CONCEPTS OF CAPITAL STRUCTURE & WORKING

CAPITAL POLICIES (POWER INDUSTRY)

Presented By:

GROUP NO. 7

POWER INDUSTRYIndia is the world’s eleventh largesteconomy by nominal GDP and fourthlargest by Purchasing Power Parity. Theeleventh five‐year plan of India’s PlanningCommission set an ambitious target of 9percent GDP growth for the plan period(2007‐2012). Critical to the ability tosustain this growth going forward is theavailability and affordability of energy.

At present, India’s energy supply isskewed in favor of non‐renewable energysources. India is one of the largest buyersof crude oil in world, while it meets mostof its demand for coal through its sizabledomestic reserves. However, the countryhas actively begun to explore otheravenues, such as nuclear power and solarpower.

Source: http://www.iea.org (2008)

COMPANIES

TATA POWER

NATIONAL THERMAL POWER CORPORATION LIMITED (NTPC)

POWER GRID CORPORATION OF INDIA LIMITED

TORRENT POWER

SUZLON ENERGY LIMITED

TATA POWER

•Tata Power is India's largest integrated power company with a significantinternational presence.

•The Company has an installed generation capacity of 8581 MW in India anda presence in all the segments of the power sector viz Generation,Transmission, Distribution and Trading. It has successful public-privatepartner ships in Generation, Transmission and Distribution in India.

• Its international presence includes strategic investments in Indonesiathrough 30% stake in coal mines and a geothermal project; in Singaporethrough Trust Energy Resources to securitise coal supply and the shippingof coal for its thermal power generation operations; in South Africa througha joint venture called ‘Cennergi' to develop projects in 16 differentcountries in Africa

NATIONAL THERMAL POWER CORPORATION LIMITED (NTPC)•NTPC Limited is also known as National Thermal Power Corporation Limited andis an Indian Central Public Sector Undertaking (CPSU) under the Ministry ofPower, Government of India, engaged in the business of generation of electricityand allied activities.

•It is a company incorporated under the Companies Act 1956 and a "GovernmentCompany" 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 powerdistribution companies and State Electricity Boards in India.

•The company also undertakes consultancy and turnkey project contracts thatinvolve engineering, project management, construction management andoperation and management of power pla

•It is the largest power company in India with an electric power generatingcapacity of 42,964 MW. Although the company has approx. 18% of the totalnational capacity it contributes to over 27% of total power generation due to itsfocus on operating its power plants at higher efficiency levels.

POWER GRID CORPORATION OF INDIA LIMITED•Power Grid Corporation of India Limited (POWERGRID) is an Indianstate-owned electric utilities company headquartered in Gurgaon,India.

•POWERGRID transmits about 50% of the total power generated inIndia on its transmission network. Its subsidiary company, PowerSystem Operation Corporation Limited (POSOCO) handles powermanagement for Power Grid. POWERGRID also operates a telecombusiness under the name POWERTEL.

•Power Grid Corporation of India Limited was incorporated on October23, 1989 under the Companies Act, 1956 with an authorized sharecapital of Rs. 5,000 Crore (subsequently enhanced to Rs. 10,000Crore 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 CorporationLimited', and it was charged with planning, executing, owning,operating and maintaining high-voltage transmission systems in the

TORRENT POWER LIMITED

•Torrent Power is one of the leading brands in the Indian powersector, promoted by the Rs.13116 crore Torrent Group, a groupcommitted to its mission of transforming life by serving two of themost critical needs - healthcare and power. Torrent PharmaceuticalsLtd., the flagship company of the Torrent Group, is a major player inthe Indian pharmaceuticals industry with a vision of becoming aglobal entity in the arena.

•The high points of Torrent’s foray into power however were theacquisitions of two of the India’s oldest utilities – The Surat ElectricityCompany Ltd and The Ahmedabad Electricity Company Ltd. Torrentturned them into first rate power utilities comparable with the best, interms of operational efficiencies and reliability of power supply.

•Torrent has a generation capacity of 3202 MW and distributes powerto 2.87 million customers annually in Ahmedabad, Gandhinagar,Surat, Bhiwandi and Agra.

SUZLON ENERGY LIMITED

•Suzlon Energy Limited is ranked as the world’s fifth largest windturbine supplier, in terms of cumulative installed capacity and marketshare, at the end of 2013.

•Suzlon's story began in 1995 when founder Tulsi Tanti was managinga 20-employee textile company.

•The company’s global spread extends across Asia, Australia, Europe,Africa and North and South America with over 24,200 MW of windenergy capacity installed, operations across over 30 countries and aworkforce of over 10,000.

•The Group has headquartered at Suzlon One Earthin Pune, India which comprises Suzlon Energy Limited and itssubsidiaries.

•The company manufactures blades, generators, panels, andtowers in-house and large or offshore turbines through its

CAPITAL STRUCTURE

CAPITAL STRUCTURE

•In finance, capital structure refers tothe way a corporation finances itsassets through some combination ofequity, debt or hybrid securities. Afirm's capital structure is then thecomposition or 'structure' of itsliabilities.

•For example, a firm that sells Rs. 20crore in equity and Rs. 80 crore indebt is said to be 20% equity financedand 80% debt-financed. The firm'sratio of debt to total financing, 80% inthis example, is referred to as thefirm's leverage. In reality, capitalstructure may be highly complex and

TOTAL CAPITAL

EQUITY CAPITAL

Equity

Preference share capital

Retained Earnings

DEBT CAPITAL

Term loans

Debentures

long term loans

CAPITAL STRUCTURE OF A FIRM

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

DEBT CAPITAL

Advantages:

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

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

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

IV. Company can obtain benefit of trading on equity.

Disadvantages:

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

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

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

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

EQUITY CAPITAL

Advantages:

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

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

III. Control over management remains with equity share holders.

IV. 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:

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

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

III. Equity dividend is not tax deductible.

IV. This may sometimes leads to over capitalization

FINANCIAL SOURCES OF THE COMPANIES

472.45

8,245.465,231.59

497.63 237.330 0 0 162.02 0

5,704.11

77,569.86

29,228.04

2,166.33

12,890.03

5,593.71

62,405.75

84,007.68

8,335.2310,255.52

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Torrent Power NTPC Power Grid Corp Suzlon Energy Tata Power

Rs. C

r. -

---->

Equity Share Capital Share Application Money Reserves Total Debt

DEBT/EQUITY RATIO

Debt/Equity Ratio = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡

𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

CompanyTotal

Debt

Shareholder

's Equity

Debt/Equit

y Ratio

Torrent

Power

5,593.7

1 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

8,335.2

3 2,825.98 2.95

10,255.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Torrent Power NTPC Power Grid Corp Suzlon Energy Tata Power

Debt/Equity Ratio

CAPITAL STRUCTURE OF THE COMPANIES

8%

92%

TORRENT POWER LTD

Equity

Debt

12%

88%

NTPC

Equity

Total Debt

6%

94%

POWER GRID

CORPORATION

Equity Total Debt

6%

94%

SUZLON ENERGY

Equity Total Debt

56%44%

TATA POWER

Equity Total Debt

WORKING CAPITAL

WORKING CAPITAL

•Working Capital is the capital available for conducting the day to dayoperation of the business and consists of current assets and currentliabilities.

•Working Capital can be viewed as a whole but interest is usuallyfocused on the individual components such as inventories or tradereceivables. Working capital is effectively the net current assets of abusiness.

•Working Capital can either be:Positive Current assets are greater than

current liabilities

Negativ

e

Current assets are less than current

liabilities

WORKING CAPITAL CYCLE

•The working capital cycle (WCC) isthe amount of time it takes to turnthe net current assets and currentliabilities into cash. The longer thecycle is, the longer a business istying up capital in its workingcapital without earning a return onit. Therefore, companies strive toreduce its working capital cycle bycollecting receivables quicker orsometimes stretching accountspayable.

CALCULATING WORKING CAPITAL CYCLE (WCC)

WORKING CAPITAL CYCLE OF POWER GRID CORPORATION

POWER GRID

CORP.

Mar

'14

(Days

)

Mar

'13

(Days

)

Mar

'12

(Days)

Mar

'11

(Days

)

Mar

'10

(Days)

Inventory

Turnover Period17 16 16 285 0

Debtors Turnover

Period36 42 47 1258 92

Creditors Turnover

Period219 -319 66 3247 280

WCC -166 377 -3-

1704-188

-166

377

-3

-1704

-188

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

Num

ber

of

Days

WORKING CAPITAL CYCLE OF COMPANIES

Torrent Power NTPCPower Grid

CorpSuzlon Energy Tata Power

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

0

58

-166

-2

-17

-200

-150

-100

-50

0

50

100

NU

MBER O

F D

AYS

WCC OF COMPANIES (2014)

WORKING CAPITAL POLICIES

Cash Policies:Do not invest funds in illiquid investment vehiclesNo investment duration shall exceed the forecasting period

All deposited funds must be insured

Accounts Receivable Policies:Do not allow payment terms greater than decided days Fix the maximum credit offered a customerStop customer credit once days outstanding exceedStop customer credit if a customer check does not clear the bank

CONT..

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

Accounts Payable Policies:

Do not pay accounts payable early

Require purchase orders for amounts exceeding Rs. ___

Disallow purchases exceeding the department budget

DIVIDENDS & DIVIDEND POLICIES

DIVIDENDS

Dividends are payments made by a corporation to its shareholdermembers. It is the portion of corporate profits paid out tostockholders.

TYPES OF DIVIDEND:

Cash Dividends:

This is the most common form of dividend. Cash dividends arethose dividends when simply cash is paid out of the profits.

Share Repurchases:

The Company repurchases the stock. Shareholders pay taxonly on the capital gains portion.

CONT..Stock Split:

It increases the number of shares in a publiccompany. The price is adjusted such that the before andafter market capitalization of the company remains the sameand dilution does not occur.

Bonus Issue:

It is a free share of stock given tocurrent shareholders in a company, based upon the numberof shares that the shareholder already owns. While the issue ofbonus shares increases the total number of shares issued andowned, it does not change the value of the company.

Right Issue:

With the issued rights, existing shareholders havethe privilege to buy a specified number of new shares from thefirm at a specified price within a specified time.

DIVIDEND POLICIES

Dividend policy is concerned with taking an implicit or explicitdecision of the Board of Directors regarding paying cash dividend inthe present or paying an increased dividend at a later stage to theshareholders.

The policy a company uses to decide how much it will pay out toshareholders in dividends from PAT and this decision is considered afinancing decision

Dividend policy can be of two types:Residual dividend policy:

The amount of dividend is simply the cash left after thefirm makes desirable investments using NPV rule. The rule is- if thecompany does not have any positive NPV projects to invest in, then itshould pay shareholders dividend.

CONT..

Dividend Stability Policy:

The fluctuation of dividends created by the residualpolicy significantly contrasts with the certainty of the dividendstability policy. With the stability policy, quarterly dividends areset at a fraction of yearly earnings. This policy reduces uncertaintyfor investors and provides them with income.

Hybrid Dividend Policy:

The final approach is a combination between the residualand stable dividend policy. Using this approach, companies tend toview the debt/equity ratio as a long-term rather than a short-term goal.

MOST COMMON TYPE OF DIVIDEND MEASURE

Level of dividends often measured by dividend yield:

Dividend yield = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 (𝐷𝑃𝑆)

𝑆𝑡𝑜𝑐𝑘 𝑃𝑟𝑖𝑐𝑒

Dividend yield measures percentage return earned by investor from dividends alone.

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

Dividend payout ratio = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 (𝐷𝑃𝑆)

𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 (𝐸𝑃𝑆)

DIVIDEND PAYOUT RATIO & DIVIDEND YIELDRATIO

Company EPS DPSShare

Price

Tata

Power4.02 1.25 74.55

NTPC 13.31 5.75 147.5

Torrent

Power2.01 0.5 161.6

Power grid 8.6 2.58 144.8

Suzlon

Energy-3.72 0 27.65

Company

Dividend

Payout

Ratio

Dividend

yield

Tata Power 31.09% 1.68%

NTPC 43.20% 3.90%

Torrent

Power24.88% 0.31%

Power grid 30.00% 1.78%

Suzlon

Energy0.00% 0.00%

INVESTMENT & DIVERSIFICATION

DIVERSIFICATION

TATA POWER:

Investment in JV’s : Rs. 158.71 Cr

Tubed Coal Mines Ltd. ,Mandakini Coal Company Ltd and Dagachhu Hydro Power Corporation Ltd.

Unrelated diversification: Rs. 9375.67 Cr

Tata services Ltd, Indian exchange Ltd.

Investment in Associates : Rs. 85.15 Cr

Yashmun Engineers Ltd. , The Associated Building Co. Ltd , Tata Projects Ltd.

INVESTMENT

TATA POWER NTPCPOWER GRID

CORP.

TORRENT

POWER LTD

SUZLON

ENERGY

TOTAL INVESTMENT (Rs. Cr) 12362.45 9757.86 998.62 2612.49 7730.07

12362.45

9757.86

998.62

2612.49

7730.07

0

2000

4000

6000

8000

10000

12000

14000

TOTAL INVESTMENT

TOTAL INVESTMENT (Rs. Cr)

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