A PROJECT REPORT ON FINANCIAL RATIO ANALYSIS OF BHEL Submitted by LALIT CHAUDHARY (06711301710) In partial fulfilment of requirements For the

reward of the degree OF BACHELOR OF BUSSINESS ADMINISTRATION Under the supervision of Ms. Sunmeet Kaur

BERI INSTITUTE OF TECHNOLOGY, TRAINING ANDRESEARCH TIKRI KALAN, DELHI (Affiliated to Guru Gobind Singh Indraprastha University)

DECLARATION

I hereby declare that the project report entitled Financial ratio analysis Of BHEL is an original and authentic work done by me and is based upon the study conducted by me. This project report was undertaken as a part of the B.B.A Program of GGSIP University.

LALIT CHAUDHARY (06711301710)

Acknowledgement

The project as it stands today is the sincere contributions of a few spirited individuals and the help of some of our friends. I take this opportunity to express my sincere gratitude to respected Ms. Sunmeet Kaur who helping me to work on this project.

I would also like to acknowledge my friends & my batch mates for their generous cooperation and assistance in carrying out this project and all those peoples who helped me in the preparation of this project. Without you, there would not be this project.

Mr. Lalit chaudhary Enroll. No. :- 06711301710

TABLE OF CONTENT

Contents page no. 1) INTRODUCTION..................................................................................5 1.1 Objective of Study......................................................................10 1.2 Research Methodology.....12 2) LITERATURE REVIEW..................................................................15 2.1 Introduction to Financial statement analysis..............................16 2.1.1 Tools of financial statement...........................................17 2.1.2 Ratio analysis as tool of Financial Statement ...............25

3) INDUSTRY AND COMPANY PROFILE.........................................40 3.1 Industrial profile of Power Sector............................................ 42 3.2 Company Profile of BHEL......................................................70

4) ANALYSIS AND INTERPRETATION..............................................78 5) CONCLUSION.....................................................................................85 6) BIBLIOGRAPHY.................................................................................98

ANNEXURE.......................................................................................100

Chapter 1
INTRODUCTION Objective of Study Research Methodology

INTRODUCTION
This project aims at studying financial statement analysis of BHEL. This project contains five sections. The first section contains the Objective of the project and Research methodology. Second section of the project contains Literature Review about the financial statement. Third section is the Industrial Profile and Company Profile which contains the information about the company BHEL, its products, vision, mission etc. BHEL is one of the few The forth chapter is the Finding and Analysis, which is shown with the help of pie charts, bar diagram. Fifth chapter may contain the project limitation and conclusion and at last bibliography and annexure. At last sections the 5 year balance sheet of BHEL Analysis means establishing a meaningful relationship between various

items of the two financial statements with each other in such a way that a conclusion is being drawn. By financial statements by means of two statements Profit and loss account or Income Statement Balance Sheet or Position Statement These are prepared at the end of a given period of time. They are the indicators of profitability and financial soundness of the business concern. The term financial analysis is also known as analysis and interpretation of financial statements. It refers to the establishing meaningful relationship between various items of the two financial statements i.e. Income statement and Position statement. It determines financial strength and weakness of the firm. Analysis of financial statements is an attempt to assess the efficiency and performance of an enterprise. Thus, the analysis and interpretation of financial statements is very essential to measure the efficiency, profitability , financial soundness and future prospects of the business units. Financial analysis serves the following purposes.
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Measuring the Profitability

The main objective of a business is to earn a satisfactory return on the funds invested in it. Financial analysis helps in ascertaining whether adequate profits are being earned on the capital invested in the business or not. It also helps in knowing the capacity to pay the interest.

Indicating the trend of achievements

Financial statements of the previous years can be compared and the trend regarding various expenses, purchases, sales, gross profits and net profit etc can be ascertained. Value of assets and liabilities can be compared and the future prospects of the business can be envisaged.

Assessing the growth potential of the business

The trend and other analysis of the business provides information indicating the growth potential of the business.

Comparative position in relation to other firms

The purpose of financial statements analysis is to help the management to make a comparative study of the profitability of various firms, engaged in similar businesses. Such comparison also helps the management to study the position of their firm in respect of sales expenses, profitability and utilising capital, etc.

Assess overall financial strength

The purpose of financial analysis is to assess the financial strength of the business. Analysis also helps in taking decisions, whether funds required for the purchase of

the new machines and equipments are provided from internal sources of the business or not if yes, how much? And also to assess how much funds have been received from external sources.

OBJECTIVES OF THE STUDY

OBJECTIVES OF THE STUDY

To calculate the important financial ratio of the organisation as a part of the ratio analysis thereby to understand the changes the needs and trends in the firms financial position. To assess the performance of B.H.E.L on the basis of earnings and also to evaluate the solvency position of the company. To identify the financial strengths and weaknesses of the organization. To give the appropriate suggestions to the investors. To help them to make more informed decisions.

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RESEARCH METHODOLOGY

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RESEARCH METHODOLOGY

Research methodology is considered as the nerve of the project. Without a proper wellorganized research plan, it is impossible to complete the project and reach to any conclusion.

Research design:
A research design specifies the methods and procedures for conducting a particular study. According to Kerlinger, Research Design is a plan, conceptual structure, and strategy of investigation conceived as to obtain answers to research questions and to control variance.

Type of research
The research is Descriptive in nature. It is undertaken in many circumstances where the researcher is interested in knowing the characteristics of certain groups such as age, sex, educational levels, occupation income, interested in knowing the proposition in a given population who have behaved in a particular manner, making the projections of certain things or determining the relationship between two or more variables, descriptive study may be necessary. These studies are well structured; design in these studies is rigid and not flexible. Descriptive study can be done with the help of qualitative research design

Sampling Technique:
Convenience Sampling:

It is the most common sampling technique. In this the samples are selected because they are accessible to the researcher. It is considered easiest, cheapest time consuming.

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Sample Size:
Last five year (2012, 2011, 2010, 2009, 2008) balance sheet and profit and loss account.

Data collection tools: Secondary Data Secondary Data has been collected from company manuals, news papers,

magazines and documents, companys website, journals and by internet.

Data analysis and interpretation: 1. Pie chart and Bar chart

Pie chart:

This is very useful diagram to represent data, which are divided into a number of categories. This diagram consists of a circle of divided into a number of sectors, which are proportional to the values they represent. The total value is represented by the full create. The diagram bar chart can make comparison among the various components or between a part and a whole of data.

Bar chart:

This is another way of representing data graphically. As the name implies, it consist of a number of whispered bar, which originate from a common base line and are equal widths. The lengths of the bards are proportional to the value they represent

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Chapter 2 LITERATURE REVIEW

Introduction to Financial statement analysis Tools of financial statement

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INTRODUCTION TO FINANCE STATEMENT:

Financial statement is that managerial activity which is concerned with the planning and controlling of the firm financial resources. Though it was a branch of economic till 1890 as a separate activity or discipline it is of recent origin. Still, as no unique body knowledge of its own, and draws heavily on economics for its theoretical concepts even today. The subject of financial management is of immense interest both academicians and practising manager. It is of great interest to academicians because the subject is still developing. And there are still certain areas where controversies exist for which no unanimous solutions have been reached as yet. Practicing manager are interested in this subject because among the most crucial decision of the firm are those which relate to finance and an understanding of the theory of financial management provides them with conceptual and analytical insight to make those decision skilfully.

SCOPE: Firms create manufacturing capacities for production of good, some provide services to customers. They sell their goods or services to earn profit. They fund to acquire manufacturing and other facilities. Thus the three most important activities of a business firm are: PRODUCTION MARKETING FINANCE

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FUNCTION: The finance function form production, marketing and other functions. Yet the function themselves can be readily identified. The function of raising funds, inverting them in assets and distributing returns earned from assets to shareholder respectively. The finance functions are: Investment or long term asset mix decision Financing or capital mix decision Dividend or profit allocation decision Liquidity or short term asset mix decision

OBJECTIVES OF THE FINANCIAL STATEMENT ANALYSIS: 1. To calculate the important financial ratio of the organization as a part of the ratio analysis thereby to understand the change and treads in the firm financial position. 2. To access the performance of the Company on the basis of earnings and also to evaluate the solvency position of the company. 3. To identify the financial strengths and weaknesses of the organization. 4. To give appropriate suggestion to the investors. To help them to make over, 5. Informed decision.

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Tools of financial statement Analysis 1. Ratios Analysis

Fundamental Analysis has a very broad scope. One aspect looks at the general (qualitative) factors of a company. The other side considers tangible and measurable factors (quantitative). This means crunching and analyzing numbers from the financial statements. If used in conjunction with other methods, quantitative analysis can produce excellent results.

Ratio analysis isn't just comparing different numbers from the balance sheet, income statement, and cash flow statement. It's comparing the number against previous years, other companies, the industry, or even the economy in general. Ratios look at the relationships between individual values and relate them to how a company has performed in the past, and might perform in the future. Ratio analysis is the method or process by which the relationship of items or group of items in the financial statement are computed, determined and presented. Ratio analysis is an attempt to derive quantitative measure or guides concerning the financial health and profitability of business enterprises. Ratio analysis can be used both in trend and static analysis. There are several ratios at the disposal of an annalist but their group of ratio he would prefer depends on the purpose and the objective of analysis. While a detailed explanation of ratio analysis is beyond the scope of this section, we will focus on a technique, which is easy to use. It can provide you with a valuable investment analysis tool. This technique is called cross-sectional analysis. Cross-sectional analysis compares financial ratios of several companies from the same industry. Ratio analysis can provide valuable information about a company's financial health. A financial ratio measures a company's performance in a specific area. For example, you could use a ratio of a company's debt to its equity to measure a company's leverage. By comparing the leverage ratios of two companies, you can determine which company uses greater debt in the conduct of its business. A company whose leverage ratio is higher than a competitor's has more debt per equity. You can use this information to make a judgment as to which company is a better investment risk.

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However, you must be careful not to place too much importance on one ratio. You obtain a better indication of the direction in which a company is moving when several ratios are taken as a group.

OBJECTIVE OF RATIOS

Ratio is work out to analyze the following aspects of business organizationA) Solvency1) Long term 2) Short term 3) Immediate B) Stability C) Profitability D) Operational efficiency E) Credit standing F) Structural analysis G) Effective utilization of resources H) Leverage or external financing

FORMS OF RATIO: Since a ratio is a mathematical relationship between to or more variables / accounting figures, such relationship can be expressed in different ways as follows A] As a pure ratio:

For example the equity share capital of a company is Rs. 20,00,000 & the preference share capital is Rs. 5,00,000, the ratio of equity share capital to preference share capital is 20,00,000: 5,00,000 or simply 4:1.

B] As a rate of times:
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In the above case the equity share capital may also be described as 4 times that of preference share capital. Similarly, the cash sales of a firm are Rs. 12,00,000 & credit sales are Rs. 30,00,000. so the ratio of credit sales to cash sales can be described as 2.5 [30,00,000/12,00,000] or simply by saying that the credit sales are 2.5 times that of cash sales.

C] As a percentage:

In such a case, one item may be expressed as a percentage of some other item. For example, net sales of the firm are Rs.50,00,000 & the amount of the gross profit is Rs. 10,00,000, then the gross profit may be described as 20% of sales [ 10,00,000/50,00,000]

STEPS IN RATIO ANALYSIS

The ratio analysis requires two steps as follows: 1] Calculation of ratio 2] Comparing the ratio with some predetermined standards. The standard ratio may be the past ratio of the same firm or industrys average ratio or a p rojected ratio or the ratio of the most successful firm in the industry. In interpreting the ratio of a particular firm, the analyst cannot reach any fruitful conclusion unless the calculated ratio is compared with some predetermined standard. The importance of a correct standard is oblivious as the conclusion is going to be based on the standard itself.

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TYPES OF COMPARISONS The ratio can be compared in three different ways

1] Cross section analysis: One of the way of comparing the ratio or ratios of the firm is to compare them with the ratio or ratios of some other selected firm in the same industry at the same point of time. So it involves the comparison of two or more firms financial ratio at the same point of time. The cross section analysis helps the analyst to find out as to how a particular firm has performed in relation to its competitors. The firms performance may be compared with the performance of the leader in the industry in order to uncover the major operational inefficiencies. The cross section analysis is easy to be undertaken as most of the data required for this may be available in financial statement of the firm.

2] Time series analysis:

The analysis is called Time series analysis when the performance of a firm is evaluated over a period of time. By comparing the present performance of a firm with the performance of the same firm over the last few years, an assessment can be made about the trend in progress of the firm, about the direction of progress of the firm. Time series analysis helps to the firm to assess whether the firm is approaching the long-term goals or not. The Time series analysis looks for (1) important trends in financial performance (2) shift in trend over the years (3) significant deviation if any from the other set of data.

3] Combined analysis:

If the cross section & time analysis, both are combined together to study the behavior & pattern of ratio, then meaningful & comprehensive evaluation of the performance of the firm can definitely be made. A trend of ratio of a firm compared with the trend of the ratio of the standard firm can give good results. For example, the ratio of operating expenses to net

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sales for firm may be higher than the industry average however, over the years it has been declining for the firm, whereas the industry average has not shown any significant changes.

The combined analysis as depicted in the above diagram, which clearly shows that the ratio of the firm is above the industry average, but it is decreasing over the years & is approaching the industry average. PRE-REQUISITIES TO RATIO ANALYSIS In order to use the ratio analysis as device to make purposeful conclusions, there are certain pre-requisites, which must be taken care of. It may be noted that these prerequisites are not conditions for calculations for meaningful conclusions. The accounting figures are inactive in them & can be used for any ratio but meaningful & correct interpretation & conclusion can be arrived at only if the following points are well considered. 1) The dates of different financial statements from where data is taken must be same. 2) If possible, only audited financial statements should be considered, otherwise there must be sufficient evidence that the data is correct. 3) Accounting policies followed by different firms must be same in case of cross section analysis otherwise the results of the ratio analysis would be distorted. 4) One ratio may not throw light on any performance of the firm. Therefore, a group of ratios must be preferred. This will be conductive to counter checks. 5) Last but not least, the analyst must find out that the two figures being used to calculate a ratio must be related to each other, otherwise there is no purpose of calculating a ratio.
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CLASSIFICATION OF RATIO

BASED ON FINANCIAL STATEMENT

BASED ON FUNCTION

BASED ON USER

1] BALANCE SHEET RATIO 2] REVENUE STATEMENT RATIO 3] COMPOSITE RATIO

1] LIQUIDITY RATIO 2] LEVERAGE RATIO 3] ACTIVITY RATIO 4] PROFITABILITY RATIO 5] COVERAGE RATIO

1] RATIOS FOR SHORT TERM CREDITORS 2] RATIO FOR SHAREHOLDER 3] RATIOS FOR MANAGEMENT 4] RATIO FOR LONG TERM CREDITORS

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BASED ON FINANCIAL STATEMENT

Accounting ratios express the relationship between figures taken from financial statements. Figures may be taken from Balance Sheet , P& P A/C, or both. One-way of classification of ratios is based upon the sources from which are taken.

1] Balance sheet ratio:

If the ratios are based on the figures of balance sheet, they are called Balance Sheet Ratios. E.g. ratio of current assets to current liabilities or ratio of debt to equity. While calculating these ratios, there is no need to refer to the Revenue statement. These ratios study the relationship between the assets & the liabilities, of the concern. These ratio help to judge the liquidity, solvency & capital structure of the concern. Balance sheet ratios are Current ratio, Liquid ratio, and Proprietary ratio, Capital gearing ratio, Debt equity ratio, and Stock working capital ratio.

2] Revenue ratio:

Ratio based on the figures from the revenue statement is called revenue statement ratios. These ratio study the relationship between the profitability & the sales of the concern. Revenue ratios are Gross profit ratio, Operating ratio, Expense ratio, Net profit ratio, Net operating profit ratio, Stock turnover ratio.

3] Composite ratio:

These ratios indicate the relationship between two items, of which one is found in the balance sheet & other in revenue statement. There are two types of composite ratios-

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a) Some composite ratios study the relationship between the profits & the investments of the concern. E.g. return on capital employed, return on proprietors fund, return on equity capital etc. b) Other composite ratios e.g. debtors turnover ratios, creditors turnover ratios, dividend payout ratios, & debt service ratios

BASED ON FUNCTION:

Accounting ratios can also be classified according to their functions in to liquidity ratios, leverage ratios, activity ratios, profitability ratios & turnover ratios.

1] Liquidity ratios: It shows the relationship between the current assets & current liabilities of the concern e.g. liquid ratios & current ratios.

2] Leverage ratios: It shows the relationship between proprietors funds & debts used in financing the assets of the concern e.g. capital gearing ratios, debt equity ratios, & Proprietary ratios.

3] Activity ratios: It shows relationship between the sales & the assets. It is also known as Turnover ratios & productivity ratios e.g. stock turnover ratios, debtors turnover ratios.

4] Profitability ratios: a) It shows the relationship between profits & sales e.g. operating ratios, gross profit ratios, operating net profit ratios, expenses ratios b) It shows the relationship between profit & investment e.g. return on investment, return on equity capital

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5] Coverage ratios: It shows the relationship between the profit on the one hand & the claims of the outsiders to be paid out of such profit e.g. dividend payout ratios & debt service ratios.

BASED ON USER:

1] Ratios for short-term creditors:

Current ratios, liquid ratios, stock working capital ratios

2] Ratios for the shareholders:

Return on proprietors fund, return on equity capital

3] Ratios for management:

Return on capital employed, turnover ratios, operating ratios, expenses ratios

4] Ratios for long-term creditors:

Debt equity ratios, return on capital employed, proprietor ratios.

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1. LIQUIDITY RATIOS: it measures the short-term solvency of the firm. In a short period of a firm should be able to meet all its short-term obligation i.e. current liabilities and provisions. It is current assets that yield funds in the short period. Current assets are those, which the firm can convert it into cash within one year or short run. Current assets should not only yield sufficient funds to meet current liabilities as they fall due but also to enable the firm to carry on its day-to-day activities.

The following are the important liquidity ratios: 1. Current ratio 2. Acid test/quick ratio. 3. Cash ratio 4. Net working capital ratio 1.Current ratio: Current ratio is the ratio of current assets to current liabilities. Current assets are the assets that are expected to be realized in cash or sold or consumed during the normal operating cycle of the business or with in one year, which ever is longer, they include
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cash in hand and bank, bills receivable, net sundry debtors, stock of raw materials, finished goods and working in progress, prepaid expenses, outstanding incomes, assured incomes and short term or temporary investments. Current liabilities are the liabilities that are to be repaid within a period of one year. They include bills payable, sundry creditors, bank overdrafts, outstanding expenses, income receivable in advance, proposed dividend, provision for taxation, unclaimed dividends and short term loans and advanced repayable within one year. Any instalment of long-term liability payable within the next 12 months is also current liability.

CURRENT RATIO= CURRENT ASSETS/ CURRENT LIABILITIES Generally 2 : 1 ratio is considered ideal for the company.

2. ACID TEST/QUICK RATIO: the acid test ratio is the ratio between quick current assets and current liabilities and calculated by dividing the quick assets by current liabilities. Quick assets mean those which can be converted into cash immediately by exclusion of inventory and prepaid expenses from current assets. Acid test Ratio=Quick assets/Current liabilities. Generally 1: 1 ratio is considered to be ideal for the company.

3. CASH RATIO: The cash ratio is the ratio of cash and bank balance, it is calculated dividing cash and bank balance by current liabilities. CASH RATIO= Cash and Bank balances/Current liabilities. Generally 1 : 2 ratio is considered to be ideal for a company.

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4. NET WORKING CAPITAL RATIO: Working capital ratio refers to comparing current assets to current liabilities and serve as the liquidity reserve avail. To satisfy contingencies and uncertainties. It is calculated by dividing net working capital by capital employed. Net Working Capital Ratio = net working capital/capital employed. Generally higher ratio is considered ideal for a company.

CAPITAL STRUCTURE/LEVERAGE RATIO: These ratios indicate the relative interests of owners and creditors in a business by showing long term financial solvency and measure the enterprises ability to pay the interest regularly and to repay the principal on maturity or in pre-determined instalments at due dates. The significant leverage ratios are: 1. Debt Equity Ratio 2. Proprietary Ratio 3. Capital Gearing Ratio. 4. Fixed assets Ratio 5. Interest coverage Ratio 6. Dividend Coverage Ratio 7. Debt Service coverage Ratio.

1.Debt Equity Ratio: It reflects the relative claim of creditors and shareholders against the assets of the business. Debt usually refers to long-term liability. Equity includes equity and preference share capital and reserves. Debt Equity Ratio=long term liabilities/share holders funds. Ideal debt equity ratio is 2 : 1
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2.Propreitary ratio: It expresses the relationship between the net worth and total assets. A high proprietary ratio is indicative of strong financial position of business. Proprietary ratio = Net worth/ Total Assets Net worth = Equity share capital + fictitious Assets Total assets= fixed assets + Current Assets Generally higher the ratio the ideal it is.

2. Capital Gearing Ratio: A company is said to be highly geared if it has a high capital gearing ratio and lowly geared if the capital gearing ratio is low. The extent of gearing determined the future financial structure of the business. A company that is highly geared will have to raise funds by issuing fresh equity shares, whereas a lowly geared company would find it attractive to raise funds by way of term loans and debentures.

3. Capital Gearing Ratio = funds bearing fixed interest and fixed dividend/equity share holders funds Funds bearing fixed interest and capital=Debentures + term loans +preference . share capital. Equity share holder funds=Equity share capital +reserves-fictitious funds.

4.Fixed Assets Ratio: This ratio indicates the mode of financial the fixed assets. It is calculated as Fixed assets Ratio= Fixed assets/capital employed

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Capital employed= equity share capital + preference share capital +reserves + long term Liabilities Fictitious Assets. Generally a ratio of 0.67 : 1 is considered ideal for a company.

5.Interest Coverage Ratio: This ratio is called as debt service ratio. This ratio indicates whether a business is earning sufficient profits to pay the interest charges. It is calculated as Interest coverage ratio=PBIT/Fixed interest charges PBIT=Profit before interest and taxes=PAT + Interest + Tax Generally a ratio of around 6 is normally considered as ideal for a company.

6.Dividend coverage ratio: It indicates the ability of a business to pay and maintain the fixed preference dividend to preference shareholders. Dividend coverage ratio=PAT/Fixed preference dividend. PAT= Profit After Taxes

7.Debt service coverage Ratio: It indicates whether the business is earning sufficient profits to pay not only the interest charges, but also the instalments due to the principal amount. It is calculated as Debt service Coverage Ratio =(PBIT/Interest + Periodic Loan Installation)/(1- Rate of income Tax) Generally greater the ratio, the better is the servicing ability of company.

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 PROFITABILITY RATIO: Profitability ratios measure the profitability of a company. Generally they are calculated either in relation to sales or in relation to investments. The various profitability ratios are discussed under the following heads.

(A) GENERAL PROFITABILITY RATIOS:

1.Gross Profit Ratio: Gross profit is one of the most commonly used ratios. It reveals the result of trading operations of the business. In other words, it indicates to us the profitability of the business. It is calculated as Gross Profit Ratio=(Gross Profit/Net sales)*100 Gross Profit=net sales-cost of goods sold. Net Sales=Total Sales- Sales Returns Cost of Goods Sold=Opening Stock + Purchases + Manufacturing expenses-closing Stock. Generally the higher the ratio, the better will be the performance of the company.

2.NET PROFIT RATIO: It indicates the results of overall operations of the firm. While the gross profit ratio indicates the extent of profitability of core operations. Net profit ratio tells us about overall profitability. It is called as Net Profit Ratio=(Net Profit after Tax/Net Sales)*100 Generally higher the ratio, the more profitable to the company.
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3. OPERATING RATIO: It expresses the relationship between expenses incurred for running the business, and the resultant net sales. It is calculated as Operating Ratio=cost of goods sold + Office and Administrative expenses + selling and distribution Expenses. Generally lower the ratio, the better it is to the company.

4. OPERATING PROFIT RATIO: It establishes the relationship between operating profit and sales. It is calculated as Operating Profit Ratio=(Operating Profit/Net Sales)*100 Generally higher the ratio, the better it is to the company.

5. EXPENSES RATIO: Expenses ratios are the ratios that supplement the information given by the operating ratio. Each of the expense rations highlights the relationship given by the particular expense and net sales. For example, factory expenses ratio is of factory expenses to net sales any expenditure can be shown as a ratio to sales. All such ratios fall under the broad head of expenses ratios.

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(B) OVERALL PROFITABILITY RATIOS: 1.RETURN ON CAPITAL EMPLOYED RATIO(ROCE) OR RETURN ON

INVESTMENT RATIO(ROD): This ratio reveals the earning capacity of the capital employed in the business. In other words, capital employed is permanent capital invested in the business. It is also called capital and hence, the ratio is also known as return on invested capital ROCE= (Profit before interest and taxes/capital employed) *100

2. RETURN ON NET WORTH(RONW): It indicates the return, which the shareholders are earning on their resources invested in the business. It is calculated as RONW=(Profit after Tax/Net Worth)*100 Generally higher the ratio, the better it is to the shareholders.

3.RETURN ON EQUITY CAPITAL: It expresses the return earned by the owners of the business, after adjusting for debt and preference capital. It is calculated as RETURN ON EQUITY= PAT- Preference dividend/equity shareholders funds. Generally higher the ratio, the better it is to the company. 4.RETURN ON ASSETS RATIO(ROA): Return on assets reflects the return earned by the firm for the company for the shareholders of the business on the investment of all the financial resources committed to the business. It is calculated as ROA=PAT/TOTAL SALES Generally higher the ratio, the better it is to the shareholders.

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5.EARNINGS PER SHARE(EPS): It is the earning accruing to the equity shareholders on every share held by them. It is calculated as EPS= PAT-Preference dividend/number of equity shares. Generally the ratio, the better is the performance of the company.

6.Dividends per share (DPS): It is the amount of dividend payable to the holder of one equity share. It is calculated as DPS=Dividend on equity share capital/number of equity shares Generally from investors point of view, the higher the ratio, the happier the investor.

7.DIVIDEND PAY OUT RATIO: It is the ratio of dividend per share to earning per share. It is calculated as Dividend Pay Out Ratio=DPS/EPS

8.PRICE EARNING RATIO(P/E Ratio): It expresses the relationship between market price of one share of a company and earnings per share of that company. P/E Ratio=Market Price of Equity share/EPS There is no ideal P/E ratio.

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9.DIVIDEND YIELD RATIO: It expresses the relationship between dividend earned per share and the market price per share. In other words, it expresses the return on investment by purchasing a share in the stock market , without accounting for any capital appreciation. It is calculated as DIVIDEND YIELD RATIO- Dividend per share/Market price of share.

10.BOK VALUE: It is the fraction of the net worth of the business as depicted in the balance sheet, which is attributable to one equity share of the business . it is calculated as BOOK VALUE=Equity share holders funds/number of equity shares. Generally higher the book value of the share, the more strong the business is assumed to be.

ACTIVITY RATIO: Activity ratios measures the efficiency or effectiveness with which a firm managers its resources or assets. They calculate the speed with which various assets, in which funds are blocked up, get converted into sales. The significant activity or turnover ratios are

1.INVENTORY TURN OVER RATIO OR STOCK TURN OVER RATIO: Stock turnover ratio indicates the number of items the stock has turned over into sales in a year. It indicates to us the extent of stock required to be held in order to achieve a desired level of sales. Inventory Turn Over Ratio = Cost of Goods Sold/Average Stock Cost of Goods Sold=Sales-Gross Profit. Average Stock=(Opening Stock + Closing Stock)/2 Generally 8 is considered ideal ratio of the company.
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2.DEBTORS TURN OVER RATIO: Debtors Turn Over Ratio expresses the relationship between debtors and net credit sales. It is calculated as Debtors Turn Over ratio= Net Credit Sales/Average Debtors. Generally the ratio between 10-12 an ideal value for the company. 3.CREDITORS TURN OVER RATIO: Creditors turn over ratio expresses the relationship between creditors and net credit purchases. It is calculated as Creditors Turn Over Ratio= Net Credit Purchases/Average Creditors. Generally the ratio 12 is an ideal for the company.

4.WORKING CAPITAL TURN OVER RATIO: This ratio is defined as Working Capital Turn Over Ratio= Cost of Goods Sold/Working Capital Working Capital=Current Assets- Current Liabilities. Generally higher ratio indicates efficient utilization of firms funds.

5.Fixed Assets Turn Over Ratio:It is Defined as ratio of Net Sales to the Fixed Assets. Generally the ratio of around 5 is considered ideal for the company.

6.TOTAL ASSETS TURN OVER RATIO:It is defined as ratio of Net Sales to the Total Sales. Generally higher the ratio, the greater is the ability of the firm to utilize the investments in the business.

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IMPORTANCE OF RATIO ANALYSIS: As a tool of financial management, ratios are of crucial significance. The importance of ratio analysis lies in the fact that it presents facts on a comparative basis & enables the drawing of interference regarding the performance of a firm. Ratio analysis is relevant in assessing the performance of a firm in respect of the following aspects: 1] Liquidity position, 2] Long-term solvency, 3] Operating efficiency, 4] Overall profitability, 5] Inter firm comparison 6] Trend analysis.

1] LIQUIDITY POSITION: With the help of Ratio analysis conclusion can be drawn regarding the liquidity position of a firm. The liquidity position of a firm would be satisfactory if it is able to meet its current obligation when they become due. A firm can be said to have the ability to meet its short-term liabilities if it has sufficient liquid funds to pay the interest on its short maturing debt usually within a year as well as to repay the principal. This ability is reflected in the liquidity ratio of a firm. The liquidity ratio are particularly useful in credit analysis by bank & other suppliers of short term loans.

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2] LONG TERM SOLVENCY: Ratio analysis is equally useful for assessing the long-term financial viability of a firm. This respect of the financial position of a borrower is of concern to the long-term creditors, security analyst & the present & potential owners of a business. The long-term solvency is measured by the leverage/ capital structure & profitability ratio Ratio analysis s that focus on earning power & operating efficiency. Ratio analysis reveals the strength & weaknesses of a firm in this respect. The leverage ratios, for instance, will indicate whether a firm has a reasonable proportion of various sources of finance or if it is heavily loaded with debt in which case its solvency is exposed to serious strain. Similarly the various profitability ratios would reveal whether or not the firm is able to offer adequate return to its owners consistent with the risk involved.

3] OPERATING EFFICIENCY:

Yet another dimension of the useful of the ratio analysis, relevant from the viewpoint of management, is that it throws light on the degree of efficiency in management & utilization of its assets. The various activity ratios measures this kind of operational efficiency. In fact, the solvency of a firm is, in the ultimate analysis, dependent upon the sales revenues generated by the use of its assets- total as well as its components.

4] OVERALL PROFITABILITY:

Unlike the outsides parties, which are interested in one aspect of the financial position of a firm, the management is constantly concerned about overall profitability of the enterprise. That is, they are concerned about the ability of the firm to meets its short term as well as long term obligations to its creditors, to ensure a reasonable return to its owners

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&secure optimum utilization of the assets of the firm. This is possible if an integrated view is taken & all the ratios are considered together.

5] INTER FIRM COMPARISON:

Ratio analysis not only throws light on the financial position of firm but also serves as a stepping-stone to remedial measures. This is made possible due to inter firm comparison & comparison with the industry averages. A single figure of a particular ratio is meaningless unless it is related to some standard or norm. one of the popular techniques is to compare the ratios of a firm with the industry average. It should be reasonably expected that the performance of a firm should be in broad conformity with that of the industry to which it belongs. An inter firm comparison would demonstrate the firms position vice-versa its competitors. If the results are at variance either with the industry average or with the those of the competitors, the firm can seek to identify the probable reasons & in light, take remedial measures.

6] TREND ANALYSIS:

Finally, ratio analysis enables a firm to take the time dimension into account. In other words, whether the financial position of a firm is improving or deteriorating over the years. This is made possible by the use of trend analysis. The significance of the trend analysis of ratio lies in the fact that the analysts can know the direction of movement, that is, whether the movement is favorable or unfavorable. For example, the ratio may be low as compared to the norm but the trend may be upward. On the other hand, though the present level may be satisfactory but the trend may be a declining one.

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ADVANTAGES OF RATIO ANALYSIS

Financial ratios are essentially concerned with the identification of significant accounting data relationships, which give the decision-maker insights into the financial performance of a company. The advantages of ratio analysis can be summarized as follows: Ratios facilitate conducting trend analysis, which is important for decision making and forecasting. Ratio analysis helps in the assessment of the liquidity, operating efficiency, profitability and solvency of a firm. Ratio analysis provides a basis for both intra-firm as well as inter-firm comparisons. The comparison of actual ratios with base year ratios or standard ratios helps the management analyze the financial performance of the firm.

LIMITATIONS OF RATIO ANALYSIS

Ratio analysis has its limitations. These limitations are described below: Information problems

Ratios require quantitative information for analysis but it is not decisive about analytical output . The figures in a set of accounts are likely to be at least several months out of date, and so might not give a proper indication of the companys current financial position. Where historical cost convention is used, asset valuations in the balance sheet could be misleading. Ratios based on this information will not be very useful for decisionmaking.

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2] Comparison of performance over time

When comparing performance over time, there is need to consider the changes in price. The movement in performance should be in line with the changes in price. When comparing performance over time, there is need to consider the changes in technology. The movement in performance should be in line with the changes in technology. Changes in accounting policy may affect the comparison of results between different accounting years as misleading.

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Chapter 3

INDUSTRY AND COMPANY PROFILE Industrial profile of Power Sector Company Profile of BHEL

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 Industrial profile of Power Sector

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Industry profile
INDIA Power Sector: Emerging Developments & Critical issues 1. Introduction Large number of power projects (XI and XII five year plans) is under construction to overcome the power shortages and meet the growing energy requirements in the country. However, the sector has been encountering problems on account of inadequate / depleting conventional fuel resources, slippages in capacity addition, transmission / open access constraints and high Aggregate Technical & Commercial (AT & C) losses in the country. Since the formulation of Electricity Act 2003, Government of India (GoI) has been taking several initiatives and announced various regulations to strengthen the sector. Significant GoI / regulatory initiatives in recent times have been those pertaining to Mega / Ultra Mega Power Generation projects revised tariff regulations for existing central government projects, competitive bidding for all future power generation projects, tariff norms for renewable energy / introduction of Renewable Energy Certificates, new transmission pricing grid code, power market regulations, Re structured Accelerated Power Development Reform Programme (APDRP2), National Electricity Fund, etc. 2. Projected demand, XII plan capacity additions and projected investment According to 17th Electric Power Survey (2007), the energy requirement in the country is projected to grow at a CAGR of 7.5% during 12th plan period reaching from 9,68,658 Giga Watt hour (Gwh) in FY 2012 to 13,92,065 Gwh by FY2017, while peak load requirement is projected to grow from 1,57,324 MW in FY2012 to 2,23,660 MW in FY 2017 at a CAGR of 7.4%. The region wise projection in energy and peak load requirement during the period FY2012 to FY2022 is shown in Annexure II. Ministry of Power and Central Electricity Authority (CEA) have projected a total investment requirement of Rs. 11,35,142 core for the power sector during the 12th Plan period, which also

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includes investment for generation capacity addition of about 1,00,000 MW. (Existing capacity is 1,64,508 MW) According to Crisil report (June 2010), about 82,000 MW of generation capacity at an investment of Rs. 5,10,000 corer is likely to be added in the next five years i.e. during FY2011 to FY2015. The Central (with NTPC having the major share), State and Private sectors are estimated to add about 21,500 MW, 15,000 MW and 45,500 MW respectively during the next five years. Further, about 12,900 MW of captive generation capacity at an investment of Rs. 75,000 crore is expected to be implemented by several players. The investments in transmission and distribution segment are projected at Rs. 3,44,000 crore during the above period. According to Crisil report (June 2010), out of the 82,000 MW capacity (scheduled for commissioning over the next five years), more than 90% of the projects have received environmental /forest clearances, acquired land, achieved financial closures and placed equipment orders. About 80% of the above projects have either signed PPAs or earmarked a portion of their total power for merchant sales. 3. Emerging Developments The emerging developments in the power sector are highlighted below: 3.1 Competitive procurement of power As per the National Tariff Policy, the procurement of power by distribution licensees have to be made through competitive bidding. From January 2011, Central / State public sector companies also are expected to compete with private sector to supply power to the distribution companies through competitive bidding. Thus, volume of power contracted through competitive base bidding {Case 1 2 (location, technology or fuel not specified) & Case 2 (location specific where the GoI assists developer in securing land, clearances, etc)} is likely to increase in the medium term. 3.2 Thermal projects & Supercritical technology In the medium term, thermal power is likely to remain the major source of generation as the coal
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based (particularly pit head plants) /gas based projects presently have a competitive tariff advantage over renewable energy projects. Thermal based capacity of about 29,000 MW is under construction (under Eleventh Plan) and about 75,000 MW coal based capacity and 10,000 MW gas based capacities are being planned for twelfth plan period. There is continued emphasis on technology in proximity to the coal mines (pit head plants) or at coastal regions (for imported coal) in the country to leverage on economies of scale / fuel efficiency. About 60% of the thermal capacity planned in the twelfth plan is on Supercritical technology, which is considered to be fuel efficient and environment friendly technology. The overall share of Thermal power in total installed generation capacity is likely to increase from 64% (FY2010) to about 74% by the end of twelfth plan. Developments in Thermal power projects are mentioned in Annexure III. 3.3 Hydro / Nuclear / Renewable energy Amidst the growing global concerns over the green house gas emissions (world wide power sector is the largest emitter (41%) of carbon dioxide) various policy / regulatory initiatives are being taken to explore hydro power potential as also the renewable and nuclear energy addition in the country. The developments in Hydropower, Renewable energy (wind & solar) and Nuclear power are mentioned in Annexure IV. Under Jawaharlal Nehru National Solar Mission (JNNSM), GoI has planned an addition of 20,000 MW solar power by FY2022 (1100MW of Solar power has been planned under the phase I of the JNNSM. 3.4 Transmission grid & New pricing framework Keeping in view the evolving load flows / externalities and evolution of open access and power markets, GoI has planned for development of national grid and augmentation of interregional transfer capacity. The new transmission pricing framework for transmission network is likely to attract private sector investment in transmission segment. However, Powergrid with its massive investment plans is expected to continue its major role as a Central Transmission Utility.
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3.5 Power trading / power exchange Several players participating in competitive bid projects are planning to set aside 15 20% of their capacities to sell through the merchant route to profit from the spread between merchant power prices and power purchase agreement (PPA) tariffs. According to Crisil report (June 2010), by FY2015, merchant power capacities are expected to account for 5.0 6.0% (13,000MW) of the countrys generation capacity vis a vis 1.0 1.5% (2000 3000 MW) in FY 2010. Going forward, the generation of power from future capacity addition is likely to be increasingly routed through the power traders / power exchanges gradually increasing the liquidity in the bilateral / OTC / power exchange market. The share of volume of power sold in short term market (bilateral / OTC / power exchanges) which is currently at 4.1% of the total electricity generated is likely to increase in the medium term. 3.6 Reforms in distribution Although several States have unbundled, privatization of distribution has not happened on a larger scale, although few circles in certain States are being given to private franchisees. Distribution 3 segment will continue to be dominated by State distribution companies (Discoms), which however may witness increase in number of private franchisees in the country. In the medium term, few States are likely to make progress in reforms by moving towards Multi Year Tariff (MYT), Time of Day (ToD) metering and intra state Availability Based Tariff (ABT). 4. Critical Issues / Risk factors In view of the emerging developments, the critical issues / risk factors pertaining to the sector are mentioned below: 4.1 Issues pertaining to thermal projects 4.1.1 Availability of power equipment / EPC players There are constraints pertaining to availability of power equipment as also the availability of quality
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EPC players to cater to the requirements of increasing number of thermal power generation projects. There has been increasing dependence on Chinese equipment and manpower by private players who have witnessed problems on account of restrictions of Chinese manpower by GoI as also concerns pertaining to the quality of equipment during operations. Developments pertaining to procurement of power equipment / EPC contracts are mentioned in Annexure VI. Despite the ongoing thrust on domestic capacity addition be the domestic power equipment industry, the reliance on equipment imports is likely to continue in he medium term. Thus the development in domestic power equipment industry and availability of quality EPC players will remain crucial for the timely implementation of power projects while meeting he quality and servicing / spare part requirements. 4.1.2 Coal shortages and environmental issues Power generation companies have been procuring coal under coal linkages / Fuel Supply Agreements with Coal India Ltd, captive mine blocks and through imports. However, domestic coal based generation plants (which account for about 72% of the total coal requirement in the country) have been experiencing coal supply constraints and have lost generation due to coal shortages on account of factors such as constrained supplies by Coal India Limited (which accounts for 85% of domestic coal supplies) and lack of progress in captive coal mining. Thus the countrys dependence on coal imports has been rising in the recent past. In FY2010, the domestic coal production was 533 million tonnes(MT) and imports 70MT. Ministry of Environment and Forest (MoEF) have recently prohibited mining in no go areas where the coal blocks have been already allotted to private power companies. According of Ministry of Power, about 55 projects amounting to 50,000 MW including two ultra mega projects (Sarguja UMPP in Chhattisgarh and Bedabahal UMPP in Orissa) have been impacted due to the above norms. The details of coal outlook for power sector are mentioned in Annexure VII. Despite the domestic capacity additions planned by Coal India Ltd, the sector is expected to remain increasingly dependent on coal imports forcing several domestic players to scout for overseas fuel linkages / coal assets for assured supplies. 4.1.3 Gas supply constraints
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Plant Load factor of gas based plants has improved recently on account of enhanced gas supplies from KG basin to power sector. Based on demand supply analysis, while the domestic gas supplies are projected to increase, the country is expected to remain dependent on LNG imports to meet the growing demand by end user industries. Gas prices in the future are expected to witness an upward trend due to increase in exploration costs from difficult fields in the country as also increase in the proportion of costly LNG imports. The details of Gas supply outlook are mentioned in Annexure VIII. The Ministry of power has st ipulated that for the 12th plan period, in view of the substantial 4 supply constraints expected, domestic gas would be allocated to meet only 60% of the total gas requirements of all power projects. The gas for the balance capacity would have to be tied through imports or retail contracts. 4.1.4 Risk factors pertaining to competitively bid generation projects The inherent risk profile of competitive bid projects exceed those of cost plus tariff structure. The levellised cost of competitive bid projects is essentially a function of the risks pertaining to market, technology, construction, fuel and regulatory factors faced by each option (technology / fuel) for generating electricity. The ability of the generating companies to pass through the fluctuation in fuel prices depends on whether such fuel price fluctuations are captured by the relevant index in levellised tariff formulae as quoted during bidding vis a vis the escalation rates as notified by CERC from time to time. Competitively bid IPPs using imported coal remain exposed to any adverse fluctuations in international prices of coal as back to back pricing terms {which IPPs have with overseas coal suppliers in line with bid assumptions} is typically not achievable during the projects long tenure. Further, there could be take or pay related risks for IPPs in case of lesser fuel offtake than the contracted commitments. Currently there is no arrangement for domestic coal linkage to import coal in case Coal India Ltd is not able to supply coal in accordance with linkages commitment and importing coal for blending becomes unavoidable. Thus risks are higher in case of Case I coal based projects. In case fuel costs are not pass through (where the bidder quoted firm tariff for every year during thecontract), the returns from the project may fluctuate considerably depending on the portion of the power being sold in the short term market. Thus the returns would depend on the bidding strategy adopted by the IPP and the ability to keep the costs (both operating and capital) within the bid levels.
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4.2 Challenges in hydro power projects Hydro power projects are expected to face risks on account of factors such as political and environmental protests, delay / cancellation of environmental clearances, delays in land acquisition, poor infrastructure, tunneling delays, geological surprises, contractual and procurement issues, shortage of skilled man power, difficulties in evacuation of power, etc. Hydro power projects are also increasingly becoming prone to hydrology risks. Based on recent studies, Himalayan glacier is becoming increasingly susceptible to non linear climate changes and have been melting at a faster rate in the past two decades. Reliance on past Hydrology data may not reflect the future projections, thus the hydro projects based on glacier fed rivers will be increasingly exposed to Hydrology risks. Hydro power projects also face risks on account of developments in intercontinental rivers. There have been reports about the construction of major hydro power project in the upstream Brahmaputra river in China which may impact its hydropower potential (estimated at 40% in India) and potential projects in the country. 4.3 Evacuation Issues In recent times, there have been problems pertaining to evacuation of power in case of generation projects who are unable to identify beneficiaries / tie up transmission through Bulk Power Transmission Agreements (BPTAs) leading to uncertainty in planning / investment in transmission line augmentation (associated transmission system) by transmission utilities / licensees. Also, there have been difficulties for evacuating power in case of small hydro / renewable energy projects which are often located in remote / difficult State Regulatory Commissions on the issue of interconnection of renewable / non firm power to the grid). There have been also issues pertaining 5 to transmission pricing (under earlier postage stamp method), which did not reflect network utilization and also led to pancaking of charges. However under the new transmission pricing framework, generating companies are not required to identify beneficiaries in advance and tie up BPTAs. Further, according to the recent regulations pertaining to connectivity CERC will consider thermal generating station of 500MW and above and a hydro generating station using renewable sources of energy of capacity of 250 MW and above (except captive generative plant) for coordinated transmission planning and also will not be required to construct a dedicated transmission line to the point of connection.

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Under the amended Connectivity regulations, CERC hence forth will allow interstate interconnection to hydro power generation plants above 50MW (earlier it was 250MW). The new transmission pricing framework also encourages solar power projects by allowing Zero transmission charges and losses. Going forward, interstate transmission planning and evacuation is expected to happened in a planned / coordinated and scientific manner which, however, may witness difficulties at intra state level due to lack of upgradation of transmission / distribution network / infrastructure in the respective states. While larges inter State projects may comfortably connect to the nearest interstate interconnection point, small and renewable energy projects who rely on respective state transmission utilities for evacuation may face difficulties due to different policies in respective States. 4.4 Intra State open access issues Open access transaction have been primarily used by SEBs / distribution licensees to sell surpluses or to meet the short term power requirements in their respective regions. The industrial customers still face problems pertaining to accessing their choice of suppliers due to the restrictions (such as invoking Section 11/108 of Electricity Act 2003) imposed by several state governments / SLDCs citing shortages or non availability of transmission infrastructure. According to Central Electricity Regulatory Commission (CERC), upto May 2010, applications seeking open for over 18000 MW have been submitted, but implementation has been quite low at about 2,000 MW (mainly for captive power).While the inter State open access market has progressed due to regulatory initiatives taken by CERC, (on going development of national grid by Power Grid (although congestion is currently taking place during peak times) and support from NLDC / RLDCs), the intra state open access is facing constraints on account of delays in implementation of Intra State ABT by several states. The sources of concern for implementation of Intra State ABT are assessment / augmentation of intra state transfer capability, advanced infrastructure at State Load Despatch Centre (SLDC), real time communication and special metering at consumer level. The progress of reforms at state level, with less intervention by respective State government, will continue to remain crucial for penetration of such transactions across the States, to facilitate the development of full fledged short term market. 4.5 Issues pertaining to trading based merchant sales While the developments in inter state open access, inter state transmission corridors and

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connectivity / medium term open access is likely to facilitate the growth of merchant power sales, the constraints pertaining to intra state open access and transmission / distribution network at statelevel are expected to remain critical. While the major portion of merchant sales will continue to be routed through bilateral / OTC trading, the portion, sold in the power exchanges may be vulnerable to regulatory intervention in terms of putting cap on the prices. 6 Short term transaction through power exchanges have faced problems on account of congestion. During FY2009, while the unconstrained cleared volume on the two power exchanges was of the order of 6.78 billion Kwh, the actual volume transacted was about 5.79 billion Kwh indicating that the actual transacted volume could have been 17% higher, had there been on congestion in the system. Merchant power transacted through medium / short open access are vulnerable to the availability of transmission corridors by relying on the margins available, after accounting for long term open access transactions (which are given priority) during the transmission corridor allocation. However, the new transmission pricing framework (Planning as per network utilization and avoiding pancaking of charges0, may facilitate efficient planning of transmission corridors leading to larges infusion of merchant capacity into the grid, promote integration of electricity markets and enhance open access. On account of projected increase in merchant capacity and narrowing peak deficit, the premium (which the merchant power currently commands over the long term PPA power) may be limited in the future. According to Crisil the merchant power prices are projected to decline from Rs. 5.9 per unit in FY 2010 to Rs. 3.5 3.8 per unit by FY 2015. However, the rising cost of supply (on account of projected escalation in fuel prices) is expected to act as a floor for merchant power prices. 4.6 Concerns pertaining to distribution AT & C losses are likely to remain a source of concern for the State sector distribution companies, thus leading to continued dependence on subsidies / grant from the respective state governments, as also resulting in frequent hikes in retail tariffs. Financial health of State DISCOMs will continue to remain fragile with continued reliance on growing subsidies and likely shift of lucrative consumers through open access. Thirteenth Finance Commission (TFC) has in its recommendation to the GoI, Pointed out that even better performing states need a minimum of 7% increase in tariff on an annual basis (at 2007-08

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subsidy levels), to bridge the gap between actual receipts and government subsidy. TFC has pointed out that requirement to hike the tariff in poorly performing state could be as high as 19% per annum which could be difficult to achieve. TFC, in its projection has pointed out that net losses of state transmission and distribution utilities are expected to rise from Rs. 68, 643 crore in FY 2011 to Rs. 1,16,089 crore in 2014-15 if immediate steps are not taken to reform the utilities. Private discoms are likely to face risks pertaining to regulatory uncertainties and intervention by State Governments, autonomy of SLDCs, competition on account of provision of multiple licences and open access, etc. 5. Assessment 5.1 Despite the efforts being made to ramp up the generation capacity, the country may witness slippages in capacity addition on account of various emerging challenges leading to continued deficit scenario in the medium term (according to estimates by CEA / ICRA, the peak and energy deficit are projected to the 12% and 6% respectively by the end of Twelfth Plan period, while Crisil has projected a reduction in peak deficit to a level of 4% by FY2015. 5.2 While the importance of renewable energy projects is expected to increase, minimization of AT & C losses and effective demand management will remain critical for sustainable growth of the sector. While the externalities and constraints in transmission / distribution components particularlyat State level would continue to persist, the ongoing regulatory developments would create an hybrid power market (comprising of long term contracted power and short term market) in the medium term. 7 India Power Sector Present status and recent government / regulatory announcements A) Present status: Installed capacity As on August 31, 2010 the installed generation capacity in the country constituted 1,64,508 MW, of which thermal capacity (coal, gas & diesel) is 1,06,432 MW followed by hydel capacity at 37,086 MW, renewable energy (wind, small hydro, solar, bio mass, etc) at 16,429 MW and nuclear energy at 4,560 MW. In addition to the total installed capacity as mentioned above, the captive generating

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capacity to the grid is 19,509 MW. The share of Central, State and private sector in the total installed capacity is 31%, 49% and 20% respectively. Demand supply gapThe domestic energy requirement for the financial year 2010 was 8,30,594 million units (mkwh) while the energy generated was only 7,46,644 million units (mkwh) creating a gap of 83950 million units (mkwh). During FY 2010 overall energy deficit in the country was 10.1% while peak deficit stood at 12.7% with shortage of 15,157 MW. During the period April July 2010, the domestic energy requirement and availability were 2,91,214 MU and 2,58,972 MU respectively leading to energy deficit of 11.1% while the peak deficit stood at 13.8%. Slippages under XI planAccording to CEA, the capacity slippages in the 11th Plan projects have been attributed to various physical and financial factors such as delays in land acquisition and creation of infrastructure facilities, delays in placement of orders mainly civil works and balance of plants (Bop), delay and non sequential supply of material for the main plant and Bop, Shortage of skilled manpower for crestion and commissioning, contractual disputes, inadequate deployment of construction machinery, shortage of fuel (gas & nuclear) and difficulties in financial closure. According to Ministry of Power and CEA, finance to the power sector has been constrained due to several factors such as bank credit being subject to sectoral and group exposure limits and prudential norms of the term lending institutions, insistence on PPAs by lenders, poor financial health of state sector utilities etc. As per planning commission, the actual generation capacity at the end of 11th Plan is expected to be about 55,000 MW as against the capacity target of 78,700 MW. Transmission grid / constraintsAs on June 30, 2009, the transmission network in the country was comprised of 3187 circuit kilometer in 750 KV segment, 91359 ckm in 400 KV segment, and 124201 ckm in 220 kv segment. The capacity of substation / transformers installed as on June 30. 2009 in 420 kv segment is 111517 mega volt amper (MVA) and 1,80,450 MVA in 220 kv segment. The ownership of the grid is predominantly with Power Grid Corporation Ltd. (PGCIL) and State Transcos / SEBs. PGCIL operates around 74000 circuit km of High Tension transmission lines and 124 substations. Currently, the interregional transmission capacity is about 21000 MW, which connects northern, western, eastern and north eastern regions in a synchronous mode operating at the same frequency and the southern region asynchronously. 8 The transmission grid is presently experiencing problems on account of insufficient interregional transfer capacity which is hampering the increasing volume of traded power as also encountering problems pertaining to increasing short circuits levels, operational voltage excursions due to
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fluctuating reactive balance and grid stability. System operations / Grid ManagementPower Grid Corporation of India, the countrys large electricity transmission utility, has formed a wholly owned subsidiary company, Power system Operation Corporation Ltd for carrying out independent power system operations. National Load Dispatch Centre is linked with the 5 Regional Load Dispatch Centers (RLDCs), which in turn and connected to 31 State Load Dispatch Centers to facilitate optimum scheduling and dispatch of electricity across Regional boundaries, thus ensuring equitable utilization of surplus power countrywide while ensuring economy, efficiency, stability and security of the National Grid. Distribution reforms / The Ministry of Power had signed the MoUs with the states in the past to undertake timebound distribution reforms. As on FY 2009, 16SEBs / Electricity Departments have been unbundled and corporatized, and 23 SERCs have issued open access non discriminatory provision for use of transmission lines and distribution system by companies engaged in generation or users of power regulations. Consumer Grievances Redressal Forums and Ombudsmen have been constituted / appointed in 22 states. All the have securitized their outstanding dues towards Central Public Utilities. Electricity Distribution has been privatized in Delhi and Orissa. At national level 98% feeders and 88% of the consumer have been metered so far. 100% feeder metering have been achieved in 20 state. Separation of agriculture feeders constituted independent regulatory commissions and 23 SERCs have issued tariff orders for rationalizing tariffs. The overall distribution loss levels, while remaining high in absolute terms, have shown improvement on account of improvement in the areas of energy audit, system strengthening, rural load management, and prevention of theft. Few States have witnessed improved financial performance and cash flows on account of gains accruing from trading in power and UI charges. However, there has been a sharp rise in the subsidy dependence of distribution utilities and SEBs in many of the States. Power trading / exchangesThe power market is dominated by long term contracted power. However, there has been gradual built up in the volume of short term transactions (bilateral contracts and deals through traders spanning less than one year as well as transaction taking place on the power exchanges). The volume of electricity transacted during 2009 was 30.60 Billion Units which constitute 3.08% of total electricity generation in the country. Of which, power traded through inter state licensees was 24.8 Bus and volume of electricity transacted through power exchange was 5.07 Bus and 0.72 Bus in Indian Energy Exchange and Power Exchanges of India respectively. The weighted average price of
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electricity transacted through trading licensees during the above period and PXs was Rs. 6.41/kwh and Rs. 5.73/kwh respectively. 9 B) Recent Government initiatives R APDRP GOl has approved the Re structured Accelerated Power Development Reform Programme for XI plan as a Central Sector Scheme Projects under the scheme shall be taken up in Two Parts. Part A shall include the projects for establishment of baseline data of IT applications for energy accountingauditing & IT based consumer service centers. Part B shall include regular distribution strengthening projects. The focus of the programme is on actual, demonstrable performance in terms of AT & C loss reduction. National Electricity FundThe Planning commission has proposed setting up a National Electricity Fund with a corpus of Rs. 100000 150000 crore with State run power Finance Corporation and Rural Electrification Corporation would be the nodal agencies to finance development of power transmission and distribution network by state utilities so as to reduce T & D losses. The proposed fund aims lines andusing new technology to reduce transmission and distribution losses to 15% by FY 2012 Clean Energy FundGol has announce setting up of clean energy fund by imposing tax to Rs. 50 per tone of coal and using it for funding renewable energy projects. C) Policy framework and recent regulatory announcements. The broad regulatory / policy framework of the power sector is contained in Electricity Act 2003 (and also in National Electricity Policy 2005 and the National Tariff Policy 2006 as required by the Act), which inert alia comprises regulations / policies such as provision / planning of electricity and network, shift from the single buyer model to the multi buyer model; delicensing of thermal generation; harnessing captive generation / renewable energy resources, grant of open access in transmission and distribution; identification of trading as a distinct activity; reorganization of theSEBs; supply of subsidized electricity only on timely payment by the State Government concerned; performance based cost of service regulation, competitive procurement of power, Merit order dispatch / Availability based Tariff, Multi Year Tariff framework, transmission pricing framework, tariff rationalization through the phased reduction and elimination of cross subsidies, trading
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margin, etc. Electricity Act 2003 was later amended in the year 2007, which primarily omitted the clause ; elimination of cross subsidies while retaining the provision for reduction of cross subsidies. Recent regulatory development are highlighted below: a) Changes in Mega Power Policy Gol has amended the Mega Power Policy (as applicable to power projects more than 1000 MW (thermal) & 500MW (hydel)). Main features includes, extension of customs duty / tax benefits to expansion projects/ relaxation in terms of power supply to more than one State, relaxation on procurement of power equipment through international competitive bidding, extension of benefits to supercritical technology, etc. B) New tariff regulations for generation & transmission projects for next five years (2009-14) The Central Electricity Regulatory Commission (CERC) issued new tariff regulation for existing cost plus tariff central sector generation & transmission projects (and the projects which will be commissioned by Jan, 2011) which will be applicable for next five years. These regulations, inter alia, include raising of base rate of return on equity for central sector projects, revision / rationalization of various financial and operational norms / factors / parameters pertaining to tariff computation, 10 incentivize peaking load generation & protection of hydrological risk in case of hydro power projects, etc. The new regulation will also be the guiding principles for the State Electricity Regulatory commissions in arriving at tariffs for their respective state generation / transmission companies / projects. C) Competitive procurement of power for all new power projects The existing public & state generating companies & Hydropower projects have been exempted to supply power to the distribution utilities through competitive route till January 2011. Thereafter, all the generating companies need to compete through competitive tariff bidding route to supply power to the distribution licensees. Central Public Sector Undertakings which will be impacted are NHPC, Sutlej Jal Vidyut Nigam Ltd., NTPC Ltd., Tehri Hydro Development Corporation, and North East Power Corporation. However, the existing Independent Power Producers, planning one time capacity addition upto 50% will be governed by the prevalent Power Purchase Agreements and terms and conditions of respective regulatory commissions (CERCs/SERCs). D) Amendments to competitive bidding tariff guidelines Ministry of power has recently amended the guidelines for tariff determination for procurement of
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power by distribution licensees through competitive bidding. The amended guidelines aim to attract serious players, to bring about greater efficiency and transparency in the tariff determination process and also promote development of power market. E) Tariff regulations for renewable energy CERC has notified the tariff regulations for electricity generated from renewable energy sources Wind, Small Hydro, Biomass, Co generation, Solar PV and Solar Thermal. These regulations include specifying capital cost norms and fixing tariff upfront for the whole tariff period for the above renewable sources. F) Introduction of Renewable Energy Certificate (REC) Central Electricity Regulatory Commission (CERC) has notified Regulation on Renewable Energy Certificate (REC) to promote renewable energy generation and overcome geographical constraints. As per the REC mechanism, there will be a central level agency to be designated by the Central Commission for registration of Re Generators participating in the scheme. The RE generators will have two options either a) to sell the renewable energy at preferential tariff fixed by the concerned Electricity Regulatory Commission or b) to sell the electricity generation at average cost of power supply and environmental attributes associated with RE generation separately. On choosing the second option, the environmental attributes can be exchanged in the form of REC. Price of electricity component would be equivalent to weighted average power purchase cost of the distribution company including short term power purchase but excluding renewable power purchase cost. The Central Agency will issue the REC to RE generators. The value of REC will equivalent to 1 MWh of electricity injected into the grid from renewable energy sources. The REC will be exchanged only in the power exchanges approved by CERC within the band of a floor price and a forbearance price to be determined by CERC from time to time. The distribution companies, Open Access Consumer, Captive Power Plants will have option of purchase Obligations. Pertinently, renewable purchase obligation is the obligation mandated by the State Electricity Regulatory Commission under the Act, to purchase minimum level of renewable energy out of the total consumption in the area of a distribution licensee.11

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G) GBIs for wind projects GOl has extended the Generation based incentive scheme for grid connected wind energy projects to maximum capacity limit of 4000 MW, wherein an incentive of Rs. 0.5 per unit above the fee in tariff is provided. H) Grant of Connectivity long term and Medium term open access in inter state transmission, 2009 (amendment Sep 2010) The above regulations provide for procedures and requirements for obtaining connectivity to interstate transmission system, availing medium term open access and availing long term access. Any generating plant having installed capacity of atleast 250 MW (50MW is case of Hydro) and any bulk consumer can seek connectivity to interstate transmission system. Medium term open access would be available for any period between three months to three years and it shall be provided on the basis of availability of transmission capacity in the existing transmission system. No augmentation of transmission system is envisaged for granting medium term open access. Long term access can be availed for any period between 12 years to 25 years and might require construction of new transmission capacities. I) New transmission tariff mechanism In accordance with the Electricity Act 2003, National Electricity Policy 2005 and National Tariff Policy 2006, CERC recently notified regulation pertaining to sharing of interstate charges and losses that issensitive to distance, direction and quantum of flow. These regulations would implement point of connection method of sharing the cost of inter state transmission services as well losses among the users in India, replacing the present system of regional postage stamps. J) Amendment to Inter State open access regulations CERC has amended the inter state open access regulations in a bid to streamline and rationalize the processes involved in obtaining open access which is likely to benefit power deficit states, consumers as well as trading companies. K) Medium term open access norms CERC has notified medium term (between 3 months and 3 years) open access regulations and
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norms to provide a non discriminatory arrangement of transmission, irrespective of ownership of he power plant. Power producers with capacity of at least 250 MW are now allowed to transfer power beyond their state limits through contract for three to 25 years as well as bulk consumers with at least 100 MW load can choose to connect to interstate transmission system under the new norms. L) Restructuring of Unscheduled Interchange Mechanism CERC has come out with new regulations restructuring the UI mechanism to avoid UI as a trading route and promulgate discipline among distribution utilities to go for planned procurement of electricity and thereby creating environment for investors to set up new power plants. Presently,may utilities postpone setting up of power projects and rely on overdrawal from the grid for meeting the consumers demand. M) Congestion Charge regulations CERC has notified the Application of Congestion Charges Regulations 2009 which will be imposed on the regional entities in addition to UI charges.12 N) Grid code regulations 2010 CERC has revised grid code which inter alia include the following revisions / additions; a ) the financial burden of all the fluctuations from schedule in case of new solar energy plants and the fluctuations within 30% of schedule in case of new wind energy plants will be borne by allthe users of inter state grid. B) The new grid code will also put in place a scheduling mechanism for renewable energy like solar and wind. It will enable the power plants to operate on must run principles, instead of merit scheduling, and also sell power to inter state regions c) maintain grid frequency within a range of 49.2 50.2 Hz and send out warning signal at 49.7 Hz and in case of violations to impose penalty and curb overdrawals by distribution companies. C) new concepts such as controlled area and increase of reactive charges to deter distribution companies from overdrawing from grid. O) Ring fencing of SLDCs CERC has advised the Centre to take up with the states, the separation of management and controlling interests between entities operating SLDCs and the entities engaged in distribution / trading activities to have a non discriminatory open access. CERC is also planning towards structuring a reporting channel of the SLDCs for implementation and monitoring of open access in respective states.

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P) New Interstate Trading regulations CERC has issued new Inter State Trading Regulations 2009. The new Trading regulations aim to tighten the term & conditions for grant of trading licence keeping in view current price of the trading power, liquidity requirements of the power trading business and to encourage the only serious players intending to undertake trading business. Power, having been imported from other countries fro resale in the domestic market is also covered under these regulations. As on FY 2009, CERC had issued trading licences to 42 companies such as Tata Power, Reliance Energy, RPG Power, GMR Energy and DLF Power, etc. Q) CERC allows term ahead contracts CERC has allowed the power exchange to launch term ahead contracts, which are likely to permit sale of energy over a longer period and thus facilitate better planning procurement and laod management of power by distribution utilities / consumers. R) Power Market regulations CERC has initiated power market regulations covering interstate electricity transactions in various contracts, including bilateral and transacted through traders and exchanges with the objective of transforming the role of power exchange from acting as price signal for investments to the dual role of providing price signal as well as acting as risk transfer platform. The regulations inter alia comprise introducing concept of derivatives contracts, financial settled exchange traded derivatives and other innovative contracts like capacity and ancillary services contracts. However, derivatives would be introduced from a date to be notified when the supply deficit scenario improves and sufficient liquidity gathers in day ahead market. S) Price cap on traded power & fixing of trading margins CERC has imposed a cap a Rs 8 / unit on the price of power traded bilaterally and at the two power exchanges to control the escalating price of power traded in the domestic market. However the price cap is for 45 days (which was to end mid October 2009). CERC has issued regulations for fixing of trading margins for interstate trading of power.13 T) Third power exchange in the country Central Electricity Regulatory Commission has given its approval to set up third power exchange in
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the country which will be owned by National Thermal Power Corporation, National Hydro Power Corporation, Power Finance Corporation, and Tata Consultancy Services. Developments in Hydropower, renewable energy and nuclear projects Hydro power projectsAs on FY 2009, there were 40 hydro power projects with an aggregate capacity of 13,085 MW under construction. Hydro Power projects have been facing difficulties on account of factors such as difficult and inaccessible potential sites, difficulties in land acquisition, rehabilitation issues, environmental and forest related issues, inter state issues, geological surprises and long gestation period. 84 schemes with an installed capacity of 22,383 MW have been allotted to private developers by states. There were 11 schemes with an installed capacity of 4,111 MW under construction in private sector. As on FY 2009, out of the 162 projects for which preliminary feasibility reports were prepared under the 50,000 MW Hydro Electric initiative, 77 schemes 33,951MW have been taken up for detailed survey & investigation and preparation of detailed project reports implementation of which DPRs for 18 schemes have been completed. Central Electricity Authority has identified about 31,000 MW capacity under Twelfth Plan. Of this about 25,316MW is considered feasible. Renewable EnergyGoI has envisaged National Action Plan on Climate Change, which envisages increase in usage of green energy with an aim to minimize the carbon footprint in the country as also provide electrification through distributed generation to remote areas. NAPCC has stipulated that minimum renewable purchase standards may be set at 5% of the local power purchase in 2010 an dtherafter should increase by 1% each year for 10 years. Regulatory commissions in the country are also emphasizing the procurement of renewable energy by Distribution companies as stipulated bythe Renewable Purchase Obligations. GoI has set target of 14,000 MW for renewable energy during Eleventh Plan period, of which only 60% capacity addition is likely to be achieved. Potential for wind power is estimated in the range of 50,000 MW to 1,00,000 MW in the country. Wind energy has been the main contributing force which has witnessed increase in level of indigenization in the manufacturing of wind generators and increasing trend towards state of the art technologies such as use of lighter and large blades in turbines, more aerodynamic design, higher towers and direct drive and variable speed gearless operation using advance power electronics. GoI is also encouraging the addition of solar power under Jawaharlal Nehru National Solar Mission, where in 20,000 MW of solar power have been planned in three phases upto the 13th Five Year Plan

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(i.e. FY 2022). Under the first phase (up to March 2013) of the mission, upto 1,100 MW grid connected solar power plants have been targeted. Under the Mission, NTPC, Vidyut Vyapar Nigam Ltd. is designated as the nodal agency to procure solar power from PV the thermal project developers at a tariff by the Central Electricity Regulatory Commission. Nuclear PowerIndia has signed 123 agreement (Concerning peaceful uses of Nuclear Energy) with the United States in October 2008, paving the way for development of civilian nuclear energy in the country. The ban on nuclear fuel imports into the country has also been lifted by the Nuclear suppliers group thus enabling the country to procure nuclear reactors / equipment as well as nuclear fuel. The integrated 14 energy policy has envisaged a possibility of reaching a nuclear power capacity of 21000 29000 MW by 2020, and 48000 63000 MW by 2030, through a mix of indigenous Pressurized Heavy Water Reactors, Fast Breeder Reactors, and Light Water Reactors which however is continent on availability / import of fuel / reactors through international cooperation as also on the evolving nuclear policy / regulatory framework and issues pertaining to nuclear liability / legal and institutional framework. Developments in TransmissionPower evacuation has been a critical issue on account of factors such as a) development / augmentation of transmission system to cater to the long term requirements of large number of upcoming inter state private sector generation projects as also need to harness renewable energy / non firm power into the grid, b) requirements of maintaining the redundancies and reliability of interconnected network (as per the grid code) with increasing complexity and c) requirements to cater to the increasing volume of short term / open access transactions. GoI is planning to develop National Inter State transmission Grid with interregional transfer capacityof 37,700MW at an investment of Rs. 55,000 crore by FY 2012. The power grid of the future is expected to be more intelligent, effective and environmentally sensitive comprising of several elements such as Ultra High Voltage / HVDC (765KV ac, 800KV HVDC and 1200 KV AC) lines, flexible alternating current transmission system (FACTS), dynamic control systems, wide area monitoring system and distribution network management. Power Grid Corporation of India Ltd is planning an additional investment of Rs. 80,000 crore over the next eight years to build transmission corridors and strengthen the grid in the country. PGCIL is planning to complete nine transmission corridors over next five years to evacuate 50,000 MW of

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upcoming projects by IPPs in various States. PGCIL is also exploring to set up transmission project toevacuate power from neighboring countries such as Myanmer, Banglahesh, Nepal, Bhutan and Sri Lanka. Seven transmission projects with investment of Rs. 5000 crore have been planned during Eleventh Plan period, while 14 other (Ultra Mega Transmission Projects) at an investment of Rs. 20,000 crore have been identified by the empowered committee on transmission that are to be awarded through tariff based competitive bidding to the private sector. CERC has recently notified regulations on sharing of inter state transmission charges and losses which have replaced the Regional Postage Stamp method by Point of Connection(PoC) system. Under the regional transmission on a pooled basis in the ratio of quantum of power drawn through the inter state transmission system. A state in the southern region buying power from a state in the eastern region have to pay for the pooled transmission charges and losses of both eastern and southern regions leading to pancaking of charges. Under PoC, transmission charges will be locationally differentiated the generators will have to take aview both on transmission costs of electricity and transportation costs of fuel. With many new independent power producers (IPPs) expected to come up in the near future and bulk consumers being allowed to buy power through open access from anywhere in India, even across regions, the change seems relevant. Under the new transmission pricing framework, all the power users will be default signatories to the transmission service agreement, requiring these users to pay the point of connection charge, which covers the revenue of transmission licensees. This commercial arrangement is expected to help financial closure of various transmission investment, as the transmission licensees will no longer be faced with the uncertainty in power generation project and the difficulties in getting the bulk power transmission agreements (BPTA) signed by all the expected beneficiaries of the transmission system. 15 Under the new system, the entire network is divided into various nodes based on geographical continuity, electrical contiguity and major consumption areas and major generation areas (load centers). Under the new mechanism, both the generator (who till now has been exempted) and load serving entity need to pay transmission charges and losses based on their location / connection level in the network (defined by node / zone comprising network of nodes) and the corresponding network usage chares as per the load flow studies conducted for each node one at a time. Thus the

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location of generating company will impact its share during the allocation of transmission charges and losses as computed in the respective network node / zone. The new pricing system is also likely to facilitate the development of competitive market by enabling interregional Case I bids to overcome distortions pertaining to pancaking of transmission charges, rationalize long term, medium term and short term open access charges and encourage solar power projects (by allowing Zero transmission charges and losses) and merchant power plants. Development in procurement of Power equipment / EPC contractsThere has been increasing reliance on the imports of Chinese equipment for the ongoing power projects. About 30,000 MW of capacity (of which 10,000 MW are planned for twelfth plan projects) has been ordered with Chinese equipment companies. Several companies have also been awarding Engineering, procurement and construction (EPC) contracts to Chinese companies. While there have been issues pertaining to design and technical parameters (such as improper design, ability to run on domestic / low calorific value and high ash content coal, boiler tube failures, water leakage, etc)with Chinese equipment, several domestic companies have had a satisfactory experience with Chinese equipment. Thus as the lifetime costs of main plant equipment are influenced by operation and maintenance costs, availability of spare parts and technical support, the long run cost to performance will remain critical for the companies relying on Chinese equipment. GoI has recently imposed restrictions on Chinese workface which however has been recently relaxed. GoI has also directed the Central and State sector generation players to source supercriticalequipment from domestic companies. GoI is also contemplating to impose duty on power equipment imports. While the domestic companies (BHEL, L&T, etc) who are currently running full order books are augmenting their capacities, several joint ventures (L&T and Mitsubishi Heavy Industries, JSW Group and Toshiba Corporation, Bharat Forge Ltd. and Alstom, etc) have come in to power equipment market to cater to the increasing demand for BTG and other equipment. It is estimated the to fulfill the demand for power by different sectors, domestic power equipment manufacturing capacity of about 40,000 MW needs to be created every year till FY2017. Restrictions on Chinese workforce may compel the domestic players to restrict the contracts to boiler turbine and generator (BTG) only rather than the manpower intensive EPC contracts. Thus, the availability of quality EPC players assumes significance for the increasing requirements of power projects in the country. Coal supply outlookIndia has Coal resources of about 267 billion tonnes of which proven reserves are about 106 billion

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tonnes. Recent initiatives / plans in domestic coal sector such as competitive bidding of coal, improvised / underground mining efforts, New Coal Distribution (NCDP), revision in coal prices, fuel supply agreements with power utilities, pricing of coal based on Gross calorific Value rather than Useful Heat Value, creation of coal regulator, etc might give a fillip to the domestic coal production(by Coal India Ltd.). As on March 31, 2009, 201 coal blocks with geographical reserves of coal of 45.89 billion tonnes have been allocated to eligible companies. Of the 201 blocks, 3 blocks have been de allocated and mining lease of one block has been declared void. Out of remaining 197 blocks with reserves of 16 27.59 Billion tonnes have been allocated to PSUs. Out of the 100 blocks allocated to private companies with geographical reserves of 17.93 Billion tonnes production has commenced in 23 blocks. According in industry sources, in FY2011, domestic production of coal is projected at 572 million tonnes(mt) (6.8 % increase compared to previous fiscal) and imports are projected to reach 84 million tonnes (21% increase from previous fiscal).While Coal India Ltd, the major producer of domestic coal is aggressively planning to increase its production and also acquire overseas coal assets, the overall demand is unlikely to be met from the domestic supplies alone in the medium to long term. Power sector consumes about 72% of the total consumption of coal in the country. Domestic consumption of coal by power sector is projected at 442 million tonnes in FY2011, while the domestic availability is projected at 389 million tonnes. Thus, the domestic demand supply gap of coal for the power sector is projected to be about 53 million tonnes FY2011. After factoring Gross Calorific value, the projected imports are estimated at 35 million tonnes in FY2011. The domestic coal demand supply gap for power sector is projected to increase to about 120 million tonnes by FY2013. According to industry sources, Coal requirements for the power sector is projected to reach to about 800 mt by FY 2017 and increase to 1070MT by FY2022. However, domestic coal supply is projected to increase to 554 Mt by FY 2017 and 756MT by FY2022. Total Coal imports are projected to reach about 200 million tonnes by FY2017. NTPC the largest power company in the country plans to raise its existing 32,000 MW capacity to 51,000 MW by 2012 and 75,000 MW by 2017. It is estimated that NTPC (currently 80% of capacity is coal based) which has consumed 150 Mt during Fy2010 would be requiring about 280 MT of coal annually by the end of the 12th plan period (2017). Around 70% NTPC coal requirement by the end of 12th plan period is expected to be met from domestic sources, while another 20% through its mines

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and the remaining 10% through imports. There have been also issues pertaining to the coal imports such as steep escalation in international coal prices and proposal by Indonesia to impose a cap on their exports. With the sudden emergence of China as a major buyer of thermal coal, global coal prices had also witnessed sharp escalation tillFY 2008, which moderated subsequently. However the international sport prices have been witnessing upturn and is projected to be firm in the long term. In Jan 2010, GoI has made allocations for IPPs (which are feasible for commissioning in Eleventh plan period). GOI have recently issued notice to cancel the coal blocks allocations where the respective players have failed to develop the same considering the shortage scenario of coal. GoI has prioritized coal linkages during Twelfth plan period based on Sector and technology. GoI is also planning to stop allocating domestic coal linkages to UMPPs which henceforth have to fully rely on imported coal and directed the domestic players to have the technical capability to process blended coal by importing upto 20% of their coal requirements. Several players are also scouting for acquisition of overseas coal assets. Recently companies such as Reliance Power, JSW Energy, Essar, NTPC and Tata Power have bought overseas coal mines. Gas Supply outlookIn Fy 2010, the overall demand for natural gas (from sectors viz., Power, Fertilisers, Petrochemicals,Spongeiron / Steel, City Gas Distribution, CNG, etc.) in the country is 190 mmscmd against overall suppliers (from Administered Price Mechanism (APM) gas, Joint Venture (JV) gas, natural gas supplies by private under National Exploration and Licensing Policy (NELP) and Regasified Liquefied Natural Gas (RLNG) of 175 mmscmd witnessing a shortage scenario to the extent of 15 mmscmd. At present, the total allocation of domestic gas to the power sector stands at 79 mmscmd. Gas based power plants have operated at 67.3% Plant Load Factor (PLF) in FY 2010, which is an 17 improvement over 57.6% in FY09, on account of increase in allocation of gas supplies from KG basin to power sector. Potentially, gas power plants can operate at 90% PLF and thus have a potential shortfall of about 19 mmscmd. At the end of eleventh Plan period, projected shortfall in gas supplies are 35 mmscmd @90% PLF) /14 mmscmd @70%PLF). About 90 mmscmd of additional supplies are projected to need the requirements (at 70% PLF) of planned capacity during 12th plan period. The development in national grid is likely to facilities the continuity in supplies to the power plants and facilitate setting up of power plants closer to the load centers. While the Reliance has begun gas production from KG basin, the gas supplies from recent discoveries of ONGC and GSPC is likely to partially materialize by FY2017. Overall gas supplies by Reliance, ONGC and GSPC are likely to be in the range of 50 to 70 mmscmd by
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FY2017. By FY2017, overall demand is projected to increase at CAGR of 9% to 350 mmscmd (including LNG imports of about 100 mmscmd). Thus the projected gas shortage is about 50 mmscmd by the end to twelfth plan period (i.e. by FY2017). The countrys dependence on LNG imports is likely to increase in the medium term. The proposed gas pooling pricing framework may facilitate introduction of substantial quantities of new LNG supplies while managing price volatility (e.g. by introducing 5MTPA of LNG at $6 per mmBtu, the pooled price along with the existing 185mmscmd of gas (54.3 mmscmd of ONGC&OIL at $1.79 per mmBtu, 18.6 mmscmd gas of PMT / Ravva gas at $5.35 per mmbtu, 90 mmscmd from KGD 6 gas at $4.4 per mmbtu and 22mmscmd term LNG gas at $5.42 per mmbtu) workds out to b $4.02 per mmbtu). In view for the gas shortages expected, Ministry of power has recently (Sep. 2010) recommended following criteria for allocation of gas fro gas based power projects planned during 12th Plan period. Break up of gas allocation: i) CPSUs / SPSUs / Case II bidding projects / Government of India initiative (SEZ and DMICDC to get 50% of the available domestic gas with the following breakup:40% for CPSUs/SPSUs/ Case II bidding projects. 4% for SEZ 4% for DMICDC Ii) remaining 505 of available domestic gas with the following break up:40% for IPPs 5% for peaking / CCHP stations 5% for CPPs Priority for projects in state which does not have coal resources and is facing acute power shortage. Projects at coastal locations using Sea Water instead of fresh Water or air cooled condenser In addition, the power ministry has asserted that supplies can begin only after the developer

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has executed power purchase agreements (PPA) corresponding to at least 85% of the 60% of the total project capacity. The duration of such PPAs will need to be fro at least 5 years corresponding to the periodicity of the relevant Gas Sale and Purchase Agreements (GSPA), which are also normally executed for 5 year period. PPAs would be co terminus with the GSPAs, if reviewed and renewed in the future.

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 Company Profile of BHEL

COMPANY PROFILE

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BHARAT HEAVY ELECTRICALS LIMITED

The vital role played by the BHEL today in the country is the mark of it continuous efforts to improve the service in the nation by consultancy, manufacturing and offering services in power sector.

This success story of BHEL however goes back to 1956 when its first plant was set up in BHOPAL. Three more major plants followed in HARIDWAR, HYDERABAD and THIRUCHIRAPALLI flowed this. These plants have been the core of BHELS efforts to grow and diversify and become one of the most integrated power and industrial equipment manufacturers in the world. The company now has 14 manufacturing units,8 service centres and 4 power sector regional centres, besides project sites spread all over India and abroad.

BHEL manufactures over 180 products under 30 major product groups and meets the needs of core sector like power, industry, transmission, defence, telecommunications, oil business etc. Its products have established an enviable reputation for high quality and reliability. This is due to the emphasis placed all along on design, engineering and manufacturing to international standards by acquiring and adopting some of the best technologies developed in its own R&D centres. BHEL has acquired ISO 9000 certification for environments. BHEL caters to the needs of different sectors by designing and manufacturing according to the need of its client in power sector.

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COMPANY VISION,MISSION and OBJECTIVE

VISION: A world class, innovation, competitive and profitable engineering enterprise providing total business solutions.

MISSION: To be the leading engineering enterprise providing quality products system and services in the field of energy, transportation, industry, infrastructure and other potential areas. VALUES: 1. Meeting commitments made to external and internal customers. 2. Faster learning, creativity and speed of response. 3. Respect for dignity and potential of individuals. 4. Loyalty and pride of the company. 5. Team playing. 6. Zeal to excel. 7. Integrity and fairness in all matters.

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OBJECTIVES

GROWTH: To ensure a steady growth by enhancing the competitive edge of BHEL in exiting business, new areas and international operation so as to fulfil national expectations from BHEL.

PROFITABILITY: To provide a reasonable and adequate return on capital employed, primarily through improvements in operational efficiency, capacity utilization and productivity and generate adequate internal resources to finance the company growth. Confidence in providing increased value for this money through international standards of product, quality, performance and superior customer services.

TECHNOLOGY: To achieve technology excellence in operations by development of indigenous technologies to and efficient absorption and adaptation of imported technologies to suit business needs and priorities and provide a competitive advantage of the company. IMAGE: To fulfil the expectation which stock holders like government as own employees, customers and the country at large have from BHEL.

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SWOT ANALYSIS OF BHEL The strength, weakness, opportunities and threats which are being experienced by BHEL as a growing concern have been summarized up in the following lines.

STRENGTHS 1. Vast pool of trained man power. 2. Excellent state of art facilities. 3. Good working atmosphere 4. Rapport between management and union. 5. Product manufactured international quality 6. Low labour cost and low manufacturing cost. WEAKNESS 1. Excess man power 2. Slippage in delivery commitments 3. System implementation adequate 4. No financial package 5. Inadequate compensation package to employees.

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 OPPORTUNITIES 1. Growing power sector machinery 2. Liberalization has opened up the market 3. Navratna company status 4. Dominant player in domestic market. THREATS 1. Liberalizationentry of MNCS or private sector-more competition. 2. MNCS taking away good employees with attractive packages. 3. Government taxation policy-against manufacturing sector. 4. Poor infrastructure.

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PRODUCTS OF BHEL

BHEL manufactures a wide range of power plant equipments and also caters to the industry sector. 1. Gas turbines 2. Steam turbines 3. Compressors 4. Turbo generators. 5. Pumps 6. Pulverizes 7. Switchgears 8. Oil rigs 9. Electrics for urban transportation system 10. Telecommunication.

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Chapter 4 Data analysis and interpretation

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Current Ratio

year 2007-08 2008-09 2009-10 2010-11 2011-12

current assets 276062 310002 453597 580804 771519

current liability 208869 243220 376332 397574 502024

Ratios 1.32 1.27 1.2 1.46 1.54

Interpretation The ideal ratio for the concern is 2:1 i.e. current assets doubled for the current liabilities considered to be satisfactory. The current ratio of BHEL is less than 1 .Thus it has to maintain its efficient current assets.

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Acid Test Ratio Year 2007-08 2008-09 2009-10 2010-11 2011-12 Liquid assets 12 14 15 1475 1415 Liquid liabilities 208869 243220 376332 397574 502024

600000

500000

400000 Liquid assets Liquid liabilities 200000

300000

100000

0 2007-08 2008-09 2009-10 2010-11 2011-12

Acid Test Ratio Current Assets Inventory / Current Liabilities The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The company is maintaining the ratio above the standard norm , thus the management of BHEL is label to meet its current obligations.

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Net working capital year 2007-08 2008-09 2009-10 2010-11 2011-12 Net working capital 67193 96410 77265 183230 269495 Capital employed 79459 107986 96894 207051 305907 Ratios 0.84 0.89 0.797 0.884 0.881

NET WORKING CAPITAL = NET WORKING CAPITAL / CAPITAL EMPLOYED A higher networking capital ratio indicates efficient utilization of working capital. Therefore the company should concentrate more on working capital management. if the liability are the more than the assets than the working capital goes negative

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Debt equity ratio year 2007-08 2008-09 2009-10 2010-11 2011-12 Total debt 607 587 2566 2034 2265 Equity 3252 3252 3252 3252 3252 Rati os 0.18 0.18 0.78 9 0.62 0.7

Debt Equity Ratio : The debt equity ratio has been increasing over the years and it has been maintained at a level of .62 for the financial year 2009-10 the higher the debt indicate that company goes to increase the liability and there or the company should maintain the equal level of the debt and equity the ideal ratio should be 2 for maintain the standard level.
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Fixed assets ratio year 2007-08 2008-09 2009-10 2010-11 2011-12 Fixed Assets 12347 9909 17699 22595 31830 Capital employed 79459 107986 96894 207051 305907 Rati os 0.15 0.09 0.18 0.11 0.1

Fixed Assets Ratio = Fixed Assets / Capital Employed Generally financially well managed company will have its fixed assets financed by long term funds. There fore , the fixed assets ratio should never be more than 1.A ratio of .67 is considered ideal. The results forBHEL is much less at 0.1

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Interest coverage ratio PBIT 2007-08 2008-09 2009-10 2010-11 2011-12 63290 68916 68478 86438 130330 Interest 2300 5870 6826 7101 8583 Rati os 27.5 1 11.7 4 10.0 3 12.1 7 15.1 8

Interest Coverage Ratio.= PBIT/INTREST Interest coverage ration of BHEL is not constant, from 2008-09 the ratio is10 as in 2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio the higher the debt causes the higher the interest and the company has to maintain the high interest coverage ratio

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Gross profit year 2007-08 2008-09 2009-10 2010-11 2011-12 Gross profit 63290 68916 68478 86483 130330 Net sales 289241 310235 414816 500342 665323 Rati os 0.21 8 0.22 24 0.16 5 0.17 2 0.19 6

Gross Profit = Gross /net sales

Generally the higher gross profit ratio , the better for the performance of the concern .In BHEL , the company has started to increase from the year on year which is a very good sign for the company.
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Operating ratios year 2007-08 2008-09 2009-10 2010-11 2011-12 Operating cost 221227 234677 338382 404647 524531 Net sales 289491 310235 414816 500342 665323 Ratios 0.76 0.76 0.81 0.8 0.79

Operating Ratio : Operating Cost / Net Sales Generally the lower the Operating Cost , the better for the concern. The ratio should be below1 which is satisfactory for the concern. The company has to low its operating expenses.

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Debtors turnover ratio year 2007-08 2008-09 2009-10 2010-11 2011-12 Net credit sales 289491 310235 414816 500342 665323 Average debtors 177301 215291 287414 328201 537364 Ratios 1.63 1.44 1.44 1.53 1.24

Debtors Turnover Ratio = Net Credit Sales / Average Debtors The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since 2008-09 from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient management of Debtor and credit sales.

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Creditors turnover ratio year 2007-08 2008-09 2009-10 2010-11 2011-12 Net credit purchases 21772 25459 31900 60293 65700 Average creditors 46452 54586 58078 88228 103305 Ratios 0.48 0.4664 0.5493 0.68 0.64

Creditors Turnover Ratio : Net Credit Purchases /Average Creditors Interpretation : The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on the increasing trend since past two financial years. The management should try to reduce this by adopting proper payment policies.

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Fixed asset turnover ratio Net sales 2007-08 2008-09 2009-10 2010-11 2011-12 289491 310235 414816 500342 665323 Fixed assets 12247 9909 17699 22595 31830 Ratio s 23.63 31.3 23.43 22.14 20.9

700000 600000 500000 400000 300000 200000 100000 0 2007-08 2008-09 2009-10 2010-11 2011-12 Net sales Fixed assets

Fixed Assets Turnover Ratio. = Net Sales / Fixed Assets At high fixed assets turnover ratio indicates better utilization of the firms fixed assets. A ratio around 5 is considered ideal for the concern .In BHEL it is more than 22.This is a very good sigh for the company.

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FINDINGS

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FINDINGS 1. The ideal ratio for the concern is 2:1 i.e. current assets doubled for the current liabilities considered to be satisfactory. The current ratio of BHEL is less than 1 .Thus it has to maintain its efficient current assets.

2. The ideal quick ratio is 1:1 which is considered satisfactory for the concern. The company is maintaining the ratio above the standard norm , thus the management of BHEL is label to meet its current obligations.

3. A higher networking capital ratio indicates efficient utilization of working capital . Therefore the company should concentrate more on working capital management

4. The debt equity ratio has been increasing over the years and it has been maintained at a level of .62 for the financial year 2009-10

5. Generally financially well managed company will have its fixed assets financed by long term funds. There fore , the fixed assets ratio should never be more than 1.A ratio of .67 is considered ideal. The results for BHEL is much less at 0.11

6. Interest coverage ration of BHEL is not constant , from 2008-09 the ratio is10 as in 2009 -10 the ratio is 12.17, There is a random fluctuation in the ratio

7. Generally the higher gross profit ratio , the better for the performance of the concern .In BHEL , the company has started to increase from the year on year which is a very good sign for the company.

8. Generally the lower the Operating Cost , the better for the concern. The ratio should be below1 which is satisfactory for the concern.

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9. The higher the ROCE ratio , the better for the concern. The company has been keeping up the good performance is increasing at the rapid phase which in turn is a good sign for the company.

10. The BHEL`s debtor turnover ratio was below 2 .Its has bee increasing since 2008-09 from 1.44 to 1.53 in 2009-10, the increasing trend Implies the efficient management of Debtor and credit sales.

11. The BHEL`s creditors Turn Over Ratio is at 0.68 , it has been on the increasing trend since past two financial years. The management should try to reduce this by adopting proper payment policies.

12. At high fixed assets turnover ratio indicates better utilization of the firms fixed assets. A ratio around 5 is considered ideal for the concern .In BHEL it is more than 22.This is a very good sigh for the company.

13. The Total Assets turnover ratio of the BHEL is below 1 . This shows greater ability of the firm to utilize the investment in the business

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CONCLUSIONS

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CONCLUSIONS 1. In the year 2008-2009 the net working capital is Rs 67193 lacs. 2. There was decrease in the ratio up to the year 2007-2008. The ratio is decreasing year by year. But the BHEL is maintaining current ratio more than the standard norms of 2. 3. The organization is able to maintain both current ratio and quick ratio above the standard norms. i.e. the ideal current ratio for the concern is 2:1 and the quick ratio is 1:1 but the cash ratio is fluctuating. 4. The quick ratio of the organization is in decreasing trend year by year. 5. Investment in current assets has been increasing to Rs 310002 in 2007-2008. 6. The inventory turnover ratio of BHEL is fluctuating i.e., showing decreasing trend to 2003-2004. But there onwards it has slowly increased till the financial year. 7. The debtors turnover ratio has decreased from the year 2008-2009 to 2010-2011 It was 2.10 in the year 2011-2012. There was decrease in debtors turnover ratio till the financial year.

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SUGGESTIONS

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SUGGESTIONS 1. The current ratio of BHEL is decreasing year by year . it was 2.41 and during the year 2008-2009 it has gone down to 1.2 later in the next financial year 2009-2010 it has gone up to 1.46, so the company should concentrate effectively on the management of Current Assets and Current Liabilities. 2. The Net Working Capital of BHEL is good for almost in range for each and every year. It is always in the ideal ratio for every organization. 3. The BHEL is using the moving average method in valuation of stock. 4. The debtors constitute nearly 50% of the Total Current Assets. For the Company it is difficult to manage the accounts receivables. The company should collect debts as quickly as possible. 5. The company has to exercise cost of control and cost of reduction techniques to increase its profitability. 6. The debtors turn over ratio in 2008-2009 is 1.97. the ratio has increased than previous years except for 2007-2008, which had 2.10. the decreasing ratio shows the inefficient management. They should concentrate more on the collection of the debts. 7. The return on investment ratio of the BHEL is 59.40 in 2008-2009. It has increased when compared to previous years ratios. It is beneficial to investors who are interested to know the profits earned by the company. 8. The investment in loans and advances should be minimized to possible extent. 9. Effective internal control system should be established. So that it can have control over all aspects of the company.

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BIBILOGRAPHY

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BIBILOGRAPHY Books and references

1. Khan M.Y, Jain P.K., (2010), Financial Management, 3rd edition, McGraw Hill Education. 2. Maheshwari S.N., (2009), Financial Management- Principles and Practice, 9th Edition Sultan Chand & Son.

News papers 1. The Economic times 2. The Times of India

Websites

1. http://www.bhel.com/financial_information/index.php 2. http://www.studyfinance.com/lessons/workcap

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ANNEXURE

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Last 5 year Balance sheet of BHEL

Balance Sheet of ------------------- in Rs. Cr. -------------------

Mar '12

Mar '11

Mar '10

Mar '09

Mar '08

12 mths

12 mths

12 mths

12 mths

12 mths

Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities 489.52 489.52 0.00 0.00 24,883.69 0.00 25,373.21 0.00 123.43 123.43 25,496.64 Mar '12 489.52 489.52 0.00 0.00 19,664.32 0.00 20,153.84 0.00 163.35 163.35 20,317.19 Mar '11 489.52 489.52 0.00 0.00 15,427.84 0.00 15,917.36 0.00 127.75 127.75 16,045.11 Mar '10 489.52 489.52 0.00 0.00 12,449.29 0.00 12,938.81 0.00 149.37 149.37 13,088.18 Mar '09 489.52 489.52 0.00 0.00 10,284.69 0.00 10,774.21 0.00 95.18 95.18 10,869.39 Mar '08

12 mths

12 mths

12 mths

12 mths

12 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories 9,729.62 5,409.83 4,319.79 1,324.63 461.67 13,444.50 8,049.30 4,648.82 3,400.48 1,762.62 439.17 10,963.03 6,579.70 4,164.74 2,414.96 1,550.49 79.84 9,235.46 5,224.43 3,754.47 1,469.96 1,212.70 52.34 7,837.02 4,443.03 3,462.21 980.82 658.47 8.29 5,736.40

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Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

26,336.13 6,671.98 46,452.61 14,217.32 0.00 60,669.93 0.00 33,638.01 7,641.37 41,279.38 19,390.55 0.00 25,496.64

27,354.62 1,430.15 39,747.80 13,267.07 8,200.00 61,214.87 0.00 31,469.58 15,030.37 46,499.95 14,714.92 0.00 20,317.19

20,688.75 865.08 30,789.29 4,801.24 8,925.00 44,515.53 0.00 28,097.73 4,417.98 32,515.71 11,999.82 0.00 16,045.11

15,975.50 1,950.51 25,763.03 4,616.67 8,364.16 38,743.86 0.00 23,415.10 4,975.58 28,390.68 10,353.18 0.00 13,088.18

11,974.87 1,511.02 19,222.29 7,366.17 6,875.00 33,463.46 0.00 16,632.97 7,608.68 24,241.65 9,221.81 0.00 10,869.39

Contingent Liabilities Book Value (Rs)

2,424.33 103.67

2,324.26 411.71

2,538.13 325.16

2,546.25 264.32

1,673.19 220.10

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