Equity Investment Cia 3: Reliance Powers
Equity Investment Cia 3: Reliance Powers
Equity Investment Cia 3: Reliance Powers
Name - Ananyasparsha
Roll No – 1712766
Class – 5 BCOM IF
RELIANCE POWERS
COMPANY ANALYSIS:
➢ CORPORATE PROFILE
•The Company appointed Shri. J P Chalasani, former Whole-time Director of Reliance Energy
Ltd as CEO of the Company.
2008
•Export-Import Bank of the US (Ex-Im) gave its preliminary approval to finance Reliance
Power's 4,000-MW project in Sasan, Madhya Pradesh.
2010 •Reliance Coal Resources Ltd, has entered into Share Purchase Agreements to acquire the
entire share capital of two coal companies in Indonesia.
•Europe's largest oil company, Royal Dutch Shell has joined hands with India's Reliance
Power (RPower) to jointly develop a liquefied natural gas (LNG) import terminal off the
2012 coast of Kakinada in Andhra Pradesh by 2014.
•Reliance Power signed MoU with Ming Yang Holdings Singapore, a subsidiary of China Ming
Yang Wind Power Group Limited to boost power operations in India, overseas.
The company’s project sites are broadly located in western India (12,220 MW), northern India (9,080 MW),
northeastern India (4,220 MW) and southern India (4,000 MW). They include six coal-fired projects (14,620 MW) to
be fuelled by reserves from captive mines and supplies from India and abroad, two gas-fired projects (10,280 MW)
to be fuelled primarily by reserves from the Krishna Godavari basin (the "KG Basin") off the east coast of India, and
four hydroelectric projects (3,300 MW), three of them in Arunachal Pradesh and one in Uttarakhand.
They have our own laboratory. This is accredited by the government of India, with a metering team in Mumbai and
Delhi, a team of business analysts to catch tampering and an R&D department that is working on new design
requirements due to the customers getting smarter and smarter.
The total R&D expenditure, incurred during the year 2018-19 was 16.79crore.
▪ Past and planned capital expenditures
- For the year ended 31st March 2019, the company has incurred capital expenditure of 349.13 crores and 168.17
crores in Bithnok and BTPSE project respectively which includes land of 176.92 crores and capital advance of 261.72
crores. On the basis of clarification received from management, current year expenses also have been capitalized in
the project cost.
- For R & D, the capital expenditure for the year ended 31st March 2019 was 3.84 Crores and for 2018 it was 0.18
Crores.
- Under notes to Financial Statements, capital expenditure for reportable segments is given as:
• Lignite Mining- for the Y.E 2019 it is 52.11 crores and for Y.E 2018 it is 189.47 crores.
• Power Generation – for the Y.E 2019 it is 1,924.05 crores and for Y.E 2019 it is 1008.88 crores.
Board Members
- Personal:
Anil Dhirubhai Ambani was born on 4th June, 1959, in Mumbai.
He is the younger son of the visionary entrepreneur Shri Dhirubhai Ambani. He graduated (B.Sc. in Science)
from K.C. College, Mumbai University and pursued MBA at Wharton, University of Pennsylvania. He is married to
former actress - Tina Munim and has two sons - Jai Anmol (25 Years) and Jai Anshul (21 Years).
- Corporate:
Anil Dhirubhai Ambani is one of India's leading business leaders and founder of the Reliance Group
He is the Chairman of the Reliance Group.
2. Shri Sateesh Seth- (Non-executive and Non-Independent Director)
ME, MBA having over thirty-five years of industry and leadership experience in both
public and private domains. A well acknowledged leader in power industry circles of
the country known for deep insight, vision, team building capability, fostering strong
relationships and a proven track record of execution and operation of large IPPs. Most
recently chaired the 'Association of Power Producers' (APP) and also was a member of
National Committee on Power at CII and FICCI at New Delhi.
Is a Commerce and Law Graduate from the University of Bombay. He was enrolled as an
Advocate of the Bombay High Court in 1973 and qualified as a Solicitor from Bombay in
1976. He also qualified as a Solicitor of the Supreme Court of England in 1982. He is a
Director of Companies of repute including Aditya Birla Finance Limited, Hercules Hoists
Limited, Escorts Limited, Reliance Broadcast Network Limited and Rosa Power Supply
Company Limited.
6. Ms Rashna Khan: - (Independent Director)
▪ Electoral System
As per the Company’s Act 2013, the members are given the facility to exercise their right to vote on resolutions
proposed to be passed at the Annual General Meetings, by electronic means. The members may cast their votes
using an electronic voting system from a place other than the venue of the meeting.
▪ Corporate Governance
They have adopted the Reliance Anil Dhirubhai Ambani Group Corporate Governance Policies and Code of Conduct
which has prescribed a set of systems, processes and principles confirming to the international standards, aimed at
promoting the interests of all their stakeholders. This is demonstrated in shareholder returns, high credit ratings,
governance processes and an entrepreneurial, performance focused work environment. Their customers have
benefited from high quality products delivered at the most competitive prices. Their employee satisfaction is
reflected in the stability of their senior management, low attrition across various levels and substantially higher
productivity. Above all, they feel honoured to be an integral part of India’s social development through their CSR
Activities.
• Accounts receivable turnover ratio = 2.54 > 1 - A high receivables turnover ratio can indicate that a company's
collection of accounts receivable is efficient and that the company has a high proportion of quality customers that
pay their debts quickly. A high ratio can also suggest that a company is conservative when it comes to extending
credit to its customers.
• Inventory turnover ratio = 8.11 > 1 - Inventory turnover measures how fast a company sells inventory. A high
ratio implies either strong sales or insufficient inventory.
• Total assets turnover ratio = 0.18 < 1 - If a company has a low asset turnover ratio, it indicates it is not efficiently
using its assets to generate sales.
• Fixed assets turnover ratio = 0.2 < 1 - It indicates how well the business is using its fixed assets to generate sales.
A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.
▪ Compensation
1. Remuneration i.e. Cost-to-Company (CTC) shall comprise of two broad components; fixed and variable.
2. Fixed portion comprises of Base pay and Choice pay components.
3. Variable pay termed as Performance Linked Incentive (PLI) comprises of a pre-determined maximum that can be
paid as % at the end of the performance year based on the composite score achieved during the relevant
performance year.
4. Performance Year shall be from 1st April - 31st March.
5. PLI is based on the following dimensions with indicated weightages for computing the Composite score based
on: (a) Individual performance rating; (b) Function/Project Annual Operating Plan (AOP) achievement rating;
and (c) Company AOP achievement rating.
▪ Turnover
Sales turnover for the Y.E March 2019 is 43.38 crores and sales turnover for the Y.E March 2018 was 44.27
crores.
▪ Corporate Culture
They have a vision of becoming the largest and the best integrated power company. They are building some of
the biggest power plants and coal mines in the shortest time periods. They are executing one of the biggest
growth stories, one that will impact every other Indian in some way or the other. The passion to stand out and
the passion to do things differently has been their trademark. This is the passion of their employees who strive
for excellence, who have gone that extra mile, who have fought mindsets that say – this is impossible, it’s this
‘can do’ attitude which has made what Reliance is today. They invest first in their people before they invest in
their business. Working at Reliance is not a job, it’s a mission and it’s a calling. They believe in Equal
Employment Opportunity and Affirmative Action.
▪ Benefits
✓ Insurance, Health & Wellness ✓ Financial & Retirement
Health Care Stock Options
Life Insurance Retirement Plan
Disability Insurance Performance Bonus
✓ Family & Parenting ✓ Vacation
Work from Home
PTO
Maternity Leave Sick Leave
Flexible Hours
Bereavement Leave
✓ Perks & Other Benefits ✓ Professional Support
Employee Discount Diversity Program
Free Lunch or Snacks Job Training & Tuition
Gym Membership Apprenticeship Program
▪ Retirement Plan
The company has adopted Accounting Standard 15, “Employee Benefits”. The Company has classified various
Employee Benefits as under:
▪ Labour Relations
There are no employee associations that are recognized by the Management. Strong deterring policies on
recruitment against child labour/ forced labour/ involuntary labour and discrimination in any manner are made part
of employment process. Similarly, Reliance Power has zero tolerance on sexual harassment.
▪ Management Strengths
▪ SWOT Analysis
STRENGTHTS
1. Huge capacity generation in pipeline
2. Projects are spread across most parts of the country
3. Advanced technology to reduce emissions has led to acquiring of carbon credits
4. Strong backing of the Reliance group makes it a force
5. Largest Portfolio
6. Diversified Fuel Sources and Technologies
7. Strategically Located Power Projects
8. Fuel Access Security
9. Diversified Power Off- take Arrangements
WEAKNESS
1. Incomplete projects leading to rise in costs which include interest costs
2. Income obtained currently is other income which is due to sale of assets and not due to operations.
Increasing other income leads to decline of share holder trust and decrease in share price.
OPPORTUNITIES
1. Setting up huge power plants in Jharkhand and Orissa which have huge reserves of coal
2. Huge scope in power sector once the projects become operational
3. Investing in Non- conventional energy projects
4. International collaborations
THREATS
1. Fluctuating foreign prices of coal and oil
2. Changes in foreign policies regarding import of coal and oil.
3. Govt. policies and regulations affect operations.
▪ Strategies
o Reduction of cost of power generation
o Ensuring fuel supply
o Focusing on power deficit regions
o Establishing an optimal miss of off-take arrangements
▪ Major Competitors
1. Tata Power
2. Adani Power
3. NTPC
▪ USP
The largest power generation portfolio under development in the private sector in India.
INDUSTRY ANALYSIS
➢ INDUSTRY BACKGROUND
India at present stands as the 4th largest consumer of energy, whereas in terms of electricity generation capacity it
ranks no. 5th in the world. Power sector is the backbone of industrial, commercial and agricultural sector and as
Indian industries across sectors ramped up their capacities in the decade gone by, generation of power as well as its
distribution gained immediate attention from the authorities to support India’s growth story. The Power sector in
India is categorized into three major segments viz. Generation, Transmission and Distribution.
Electricity generation refers to generation of power from primary sources of energy which is commonly expressed
in kilowatt-hours (kWh). Electricity generation capacities in India are classified on the basis of ownership. State
governments collectively account for ~40% of the total generation capacity, followed by private players (~31%) and
central government (~29%) . India’s power generation capacity has increased from ~143GW in FY08 to ~223 GW in
FY13, witnessing a CAGR of ~11.8%
Transmission in context of power refers to evacuation of electricity from a generator to a distributor. The
transmission systems in the country are categorized into inter-state and intra-state systems. Power Grid Corporation
of India largely owns and operates the inter-state assets, whereas the state utilities own the intrastate assets.
Although the transmission sector in India has been opened up for private players, their presence is negligible.
A distribution system technically acts as a carrier of electricity to the end-user from the transmission network. At
present the Indian power sector has close to 200 million consumers and there are ~73 distribution utilities catering
to their needs. The distribution utilities include electricity departments, private distribution companies and state
electricity boards. Capacities-Classification (Ownership): FY13 Power Generation: Capacity & Actual : FY08-FY13
Although India is amongst the largest consumers in the world, in terms of per capita consumption of power its
ranking in the world is dismal. As per the World Bank database, India’s per capita consumption in 2011 was 684
kWh. However the same for countries like USA and U.K. was 13,246 kWh and 5,516 kWh respectively.
➢ INDUSTRY CHARACTERISTICS
Below I have identified the current stage of the Indian power industry in the ‘Industry Life Cycle’ i.e. it is in the
Mature Stage/ Late Stage since it follows the characteristics as described in the two illustrations below:
ILLUSTRATION 1
ILLUSTRATION 2
▪ Brand Loyalty
The emergence of smart grids changes the customer-utility relationship. To facilitate the transition
towards a sustainable, reliable and economically viable energy system, utilities need to develop smart grid
products and services that have strong customer acceptance and enable different customer segments to
engage in energy efficiency. Thus, integrating customer feedback on innovative smart grid services early in
the innovation process is of crucial importance. Further, energy providers need to increase customer
loyalty and invest in relationship marketing in order to survive and be successful in a competitive market
environment. A five-month field experiment was conducted that investigated the effectiveness of different
reward programs in increasing customer loyalty and customer feedback provision in the energy sector. The
results demonstrate that reward programs have a positive effect on behavioral (customer feedback
provision) and attitudinal (e. g. satisfaction with the energy provider) aspects of customer loyalty. The
reward type matters, however. While monetary reward programs are effective in increasing customer
feedback provision, only social reward programs can improve attitudinal aspects of customer loyalty.
Energy providers should therefore consider tailoring the reward type to meet their program objectives
when employing reward programs.
▪ Intensity of Competition
Competition is getting intense, but despite there being enough room for many players, shortage of inputs
such as natural gas and regulatory hurdles has dissuaded new entrants.
▪ Buyer Power
o Based on the following parameters it can be said that Overall the buyer has weak power.
o Low Switching Cost – switching cost for the buyers is low as of now but is supposed to increase when new
players come in the market as the product in not differentiable i.e. electricity.
o Buyer size – Very small.
o Oligopoly Threat – Very Low.
o Undifferentiated product – As the product i.e. electricity is undifferentiated product, so this increases buyer
power.
o Tendency to switch – Buyers will switch to the supplier who is efficient and cost effective.
o Price sensitivity – Not much price sensitive
o Financial muscle – Nothing as compared to PSEs.
o Buyer independence – Low as of now but if more suppliers come into picture as Govt. has sought competition in
this market, the buyer power will increase.
o Product dispensability – Very Low.
▪ Supplier Power
o Based on the following parameters it can be assessed that the supplier Power in High.
o Supplier size – Very Large as the suppliers are Large PSEs.
o Oligopoly threat – Small number of suppliers enjoy monopoly, thereby contributing to the supplier power.
o Switching costs – Very high, as only large govt. companies are the suppliers.
o Player independence – Low
o Substitute inputs – As no substitute inputs, so the firms have no choice.
o Player dispensability – High
o Differentiated input- Inputs are same i.e. electricity in case of company buying electricity from wholesale market
and selling to the end-users, and coal or gas in case the company is in power generation field.
o Bargaining Power of the suppliers – Not very high since the tariff structure is mainly regulated.
▪ Threat of Substitutes
o The Threat of substitutes is Weak as per the following parameters:
o Low Switching Cost – The cost of switching to substitutes like gas, solar penal, etc. is high.
o Number of Companies in the industry is few so the market share is concentrated.
▪ Barriers to exit:
1. Direct costs - preservation and reinstatement costs, site remediation costs and staff redundancy costs.
2. Site leases - Where the land on which generating plant is located is leased, the lease document will usually
include provisions which require the lessee to remove the generating plant and return the site to the state it
was in prior to the commencement of the lease at the end of the lease term.
3. Staff redundancy costs.
4. Indirect opportunity costs- profits foregone by a firm if it leaves an industry such as:
-The operating profits the generator could expect to earn on its plant if it continued operating.
-The proceeds (if any) from the sale of its plant and the expected return on those proceeds.
▪ Technologies used:
1. Coal-based-
Conventional coal-based plants have two major drawbacks - low overall efficiency levels and high pollution levels.
As a result, technological research has focused on the development of non-polluting technologies using coal. The
most popular of these technologies are fluidized bed combustion (FBC) and integrated gasification combined cycle
(IGCC). In Fluidized bed combustion, air is blown at high pressure through finely ground coal. The particles mix with
the air and form a floating or fluidized bed. This bed acts like a fluid in which the constituent particles collide with
one another. The bed contains around 5 per cent coal (or fuel) and 95 per cent of inert material (such as ash or
sand). Integrated gasification combined cycle IGCC technology is used to enhance the thermal efficiency of coal-
based power plants and reduce emissions. In IGCC plants, the coal is gasified using a gasifier. The gaseous coal is
purified to remove pollutants such as sulphur. The purified coal is subsequently burnt to generate hot gases, which
are used to run a gas turbine. The exhaust gases, containing waste heat, are used to boil water and generate steam.
The steam is used to run a steam turbine. IGCC technology can deliver thermal efficiency of up to 48-50 per cent. In
addition, it can be used with other heavy fuels such as refinery residues and petroleum coke. IGCC technology is
also environment friendly, as pollutants such as sulphur dioxide and oxides of nitrogen, are reduced to very low
levels. However, the cost of IGCC plants is higher than conventional plants.
2. Nuclear Power-
Nuclear power plants reduce carbon dioxide emissions. However, safety concerns abound, particularly those
relating to exposure to harmful nuclear radiations. In addition, the cost of a nuclear plant is around three times
higher than that of a gas-based plant. However, new technologies are being developed to address some of the
safety issues associated with nuclear power plants:
• Pebble bed modular reactor-
The pebble bed modular reactor (PBMR) differs from a conventional ‘light water’ reactor as it utilizes no fuel rods
and cooling water. The fuel comprises nearly 15,000 small carbon and ceramic-coated specks of uranium that are
pressed into a small pebble. The pebble is coated with a layer of graphite. Inside the pebble, uranium undergoes
fission and releases heat. However, the graphite layer traps the radioactivity. Around 300,000 pebbles are kept in
a reactor, which is cooled by a flow of helium gas. The helium gas expands due to the heat and spins an electricity
generating turbine. However, since helium is chemically and radiologically inert, it does not become radioactive as
it circulates through the pebble bed. One of the main advantages of PBMR technology is that relatively small units
producing 100-150 MW of power can use it. In addition, the core of the reactor does not melt even at high
temperatures, as the operating temperature continues to remain below the melting point of the ceramic pebbles
that contain the fuel. This helps prevent safety hazards.
3. Distributed generation-
In distributed generation, small generators are located near the consumer site, within the distribution system.
Distributed gencos are not directly connected to the transmission grid. Considering the technological
improvements and reduction in the costs of small generators, the amount of power consumption through
distributed generation is expected to rise in the future.
4. Technology in transmission-
HVDC transmission- One of the pre-requisites for integrating grids is to synchronise their frequencies. In India,
synchronous integration of regional grids was not possible due to variations in frequencies and voltages. Therefore,
the most viable alternative is the asynchronous transfer of power through HVDC transmission links.
AMI is not a single technology implementation, but rather a fully configured infrastructure that must be integrated
into existing and new utility processes and applications. This infrastructure includes home network systems,
including communicating thermostats and other in-home controls, smart meters, communication networks from
the meters to local data concentrators, back-haul communications networks to corporate data centers, meter data
management systems (MDMS) and, finally, data integration into existing and new software application platforms.
Additionally, AMI provides a very ―intelligent step toward modernizing the entire power system. At the consumer
level, smart meters communicate consumption data to both the user and the service provider. Smart meters
communicate with in home displays to make consumers more aware of their energy usage. Going further, electric
pricing information supplied by the service provider enables load control devices like smart thermostats to
modulate electric demand, based on pre-established consumer price preferences. More advanced customers
deploy distributed energy resources (DER) based on these economic signals. And consumer portals process the AMI
data in ways that enable more intelligent energy consumption decisions, even providing interactive services like
prepayment.
▪ Government Regulation
Electricity Act, 2003 provides an enabling framework for accelerated and more efficient development of the power
sector. The Act seeks to encourage competition with appropriate regulatory intervention. Competition is expected
to yield efficiency gains and in turn result in availability of quality supply of electricity to consumers at competitive
rates.
Section 3 (1) of the Electricity Act 2003 requires the Central Government from time to time to prepare the National
Electricity Policy and tariff policy, in consultation with the State Governments and the Authority for development of
the power system based on optimal utilization of resources such as coal, natural gas, nuclear substances or
materials, hydro and renewable sources of energy.
Section 3 (3) of the Act enables the Central Government to review or revise the National Electricity Policy from time
to time.
The National Electricity Policy aims at laying guidelines for accelerated development of the power sector, providing
supply of electricity to all areas and protecting interests of consumers and other stakeholders keeping in view
availability of energy resources, technology available to exploit these resources, economics of generation using
different resources, and energy security issues. The National Electricity Policy has been evolved in consultation with
and taking into account views of the State Governments, Central Electricity Authority (CEA), Central Electricity
Regulatory Commission (CERC) and other stakeholders.
1. Inadequate last mile connectivity is the main problem to supply electricity for all users. The country already has
adequate generation and transmission capacity to meet the full demand temporally and spatially. However, due to
lack of last-mile link-up with all electricity consumers and reliable power supply, many consumers depend on diesel
generators using costly diesel oil for meeting unavoidable power requirements. Also more than 10 million
households are using battery storage UPS as back-up in case of load shedding.
2. A system of cross-subsidization is practiced based on the principle of 'the consumer's ability to pay'. In general, the
industrial and commercial consumers subsidize the domestic and agricultural consumers.[214][215] Further,
Government giveaways such as free electricity for farmers, partly to curry political favor, have depleted the cash
reserves of state-run electricity-distribution system and led them to a mass debt of ₹2.5 trillion (US$36 billion). This
has financially crippled the distribution network, and its ability to pay for purchasing power to meet the demand in
the absence of subsidy reimbursement from state governments. This situation has been worsened by state
government departments that do not pay their electricity bills.
3. Name plate/declared capacity of the many coal-fired plants owned by IPPs are overrated above the
actual maximum continuous rating (MCR) capacity. The reason for overrating the capacity is to over-invoice the
plant cost.These plants operate 15 to 10% below their declared capacity on daily basis and operate rarely at
declared capacity. Thus these units are not effectively contributing to the online spinning reserves to maintain
power system/grid stabilization. This is also due to the reason that point of connection charges are levied in India
based on energy exported instead of MCR capacity as applicable for national grid in the UK.
4. Coal supply: Despite abundant reserves of coal, the country isn't producing enough to feed its power plants. India's
monopoly coal producer, state-controlled Coal India, is constrained by primitive mining techniques and is rife with
theft and corruption. Poor coal transport infrastructure has worsened these problems. To expand its coal production
capacity, Coal India needs to mine new deposits. However, most of India's coal lies under protected forests or
designated tribal lands. Any mining activity or land acquisition for infrastructure in these coal-rich areas of India, has
been rife with political demonstrations, social activism and public interest litigations. Being a massive consumer of
local and imported coal, India should end the Coal India's coal pricing monopoly and implement coal trading
in commodities stock exchange to arrive at market-determined coal price on daily basis.
5. Poor pipeline connectivity and infrastructure to harness India's abundant coal bed methane and natural gas
potential. The giant new offshore natural gas field has delivered far less gas than claimed to cause a shortage of
natural gas.
6. Average transmission, distribution and consumer-level losses exceeding 30% which includes the auxiliary power
consumption of thermal power stations, fictitious electricity generation by wind generators, solar power plants &
independent power producers (IPPs), etc.
7. The residential building sector is one of the largest consumers of electricity in India. Continuous urbanization and
the growth of population result in increased power consumption in buildings. Thus, while experts express the huge
potential for energy conservation in this sector, the belief still predominates among stakeholders that energy-
efficient buildings are more expensive than conventional buildings, which adversely affects the "greening" of the
building sector.
8. Theft of power: In India, financial loss due to theft of electricity may be around $16 billion yearly. Populist pro-free
power measures also bleed the power companies. Some power companies continue to bleed and lead to bankruptcy
due to one of these factors. This also leads legal users to pay more. This creates a scenario where villages have a
huge cut of power and simultaneously availability of power in the grid with no purchase by DISCOMs.
➢ Analysis of Demand
o Demand trends
During the fiscal year 2017-18, the utility energy availability was 1,205 billion KWh with a short fall of requirement by 8
billion KWh (-0.7%) against 1230 billion KWh anticipated. The peak load met was 160,752 MW with a short fall of
requirement by 3,314 MW (-2%) against 169,130 MW anticipated. In LGBR 2018 report, India's Central Electricity
Authority anticipated for the 2018–19 fiscal year, energy surplus and peaking surplus to be 4.6% and 2.5%
respectively.[47] Though few states are expected to face energy shortage, power would be made available adequately from
the surplus regions with the available excess capacity inter regional transmission links.[48] By the end of calendar year
2015, India has become power surplus country despite lower power tariffs.
o Demand drivers
1. Nearly 0.28% of households (0.6 million) have no access to electricity in India. The International Energy
Agency estimates India will add between 600 GW to 1,200 GW of additional new power generation capacity
before 2050.
2. About 136 million Indians (11%) use traditional fuels. Traditional fuel is an inefficient source of energy, its burning
releases high levels of smoke. Some reports, including one by the World Health Organisation, claim 300,000 to
400,000 people in India die of indoor air pollution and carbon monoxide poisoning every year because of biomass
burning. Traditional fuel burning in conventional cook stoves releases unnecessarily large amounts of pollutants,
between 5 and 15 times higher than industrial combustion of coal, thereby affecting outdoor air quality, haze and
smog, chronic health problems, damage to forests, ecosystems and global climate. The growth of the electricity
sector in India may help find a sustainable alternative to traditional fuel burning.
3. Rural and Urban electrification- As on 28 April 2018, all Indian villages were electrified. India's Ministry of Power
launched Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) as one of its flagship programmes in July 2015 with
the objective of providing round the clock power to the rural areas. It focuses on reforms in the rural power sector
by separation of feeder lines (rural households & agricultural) and strengthening of transmission and distribution
infrastructure.
The total installed capacity in the country as on 31st March 2017 was 344 GW as on 31st March 2018, out of this
64.8% is accounted by the thermal power stations. With this the total capacity addition during the 12th plan period is
99,209.5 MW.
The power supply market in India consists of renewable and non renewable sources of energy. Major market is
covered by Thermal Power Plants generating about 66% of total power production. The Renewable energy sources
including Wind Energy, Solar Energy and Biomass Energy constitute of 10% installed power capacity. It is to be noted
that the government is taking initiative to expand the installation capacity for renewable sources up to 20,000 MW
by 2020. This will not only reduce the cost of power production but also increase the power capacity to maximum.
▪ Trading
Bulk power purchasers can buy electricity on a daily basis for short, medium and long term duration from reverse e-
auction facility. The electricity prices transacted under reverse e-auction facility are far less than the prices agreed
under bilateral agreements. Multi Commodity Exchange has sought permission to offer electricity future markets in
India. The Government of India is also planning reverse procurement process in which generators and discoms with
surplus power can seek e-bids for power supply up to one-year period to put an end to bilateral contracts and find
out market-based price discovery for electricity.
▪ Demand Supply Gap
The demand supply gap for FY18 was range bound between 0.6-0.9% with few months reporting low peak and base
deficit of 0.6%. The demand, however remains low due to various reasons including the low paying capacity of
financially distressed Discoms and last mile connectivity to all consumers yet to be achieved. This has inturn led to a
heavy financial burden in the form of NPA’s to the banking sector.
➢ Analysis of Pricing
The cost of a power project depends on the type of fuel used. The choice of fuel for a power plant depends on
several factors listed below:
• Relative cost of generation
• Availability of fuel
• Transportation constraints
• Environmental hurdles
The capital cost of power plants also vary significantly based on the source of energy, infrastructure, plant size,
technology, equipments and interest costs incurred during construction.
Tariff:
A power generation project has three party tariff structure.
1. The fixed part of tariff comprising the interest on long term debt, interest on working capital, depreciation,
operation and maintenance expenses and taxes.
2. The variable part of tariff comprising the cost of primary and secondary fuel.
3. Unscheduled interchange to account for the valuation between the actual generation and the scheduled
generation.
The investment costs in the power sector are very high in the infrastructure and since they have very less
competitors and mostly government monitors, the power rates are set as per standards. The demand and supply of
power is also a determining factor for power rates and hence the distribution companies keep the charges
accordingly. In some areas due to lower economic level the government subsidizes the rates and hence the
government will be responsible for filling the gap of subsidy.
1. LIQUIDITY RATIOS – Measures the company’s ability to meet its short-term obligations.
▪ Current Ratio = Current Assets/ Current Liabilities = 0.56 < 1
A current ratio below 1 means that the company doesn't have enough liquid assets to cover its total short-
term liabilities.
▪ Quick Ratio =Most Liquid Current Assets/ Total Current Liabilities = 1.22 > 1
A company having a quick ratio higher than 1 can instantly get rid of some of its current liabilities.
2. SOLVENCY RATIOS - Measures the company’s ability to meet its debt obligations.
▪ Debt Equity Ratio= Total Debt/ Total Equity = 1.56 > 1
- If total liabilities are greater than total equity, the debt to equity ratio will be greater than 1 indicating
that more than 50% of the company's assets have been funded by debt. It also means that the owner's
ownership % of assets is going up.
▪ Long- term Debt Equity Ratio = Long Term Debt/ Total Equity = 1.04 > 1
- Same as debt equity ratio but long term debts are taken into consideration.
▪ Financial Leverage = Total Assets/ Total Equity = 7.03
Financial leverage ratio helps in determining the effect of debt on the overall profitability of the company
High financial leverage means the fixed costs of running the business are high.
▪ Interest coverage = 1.07
Lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of
bankruptcy or default. A higher ratio indicates a better financial health as it means that the company is more
capable of meeting its interest obligations from operating earnings.
▪ Net Debt (Total ST & LT Debt – Total Current Assets) to EBITDA = (27,029.92- 17,675.18) /1113.50 = 8.40
A higher Debt/EBTIDA ratio means that the company is heavily leveraged and it might face difficulties in paying
off its debts.
▪ Net Debt to Capital = 23008.96/ 29835.05 = 0.77
Same as debt to capital.
▪ Debt to Assets = 27,029.92/ 44,407.39 = 0.61
A ratio less than one (<1) means the company owns more assets than liabilities and can meet its obligations by
selling its assets if needed. The lower the debt to asset ratio, the less risky the company.
▪ Debt to Capital = 27,029.92/ 29835.05 = 0.91< 1
A good debt to equity ratio is around 1 to 1.5. It is lesser than 1 so it should improve.
3. PROFITABILITY RATIOS- Measures a company’s ability to generate profitable sales from its resources (assets).
▪ Gross Profit Margin(%) = 37.68
▪ Operating Profit Margin(%) = 47.91
▪ Profit Before Interest And Tax Margin(%) = 36.21
▪ Net Profit Margin(%) = -35.99
▪ Return on capital employed(%) = 7.7
▪ Return on Assets (ROA) = NI/Avg. Total Assets = -2,951.82 / 47456.25 = -0.06
▪ Return on Equity (ROE) = NI/ Avg. Total Equity = -2,951.82 / 2805.13 = -1.05
- Higher the profitability ratios the better.
VALUATIONS
Method used – Discounted Cash Flow Method
FCF = Cash from Operating Activities – Capital Expenditures.
Let us calculate the FCF for the last 3 financial years.
(Rupees in Lakhs)
PARTICULAR 2017-2018 2016-2017 2015-2016
Cash from Operating 4,36,472 4,70,536 4,68,207
Activities (after income tax)
Capital Expenditures (45,974) (60,061) (211,911)
FCF 390,498 410,475 256,296
Step 4 - The Terminal Value – is the sum of all the future free cash flow, beyond the 10th year, also called the terminal
year. It can be taken as 3%.
Terminal Value = FCF * (1 + Terminal Growth Rate) / (Discount Rate – Terminal growth rate).
Let us calculate the terminal value considering a DR of 9% and terminal growth rate of 3%
= 9,92,702.26*(1+3%)/(9%-3%)
= 9,92,702.26*(1.03)/(6%)
=9,92,702.26*17.17
=Rs. 1,70,44,697.80
Step 5 – NPV
DR = 9%
Sl. Year GR FCF Discounted CFS Discounted CFS
No.
01 2015-16 15% 352,423 352,423/1.09 3,23,323.85
02 2016-17 15% 405,286.45 405,286.45/(1.09)^2 3,41,121.49
03 2017-18 15% 466,079.41 466,079.4/(1.09)^3 3,59,906.87
04 2018-19 15% 535,991.32 535,991.32/(1.09)^4 3,79,710.19
05 2019-20 15% 616,390 616,390/(1.09)^5 4,00,617.44
06 2021-22 10% 678,029 678,029/(1.09)^6 404,286.56
07 2022-23 10% 745,831.9 745,831.9/(1.09)^7 408,004.32
08 2023-24 10% 820,415.09 820,415.09/(1.09)^8 411,730.94
09 2024-25 10% 902,456.60 902,456.60/(1.09)^9 415,514.80
10 2025-26 10% 992,702.26 992,702.26/(1.09)^10 419,321.72
NPV of Future FCFs = 38,63,538.18
Along with this, we also need to calculate the net present value for the terminal value = 1,70,44,697.80/ (1+9%)^10 =
7,199,875.72.
Therefore, the sum of the present values of the cash flows is = NPV of future free cash flows + PV of terminal value =
38,63,538.18 +7,199,875.72 = Rs. 11063413.9 is the Total PV of FCFs
Share Price = Total Present Value of Free Cash flow / Total Number of shares
We know from Reliance Power’s FY 2017-18 annual report the total number of outstanding shares is. Hence the intrinsic
value or the per share value is – 9,64,895.
= 11,060,614.98/ 9,64,895
REFERENCES:
• https://en.wikipedia.org/wiki/Electricity_sector_in_India
• RBSA Indian Power Industry Analysis report
• Research Article on “Study on Indian Power Sector : Opportunities and Trend”
• Research Article on “Power Sector Analysis and Project Economics”
• Analysis on Power Supply Market in India -http://power-supply-market-india.blogspot.com/2012/03/analysis-
on-power-supply-market-in.html?m=1
• https://www.electricalindia.in/power-sector-in-2019-beyond/
• https://m.moneycontrol.com/stock/RP/financials/financials-ratio
• Company Annual Reports FY 2015-16, 2016-17, 2017-18.