VIGNANA JYOTHI INSTITUTE OF MANAGEMENT

CORPORATE FINANCE

MANAGEMENT

TERM PAPER

Presented By:

Group No. 7

I

TABLE OF CONTENTS

TATA POWER ................................................................................................................................................. 1

NTPC Limited ................................................................................................................................................. 2

POWER GRID CORPORATION OF INDIA LIMITED .......................................................................................... 3

TORRENT POWER LIMITED ........................................................................................................................... 5

SUZLON ENERGY LIMITED ............................................................................................................................. 6

CAPITAL STRUCTURE ..................................................................................................................................... 8

CAPITAL STRUCTURE IN A PERFECT MARKET............................................................................................ 8

CAPITAL STRUCTURE IN THE REAL WORLD ............................................................................................... 9

TOTAL CAPITAL STRUCTURE OF A FIRM .................................................................................................. 10

FINANCIAL STATEMENTS OF THE COMPANIES ....................................................................................... 12

FINANCIAL CONDITIONS ......................................................................................................................... 12

FINANCIAL SOURCES OF THE COMPANIES .............................................................................................. 15

WORKING CAPITAL POLICY ......................................................................................................................... 19

WORKING CAPITAL CYCLE OF COMPANIES ............................................................................................. 20

WORKING CAPITAL POLICIES .................................................................................................................. 24

DIVIDENDS AND DIVIDEND POLICIES .......................................................................................................... 26

TYPES OF DIVIDEND: ............................................................................................................................... 26

Dividend policy ........................................................................................................................................ 26

II

CONCEPT OF DIVIDEND ........................................................................................................................... 27

INVESTMENT OF COMPANIES ..................................................................................................................... 29

REFERENCES ................................................................................................................................................ 33

III

TABLE OF FIGURES

Figure 1: Capital Structure of a firm ............................................................................................................ 10

Figure 2: Graph of Financial Sources of the Companies ............................................................................. 15

Figure 3: Graph for debt and Equity of Companies .................................................................................... 16

Figure 4: Debt/Equity Ratios of Companies ................................................................................................ 17

Figure 5: Working Capital Cycle: ................................................................................................................. 19

Figure 6: Working capital cycle in manufacturing business ........................................................................ 20

Figure 7: Graph for WCC of Torrent Power Ltd........................................................................................... 20

Figure 8: Graph for WCC of NTPC ............................................................................................................... 21

Figure 9: Graph of WCC for Power Grid Corp. of India ............................................................................... 22

Figure 10: Graph of WCC for Suzlon Energy Ltd. ........................................................................................ 23

Figure 11: Graph of WCC for TATA Power .................................................................................................. 23

Figure 12: Graph for WCC of Companies .................................................................................................... 24

Figure 13: Graph of Total Investment of Companies .................................................................................. 32

IV

LIST OF TABLES

Table 1: Financial Statement of companies for FY 2013-2014 ................................................................... 13

Table 2: Debt and Equity of Companies ...................................................................................................... 16

Table 3: Calculating Working capital cycle (WCC) of Torrent Power .......................................................... 20

Table 4: Calculating Working capital cycle (WCC) of NTPC ......................................................................... 21

Table 5: Calculating Working capital cycle (WCC) of Power Grid Corp. of India ........................................ 22

Table 6: Calculating Working capital cycle (WCC) of Suzlon Energy Ltd. .................................................... 22

Table 7: Calculating Working capital cycle (WCC) of TATA Power .............................................................. 23

Table 8: WCC of Companies ........................................................................................................................ 24

Table 9: EPS, DPS and Share Price of Companies........................................................................................ 28

Table 10: Dividend Payout & Dividend Yield Ratios of the Companies ...................................................... 28

Table 11: Investment of Torrent Power Ltd. in FY 2014 ............................................................................. 29

Table 12: Investment of NTPC in FY 2014 ................................................................................................... 29

Table 13: Investment of TATA Power in FY 2014 ........................................................................................ 30

Table 14: Investment of Power Grid Corp. in FY 2014 ................................................................................ 30

Table 15: Investment of Suzlon Energy Ltd. in FY 2014 .............................................................................. 31

Table 16: Total Investment of Companies .................................................................................................. 31

1

TATA POWER

Tata Power is India's largest integrated power

company with a significant international presence.

The Company has an installed generation

capacity of 8581 MW in India and a presence in

all the segments of the power sector viz

Generation, Transmission, Distribution and

Trading. It has successful public-private partner

ships in Generation, Transmission and

Distribution in India namely "Tata Power Delhi

Distribution Limited" with Delhi Vidyut Board

for distribution in North Delhi, 'Powerlinks

Transmission Ltd.' with Power Grid Corporation

of India Ltd. for evacuation of Power from Tala

hydro plant in Bhutan to Delhi and 'Maithon

Power Ltd.' with Damodar Valley Corporation

for a 1050 MW Mega Power Project at

Jharkhand. It is one of the largest renewable

energy players in India has developed country's

first 4000 MW Ultra Mega Power Project at

Mundra (Gujarat) based on super-critical

technology. Recently, Tata Power has been

selected to work as a Distribution Franchisee

(DF) in Jamshedpur Circle of Jharkhand State

Electricity Board (JSEB).

Its international presence includes strategic

investments in Indonesia through 30% stake in

coal mines and a geothermal project; in

Singapore through Trust Energy Resources to

securitise coal supply and the shipping of coal

for its thermal power generation operations; in

South Africa through a joint venture called

‘Cennergi' to develop projects in 16 different

countries in Africa; in Australia through

investments in enhanced geothermal and clean

coal technologies and in Bhutan through a hydro

project in partnership with The Royal

Government of Bhutan. With its track record of

technology leadership, project execution

excellence, world class safety processes,

customer care and driving green initiatives, Tata

Power is poised for a multi-fold growth and

committed to 'lighting up lives' for generations to come.

Type Public Company

Traded as

NSE: TATAPOWER

BSE: 500400

BSE SENSEX Constituent

Industry Electric utility

Founded 1911

Founder Dorabji Tata

Headquarters Mumbai, Maharashtra, India

Key people Cyrus Pallonji Mistry(Chairman)

Anil Sardana (CEO and MD)

Services

Electricity generation and distribution

natural gas exploration, production,

transportation and distribution

Net income 12766 million (2013)

Number of

employees 4,126 (March 2013)

Parent

Tata Group

Website www.tatapower.com

2

NTPC Limited

NTPC Limited is also known as

National Thermal Power Corporation

Limited and is an Indian Central Public Sector

Undertaking (CPSU) under the Ministry of

Power, Government of India, engaged in the

business of generation of electricity and allied

activities. It is a company incorporated under

the Companies Act 1956 and a "Government

Company" within the meaning of the act. The

headquarters of the company is situated at New

Delhi. NTPC's core business is generation and

sale of electricity to state-owned power

distribution companies and State Electricity

Boards in India. The company also undertakes

consultancy and turnkey project contracts that

involve engineering, project management,

construction management and operation and

management of power plants. The company

has also ventured into oil and gas exploration

and coal mining activities. It is the largest

power company in India with an electric power

generating capacity of 42,964 MW. Although

the company has approx. 18% of the total

national capacity it contributes to over 27% of

total power generation due to its focus on

operating its power plants at higher efficiency

levels.

It was founded by Government of India in

1975, which held 75% of its equity shares on

31 March 2013 (after divestment of its stake in

2004, 2010 and 2013). In May 2010, NTPC

was conferred Maharatna status by the Union

Government of India. It is ranked 424th in in

the Forbes Global 2000 for 2014.

Type Government-owned corporation

Public company

Traded as

BSE: 532555

NSE: NTPC

BSE SENSEX Constituent

CNX Nifty Constituent

Industry Electric Utility

Founded 1975

Headquarters New Delhi, India

Key people Arup Roy Choudhury

(Chairman & MD)

Services Electricity generation and distribution

natural gas exploration, production,

transportation and distribution

Revenue INR 73904 Crores (2013-14)

Net income INR 13834 Crores (2013-14)

Number of

employees

25,484 (March 2013)

Website www.ntpc.co.in

3

POWER GRID CORPORATION OF INDIA LIMITED

Power Grid Corporation of India

Limited (POWERGRID) is an Indian state-owned

electric utilities company headquartered in Gurgaon,

India. POWERGRID transmits about 50% of the total

power generated in India on its transmission network.

Its subsidiary company, Power System Operation

Corporation Limited (POSOCO) handles power

management for Power Grid. POWERGRID also

operates a telecom business under the name

POWERTEL.

Power Grid Corporation of India Limited was

incorporated on October 23, 1989 under the

Companies Act, 1956 with an authorized share

capital of Rs. 5,000 Crore (subsequently enhanced to

Rs. 10,000 Crore in Financial Year (FY) 2007-08) as

a public limited company, wholly owned by the

Government of India.

Its original name was the 'National Power

Transmission Corporation Limited', and it was

changed with planning, executing, owning, operating

and maintaining high-voltage transmission systems

in the country. On 8 November 1990, the National

Power Transmission Corporation received its

Certificate for Commencement of Business. Their

name was subsequently changed to Power Grid

Corporation of India Limited, which took effect on

October 23, 1992.

Type Government-owned corporation

Traded as

NSE: POWERGRID

BSE: 532898

Founded 23 October 1989

Headquarters Gurgaon, India

Area served India

Key people Shri RN Nayak

(Chairman and MD)

Products transmission and distribution;

energy trading

Revenue 157.21 billion (2013–14)

Net income 44.97 billion (2013–14)

Number of

employees

10,000 (2012)

Website powergridindia.com

4

POWERGRID started functioning on management basis with effect from August, 1991 and

subsequently it took over transmission assets from NTPC, NHPC, NEEPCO, NLC, NPC, THDC,

SJVNL etc. in a phased manner and it commenced commercial operation in 1992-93. In addition

to this, it also took over the operation of existing Regional Load Despatch Centers (RLDCs) from

Central Electricity Authority (CEA), in a phased manner from 1994 to 1996, which have been

upgraded and modernized with State of-the-art Unified Load Despatch and Communication

(ULDC) schemes. Consequently, National Load Despatch Centre (NLDC) was established in 2009

for overall coordination at National level.

According to its mandate, the Corporation, apart from providing transmission system for

evacuation of central sector power, is also responsible for Establishment and Operation of

Regional and National Power Grids to facilitate transfer of power within and across the Regions

with Reliability, Security and Economy on sound commercial principles. Based on its performance

POWERGRID was recognized as a Mini-ratna category-I Public Sector Undertaking in October

1998 and conferred the status of "Navratna" by the Government of India in May 2008.

POWERGRID, as the Central Transmission Utility of the country, is playing a major role in Indian

Power Sector and is also providing Open Access on its inter-State transmission system.

5

TORRENT POWER LIMITED

Torrent Power is one of the leading

brands in the Indian power sector, promoted by

the Rs.13116 crore Torrent Group, a group

committed to its mission of transforming life by

serving two of the most critical needs - healthcare

and power. Torrent Pharmaceuticals Ltd., the

flagship company of the Torrent Group, is a

major player in the Indian pharmaceuticals

industry with a vision of becoming a global entity

in the arena.

With an all-round experience in generation,

transmission and distribution of power, and a

proven track record of implementing large power

projects, Torrent Power is the most experienced

private sector player in Gujarat.

Torrent Power foresaw the prospects in the power

sector much before the liberalization, when it

took-over an ailing power cable company in 1989

(now known as Torrent Cables Limited) and

successfully turned it around.

The high points of Torrent’s foray into power

however were the acquisitions of two of the

India’s oldest utilities – The Surat Electricity

Company Ltd and The Ahmedabad Electricity

Company Ltd. Torrent turned them into first rate

power utilities comparable with the best, in terms

of operational efficiencies and reliability of

power supply.

Torrent has a generation capacity of 3202 MW and distributes power to 2.87 million customers

annually in Ahmedabad, Gandhinagar, Surat, Bhiwandi and Agra. Recently the company

implemented a 1200 MW gas based power project at Dahej in South Gujarat.

Type: Public

Traded as

BSE: 532779

NSE: TORNTPOWR

Industry: Energy

Founded: 1996

Headquarters: Ahmedabad, India

Products: Sale and distribution,

electricity generation and

distribution, wind power,

energy trading

Revenue: INR 88 billion (2014)

Number of

employees: 7200 (2014)

Parent: Torrent Group

Slogan: Transforming Life

Website: torrentpower.com

6

SUZLON ENERGY LIMITED

Suzlon Energy Limited is ranked as the

world’s fifth largest wind turbine supplier, in terms

of cumulative installed capacity and market share, at

the end of 2013. The company’s global spread

extends across Asia, Australia, Europe, Africa and

North and South America with over 24,200 MW of

wind energy capacity installed, operations across

over 30 countries and a workforce of over 10,000.

The Group has headquartered at Suzlon One Earth

in Pune, India which comprises Suzlon Energy

Limited and its subsidiaries.

Suzlon's story began in 1995 when founder Tulsi

Tanti was managing a 20-employee textile company.

Due to the erratic availability of power locally, and

its rising costs, the highest business expenditure after

the raw materials was electricity. The cost of

electricity also offset any profits made by the

company. After providing electricity for his own

company, Tanti realized that other companies in

India could also greatly benefit from being sold wind

power technology and advised on its use. With the

help of some of his friends in Rajkot, he moved into

wind energy production as a way to secure the textile

company's energy needs, and founded Suzlon Energy. Suzlon adopted a business model wherein

clients would be responsible for 25% of the up-front capital investment and Suzlon would arrange

the remaining 75% on loan. Initially banks were hesitant to fund loans for this model but by 2008

40-50 Indian banks were financing wind power projects for Suzlon clients.

The company manufactures blades, generators, panels, and towers in-house and large or offshore

turbines through its subsidiary Senvion. The company is integrated downstream and

delivers turnkey projects through its project management and installation consultancy, and

operations & maintenance services. Suzlon has offices, R&D and technology centers,

manufacturing facilities and service support centers spread across the globe.

Type Public company

Traded as

BSE: 532667

NSE: SUZLON

Industry Renewable energy

Founded 1995

Founder Tulsi Tanti

Headquarters Pune, India

Key people Tulsi Tanti, Chairman

Products Wind Turbines

Revenue 204.0286

billion(US$3.2 billion)

(2014)

7

Suzlon has design and R&D teams and facilities in India, Germany, Denmark and The

Netherlands. The international sales business of Suzlon is managed out of Aarhus, Denmark, while

its global management office is in Pune, India.

Suzlon crossed 8,000 megawatts of cumulative installations in India in September 2010. Suzlon

has cumulatively added over 7,600 megawatts of wind power capacity for over 1,700 customers

in India across 40 sites in eight States. Suzlon accounts for nearly half of the country’s total wind

installations.

In the key states of Tamil Nadu, Maharashtra and Gujarat, Suzlon’s installation base is over 1,000

megawatts each (Over 1GW). Leading corporate such as the Bajaj Group, the Birla Group, MSPL,

DLF, the Tata Group, the Reliance Group, the ITC Group, L&T, as well as public sector companies

like GSPL, HPCL, Indian Railways, Rajasthan Mines & Minerals, GACL, GSPC, GSFC, Indian

Oil, ONGC and State Bank of India (SBI, Nuclear Power Corporation of India Limited (NPCIL),

NALCO, GAIL, Vedanta Group (HZL), DLF Group, amongst others, have chosen Suzlon for their

wind power projects. Suzlon is India's leading wind turbine manufacturer with nearly 50 percent

YoY market share. The company has eight manufacturing facilities across the country. Suzlon has

a workforce of over 10,000 employees globally.

As of August 2014, Suzlon's debt was over 8000 crores. On 22 January 2015, Suzlon announced

the sale of Senvion SE, its wholly owned subsidiary, to Centerbridge Partners, a private equity

firm in a deal valued at 7200 crores. The deal is expected to ease Suzlon's debt burden. In a

further equity infusion, Dilip Shanghvi Family and Associates (DSA), run by Dilip Shanghvi, the

founder and managing director of Sun Pharmaceutical, agreed to purchase a 23 percent stake in

Suzlon for a sum of 1800 crores. The deal will see Tanti's holding shrink to 24 percent, but

management control will still remain with the Tanti family.

8

CAPITAL STRUCTURE

In finance, capital structure refers to the way a

corporation finances its assets through some combination of

equity, debt or hybrid securities. A firm's capital structure is

then the composition or 'structure' of its liabilities.

For example, a firm that sells Rs. 20 crore in equity and Rs. 80 crore in debt is said to be 20%

equity financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this

example, is referred to as the firm's leverage. In reality, capital structure may be highly complex

and include tens of sources.

The Modidliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the

basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical

result since it assumes away many important factors in the capital structure decision. The theorem

states that, in a perfect market, the value of a firm is irrelevant to how that firm is financed. This

result provides the base with which to examine real world reasons why capital structure is relevant,

that is, a company's value is affected by the capital structure it employs. These other reasons

include bankruptcy costs, agency costs, taxes, information asymmetry, to name some. This

analysis can then be extended to look at whether there is in fact an optimal capital structure: the

one which maximizes the value of the firm.

CAPITAL STRUCTURE IN A PERFECT MARKET

Assuming a perfect capital market i.e. no transaction or bankruptcy costs, perfect information;

firms and individuals can borrow at the same interest rate; no taxes; and investment decisions aren't

affected by financing decisions. Modigliani and Miller made two findings under these conditions.

Their first 'proposition' was that the value of a company is independent of its capital structure.

Their second 'proposition' stated that the cost of equity for a leveraged firm is equal to the cost of

equity for an unleveraged firm, plus an added premium for financial risk. That is, as leverage

increases, while the burden of individual risks is shifted between different investor classes, total

risk is conserved and hence no extra value created.

Their analysis was extended to include the effect of taxes and risky debt. Under a classical tax

system, the tax deductibility of interest makes debt financing valuable; that is, the cost of capital

decreases as the proportion of debt in the capital structure increases. The optimal structure, then

would be to have virtually no equity at all.

9

CAPITAL STRUCTURE IN THE REAL WORLD

If capital structure is irrelevant in a perfect market, then imperfections which exist in the real world

must be the cause of its relevance. The theories below try to address some of these imperfections,

by relaxing assumptions made in the M&M model.

Trade-off theory:

Trade-off theory allows the bankruptcy cost to exist. It states that there is an

advantage to financing with debt (namely, the tax benefit of debts) and that there is a cost

of financing with debt (the bankruptcy costs of debt). The marginal benefit of further

increases in debt declines as debt increases, while the marginal cost increases, so that a

firm that is optimizing its overall value will focus on this trade-off when choosing how

much debt and equity to use for financing. Empirically, this theory may explain differences

in D/E ratios between industries, but it doesn't explain differences within the same industry.

Pecking order theory:

Pecking Order theory tries to capture the costs of asymmetric information. It states

that companies prioritize their sources of financing (from internal financing to equity)

according to the law of least effort, or of least resistance, preferring to raise equity as a

financing means ―of last resort‖. Hence internal debt is used first, and when that is

depleted debt is issued, and when it is not sensible to issue any more debt, equity is issued.

This theory maintains that businesses adhere to a hierarchy of financing sources and prefer

internal financing when available, and debt is preferred over equity if external financing is

required. Thus, the form of debt a firm chooses can act as a signal of its need for external

finance. The pecking order theory is popularized by Myers (1984) when he argues that

equity is a less preferred means to raise capital because when managers (who are assumed

to know better about true condition of the firm than investors) issue new equity, investors

believe that managers think that the firm is overvalued and managers are taking advantage

of this over-valuation. As a result, investors will place a lower value to the new equity

issuance.

Agency Costs:

There are three types of agency costs which can help explain the relevance of capital

structure.

Asset substitution effect:

As D/E increases, management has an increased incentive to

undertake risky (even negative NPV) projects. This is because if the

project is successful, shareholders get all the upside, whereas if it is

unsuccessful, debt holders get all the downside. If the projects are

10

undertaken, there is a chance of firm value decreasing and a wealth

transfer from debt holders to shareholders.

Underinvestment problem:

If debt is risky, the gain from the project will accrue to debt

holders rather than shareholders. Thus, management have an

incentive to reject positive NPV projects, even though they have the

potential to increase firm value.

Free cash flow:

Unless free cash flow is given back to investors,

management has an incentive to destroy firm value through empire

building and perks etc. Increasing leverage imposes financial

discipline on management.

Arbitrage :

A capital-structure arbitrageur seeks opportunities created by differential pricing of

various instruments issued by one corporation. Consider, for example, traditional bonds

and convertible bonds. The latter are bonds that are, under contracted-for conditions,

convertible into shares of equity. The stock-option component of a convertible bond has a

calculable value in itself. The value of the whole instrument should be the value of the

traditional bonds plus the extra value of the option feature. If the spread, the difference

between the convertible and the non-convertible bonds grows excessively, then the capital-

structure arbitrageur will bet that it will converge.

TOTAL CAPITAL STRUCTURE OF A FIRM

Figure 1: Capital Structure of a firm

TOTAL CAPITAL

EQUITY CAPITAL

Equity

Preference share capital

Retained Earnings

DEBT CAPITAL

Term loans

Debentures

long term loans

11

A firm has to maintain a proper balance between

Long Term Funds & Short Term Funds

Loan Funds & Own Funds

The following options are available to a firm:

Capital structure with equity share only

Capital structure with equity share & preference share

Capital structure with equity share & debenture

Capital structure with equity share, debenture & preference share

EQUITY CAPITAL

Advantages:

1. Payment of dividend only when there is sufficient profit.

2. Management need not to make provision for repayment of finance.

3. Control over management remains with equity share holders.

4. Company does not require to mortgage its assets for issue of equity share, so mortgage

asset for long term debt in future can be created.

Disadvantages:

1. The expenses for procurement of capital through equity share is more.

2. Benefit of trading on equity can‘t be obtained.

3. Equity dividend is not tax deductible.

4. This may sometimes leads to over capitalization

DEBT CAPITAL

Advantages:

1. The administrative & issuing cost are normally lower than raising equity capital.

2. Cost advantage due to the ability to set debt interest against profit for tax purposes.

3. The pre tax rate of interest is invariably lower, than the return required by equity capital

suppliers.

4. Company can obtain benefit of trading on equity.

12

Disadvantages:

1. Payment of interest whether there is profit or loss.

2. Capacity of creating future debt for the company reduces.

3. There is fear of loss of control over management.

4. Assets are mortgaged to debenture holders so, they have first right on all assets of the

company.

FINANCIAL STATEMENTS OF THE COMPANIES

A company’s financial statements provide various financial information that investors and

creditors use to evaluate a company’s financial performance. Financial statements are also

important to a company’s managers because by publishing financial statements, management can

communicate with interested outside parties about its accomplishment running the company.

Different financial statements focus on different areas of financial performances.

FINANCIAL CONDITIONS

A company’s financial conditions are of a major concern to investors and creditors. As capital

providers, investors and creditors rely on a company’s financial conditions for both the safety

and profitability of their investments. More specifically, investors and creditors need to know

where their money went and where it is now. The financial statement of balance sheet addresses

such issues by providing detailed information about a company’s asset investments. The balance

sheet also lists a company’s outstanding debt and equity components, and so debt and equity

investors can better understand their relative positions in a company’s capital mix

13

Table 1: Financial Statement of companies for FY 2013-2014

14

15

FINANCIAL SOURCES OF THE COMPANIES

Figure 2: Graph of Financial Sources of the Companies

The financial sources of the companies like Equity share capital, Reserves & surplus and debt are

shown in the graph above. The total debt of Power Grid is the highest which means that the

company has been dependent more on the debt for meeting their financial needs. On the other side

NTPC has the highest equity share capital to fund their company but also has large amount of

funding through debt. Where in small players like Torrent Power, Suzlon Energy and Tata Power,

Tata Power has the highest debt and Suzlon Energy has the highest funding through Equity

amongst them.

DEBT/EQUITY RATIO:

Debt/Equity Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

The debt to equity ratio is used to measure the riskiness of a company's financial structure.

The ratio is closely monitored by lenders and creditors, since it can provide early warning that an

organization is so overwhelmed by debt that it is unable to meet its payment obligations.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Torrent Power NTPC Power Grid Corp Suzlon Energy Tata Power

Rs.

Cr.

---

-->

Equity Share Capital Share Application Money Reserves Total Debt

16

Table 2: Debt and Equity of Companies

Company Total Debt

Shareholder's Equity

Debt/Equity Ratio

Torrent Power 5,593.71 6,176.56 0.91

NTPC 62,405.75 85,815.32 0.73

Power Grid Corp 84,007.68 34,459.63 2.44

Suzlon Energy 8,335.23 2,825.98 2.95

Tata Power 10,255.52 13,127.36 0.78

Figure 3: Graph for debt and Equity of Companies

The proportion of debt & shareholder’s equity for the companies can be seen from the graph

above.

The two major players in the power industry i.e. NTPC and Power Grid Corporation follow

different strategy to meet their financial needs. Power Grid Corporation has higher debt whereas

NTPC has higher shareholder’s equity compared to the debt.

0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

160,000.00

Torrent Power NTPC Power GridCorp

Suzlon Energy Tata Power

Debt & Shareholder's Equity

Total Debt Shareholder's Equity

17

Figure 4: Debt/Equity Ratios of Companies

Funding through debt or shareholder’s equity, both carries their cost and thus both have their

pros and cons. It depends on the type of company and its requirements of the funds.

The company can fund through loans and debentures but it has interest which is to be paid even

if the company doesn’t earn whereas in case of financing through equity, the company doesn’t

need to pay to the shareholders in case of losses. Thus it is important that the company changes

its capital structure on the basis of its needs of fund and future goals.

CAPITAL STRUCTURE OF THE COMPANIES

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

TorrentPower

NTPC Power GridCorp

SuzlonEnergy

Tata Power

Debt/Equity Ratio

8%

92%

TORRENT POWER LTD

Equity

Debt

12%

88%

NTPC

Equity

Total Debt

18

6%

94%

POWER GRID CORPORATION

Equity Total Debt

6%

94%

SUZLON ENERGY

Equity Total Debt

56%44%

TATA POWER

Equity Total Debt

19

WORKING CAPITAL POLICY

Working Capital is the capital available for conducting the day to day operation of the business

and consists of current assets and current liabilities.

Working Capital can be viewed as a whole but interest is usually focused on the individual

components such as inventories or trade receivables. Working capital is effectively the net current

assets of a business.

Working Capital can either be:

Positive Current assets are greater than current liabilities

Negative Current assets are less than current liabilities

WORKING CAPITAL CYCLE

The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and

current liabilities into cash. The longer the cycle is, the longer a business is tying up capital in its

working capital without earning a return on it. Therefore, companies strive to reduce its working

capital cycle by collecting receivables quicker or sometimes stretching accounts payable.

Figure 5: Working Capital Cycle:

20

Figure 6: Working capital cycle in manufacturing business

WORKING CAPITAL CYCLE OF COMPANIES

Table 3: Calculating Working capital cycle (WCC) of Torrent Power

Torrent Power Mar '14 (Days)

Mar '13 (Days)

Mar '12 (Days)

Mar '11 (Days)

Mar '10 (Days)

Inventory Turnover Period 12 11 0 0 0

Debtors Turnover Period 32 31 29 32 32

Creditors Turnover Period 44 48 47 27 26

WCC 0 -6 -18 5 6

Figure 7: Graph for WCC of Torrent Power Ltd.

0

-6

-18

56

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

Nu

mb

er o

f D

ays

21

The WCC of Torrent Power Ltd. had been getting better from 2010 till 2012 i.e. the company was

utilizing the time of payment to the creditors. But from 2012 to 2014 the time period for payment

to creditor decreased gradually thus the company is clearing the accounts payable and is not able

to utilize the account receivable.

Table 4: Calculating Working capital cycle (WCC) of NTPC

NTPC Mar '14 (Days)

Mar '13 (Days)

Mar '12 (Days)

Mar '11 (Days)

Mar '10 (Days)

Inventory Turnover Period 27 22 21 24 13

Debtors Turnover Period 27 31 21 27 40

Creditors Turnover Period -4 -8 -23 -25 -100

WCC 58 61 65 76 153

Figure 8: Graph for WCC of NTPC

The WCC of NTPC has decreased three fold of its value in 2010. The company’s management is

getting efficient in collecting the accounts receivable from the customers and has also increased

the CTP. But still the WCC can be lowered by decreasing the DTP.

58 61 6576

153

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

Nu

mb

er o

f D

ays

22

Table 5: Calculating Working capital cycle (WCC) of Power Grid Corp. of India

POWER GRID CORP. Mar '14 (Days)

Mar '13

(Days)

Mar '12 (Days)

Mar '11 (Days)

Mar '10 (Days)

Inventory Turnover Period 17 16 16 285 0

Debtors Turnover Period 36 42 47 1258 92

Creditors Turnover Period 219 -319 66 3247 280

WCC -166 377 -3 -1704 -188

Figure 9: Graph of WCC for Power Grid Corp. of India

The WCC of Power Grid Corporation in 2014 is better when compared to other years as the DTP

is lowest of all time and the CTP is high enough to take the advantage of the money received from

the customers which can be utilized in working capital.

Table 6: Calculating Working capital cycle (WCC) of Suzlon Energy Ltd.

Suzlon Energy Mar '14 (Days)

Mar '13 (Days)

Mar '12 (Days)

Mar '11 (Days)

Mar '10 (Days)

Inventory Turnover Period 88 320 75 81 78

Debtors Turnover Period 186 521 152 221 401

Creditors Turnover Period 276 746 122 -89 -2

WCC -2 95 105 391 481

-166

377

-3

-1704

-188

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

Nu

mb

er o

f D

ays

23

Figure 10: Graph of WCC for Suzlon Energy Ltd.

Suzlon’s WCC has been decreasing gradually which shows that the management is getting

efficient to meet its day to day need. Still the DTP and ITP is very high which can be reduced to

get better WCC.

Table 7: Calculating Working capital cycle (WCC) of TATA Power

TATA Power Mar '14 (Days)

Mar '13 (Days)

Mar '12 (Days)

Mar '11 (Days)

Mar '10 (Days)

Inventory Turnover Period 30 29 25 20 19

Debtors Turnover Period 55 19 63 104 91

Creditors Turnover Period 102 -17 -63 -47 -71

WCC -17 65 151 171 181

Figure 11: Graph of WCC for TATA Power

-2

95 105

391

481

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

Nu

mb

er o

f D

ays

-17

65

151171

181

Mar '14 Mar '13 Mar '12 Mar '11 Mar '10

Nu

mb

er o

f D

ays

Axis Title

24

WCC of TATA Power has been negative for the first time when compared to previous years, thus

shows that it has been doing good for past years.

Table 8: WCC of Companies

Company Torrent Power NTPC Power Grid

Corp Suzlon Energy

Tata Power

WCC (2014) 0 58 -166 -2 -17

Figure 12: Graph for WCC of Companies

When the WCC of the companies are compared with one another, we notice that all the companies

except for NTPC have a good balance between the DTP and CTP. The CTP of Power Grid

Corporation is very high with low DTP thus indicating that the management is efficient and is able

to meet the day to day financial needs efficiently.

WORKING CAPITAL POLICIES

1. Cash Policies:

Do not invest funds in illiquid investment vehicles

No investment duration shall exceed the forecasting period

All deposited funds must be insured

0

58

-166

-2

-17

-200

-150

-100

-50

0

50

100

T O R R E N T P O W E R

N T P C P O W E R G R I D C O R P

S U Z L O N E N E R G Y

T A T A P O W E R

NU

MB

ER O

F D

AYS

WCC OF COMPANIES (2014)

25

2. Accounts Receivable Policies

Do not allow payment terms greater than decided days

Fix the maximum credit offered a customer

Stop customer credit once days outstanding exceed

Stop customer credit if a customer check does not clear the bank

3. Inventory Policies

Review inventory on hand exceeding __ days of usage.

Adopt just-in-time purchasing on qualified raw materials and merchandise.

Drop shipped inventory is the preferred stocking method

4. Accounts Payable Policies

Do not pay accounts payable early

Require purchase orders for amounts exceeding Rs. ___

Disallow purchases exceeding the department budget

26

DIVIDENDS AND DIVIDEND POLICIES

Dividends are payments made by a corporation to its shareholder members. It is the portion of

corporate profits paid out to stockholders.

TYPES OF DIVIDEND:

1. Cash Dividends:

This is the most common form of dividend. Cash dividends are those dividends

when simply cash is paid out of the profits.

2. Share Repurchases:

The Company repurchases the stock. Shareholders pay tax only on the capital gains

portion.

3. Stock Split:

It increases the number of shares in a public company. The price is adjusted such

that the before and after market capitalization of the company remains the same

and dilution does not occur.

4. Bonus Issue:

It is a free share of stock given to current shareholders in a company, based upon

the number of shares that the shareholder already owns. While the issue of bonus

shares increases the total number of shares issued and owned, it does not change

the value of the company.

5. Right Issue:

With the issued rights, existing shareholders have the privilege to buy a specified

number of new shares from the firm at a specified price within a specified time.

Dividend policy is concerned with taking an implicit or explicit decision of the Board of

Directors regarding paying cash dividend in the present or paying an increased dividend at a later

stage to the shareholders.

27

The policy a company uses to decide how much it will pay out to shareholders in dividends from

PAT and this decision is considered a financing decision

Dividend policy can be of two types:

1. Residual dividend policy:

The amount of dividend is simply the cash left after the firm makes desirable

investments using NPV rule. The rule is- if the company does not have any

positive NPV projects to invest in, then it should pay shareholders dividend.

2. Dividend Stability Policy:

The fluctuation of dividends created by the residual policy significantly

contrasts with the certainty of the dividend stability policy. With the

stability policy, quarterly dividends are set at a fraction of yearly earnings.

This policy reduces uncertainty for investors and provides them with

income.

3. Hybrid Dividend Policy:

The final approach is a combination between the residual and stable

dividend policy. Using this approach, companies tend to view the

debt/equity ratio as a long-term rather than a short-term goal.

CONCEPT OF DIVIDEND

Dividends paid by the firms are viewed positively both by the investors and the firms. The

firms which do not pay dividends are rated low by investors thus affecting the share price.Dividend

policy is challenging for the directors and financial manager of a company, as different investors

have different views on present cash dividends and future capital gains. Also regarding the extent

of effect of these dividends on the share price. Due to this controversial nature of a dividend policy

it is often called the dividend Puzzle.

Most common type of dividend Measure:

Level of dividends often measured by dividend yield:

Dividend yield = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

Dividend yield measures percentage return earned by investor from dividends

alone.

28

Firm’s dividend policy can be measured by payout ratio:

Payout ratio = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒

Data from Financial Statements

Table 9: EPS, DPS and Share Price of Companies

Company EPS DPS Share

Price

Tata Power 4.02 1.25 74.55

NTPC 13.31 5.75 147.5

Torrent

Power 2.01 0.5 161.6

Power grid 8.6 2.58 144.8

Suzlon

Energy -3.72 0 27.65

Dividend Payout ratio:

Dividend Payout Ratio = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 (𝐷𝑃𝑆)

𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆) =

0.5

2.01 = 24.88

Dividend yield:

Dividend yield = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒 =

0.5

161.6 = 0.31%

Similarly, the dividend payout ratio & dividend yield can be calculated for other companies as

follows:

Table 10: Dividend Payout & Dividend Yield Ratios of the Companies

Company Dividend

Payout Ratio

Dividend

yield

Tata Power 31.09% 1.68%

NTPC 43.20% 3.90%

Torrent Power 24.88% 0.31%

Power grid 30.00% 1.78%

Suzlon Energy 0.00% 0.00%

29

INVESTMENT OF COMPANIES

TORRENT POWER LIMITED

Table 11: Investment of Torrent Power Ltd. in FY 2014

Non-Current Investments: Rs. Cr

Tidong Hydro Power Limited 0.02

AEC Cements & Constructions Limited 0.61

Torrent Power Grid Limited 66.6

Torrent Energy Limited 1988.22

Torrent Pipavav Generation Limited 57.5

8.28% GOI Bond – 2032 0.99

8.97% GOI Bond – 2030 1.01

Total Current Investment 2114.95

Current Investments:

Birla Sun Life Cash Plus – Growth 123.32

IDFC Cash Fund – Growth 0.94

ICICI Liquid Plan - Regular – Growth 101.39

Kotak Liquid Scheme Plan A – Growth 81.24

SBI PLF- Regular Plan – Growth 88.99

Tata Liquid Fund Plan A – Growth 101.66

Total Current Investment 497.54

Total Investment 2612.49

NATIONAL THERMAL POWER CORPORATION LIMITED

Table 12: Investment of NTPC in FY 2014

Non-Current Investments: Rs. Cr

PTC India Ltd. 12

Subsidiary Companies 1267.23

Joint venture companies 5015.83

Share application money pending 174.38

Bonds 1651.46

Total Non-current Investment 8120.9

Current Investments:

8.50 % Tax-Free State Government Special Bonds 1636.96

Total Investment 9757.86

30

TATA POWER

Table 13: Investment of TATA Power in FY 2014

Non-current Investments Rs. Cr

Trade Investment

Equity shares fully paid

Investment in Subsidiaries (Quoted) 11.07

Investment in Subsidiaries (Unquoted) 9119.38

Joint venture companies 158.71

Associates 85.15

Investment in Others 1.36

Preference Shares, Investment in Subsidiaries 391.81

Other Investment

Statutory Investments 357.11

Non-trade Investments

Equity Shares fully Paid-up 2236.47

Government Securities 0.03

Total Non-current Investments 12361.09

Current Investments 1.36

Total Investments 12362.45

POWER GRID CORPORATION

Table 14: Investment of Power Grid Corp. in FY 2014

Non-current Investments Rs. Cr

Trade Investment

Equity shares fully paid

PTC India Limited 12

Investment in Subsidiaries 30.69

Joint venture companies 577.31

Govt.Securities 180.44

Other Bonds 13.83

Total Non-current Investments 814.27

Current Investments

Govt.Securities 179.35

Other Bonds 5

Total Current Investments 184.35

Total Investments 998.62

31

SUZLON ENERGY

Table 15: Investment of Suzlon Energy Ltd. in FY 2014

Non-current Investments Rs. Cr

Government Securities 0.01

Investment in Subsidiaries (Indian) 409.75

Investment in Subsidiaries (Overseas) 7320.3

Other than subsidiaries 0.01

Total Non-current Investments 7730.07

Current Investments 0

Total Investments 7730.07

Investment of companies for FY 2013-2014:

Table 16: Total Investment of Companies

COMPANY TOTAL INVESTMENT

(Rs. Cr.)

TATA POWER 12362.45

NTPC 9757.86

POWER GRID CORP. 998.62

TORRENT POWER LTD 2612.49

SUZLON ENERGY 7730.07

32

Figure 13: Graph of Total Investment of Companies

The total investment done by the companies include Non-current investment and

current investment which give an idea of their future plans diversification.

12362.45

9757.86

998.622612.49

7730.07

0

2000

4000

6000

8000

10000

12000

14000

TATA POWER NTPC POWER GRIDCORP.

TORRENT POWERLTD

SUZLON ENERGY

TOTAL INVESTMENT

TOTAL INVESTMENT (Rs. Cr)

33

REFERENCES

1. Annual Reports of the Companies from 2010 till 2014

http://www.ntpc.co.in/annual-reports/1218/download-complete-

annual-report-2013-14-2013

http://www.torrentpower.com/investors/pdfs/2014/tp_annual_report_1

3-14.pdf

http://www.powergridindia.com/_layouts/PowerGrid/WriteReadData/

file/agm/2014/Annual%20Report%202013-14.pdf

http://www.suzlon.com/images/investor_annual_result/22_Suzlon_An

nual_Report_2013-14.pdf

http://www.tatapower.com/investor-relations/pdf/95Annual-Report-

2013-14.pdf

2. www.capitaline.com

3. www.moneycontrol.com

4. www.accountingtools.com