operations for a years to come, and the smaller a firm is, the greater the potential impact, since the investment being a made could represent a substantial percent of the firm's assets. Capital Project Examples Capital projects are usually identified by functional needs or opportunities, although many are also identified a as a result of risk evaluation or strategic planning. Some typical long-term decisions include whether or not to: Buy new office equipment, cars or trucks; Add to or renovate existing facilities, including the purchase of new capital equipment/machinery; Expand plant or process operations; Invest in facilities for a new product line or to expand services; Continue or discontinue an existing product line; Replace existing capital equipment/machinery with new equipment/machinery;

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Invest in software to meet technology-based needs or systems designed to help improve process and/or efficiency; Invest in R&D or intangible assets; Build or expanding a foreign or satellite operation; Reorganize assets or services; or, Acquire another company.

Capital investment (or, expenditure) decisions are more commonly referred to as capital budgeting decisions since they involve resource allocation, particularly for the production of future goods and services, and the determination of cash out-flows and cash-inflows, which need to be planned and budgeted a over a long period of time. It is important that you get involved right from the start to guide them through this process since this is a very complicated accounting issue. Capital Budgeting Phases The phases of the capital budgeting process include: Description of the need or opportunity; Identification of alternatives; Evaluation of options and the relevant cash flows of each; Selection of the best alternative; and Conducting a post-completion audit of the projects.

Identifying Capital Budgeting Needs The first step is to identify the need or opportunity. This is usually done at the mid-management level and is the result of a shared vision of company goals and strategies coupled with a "where the rubber meets the road" perspective of "local" clients needs, tastes and behavior. They see a need or opportunity and communicate it to senior management, usually in the form of proposals which both include identification of the need or opportunity, and potential solutions and/or recommendations. Senior management then evaluates the merit of each proposed opportunity and makes a determination of whether or not to look into it a further.

While project need identification is usually a de-centralized function, capital initiation and allocation decisions tend to remain a highly centralized undertaking. The reason for this revolves around the

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need for capital rationing, especially when funds are limited and upper-management wishes to maximize its returns/benefits from any capital projects undertaken.

The information needed to make this determination usually comes a from both internal and external sources, and is based on both financial and non-financial considerations. Interestingly enough, the factors examined in this process can be both firm-specific and market-based in nature. It is that this point that companies should be a seeking qualified financial guidance since the consequences of both a poor decision and of the implementation of a good decision can be far-reaching. Capital Project Evaluation Upper management must develop an objective methodology so that a alternate capital projects can be evaluated on a reasonable basis. Both quantitative and qualitative issues must be considered and the whole organization should be used as a resource.

Marketing should provide data on sales trends, new demand and opportunities for new products. Managers at every level should be identifying resources a that are available to upper-management that may lead to the use of existing facilities to resolve the need/take advantage of the opportunity. They should also be communicating any needs they/their departments or a divisions have that should be part of the capital decision. Financial analysts, or in their absence, qualified external financial experts such as your firm, should be involved in identifying the target cost of capital, the evaluation of startup costs and the calculation of cash flows for those projects chosen for evaluation purposes. Calculating the appropriate discount rate and calculating conservative cash flows is a critical part of this process that is best served by an independent accounting firm that can look at the project/these issues impartially. Estimation bias can be dangerous.

The objective is to evaluate (predict) how well each capital asset alternative will do and to determine if the net a benefits to the firm are consistent with the required capital allocation, given the scarcity of resources most firms are faced with. Measurements Used in Capital Budgets The purpose of the evaluation phase is to predict how well a new asset will benefit the firm. Possible measures, which you should help the firm develop, that should be considered include: Net income managers evaluate the incremental increase in accounting net income between

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alternatives; Net cash flow this is the most widely used measure; this measure looks at the actual a cash flows (out and then in) resulting from the capital investment for each alternative; these need to be evaluated for both overall value (several techniques will be discussed next) and from the standpoint of the effect on daily cash flow and the ability of the firm to meet its financial obligations in a timely manner; projects with high projected future returns may not be as attractive when adjusted for the time value of money or the costs involved in borrowing funds to meet operating obligations such as payrolls and accounts payable; Cost savings many capital investments are not designed to generate revenues directly but are, instead, designed to save costs and increase productivity; these projects are best evaluated on the basis of incremental savings generated; Equality of cash flows cash flows tend to vary from year to year; the timing of cash flows may be an important consideration to the firm; Salvage value and functionality of an existing asset when replacing it with a new asset while the historical cost of an existing asset is not relevant to a capital budgeting decision, the net proceeds from disposal of the existing equipment is; so is the question of how well existing equipment operates given that capital budgeting decisions are only concerned with incremental costs and incremental savings/profits; Depreciation, earnings and income tax effects need to be considered based on the form of the firm (sole proprietorship, partnership, corporation, etc.), and the differences in the financial and tax accounting treatments available to the firm, especially as they apply to salvage value, useful lives and allowed depreciation methods, and, consideration of the marginal tax rate (which may vary from country to country); most firms fail to consider this cost or choose a tax or financial accounting treatment that does not maximize the firm's return on invested capital; Inflation the effects of inflation need to be considered in estimating cash flows as well, especially if is projected to increase in future periods and varies between capital projects being considered; Risk considerations political risk, monetary risk, access to cash flows, economic stability, and inflation should all be considered in the evaluation process since all are hidden costs in the capital budgeting process; and, Interest and the cost of capital the venture has to have a return that is greater than its cost of capital, adjusted for tax benefits, if any.

The firm should also make a subjective decision as to its preferences in terms of characteristics of projects in addition to the regular selection criteria it has set. For example, does the firm prefer:

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Projects with small initial investments? Earlier cash flows? Or, perhaps, shorter payback times? New projects or expansion of the existing operations? Domestic projects or foreign operations? If the firm is risk neutral, would the prospects of additional potential cash flows in riskier investments make a capital project more attractive?

Evaluating Risk of Capital Projects Risk also needs to be analyzed carefully, regardless of which valuation method is used to evaluate the project. The more popular risk-assessment techniques include Sensitivity Analysis, Simple Probability Analysis, Decision-Tree Analysis, Monte Carlo Simulations and Economic Value Added (EVA):

Sensitivity Analysis considers what will happen if key assumptions change and identifies the range of change within which the project will remain profitable; Simple Profitability Analysis assesses risk by calculating an expected value for future cash flows based on their probability of success to future cash flows; Decision-tree Analysis builds on Simple Profitability Analysis by graphically outlining potential scenarios and then calculating each scenario's expected profitability based on the projects cash flow/net income; this technique allows managers to visualize the project and make more informed decisions, although decision trees can become very complicated considering all the scenarios that should be considered (e.g., inflation, regulation, interest rates, etc.); Monte Carlo Simulations use econometric/statistical probability analyses to calculate risk; and, EVA, which is growing in popularity, is a performance measure that adjusts residual income for "accounting distortions" that decrease short-term income but have long-term effects on shareholder wealth (e.g., marketing programs and R&D would be capitalized rather than expensed under EVA).

Once the risk has been assessed, which valuation method should the firm/you use for a project? The answer depends on considerations such the nature of the investment (the timing of its cash flows, for instance), uncertainty about the economy and the time value of money if it is a very long term capital project.

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Capital Project Evaluation Methods The four most popular methods are:

The Payback Period Method, which favours earlier cash flows and selects projects based on the time it takes to recover the firm's investment; weaknesses in this method include the facts it does not consider cash flows after the payback period and it does not consider the time values of money; a common practice is to use this method to select from projects with similar rates of return that have been evaluated using a discounted cash flow (DCF) method (e.g., this is often referred to as the Payback Method based on Discounted Cash Flows or Break-Even Time Method); The Accounting Rate of Return (ARR) Method, which uses accounting income/GAAP information, is calculated as the average annual income divided by the initial or average investment; the projected return is normally compared to a target ARR based on the firm's cost of capital, the company's past performance and/or the riskiness of the project; The Net Present Value(NPV) Method, which is based on the time value of money and is a popular DCF method; the NPV Method discounts future cash flows (both in- and out-flows) using a minimum acceptable cost of capital (usually based on the weighted average cost of capital or WACC, adjusted for perceived risk) that is referred to as the "hurdle rate"; the NPV is as the difference between the present value of net cash inflows and cash outflows, and a $0 answer implies that the project is profitable and that the firm recovered its cost of capital; and, The Internal Rate of Return (IRR) Method, which is based on the time value of money, calculates the interest rate that equates the present value of cash outflows and cash inflows; this calculated rate of return is then compared to the required rate of return, or hurdle rate, to determine the viability of the capital projects. Soft Costs and Benefits in Capital Budgeting Other considerations the firm/you should consider as part of the valuation process are "soft" costs and benefits. Soft costs and benefits are difficult to quantify by are real non-the-less. Examples of soft costs might be a capital investment in a manufacturing process that results in added pollution to the atmosphere. A soft benefit might be the enhancement of a firm's overall image as a result of investing in R&D for high-tech products. Ignoring soft benefits and costs can lead to strategic mistakes, especially if you are taking about investments in advanced manufacturing technology. Soft benefits and costs need to be estimated and then included as part of the method used to determine if a capital project is desirable.

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Post Completion Project Evaluation Once the project has been chosen and put into operation, a post completion audit of the project should be undertaken by a qualified financial services firm, such as yours, which can evaluate the project objectively. This audit by an independent party will function as a control mechanism to ensure that the capital project is performing as expected and, in the event it is not, to make it easier to terminate the project by eliminating any bias of those involved in the project. It will also serve as a learning mechanism for upper management as they compare actual performance to expected results, and improve the processes and estimates they use in future investment decisions.

It should be noted that this control mechanism, which can be expensive, is essential to the success of future capital investment decisions, especially considering the long life of most capital projects.

One final word regarding implementation of this control mechanism; successful post-completion auditing processes require that upper management understand that the purpose of the audit is to learn from past experiences,. Managers should not be penalized for the decisions they made but should, instead, be given the opportunity to learn from them.

Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period. NPV The difference between the present value of cash inflows and the present value of

cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or
project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lump-sum present value amount, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.

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NTPC Ltd
Financing Of New Projects The capacity addition program will be financed with debt equity ratio of 70:30. The directors believe that the internal accruals of the company will be substantial to finance the equity component for the new projects. Given its low gearing and strong credit ratings, the company is well positioned to raise the required borrowings.
2010-11 Debt Equity Ratio 2009-10 2008-09

0.76

0.73

0.70

The organization is exploring domestic as well as international borrowing options including overseas development assistance provided by bilateral agencies to mobilize the debt required for the planned capacity expansion program. During the year 2010-11, the company has tied up loans of Rs 3479 crores including Rs2000 crores from HUDCO Ltd. and Rs 1000 crores from HDFC bank Limited for part funding of debt requirement in respect of capital expenditure for the next three years. The company has entered into a term loan agreement with State Bank of India on 07.07.2011 for Rs 10,000 crore for financing NTPC Ongoing Capital Expenditure for various power generation projects including renovation/modernization of existing power plants. Bonds amounting to Rs 720 crore were raised from the domestic market for financing the capital expenditure and refinancing the loans. The company also raised USD 500 million senior unsecured fixed rate 10 year bonds under its USD 1 billion MTN programme during the July 2011. The bonds carry a coupon rate of 5.625% p.a. payable semi-annually and are due for maturity in July 2021. Investment Pattern of Long-term Assets During the year 2010-11, the gross block of the company increased by around 9% over the previous year. This was on account of capitalization of one unit of Korba-II ( 500 MW ) Power Project and one unit of Dadri-II ( 490 MW ) Power Project. However, Net Block increased by 13%. This was due to the fact that the company had revised its depreciation policy in line with the opinion expressed by the Comptroller and Auditor General of India. Due to the increase in construction activities the capitalwork-in-progress increased by 25% over the last year.

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% Growth
Fixed Assets
2009-10 2010-11 6.91 8.88

Net Block
4.97 12.99

Total Liabilities
8.51 9.90

Long-Term Growth Strategy To realize the vision and mission, few key corporate objectives have been identified. Financial Soundness o o To maintain and improve the financial soundness of NTPC by prudent management of the financial resources To continuously strive to reduce the cost of capital through the prudent management of deployed funds, leveraging opportunities in domestic and international financial markets o o To develop appropriate commercial policies and processes which would ensure remunerative tariffs and minimize receivables To continuously strive for reduction in cost of power generation by improving operating practices The company has entered FY12 with an approved outlay for capital schemes of Rs 26,400 crore which is 18% higher than the capital expenditure for FY11. The company aims at reducing cost while continuing to drive growth. Disciplined capital expenditure and prudent resource mobilization strategies have been the abiding features of the companys management of finance. In fact, Indias biggest bank, State Bank of India, has extended its largest ever loan to any organization in India or abroad by signing a loan agreement of Rs 10,000 crore with NTPC in July 2011. Environmental concerns underpin the companys growth strategy as the company strives to achieve a low carbon future. The approach includes increasing cycle efficiency of fossil fuel based units, increasing the share of non-fossil fuel based generation and research in CO2 fixation technologies. Investment in technology is directly linked to creating value for the shareholders of NTPC.

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2008-09 Fixed Assets Net Current Assets 62,353.00 20,236.60

2009-10 66,663.80 19,848.40

2010-11 72,583.94 21,720.93

Fixed Assets Utilization and Profitability 2008-09 Asset Turnover Ratio Operating Margin 0.67 12.79 2009-10 0.70 15.09 2010-11 0.76 15.34

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. 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 Re. 1 of assets, the turnover is Rs X. It also indicates the pricing strategy: companies with low profit margins generally tend to have high asset turnover, while those with high profit margins have low asset turnover. It's not always grave when this ratio falls - it should recover as the additional assets start to generate sales and profit in the future. The combination of profit margin and asset turnover is reflected in a financial relationship often called the the DuPont Model or Return on Assets (ROA) model. Capacity Utilization in the Indian Power sector is measured by the Plant Load Factor. PLF of Thermal stations declined from 77.68% to 75.08%. The PLF of gas stations also reduced.

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Suzlon Energy Ltd

Suzlons strategy of expansion has been through inorganic growth. Inorganic growth is synonymous with growth that is fuelled through Mergers & Acquisitions. In order to fund this growth through the path of Mergers & Acquisitions, Suzlon has been exposed to considerable amount of debt. This is very evidently reflected in their debt to equity ratio. The debt to equity has clearly grown at a pace over the last three years from 0.44 in 2008-09 to 1.36 in 2010-11.

2010-11 Debt Equity Ratio

2009-10

2008-09

1.36

1.13

0.44

Growth Strategy Suzlons business strategy rests on three main pillars. Of these three, two are enumerated below. Increased Customer Reach Suzlon operations are now spread across Asia, Australia, Europe, Africa and North and South America with operations in 32 countries. Suzlon boosted its customer profiles by signing biggest contracts from IPP (Independent Power Producer) in the Indian market - a 1000 MW order from Caparo Energy and a 202 MW order from the Techno Electric Group. Suzlon also secured 218 MW order in Brazil from the Martifer Group reinforcing Suzlons presence in the global market. In the European Onshore segment, the companys international business arm, Suzlon Wind Energy A/S, broke new ground with its first order in Sweden. The Company has also entered into an agreement with Volkswind Bulgaria, a subsidiary of Germanys Volkswind GmbH. This aims to accelerate the manufacturers growth in the Bulgarian wind energy market and will develop projects exclusively using Suzlon wind turbines. In April 2011, REpower entered into its biggest onshore framework agreement in Europe with Juwi for 720 MW covering upto 240 wind turbines of 3 MW systems. In the European Offshore segment, REpower has signed a contract with Belgian offshore project development company,CPower for development of 295 MW project in phase II and III of the first Belgian offshore wind farm, Thornton Bank. A bank consortium of seven commercial banks together with European investment bank is providing necessary financing for the said project. This represents the biggest ever project financing in the offshore wind industry. REpower has also signed another major contract with RWE Innogy for development of 295 MW project at

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Nordsee Ost. This is the first supply under the framework agreement concluded between REpower and RWE Innogy in February 2009 for the delivery of up to 250 turbines of 5M/6M turbines.

Improving product portfolio Suzlon and REpower have R&D and technology centers in Germany, the Netherlands, India and China. Its R&D initiatives have led to the development of Suzlons new S9X suite of turbines comprising the S88-2.25 MW, S95 and S97 2.1 MW turbines. This suite of products, is an evolution of Suzlons proven S88-2.1 MW platform, and is built around the core doubly fed induction generator based technology. A compact and modular DFIG design allows ease of serviceability and meets the latest grid requirements for smoother wind power plant connectivity. New blade designs with rotor diameter of 95 meter and 97 meter offers a larger swept area with greater energy capture and power production from moderate to low wind speeds. To ensure the highest standards in quality, Suzlons blade testing facilities far exceeds industry baseline by simulating total life cycle of blade (1 million cycles) in most extreme onsite conditions. In the onshore segment, REpower has launched two new variant for low wind speed regions. One in its 3XM series-3.2M114 and another new MM series turbine, MM100 with rated output of 3.17 MW and 1.80 MW respectively. The construction of 3.2M114 uses the economical hybrid tower type of construction with concrete and steel. The manufacturing principle also makes it extremely easy to dismantle. The MM100 is specially adapted for the North American market. In February 2011, REpower received a unit certificate from GL Renewables certification for its 3.4M104 turbines. This confirms that the wind turbines meet the technical requirements of the Renewable Energy Act and the System Service ordinance. In addition to the 3.4M104, the MM82 and MM92 were also certified last year. As a result REpower is the first wind turbine manufacturer to have received unlimited unit certificates (EZE) for its onshore turbines. In the offshore segment, REpower has gained a level of skills that sets it apart from majority of its competitors. The machine availability of REpower offshore turbines have shown result at par with onshore turbines despite the adverse conditions in the open ocean.

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Fixed Assets have shown a rise in value over the last three years while the Net Current Assets have shown a decline over the last three years financial data. 2008-09 Fixed Assets Net Current Assets 915.83 5,943.53 2009-10 1,355.74 4,685.39 2010-11 1,439.52 4,725.42

25 20 15 10 5 0 -5 -10 2008-09 2009-10 2010-11 Asset Turnover Ratio Operating Margin

Fixed Asset Utilization and Profitability From the data of the past three years, it is very evident of the relation between Asset Turnover Ratio and Operating Profit Margin. These two parameters follow the same trend as manifest from the graph plotted for the data of the past three years. 2008-09 Asset Turnover Ratio Operating Margin 9.65 23.09 2009-10 8.91 11.92 2010-11 2.97 -5.57

25 20 15 10 5 0 -5 -10 2008-09 2009-10 2010-11 Asset Turnover Ratio Operating Margin

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Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. 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 Re. 1 of assets, the turnover is Rs X. It also indicates the pricing strategy: companies with low profit margins generally tend to have high asset turnover, while those with high profit margins have low asset turnover. It's not always grave when this ratio falls - it should recover as the additional assets start to generate sales and profit in the future. The combination of profit margin and asset turnover is reflected in a financial relationship often called the the DuPont Model or Return on Assets (ROA) model.

Risk and Risk Mitigation Policies

Foreign Exchange Risk A significant part of Suzlons revenue, costs, assets and liabilities, are denominated in foreign currency. Unhedged trade and financial exposure thus creates potential to adversely impact our project and overall profitability. Suzlons presence across geographies helps in providing natural hedging by offsetting purchase and sales transactions amongst various currencies. Risks are recognized at the contractual juncture and are hedged progressively at various stages of project life cycle, depending upon the nature of the transactions and in accordance with the Hedging Policy of the company. During the year, risk management practices continued to focus on minimising the economic impact on Company profitability arising from fluctuations in exchange rates.

Interest rate risk Suzlon is exposed to interest rate fluctuation at the group level. The Corporate Finance Team is continuously involved in working out interest rate sensitivity and propositions to mitigate the interest rate risk.

Credit risk Suzlon is exposed to high debt, taken to fund its inorganic growth. With increased interest rates and credit squeeze across the globe, funding of Wind Projects still remains a challenge, leading to slow order inflow in markets like Europe and USA. Suzlon has been able to bring down its net debt - equity ratio to around 1.4. Company has also undertaken USD 175mn Foreign Currency Bond issue in April 2011. Focus on cost reduction, improved operational efficiencies and reduction in working capital deployment, is expected to help in reducing the liquidity pressure.

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ADANI POWER LIMITED Adani Power Limited is the power company under the Adani Group. It together with its subsidiaries currently has eight power projects with a combined installed capacity of 13,200 MW, out of which 660 MW has been commissioned, 9900 MW is under implementation and 2640 MW is at the planning stage. The Company intends to sell the power generated from these projects under a combination of long term PPAs (Power Purchase Agreements) and on merchant basis. The Company is developing and will operate and maintain coal based thermal power projects in India. The Company has three coal based thermal power projects under various stages of implementation, with a combined installed capacity of 4620 MW at Mundra.

Adani Power Limited has 11 subsidiaries at the end of the year which are as follows: 1) Adani Power Maharashtra Ltd. 2) Adani Power Rajasthan Ltd. 3) Adani Power Dahej Ltd. 4) Adani Pench Power Ltd. 5) Mundra Power SEZ Ltd. 6) Kutchh Power Generation Ltd. 7) Adani Power (Overseas) Ltd., UAE 8) Adani Shipping PTE Ltd., Singapore 9) Adani Power PTE Ltd., Singapore 10) Rahi Shipping PTE Ltd., Singapore 11) Vanshi Shipping PTE Ltd., Singapore

FINANCIAL HIGHLIGHTS IN TERMS OF CAPITAL BUDGETING

2008-09

Adani Power Limited has incurred expenditure of Rs. 41698.67 million on various projects during the year. Accordingly, the fixed assets (including capital work in progress) of the Company has increased from Rs. 24,058.39 million as at 31st March, 2008 to Rs. 65,757.06 million as at 31st March, 2009.

The sources of funds (including shareholders and loan funds) has increased from Rs 24,472.34 million as at 31st March, 2008 to Rs.72,833.87 million as at 31st March, 2009.

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2009-10

The Indian power sector has been often seen to suffer from demand-supply gap which has been increasing over the years. During the Eleventh Plan period (FY08-12) the Government of India (GoI) targeted capacity addition of 78,577 MW. As per Central Electricity Authority (CEA) assessment, a total capacity of 62,374 MW is likely with a high level of certainty, and an additional capacity of 12,590 MW may materialize on best effort basis during the 11th Plan. The actual addition has been only 22,300 MW (as on 31st March, 2010) and it is estimated that final addition for the plan will not be more than 50,000 MW. In FY09, peak energy deficit was at 12%. This figure for FY10 has increased to 13.3% as per CEAs provisional numbers. Indias peak power shortage is projected to further rise in coming years. As per the report on 17th Electric Power Survey (EPS) of India published by CEA, the projected peak electricity demand in FY12 & FY17 will be 1,52,746 MW and 2,18,209 MW respectively. As per the estimates of CEA, the capacity addition target for the Twelfth Plan (FY13-17) should be about 1,07,000 MW to meet the demand prospects of the 17th EPS.

POWER PROJECTS

The company together with its subsidiaries currently has nine power projects with a combined installed capacity of 16,500 MW, out of which 1,980 MW has been commissioned, 7,260 MW is under implementation and 7,260 MW is at the planning stage. The company intends to sell the power generated from these projects under a combination of long-term PPAs and on merchant basis. The company gets synergistic benefit of the integrated value chain of Adani Group. It has to be noted that as per planning commission report, private sector will add about 15,000 MW of capacity during the 11th plan period (2007- 2012), out of which Adani Power was suppose to add 1320 MW of capacity. However, as on date the Company has operational capacity of 1980 MW and by end of this plan period, the Company is likely to achieve 6000 MW of capacity, which is roughly 40% of total capacity to be added by the private sector in this plan period. Therefore, the Company has emerged as one of the most promising private sector companies with strong project execution capability. The company will add highest capacity amongst the private sector power companies in 11th plan period.

A. The power projects of 4620 MW capacity being developed at Mundra, Gujarat are as follows:

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1. Mundra Phase I and II Power Project (Mundra I and II) is having four coal-fired, sub-critical generation units of 330 MW each, with combined capacity of 1,320 MW. The last two 330 MW units of Mundra Phase I and II power project were commissioned in August 2010 & December 2010. For the period between April 2010 to March 2011, Phase I and II operated at an average PLF of 85% generating 7241 million units of electricity & during the last quarter ending March11 Ph I & II power project achieved PLF of 92%. A power off-take agreement has been executed with Gujarat Urja Vikas Nigam Limited (GUVNL) for supply of 1000 MW for a period of 25 years.

2. Mundra Phase III Power Project (Mundra III) is having two coal-fired, super-critical generation units of 660 MW each, with combined capacity of 1,320 MW. Phase III power projects first unit of 660 MW was commissioned in February 2011, which is Indias first supercritical unit.

3. Mundra Phase IV Power Project (Mundra IV) will have three coal fired, super-critical generation units of 660 MW each, with combined capacity of 1,980 MW. The entire capacity is expected to be fully commissioned by April 2012. Power off-take agreements have been executed with Uttar Haryana Bijli Vitran Nigam Limited (UHBVNL) and Dakshin Haryana Bijli Vitran Nigam Limited (DHBVNL) for the supply of a total of 1,424 MW of power for a term of 25 years.

In addition, environmental clearances for 4620 MW Mundra Power Projects have been received from Ministry of Environment & Forest (MoEF), GoI. Land requirement for implementation of all the Mundra Power Projects has been fulfilled. In order to meet consumptive and cooling water requirements sea water is utilised. A dedicated 433 km double circuit 400 kV transmission line with a capacity to wheel up to 1,000 MW of power, connecting to the grid of the Power Grid Corporation of India Limited (PGCIL) at Dehgam, Gandhinagar has been commissioned in July 2009 for evacuation of surplus power from the Mundra Power Project. Construction of a dedicated 986 km 500 kV high voltage direct current transmission line with a capacity to wheel up to 2,500 MW of power, from Mundra IV up to Haryana Vidyut Prasaran Nigam Limited (HVPNL) substation at Mohindergarh, Haryana, is under progress. Entire 4620 MW capacity is expected to be commissioned by FY12.

B. The power projects of 3300 MW capacity being developed at Tiroda, Maharashtra are as follows:

1. Tiroda I and II Power Project (Tiroda I and II), being developed by Adani Power Maharashtra Limited (APML), a subsidiary of the company, will have three coal fired, super-critical generation

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units of 660 MW each, with a combined capacity of 1,980 MW. The BTG package and the BoP package for the power project have been awarded. A power off-take agreement has been executed with Maharashtra State Electricity Distribution Company Limited (MSEDCL) for sale of 1,320 MW of electricity for a term of 25 years.

2. Tiroda III Power Project (Tiroda III), which is also being developed by APML, will have two coalfired, super-critical generation units of 660 MW each, with a combined capacity of 1,320 MW. The BTG package and the BoP package for the power project have been awarded. A power off-take agreement has been executed with MSEDCL for sale of 1,200 MW of electricity for a term of 25 years at a tariff having a nonescalable component and an escalable component for fuel & fuel transportation with yearly escalation as notified by CERC escalation indexes from time to time.

In addition, sufficient land for implementing the Tiroda power projects has been taken on lease on a long term basis. Water requirement for both the projects has been fulfilled. The environmental clearances forthe power projects have been received from MoEF, GoI. Construction of a 200 km 440 kV double circuit transmission line with a capacity to wheel 1,000 MW of power, from Tiroda to Warora in Maharashtra, is under progress. Coal requirement for Tiroda I and II power project has been fulfilled from domestic sources and an application for domestic coal linkage to meet the coal requirement of Tiroda III power project has been made. In FY12, a capacity of 1320 MW is expected to be commissioned and by FY14 entire 3300 MW capacity is expected to be commissioned.

C. The power project of 1320 MW capacity being developed at Kawai, Rajasthan is as follows:

Kawai Power Project, being developed by Adani Power Rajasthan Limited (APRL), a wholly-owned subsidiary, will have two super-critical generation units of 660 MW each, with a combined capacity of 1,320 MW. The BTG package and the BoP package for the power project have been awarded. A power purchase agreement has been executed with Jaipur Vidyut Vitran Nigam Limited, Ajmer Vidyut Vitran Nigam Limited and Jodhpur Vidyut Vitran Nigam Limited for the sale of 1,200 MW power for a term of 25 years at a tariff having a non-escalable component and an escalable component for fuel & fuel transportation with yearly escalation as notified by CERC escalation indexes from time to time. In addition, land and water requirement for the implementation of the Kawai power project has been fulfilled.

The environmental clearance for the power project has been recommended by Expert Appraisal Committee, MoEF, GoI. An application for domestic coal linkage to meet the coal requirements of the

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Kawai power project has been made. Entire 1320 MW capacity is expected to be commissioned by FY14.

D. The power project of 1320 MW capacity being developed at Chhindwara, Madhya pradesh is as follows:

Chhindwara Power Project, being developed by Adani Pench Power Limited, a wholly-owned subsidiary, pursuant to a Letter of Intent (LoI), from Madhya Pradesh Power Trading Company Limited (M.P. Tradeco) to set up a 1,320 MW thermal power project based on super critical technology. The terms of reference have been obtained from MoEF, GoI. A notice inviting tenders for EPC works has been floated. In addition, land and water required for the implementation of the Chhindwara power project have been fulfilled.

An application for coal linkage to meet the requirements of the Chhindwara power project has been made.

E. The power project of 2640 MW capacity under planning at Dahej, Gujarat is as follows:

Dahej Power Project, proposed to be developed by Adani Power Dahej Limited, a wholly-owned subsidiary, will be a coal-based power project with an aggregate capacity of 2,640 MW. The terms of reference have been obtained from MoEF, GoI. A notice inviting tenders for EPC works has been floated. An application for coal linkage to meet the requirements of the Dahej power project has been made.

F. The power project of 3300 MW capacity under planning at Bhadreshwar, Gujarat is as follows: Bhadreshwar Power Project, proposed to be developed by Kutchh Power Generation Limited, a wholly-owned subsidiary, will be a coal-based power project with an aggregate capacity of 3,300 MW. The terms of reference have been obtained from MoEF, GoI. A notice inviting tenders for EPC works has been floated. An application for coal linkage to meet the requirements of the Bhadreshwar power project has been made.

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FINANCING AND INVESTMENT PATTERN OF LONG TERM ASSETS

11-Mar Share Capital Gross Block 2180.04 8071.06

10-Mar

09-Mar

2180.04 2179.2

1841.98 335.53

With improvement in the power sector of India, there has been a continuous investment in new plant and project setups. It may be seen that that Adani Power Limiteds fixed assets has been of a continuous growth since 2009 having grown over 20 times. However seeing the share capital, it can be seen that there has only been limited growth since 2009. It can be interpreted as that the growth in investments in fixed assets is not majorly from the share capital that has been risen by the company.

11-Mar Term Loans (Banks) Term Loans (Institutions) 756.16 5401.64

10-Mar

09-Mar

2152.65

1482.96

447.18

416.54

On looking at the term loans, both from banks as well as institutions, it may be seen that there is a continuous increase over the previous two years. This shows that the possible loans taken could be a factor in the growth of investment in fixed assets. There has been a growth of 7735.53 crores over the past 2 years. The total growth in share capital value and term loans is equal to 4596.3 crores. Hence around 3000 crores of fixed investment has to be attributed to existing reserves.

MAJOR STRATEGY FOR LONG TERM GROWTH

Adani Power Limited along with its eleven subsidiaries currently has nine power projects of a combined installed capacity of 16500 MW, out of which 1,980 MW has been commissioned, 7,260 MW is under implementation and 7,260 MW is at the planning stage. The company intends to sell the power generated from these projects under a combination of long-term PPAs and on merchant basis. The company gets synergistic benefit of the integrated value chain of Adani Group. It has to be noted that as per planning commission report, private sector will add about 15,000 MW of capacity during the 11th plan period (2007- 2012), out of which Adani Power was suppose to add 1320 MW of

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capacity. However, as on date the Company has operational capacity of 1980 MW and by end of this plan period, the Company is likely to achieve 6000 MW of capacity, which is roughly 40% of total capacity to be added by the private sector in this plan period. Therefore, the Company has emerged as one of the most promising private sector companies with strong project execution capability. The company will add highest capacity amongst the private sector power companies in 11th plan period.

FIXED ASSETS VS CURRENT ASSETS

11-Mar Current Assets Gross Block 3491.94 8071.06

10-Mar

09-Mar

2634.99 2179.2

968.38 335.53

This shows a continuous increase in current assets over the previous two years. This may be attributed to increasing sundry debtors. However the ratio of current assets to fixed assets has decreased from 2.89 in 2009 to 0.43 in 2011. This decrease has corresponded with the increase in the investments of the fixed assets. It could be hence said that once a cash rich company, Adani Power Limited has used considerable amount of reserves for its expansion policy.

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RISK ANALYSIS

11-Mar Revenue Expenditure Op Profit 2,211.62 890.65 1,320.97

10-Mar 466.79 190.27 466.79

Revenue (+10%) Expenditure Op Profit 2432.782 890.65 1542.132 513.469 190.27 323.199

Revenue Expenditure (+10%) Op Profit

2,211.62

466.79

979.715 1,231.91

209.297 257.493

The risk analysis is performed with a fixed parameter of 10%. The operational profit in all three cases 1. Normal case, 2. Increased revenue and 3. Increased Expenditure are found to be healthy and may be said that Adani Power Limited lies in a healthy position in terms of a sensitivity risk analysis.

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TATA POWER COMPANY LIMITED Along with various projects commissioned in the last 3 years, Tata Power Company Limited is on the verge of commissioning Indias first Ultra Mega Power Project and, for the first time in the country, bringing in 800 MW super critical units with aggregated capacity of 4000 MW in Mundra, Gujarat. A 1050 MW mega power project in Maithon is close to commercialisation. A healthy pipeline of mega projects will be fuelling future growth. Two international clean energy projects are also under implementation viz. 114 MW Dagachhu hydro project in Bhutan and 240 MW geothermal project in Indonesia. The Company has partnership with SN Power, Norway for hydro projects and has won a bid for 236 MW Dugar Project in Himachal Pradesh. It is already a leading player in wind energy with 273 MW of wind capacity and will be adding 100-150 MW capacity every year. 2010-2011 Consolidated Revenue stood at ` 19,450.76 crores. Consolidated Net Profit up by 5% at ` 2,059.60 crores. Annual Sales at 16,060 Million Units (MUs). Consumer base in Mumbai increased and crossed 1,50,000. New 120 MW unit commissioned at Jojobera Thermal Power Station in Eastern India. 3 MW, PV based, grid connected solar power plant commissioned at Mulshi in Maharashtra. Power Purchase Agreement (PPA) signed and construction underway for the 25 MW Solar PV Project at Mithapur in Gujarat. Won a bid for the 236 MW Dugar Hydro Electric Project in Himachal Pradesh along with SN Power, Norway. Leading private wind generator with an installed capacity of 273 MW. Won a bid for 240 MW Sorik Marapi geothermal project in Indonesia in a Consortium with Origin Energy, Australia and PT Supraco, Indonesia.

2009-2010

Consolidated revenue increased by 5%, at Rs. 18985.84 crores. Consolidated Net Profit at Rs. 1966.84 crores, up by 61%. Annual Generation highest at 15946 MUs. Expanded and doubled consumer base in Mumbai within 5 months. 120 MW Power House # 6 at Jamshedpur commissioned in August 2009.

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120 MW Haldia Power Plant generated 608 MUs as compared to 179 MUs last year. Becomes one of the largest wind power generators with 200 MW installed capacity and first to commission 2 MW-class wind turbines. Signed an exclusive partnership agreement with SN Power to jointly develop hydropower projects in India and Nepal. Developing a 3 MW, PV based, grid connected solar plant at Mulshi, Maharashtra.

2008-2009

Consolidated revenues from operations up by 61% at Rs. 17,587.53 crores. Consolidated PAT at Rs. 1,218.74 crores, an increase of 16%. Annual Generation highest at 14,807 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.

POWER PROJECTS

Mundra Ultra Mega Power Project (UMPP), 4,000 MW Indias first UMPP at Mundra is progressing well with engineering, procurement and construction activities in full swing. The cumulative progress till the end of March 2011 was approximately 77%. The first unit is expected to be synchronized with the grid in the second quarter of FY12.

Maithon Power Project, 1,050 MW

The 1,050MaithonPower Project is close to commissioning. Unit 1 has been successfully synchronized with secondary fuel oil in March 2011. Unit 1 coal firing and Commercial Operation Declaration (COD) is expected before end of H1 FY12.

Dagachu Hydro Power Project, 114 MW

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This project, in partnership with The Royal Government of Bhutan (RGoB), is progressing well. Major ordering for the project has been completed. All statutory clearances, land, water and environment clearances have been received and PPA for the entire quantum of power has been signed. The project is expected to be commissioned in FY14.

Coastal Maharashtra Project, 1,600 MW

All statutory clearances required to start the 1,600 MW Coastal Maharashtra Project are in place. Disbursement of compensation to land owners is in progress by Raigad District Authorities and above 50% of private land has been acquired till date.

Tiruldih Power Project, Jharkhand,1,980 MW

The process of land acquisition for the project is in progress. In principle clearance has been received from Railways for transportation of coal from Tubed Coal Block. Tubed Coal Block has been jointly allotted to Tata Power and Hindalco in Jharkhand.

Partnership with SN Power

The Company has signed an exclusive partnership agreement with SN Power, Norway to set up JVs for developing hydropower projects in India and Nepal. Dugar Hydro Power Project, 236 MW

The Tata Power-SN Power consortium recently won the bid for 236 MW Dugar Hydro Power Project in Himachal Pradesh. The project will primarily feed the Northern Grid.

Naraj Marthapur, Orissa, 660 MW

The major clearances for the 660 MW Naraj Marthapur project have been obtained. The Environment Clearance has been granted by MoEF, subject to clearance from National Board of Wild Life for which the process is on. All the balance clearances for the project have been obtained.

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SOLAR POWER

Mulshi Solar Plant, 3 MW

The Company has commissioned a 3 MW, PV based, grid connected Solar plant at Mulshi, in the Western Ghats.

Solar Power Project, 25 MW The Company has also signed a PPA with Gujarat Urja Vikas Nigam Limited for a 25 MW Solar Photovoltaic (PV) Power Project at Mithapur, Gujarat.

Solar Rooftop A 60.48 kWp solar power plant has been installed on the rooftop of Tata Powers office at Carnac Bunder. It was implemented in the month of December 2010 and is estimated to operate at a PLF of around 16%.

Floating Solar Plant The Company has also partnered with the Australian company Sunengy Pty. Ltd. to build the first floating solar plant in India.

Wind Farm Projects:

Tata Power has an installed capacity of 273 MW spread across four states viz. Maharashtra, Gujarat, Tamil Nadu and Karnataka. The Company had placed an order for 150 MW additional wind capacity to be set up in Maharashtra and Tamil Nadu, of which 45 MW was commissioned in April 2011 and the balance is expected to be commissioned by December 2011.

Sorik Marapi Geothermal Project, 240 MW:

Tata Power led consortium along with Origin Energy, Australia and PT Supraco, Indonesia won the Sorik Marapi geothermal project in Indonesia. The Sorik Marapi project is estimated to support the development of approximately 240 MW of geothermal generation capacity. The expected Commercial Operation Date for the project is June 2015.

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FINANCING AND INVESTMENT PATTERN OF LONG TERM ASSETS

11-Mar Share Capital Gross Block 237.33

10-Mar

09-Mar

08-Mar

07-Mar

237.33

221.44

220.72

197.92

10,518.92 10,010.80 8,985.86 6,482.25 6,229.71

With improvement in the power sector of India, there has been a continuous investment in new plant and project setups. It may be seen that the gross block has continuously increased for Tata Power over the last 5 years. However there has been negligible change in the share capital of the firm. Hence it may be concluded that the growth in investment for fixed asset is not a result of share capital risen by Tata Power Company Limited.

11-Mar Term Loans (Banks) Term Loans (Others)

10-Mar

09-Mar

08-Mar

07-Mar

1,504.56 1,174.61 1,134.39

708.21

26.29

874.02 1,286.38 1,089.04

833.35

504.00

On checking for term loans it may be seen that the term loans has increased considerably 2007 to 2008 however since then it has remained status quo more or same. This shows that the growth in long term assets may not be attributed to loans also. This points to the possibility that the funds for the investment in fixed assets may have been from the reserves and surplus.

MAJOR STRATEGY FOR LONG TERM GROWTH Tata Power Company Limiteds strategy has long established it as Indias largest integrated private power player with presence across the power value chain. From Fuel and Logistics to Generation and Transmission to Distribution and Trading to even exploring renewable sources of energy, Tata Power Company Limited now has a strong international presence.

Along with various projects commissioned in the last 3 years, Tata Power Company Limited is on the verge of commissioning Indias first Ultra Mega Power Project and, for the first time in the country, bringing in 800 MW super critical units with aggregated capacity of 4000 MW in Mundra, Gujarat. A

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1050 MW mega power project in Maithon is close to commercialisation. A healthy pipeline of mega projects will be fuelling future growth. Two international clean energy projects are also under implementation viz. 114 MW Dagachhu hydro project in Bhutan and 240 MW geothermal project in Indonesia. The Company has partnership with SN Power, Norway for hydro projects and has won a bid for 236 MW Dugar Project in Himachal Pradesh. It is already a leading player in wind energy with 273 MW of wind capacity and will be adding 100-150 MW capacity every year.

FIXED ASSETS VS CURRENT ASSETS

11-Mar Gross Block Current Assets 6,012.71

10-Mar

09-Mar

08-Mar

07-Mar

10,518.92 10,010.80 8,985.86 6,482.25 6,229.71

5,954.26 4,681.14 3,875.51 4,042.33

The fixed assets to current assets ratio has remained similar over the last 5 years showing consistency in both operational and strategic behavior of the company. However the current assets value by itself is a high value and shows that the company is cash rich and will not face any short term liquidity problems in case of working capital management. The growth in fixed assets may be attributed to Tata Power Company Limited constantly investing new power projects including solar projects over the past few years.

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References
NTPC Annual Reports ( 2008-10) Suzlon Annual Reports ( 2008-10) WikiCFO (http://www.wikicfo.com/wiki/Capital%20Budgeting%20Methods.ashx) Investopedia (http://www.investopedia.com/) Capitaline.com Netscribes CEA (Central Electricity Authority) White paper on Implementation Challenges and Opportunities KPMG in India Adani Power Limited Balance Sheets (2008-2010) Tata Power Company Limited (2008-2010) Ministry of Power, Website