final research report - jai prakash power venture

SUMMARY

The project was undertaken at First Call India Equity Advisors Pvt Ltd with a view to study the

credit appraisal in an Indian company. Credit appraisal is an important activity which is carried

out in the banks with a view to find out whether a borrower is worthy enough to avail of a long

term loan. Credit appraisal basically deals with judging the credit worthiness of a borrower. While

investigating a credit appraisal banks need to understand all the aspects related to the company.

The main purpose of the project is to understand the different techniques applied while

conducting a credit appraisal. For the purpose of credit appraisal Jai Prakash Power Venture Ltd a

power generation and distribution company will be appraised based on various parameters like

company background, background of the promoters, business of the company, financial statement

analysis of the company the company valuation and other such factors.

Background

The Jaypee Group is a conglomerate which is into

various business interests like Engineering &

Construction, Power, Cement, Real Estate,

Hospitality, Expressways, IT, Sports & Education

not-for-profit). Jaiprakash Power Ventures Limited,

a part of the Jaypee Group was incorporated in

1994. The company was incorporated The

Company was incorporated on December 21, 1994

with the object to set up hydro-electric or Thermal

power projects and for the supply of general

electric power. The company is the largest private

sector hydropower company with 1700 MW in

operation. The company is in the business of

planning, developing and implementing power

projects in India. Presently the company owns and

operates the 300 MW Baspa-II Hydroelectric Project at District Kinnaur, Himachal Pradesh , 400

MW Vishnuprayag Hydroelectric project, at District Chamoli, Uttarakhand and 1000 MW

Karcham-Wangtoo at District Kinnaur, Himachal Pradesh. As on 31st March 2014 the the

Company had a total workforce of 1973 employees which include Engineers, Chartered

Accountants, managers and other employees.

BUSINESS TRENDS

JPVL has also acquired Bina Power Supply Company Limited (BPSCL) from the Aditya Birla

Group and is setting up a 1250 MW coal fired Thermal Power Plant at Bina in the State of

Madhya Pradesh. JSW Energy was in talks to buy JPJP Power's Nigrie and Bina thermal power

units. JSW Energy thereafter had agreed to buy two hydropower projects from Jaiprakash Power

Ventures Ltd for 97 billion Indian rupees ($1.57 billion) including debt. In February 2015, JSW

Type : Public

Traded as: BSE: 532627 NSE: JPPOWER

Industry: Conglomerate

Incorporated year: 1994

Headquarters: Solan District, Himachal Pradesh, India

Key People: Manoj Gaur (Chairman)

Industry/Sector: Power Generation/Distribution

Business Activity: Engaged in setting up hydro electric, thermal power projects and general electric power.

Revenue: Rs.2740.50 Crores

JAIPRAKASH POWER VENTURES LTD

(Detailed Research Report)

Energy got approval from CCI to acquire the 2 hydropower projects. JPV had announced in 2010

of raising $200 million through convertible bonds. The conversion price of the paper, due next

month, was fixed at 85.81 rupees a share. However in Feb 13 JPV announced that it was likely to

default on the payments for convertible bonds worth $200 million. The reason was the company’s

inability to generate sufficient revenues from its operation.

SHAREHOLDING PATTERN (As on 31st March 2014)

64%12%

9%

6%

4%4%

1% 1% 0%SHAREHOLDING PATTERN

PromotersOthersGeneral PublicForeign InstitutionsOther CompaniesNBFC and Mutual FundsFinancial InstitutionsForeign - OthersForeign - NRI

PARTICULARS No. of Shares

Promoters 1,868,648,237Others 344,107,873General Public 252,004,086Foreign Institutions 183,414,038Other Companies 118,536,661NBFC and Mutual Funds 110,148,515Financial Institutions 27,925,944Foreign - Others 25,067,286Foreign - NRI 8,150,444TOTAL 2,938,003,084

BOARD OF DIRECTORS AND ITS MANAGEMENT PERSONNEL (31st March 2015)

NAME DESIGNATION PROFILE

Mr. Manoj Gaur Chairman

● A Degree in Civil Engineering from BITS Pilani. ● Rich Experience of around 22 years in Corporate and Finance related matters he has utilized this experience to head the helm at the conglomerate.● Instrumental in setting up the marketing network and has been associated with various activities of the Jaypee Group, such as engineering construction, hydro power, cement, real estate, information technology, and other initiatives.● Won the Global Standard Award at NDTV Profit Business Leadership Awards 2011.

Shri.Sunil Kumar Sharma VC and CEO

● A B.Sc graduate from University of Meerut ● Hands on experience of 30 years in the field of procurement and management.● Vast knowledge on various disciplines has been instrumental in the completion of several engineering construction projects, including raising the height of the Lakhya Dam in Karnataka and in the construction of various hotels.

Mr. Suren Jain MD and CFO

● A Bachelor’s degree in Prod Engineering and has a experience of around 20 years in fields related to corporate finance and planning.● Involved in various capacities of the Jaypee Group and works in a team which is part of various business strategies related to the business ● Solely responsible for the construction activities and the hydro-power wing of the Jaypee group.

Shri B.B. Tandon

Non-Executive Independent Director

● A Bachelor’s Degree in Law and Master’s Degree in Economics from the University of Delhi ● Held various positions in the Government of India and Government of Himachal Pradesh including as Principal Secretary, Power and Chairman, Himachal Pradesh State Electricity Board.

Shri. Raj Narain Bhardwaj


● Post graduate degree in economics from the Delhi School of Economics and a Diploma in Industrial Relations and Personnel Management from Punjabi University, Patiala. ●Over 37 years of experience with LIC and has served in various key positions including as its Managing Director & Chairman. Also held position of director in various companies

Shri. A. K. GoswamiNon-Executive Independent

● A Bachelors’ Degree in Mechanical Engineering ● Over 42 years of work experience in various capacities with

Director

the Central Government and the Government of Himachal Pradesh, including several senior level positions such as Secretary, Ministry of Water Resources, and Chief Secretary amongst other positions.

Shri. S. S. Gupta


● Served in key positions such as the Chairman and CEO of Himachal Pradesh Electricity Regulatory Commission. ● Also worked with East African Power and Lighting Company, Kenya.● Member of the Steering Committee of South Asian Forum of Infrastructure Regulators.

Shri. Dharam Paul Goyal


● Renowned Hydro-Power Development (Construction and Contract Management) Expert and carries with him vast experience of around 48 years in the field of Hydro-Power Projects. ● Previously working as the Director (Technical) with Tala Hydro-Electric Project Authority, Bhutan. Shri Goyal was sent on deputation from HPSEB on Foreign Service terms of the Ministry of External Affairs, Government of India to Tala Hydro- Electric Project Authority

Shri D.P. Lieutenant General (Retired) Ravindra Mohan Chadha


● Over 44 years of experience in conceptualization, planning, direction and implementation of various projects especially in personnel management, equipment/ materials, logistics and financial aspects.● Served in the Indian Army for 40 years before retiring as a Lieutenant General. ● Joined as President in erstwhile Jaiprakash Power Ventures Ltd, in 2007 and thereafter appointed as Whole-time Director in the said Company and was looking after the operations of 400 MW Vishnuprayag Project at Site.

Shri. Praveen Kumar Singh

Whole-time Director

● Associated with the Jaypee Group for the past 16 years and has been involved in the construction and implementation of Karcham-Wangtoo HEP.● Also involved in the construction of the Indira Sagar hydro electric project and was the unit in-charge of Omkareshwar hydroelectric project.

Ms. Sunita JoshiNon-Executive Director

● A Masters’ Degree in International Business Management and possess about 24 years experience in related fields especially information technology, IT education and software development, sales and marketing and corporate communications. ● A Whole-time Director of JIL Information Technology Limited.

Shri G.P. Gaur


●More than 38 years of experience in material management and construction.● Oversees the purchase & procurement for the projects related to the JP group.

Shri Arun Bala Krishnan

Independent Director

● B.E (Chemical) from the College of Engineering, Trichur, Kerala and has Post Graduate Diploma in Management from the Indian Institute of Management, Bangalore. ● Currently on board of HPCL Mittal Energy Ltd., Western Coalfields Ltd., NCDEX (National Commodities & Derivatives Exchange) Spot Ltd., and KSS Global BLV. ●Acts as an advisor to Mittal Energy India Services Ltd. and other companies

Shri S.L. MohanIndependent Director

● Ex - Chairman Cum Managing Director, The Oriental Insurance Company Ltd.

Shri Atanu SenIndependent Director

Dr. Jagan Nath Gupta


Shri S.D.Nailwal


Shri K.N. BhandariIndependent Director

BREAK-UP OF EXPENDITURE (31ST Mar 2014)

26%

3%

53%

16%

2%

Expenses (2013-14)

Cost of operation and maintenance

Employee benefits expense

Finance costs

Depreciation and amortization expense

Other expenses

SWOT ANALYSIS of JP POWER VENTURE LTD

Helpful

to achieving the objective

Harmful

to achieving the objective

Inte

rnal

ori

gin

(attr

ibut

es o

f the

syst

em)

STRENGTHS

1. Production process of the plants is

high on efficiency.

2. The company is a subsidiary of the

Jaypee group which is a strong

conglomerate thereby making its

presence strong.

3. Use of green technology and

upgradations thereby making the process

environmentally friendly.

WEAKNESSES

1.Huge competition which implies that

only few players dominate the market

and therefore limited market share.

2. Large amount of debts accumulated

by the firm over a consistent period of

time.

Ext

erna

l ori

gin

(attr

ibut

es o

f the

env

ironm

ent)

OPPORTUNITIES

1.Company aimed to find new avenues

of power generation due to increase in

competition. By 2020 the demand for the

power is expected to go up to 400000

MW.

2.. The power generation companies are

eligible for a 100% tax deduction as per

Income Tax Act 1961 on the profits for

10 consecutive years. This benefit can be

procured till 2017.

3. Investment in the power sector is

expected to be around Rs 750000 crore

from which the private sector includes

nearly half of the investments

THREATS

1.Failure to meet the targets of power

generation. Increase in the cost of raw

materials like coal which increases the

overall cost of production.

2. Obtaining private investment in

power projects considering the high

financial risk.

3. Getting the required permission for

the land availability and other clearances

for the project

4. Lesser number of employees in this

sector as the candidates prefer more

lucrative opportunities.

BALANCE SHEET OF JAIPRAKASH POWER VENTURES LTD

BALANCE SHEET AMOUNT IN LACS(` in Lacs)PARTICULARS 2014 2013 2012 2011I. EQUITY AND LIABILITIES(1) Shareholders’ Funds(a) Share Capital 293,800 293,800 262,476 262,476(b) Reserves and Surplus 339,171 350,636 284,024 254,590(3) Deferred Revenue 56,266 48,716 39,207 31,302(4) Non Current Liabilities

(a) Long-term borrowings1,737,02

81,580,13

81,310,80

3 1,173,993(b) Deferred tax liabilities (net) 13,704 14,333 12,344 –(c) Other Long-term liabilities 2,798 3,395 1,253 9,669(d) Long-term provisions 25,310 44,636 35,533 34,672(5) Current Liabilities(a) Short-term borrowings 19,031 23,707 51 5,082(b) Trade payables 101,280 101,625 81,127 32,952(c) Other current liabilities 317,571 216,814 174,363 31,406(d) Short-term provisions 27,410 16,696 36,561 1,947TOTAL CURRENT LIABILITIES 465,292 358,842 292,102 71,387

TOTAL2,933,36

92,694,49

62,237,74

2 1,838,089

ASSETSNon-current assets(a) Fixed assets

Tangible assets1,244,87

31,121,68

0 965,700 307,414 Capital work-in-progress 991,310 911,994 638,377 896,216(b) Non-current investments 500,499 443,417 386,308 360,630(c) Long-term loans and advances 31,104 37,196 68,394 21,596(d) Other non-current assets 13,341 4,176 9,661 10,578(2) Current assets(b) Inventories 15,834 13,572 4,866 1,753(c) Trade receivables 25,287 45,157 43,036 15,566(d) Cash and bank balances 55,700 58,367 71,581 202,424(e) Short-term loans and advances 51,301 54,993 46,615 16,539(f) Other current assets 4,120 3,944 3,204 5,373TOTAL CURRENT ASSETS 152,242 176,033 169,302 241,655

TOTAL2,933,36

92,694,49

62,237,74

2 1,838,089 The share capital has been increasing from Rs 262476 lacs in 2011 to Rs 293800 in 2014.

lacs. As far as the reserves and surplus component is concerned it has increased at a CAGR of 7%

but comparing it to the previous year it has decreased from 350,636 lacs to 339171 lacs. It means

that the company may need to keep on hold their expansion and other strategic plans. The long

term debt though has increased majorly from Rs 1183662 lacs in 2011 to Rs 1739826 lacs in

2014. This states that the company is more dependent on its external borrowings. The profits have

decreased from the previous years as a result of which the earnings for the shareholders have

reduced. The current assets have reduced by a CAGR of 10.91%.where as the current liabilities

for the same period have increased by a CAGR of 59% which states that the company has

accumulated debts and they will have to reduce their debts significantly.

INCOME STATEMENT OF JPVL

AMOUNT IN LACSPARTICULARS 2014 2013 2012 2011

I. Revenue from operations 267,750 225,262161,55

6 73,689II. Other Income 6,300 3,818 7,074 10,385

III. Total Revenue 274,050 229,080168,63

0 84,074IV. Expenses :Cost of operation and maintenance 69,981 38,963 4,936 2688Employee benefits expense 7,422 5,739 4,329 2,434Finance costs 144,768 112,409 85,945 44,844Depreciation and amortization expense 44,659 32,389 23,005 9,491Other expenses 5,868 4,669 4,116 2,969

Total expenses 272,698 194,169122,33

1 62,426V. Profit before exceptional and extraordinary items and tax (III-IV) 1,352 34,911 46,299 21,648VI. Exceptional items Prior Period Expenses 8 – – –VII. Profit before extraordinary items and tax (V-VI) 1,344 34,911 46,299 21,648VIII. Extraordinary items – – – – – 1,002IX. Profit before tax (VII-VIII) 1,344 34,911 46,299 20,646X. Tax Expense :Net Current Tax – – – – – 4,116(ii) Previous Year - Written Off – 7 -124 -4(iii) Deferred tax charge/(reversal) -629 1,989 6128 4,135XI. Profit/(loss) from operations (IX-X) 1,973 32,915 40,295 16,511XII. Profit/(loss) from continuing operations -21,044 -6,200 –XIII. Tax expense of continuing operations -2,192 -3,196 –XIV. Profit/(loss) from continuing operations (after tax) (XII-XIII) -18,852 -3,004 – –XV. Profit/(loss) from discontinuing operations 22,388 41,111 – –XVI. Tax expense of discontinuing operations 1,563 5,192 – –XVII. Profit/(loss) from discontinuing operations (after tax) (XV-XVI) 20,825 35,919 40,295 –XVIII. Profit/(loss) for the period (XIV + XVII) 1,973 32,915 40,295 16,511XIX. Earnings per equity share :Before Extraordinary items(i) Basic 0.07 1.24 1.54 0.84(ii) Diluted 0.06 1.19 1.47 0.67

After Extraordinary items(i) Basic 0.07 1.24 1.54 0.79(ii) Diluted 0.06 1.19 1.47 0.64

The sales have increased at a CAGR of 34% from 2011 to 2014. It has increased from Rs 84074

lacs to Rs 274050 lacs. This shows that in order to reduce its mounting debts the company is

selling off its power plants. The depreciation has also increased from Rs 9491 lacs in 2011to Rs

44659 lacs in 2014 since the company has increased the purchase of its assets. The profits of the

company have shown a steady decline from Rs 16511 in 2011 to Rs 1973 lacs in 2014. The

declining profits also have had an impact on the EPS. For the investors EPS forms one of the

major criteria for investing in any company. But investors also look into the operating cash flows

of the company to decide whether or not to invest. The operating cash flow for the company has

been at 0.7 in the year 2014 which is higher than the EPS. This states that the quality of the

earnings is of the highest quality since the company is generating more revenue from the

operations.

RATIOS OF JPV LTD

RATIOS 2011 2012 2013 2014

1 CURRENT RATIO 3.39 0.58 0.49 0.33

2 QUICK RATIO 3.36 0.56 0.45 0.29

3 WORKING CAPITAL TURNOVER RATIO 2.03 -0.73 -0.80 -1.14

4 DEBT EQUITY RATIO 2.30 2.40 2.49 2.78

5 DEBT TO ASSETS RATIO 0.70 0.74 0.74 0.77

6 EQUITY TO ASSETS RATIO 0.28 0.24 0.24 0.22

7 ASSETS TURNOVER RATIO 20.64 25.38 21.58 22.63

8 INVENTORY TURNOVER RATIO 42.04 33.20 16.60 16.91

9 GROSS PROFIT MARGIN (%) 84.45 92.88 81.32 72.17

10 NET PROFIT MARGIN (%) 22.41 24.94 14.61 0.74

11 RETURN ON CAPITAL EMPLOYED (%) 1.17 2.38 1.49 0.05

12 RETURN ON EQUITY (%) 3.19 7.37 5.11 0.31

13 NET FIXED ASSETS TO NET WORTH RATIO 0.59 1.77 1.74 1.97

14 INTEREST COVERAGE RATIO 1.62 1.62 1.37 1.04

15 EXPENSES TO TOTAL SALES RATIO 74.25 72.54 84.76 99.50

1. CURRENT RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00 3.39

0.580.49

0.33

Current Ratio

The current ratio of a company basically shows how good a company is in meeting its short term

debt obligations. Current ratio for the company for the financial year was 3.39:1 in 2011 and due

to the increasing debts that the company has incurred this has drastically declined to 0.58 in 2012,

0.49 in 2013 and 0.33 in 2014. This suggests that the company needs to sort out its working

capital management.

2. ACID TEST RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.003.36

0.56 0.450.29

Quick Ratio

The acid test ratio is an indicator of a company’s ability to show how quickly it can convert assets

into cash. Inventory been slow moving, it is not included in the acid test ratio. The ratio has been

declining from 3.36 in 2011 to 0.29 in 2014.

3. WORKING CAPITAL TURNOVER RATIO

Like the other liquidity ratios this ratio also determines how much liquid assets are present with

respect to its liquidity. The higher the net working capital to sales ratio the better is the ability of

the company to meet its debt obligations.

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

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

WORKING CAPITAL TURNOVER RATIO

WO

RK

ING

CA

PIT

AL T

UR

NO

VE

R R

AT

IO

For the year 2010-11 the ratio was 2.03 which is a very satisfactory ratio. But due to the mounting

debt obligations the ratio has been in the red since Mar 2012. The ratio has plummeted to -1.14 in

Mar 2014.

4. DEBT EQUITY RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2.30 2.402.49

2.78

Debt Equity Ratio

The debt equity ratio indicates how aggressively a company finances its overall growth by

way of debt. Debt indicates loan and equity means how much capital the company can bring

in. The graph basically shows the debt equity ratio of the company. The debt equity ratio

basically has increased from 2.3 in March 2011 to 2.78 in March 2014. This basically shows

the company’s dependence on its debt portion for financing the growth has increased

5. DEBT TO ASSETS RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0.70 0.74 0.740.77

DEBT TO ASSETS RATIO

This ratio basically shows the company’s capability to pay off its debt with the help of the assets.

In an ideal scenario a company with higher debts will have a higher debt ratio which is not ideal

for any company. For this ratio the debt ratio is rising very marginally albeit the ratio is on the

higher side. It was 70% in 2011 but in 2014 the ratio has increased till 77%. The company will

require reducing its dependency on its external borrowings.

6. EQUITY TO ASSETS RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.280.24 0.24

0.22

EQUITY TO ASSETS RATIO

Equity ratio shows how much assets are owned by the investors of the company. Additionally it

also shows how much burden the company has with respect to its debt portion. As of the present

situation the scenario does not look all that favorable for the company. It has decreased from 28%

in 2011 to 22% in 2014.

7. ASSETS TURNOVER RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

20.00

40.00

60.00

80.00

100.00

20.6425.38

21.58 22.63

ASSETS TURNOVER RATIO (%)

The asset turnover ratio basically determines a company’s ability to generate sales from its assets.

It shows how efficiently a company can generate sales from its assets. In 2013 it stood at 21.58%

but it has risen to 22.63%. For every 1 rupee of asset the company is generating 22 paise in return.

As seen in the graph the assets and the sales have more or less kept pace with each other.

8. INVENTORY TURNOVER RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

10.00

20.00

30.00

40.00

50.00 42.04

33.20

16.60 16.91

INVENTORY TURNOVER RATIO

This ratio determines a company’s ability to generate sales from its inventory. It also shows how

much stock can be sold in a given period of time. The chart illustrates that the inventory turnover

ratio has decreased from 42 in 2011 to 33 in 2012 and has declined further to 16.91 in 2014.

Given the nature of the industry the company is part of, it is quite satisfactory that the company is

doing a satisfactory job when it comes to maintaining the inventory ratio.

9. GROSS PROFIT MARGIN

Mar '11 Mar '12 Mar '13 Mar '140.00

20.00

40.00

60.00

80.00

100.0084.45

92.88

81.32

72.17

GROSS PROFIT MARGIN(%)

Gross profit ratio connotes the operational efficiency of a firm. The gross profit at this company

shows that it has increased from 84 % in Mar 2011 to 92% in March 2012 thereafter it has

steadily declined to around 72% in 2014. This indicates that the pricing strategy of the company is

faulty. It also shows that the company is not been able to properly maintain the expenses

10. NET PROFIT MARGIN (%)

Mar '11 Mar '12 Mar '13 Mar '140.00

20.00

40.00

60.00

80.00

100.00

22.41 24.94

14.61

0.74

NET PROFIT MARGIN (%)

Net profit ratio is the ratio of profit after tax to sales. To arrive at the net profit all the costs of

administration, financing and production are deducted from it. The net profit for the firm has had

a slight decline in the year 2012 from 22.41% in 2011 to 24.94% in 2012. Thereafter it has shown

a steady decline and in 2014 it has drastically declined to 0.74% which is very low.

11. RETURN ON CAPITAL EMPLOYED (%)

Mar '11 Mar '12 Mar '13 Mar '140.00

0.50

1.00

1.50

2.00

2.50

3.00

1.17

2.38

1.49

0.05

Return On Capital Employed(%)

Return on capital employed portrays a company’s ability to generate return using its equity and

debt. The ROCE has seen a steady decline since 2012. It was around 1.17 %in 2011 and has

declined to 0.05% . This indicates that the firm is not been able to deploy its capital in an effective

manner and hence it has not been able to increase its shareholder’s value.

12. RETURN ON EQUITY (%)

Mar '11 Mar '12 Mar '13 Mar '140.00

25.00

50.00

75.00

100.00

3.197.37 5.11

0.31

Return On Equity(%)

Return on equity also known as return on net worth shows the amount of profit a company

generates on its equity. It shows a company’s ability to depend on its own capital rather than the

outsider’s capital. Much of the company’s financing occurs through borrowings. The ROE ratio

has increased from 3 % in Mar 2011 to 7% in Mar 2012 and thereafter it has steadily declined to

5%. For 2013-14 the ROE stands at 0.31 which is a very drastic fall down.

13. NET FIXED ASSETS TO NET WORTH RATIO

Mar '11 Mar '12 Mar '13 Mar '140.00

0.50

1.00

1.50

2.00

2.50

0.59

1.771.74

1.97

NET FIXED ASSETS TO NET WORTH RATIO

Net fixed assets to net worth ratio shows how much of the company’s assets are tied up in fixed

assets and how much funds available for the operations of the company. Ideal ratio for any

company is 0.75. The ratio has shown an increasing trend except in Mar 2013 where it improved

marginally.

14. INTEREST COVERAGE RATIO

Mar '11 Mar '12 Mar '13 Mar '140.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1.69 1.621.37

1.04

INTEREST COVERAGE RATIO

Interest Cover

This ratio basically deals with a company’s ability to pay interest on its debt. It can be calculated

by dividing a company’s EBIT upon its interest. The interest coverage ratio was 1.69 in Mar 2011

and thereafter it has declined to 1.04 Even though the company sales figure is growing at an

average of 50% yet there seems to be no effect of decrease in its interest costs. The company is

struggling to pay off its debt.

15. EXPENSES TO SALES RATIO (%)

Mar '11 Mar '12 Mar '13 Mar '140.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

74.25 72.54

84.76

99.51EXPENSES TO SALES RATIO (%)

As the name of the ratio it indicates how much expense form as part of the sales. The expenses

have been increasing at a higher rate than usual. In 2014 the expenses have touched close to 100%

which shows that the company is not been able to struggle with the costs in an effective manner

and therefore there is a subsequent decline in the profits. This ratio can also be used to determine

and estimate the future expenses.

16. EARNINGS PER SHARE

2011 2012 2013 20140

0.5

1

1.5

2

2.5

0.840000000000001

1.541.24

0.07

EARNINGS PER SHARE

EPS shows the net profit earned per share of the company. It shows capability to earn profits for

the investors. EPS can be compared with companies in the same industry. The EPS has been

declining since 2013 from 1.24 to 0.07 in 2014.

17. PRICE EARNING RATIO

2011 2012 2013 20140.00

25.00

50.00

75.00

100.00

125.00

150.00

175.00

200.00

41.90

24.4215.24

172.29

PRICE EARNING RATIO

PE ratio basically determines the price that the market is willing to pay based on its earning. It is

assumed that higher P/E is better, which shows that the company has good potential to grow in

the near future. A higher ratio indicates that the investors expect the growth in the future. The PE

ratio has been declining since 2011 but in 2014 due to low earnings per share the ratio has risen

from 15.24 in 2013 to 172.29 in 2014. It means that the investors are ready to put Rs 172.29 to

earn one rupee in the year 2014.

18. BOOK VALUE RATIO

2011 2012 2013 20140

5

10

15

20

25

30

22.1520.82 21.93 21.54

BOOK VALUE PER SHARE

Book value ratio calculates what a shareholder would receive should the company liquidates. The

growth has been more or less constant. It was Rs 22.15 in 2011 and has decreased slightly to Rs

21.54 in 2014.

19. PRICE TO BOOK VALUE

2011 2012 2013 20140.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1.59

1.81

0.86

0.56

PRICE TO BOOK VALUE

Price to Book ratio measures the market price with respect to its book value. Price to book of JPV

has been from 1.81 in 2012 to 0.56 in 2014. This ratio changes due to change in the market price.

There has been a reduction in market price which has reduced from 35.2 in 2011 to 12.06 in 2014.

20. PRICE TO SALES RATIO

2011 2012 2013 20140.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00 8.77

5.85

2.42

1.29

PRICE TO SALES RATIO

Price to Sales ratio is valuation tool. It may change due to change in the market capitalization of

the firm. It shows how much exchange value every rupee of company sales. The market value of

the share has been decreasing due to a decrease in market price of the share. For every rupee of

sale the exchange is valuing the share at Rs 8.77 in 2011 to Rs 1.29 in 2014.

ALTMAN’S Z SCORE

PARTICULARS 2011 2012 2013 2014Working Capital/Total Assets (X1) 0.09 -0.05 -0.07 -0.11Retained Earnings/Total Assets (X2) 0.01 0.02 0.01 0.0007EBIT/Total Assets (X3) 0.04 0.06 0.05 0.05

Market Capitalization/Total liabilities (X4) 0.54 0.51 0.24 0.13Sales/Total Assets (X5) 0.05 0.08 0.09 0.09ALTMAN'S Z SCORE 0.61 0.53 0.34 0.21

2011 2012 2013 20140.00

0.50

1.00

1.50

2.00

0.610.53

0.340.26

ALTMAN'S Z SCORE

The Altman Z score devise by Edward I. Altman in 1968 is a score which shows the likelihood of

a firm going into bankruptcy. A score below 1.8 suggests that bankruptcy is likely whereas a

score higher than 3.0 suggests that bankruptcy is unlikely for the next 2 years. Scores in between

1.8 and 3.0 mean that the company is in grey area. In 2011 the Z score was 0.61 but it slipped to

0.53 in the next year and further slipped to 0.26 in 2014. Comparing the company’s performance

to its competitors, Reliance Infrastructure has got an average Altman Z score of 1.03, for Adani

Power it stands at 0.44, Tata Power has got an average of 1.01 whereas Jai Prakash Power

Venture stands at 0.44. By analyzing the Z score the X3 component has been more or less stable.

The retained earnings component X2 has gone down majorly since 2012 and has reached the

value of 5 in 2014. As far as the market equity X4 is concerned it has reduced from 0.54 in 2011

to 0.13 in 2014. The liquidity component X1 has been showing a downward trend from 0.09 to -

0.11. The sales component however has shown a healthy trend. It is showing an increasing trend

from 0.05 to 0.09 on account of the sales increasing at 65% rate. On the whole the Z score has

been at a decreasing rate to 0.21 at -29%. In all of the years above, the company is in distress

zone.

WEIGHTED AVERAGE OF VALUATION

PRESENT VALUE OF THE FIRM(Rs in lacs)

VALUATION TYPE Present Value of the firm Weights Weighted average value

DCF 2228650 33.34% 743032Price Book Valuation 354323 33.33% 118096Price Earning Valuation 210067 33.33% 70015TOTAL 100.00% 931143Number of Outstanding shares 29380Value of Equity share 31.69

For valuing the company 3 methods have been utilized and have been given an equal weight age.

The total value of the firm comes to around Rs 931143 lacs. The value of the share comes to

around Rs31.69.

For the year 2014 the market price stands at Rs 12.06. It can be stated that the share is

undervalued and it is recommended that the share may be purchased. The reasons for the stock

being undervalued are

The company has not been paying dividends for the past 4 years since it intends to utilize the

earnings Company’s expansion plans/investment in subsidiaries executing power projects.

The stock of the company is not a household name. The shares do have potential but there is

lack of visibility on the same.

The rising debts of the company have has caused the public to panic and ultimately based on

the market sentiments it is the investor which speculate and dictate the market price.

The company’s declining profits been lower than expectation have lead to the investors sell

their share and causing the stock price to fall down.

Expected mergers and acquisition had been called off like the TAQA India Power Ventures

Limited who in principal had agreed to buy two hydroelectric power but later backed out of

the expected deal. This called the share prices to decline considerably.

RECOMMENDATIONS

1. Banks need to maintain a full proof credit appraisal system failing which they can run the risk

of running into high NPA’s. Banks need to be accustomed to apply modern technology to

mitigate risk.

2. Though different banks follow different procedures for the credit appraisal yet most of the

banks follow a rigorous credit appraisal procedure.

3. In terms of the overall appraisal of the company, Jaiprakash Power Ventures is performing at

below its expectations. Although the financials and other parameters have not been favorable

yet the management with its experience can turnaround the situation and significantly reduce

its debt proportion.

4. Rather than declaring bankruptcy the company would benefit if it enters into debt

restructuring which will reduce the debt and extend the payment term. Alternatively the

company can go for the debt-for- equity swap in which the creditors will reduce some of its

debt in turn for the equity in the company.

CONCLUSIONS

1. By conducting a credit appraisal on the company the company’s performance is not

satisfactory on all the grounds especially the financials. As far as the whether JPV will be

eligible for availing loan it can be noted that the company may need to concentrate on

reducing its massive amount of debt before availing credit.

2. In terms of appraising the company the qualitative tools needs to be given due importance. As

far as the qualitative criteria is concerned the promoter’s contribution, evolution of the

company, management quality, M &A, environment evaluation, strategies of the business and

the past record are one of the most valuable tools for evaluating the company. SWOT analysis

can be one of the tools that can be utilized as it help[s the firm to find out whether the

company is performing well, understand the external and the internal factors affecting its

performance and also evaluate the business for any future course of action. Also the Porter’s

five forces can act as an effective tool in determining the overall industrial purview.

3. Ratio analysis remains one of the quantitative tools used by banks for credit appraisal even if

though the result is historical in nature and cannot give any estimate about the future earnings.

Altman Z-score gives a comprehensive view based on the financials of the company although

it may not be totally suitable for evaluating the power industry.

4. Valuation techniques can pitch in the lacunae where ratio analysis fails to do so. Even though

valuations are based purely on assumptions yet it acts as a fortune teller; it gives a projected

results based on the financial results.

5. For a comprehensive credit appraisal, banks may need to apply a perfect mix of both

quantitative as well as qualitative tools. Banks should understand the nature of the business

thoroughly and the market conditions and accordingly makes the right judgment.

final research report - jai prakash power venture

Economy & Finance