Summer Training Project Report
on
The study of Financial Analysis Of
POWERGRID
Corporation Of India Ltd.
Submitted in Partial fulfilment of requirement of award of MBA degree of
GGSIPU, New Delhi
Submitted By:
ANKIT SHARMA
05815603914
MBA III Semester
Batch: 2014-16
Northern India Engineering College
(Affiliated to GGSIPU)
FC-26, Shastri Park, Delhi-110053
DECLARATION
This is to certify that the Project Report titled, “To Study Financial Analysis Of
POWERGRID Corporation Of India Ltd.” Which is submitted by me in partial
fulfilment of the requirement for the award of degree “Master of Business
Administration” from “Guru Gobind Singh Indraprastha University” at Northern India
Engineering College, Delhi comprises only my original work and has not been
submitted in part or full for any other degree or diploma of any university.
Date:
Place: DELHI ANKIT SHARMA
ACKNOWLEDGEMENT
“As we express our gratitude, we must never forget that the highest appreciation is not to
utter words, but to live by them.”
My heartfelt gratitude and warm salutations are also due to Faculty guide, Ms. Ashima kapoor for
inculcating in me the principles of dedication and hard work, and providing his guidance and support
throughout the Project. I would like to thank him for making the doubts clear during the presentation and
also for his constructive criticism of the approach to the problem and the result obtained during the course
of this work has helped me to a great extent in bringing work to its present shape.
Behind every fruitful endeavour lie the advice, guidance and inspiration of all the people directly
or indirectly involved with the report. I wish to express my gratitude to all the people involved in
the completion of this report. I am thankful to all of them for their help and encouragement
throughout the completion of the report. They have been a constant source of support for me.
I would also like to thank our Head of the Department, Ms. Divya Gangwar for her support and
guidance.
I would like to extend my sincere gratitude to the management of POWERGRID
CORPORATION OF INDIA LIMITED for providing me the enriching opportunity of working
with the organization and its team for a period of 2 months. In particular, I would like to thank my
Company Guide and mentor, Mr. B.K SAHOO (Asst. GM, Finance), PGCIL, for sparing the
time to provide me with necessary guidance and advice from time to time, with utmost patience, in
spite of his extremely busy schedule. I would also like to thank and Mr. TILAK MATTA
(Senior Accounts Officer), PGCIL for making my doubts clear from time to time
Ankit Sharma
05815603914
TABLE OF CONTENT
SR
NO.
PARTICULARS PAGE NO.
1 OBJECTIVE OF THE STUDY 1
2 INTRODUCTION 2
3 COMPONY PROFILE 3-13
4 RESEARCH METHODOLOGY 14-15
5 LITERATURE REVIEW 16-17
6 FUND RAISING OPTIONS 18-28
7 BALANCE SHEET AND PROFIT AND LOSS ACCOUNT 29-30
8 Corporate Finance analysis 31-35
9 FINDINGS 36
10 CONCLUSION 37
11 RECOMMENDATION 38
Bibliography 39
SR
NO.
PARTICULARS PAGE NO.
1 OBJECTIVE OF THE STUDY
2 INTRODUCTION
3 COMPONY PROFILE
4 RESEARCH METHODOLOGY
5 LITERATURE REVIEW
6 FUND RAISING OPTIONS
7 BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
8 Corporate Finance analysis
9 FINDINGS
10 CONCLUSION
11 RECOMMENDATION
Bibliography
CHAPTER 1
OBJECTIVES
OF THE STUDY
1
Objectives of the Project
To meet these many management planning and control needs, it becomes necessary to understand the process
of FINANCIAL ANALYSIS. So the objectives of this project are:
1) To study the composition of source of funds and application of funds implemented by the
POWERGRID.
2) To study the costs of various sources of finance used by POWERGRID.
3) To calculate the WACC of PGCIL and study its impact on the PGCIL capital structure.
CHAPTER 2
INTRODUCTION
2
INTRODUCTION
Power Grid Corporation of India ltd. (POWERGRID), India?s principal player in Electric power
transmission and a “Navratna” company, was incorporated on October 23, 1989 as a public
limited company, wholly owned by the Government of India. It has been carrying out its
responsibilities efficiently in the construction, operation and maintenance if inter-state
transmission systems and operation of Regional Power Grids. It has been notified as the Central
Transmission Utility (CTU) of the country.
This project undertakes the exploration of various financial instruments for the company to find
out the optimal instruments to use for the requirements of financing of its projects, and a critical
analysis of the relative merits and demerits of different options. Basically, analysis has been done
while comparing different financial instruments, which are used by PGCIL.
The Project Report can be divided into four parts:
(1) Presentation of the concepts relevant for the study
(2) calculation of WACC of PGCIL and study its impact on the PGCIL capital structure
(3) Detailed and critical analysis of data from various angles
(4) Recommendations for the most suitable fund raising options for the company.
Through recommendations, optimal fund raising options have been suggested, which incurred
more profit and less risk. However, the selection of instruments is more depended upon the
economic condition of the firm, and the country.
The project involves the studying of “Portfolio Management” for the organization and analyzing
the optimal financial instrument as a source for financing. Starting with the introduction, this
section outlines detail about the project, its relevance & significance as well as the purpose &
objective of the study. Subsequent to this section, comes the methodology. This section gives a
detailed note about the data collection, sampling and data analysis. Then, literature review is
included, which contains various concepts relevant to the study of the project. Then, an analysis
of various financial instruments has been conducted. Lastly, conclusion and recommendations
are given providing the results of the analysis, and suggestions towards the selection of financial
instrument for financing.
CHAPTER 3
COMPANY PROFILE
3
COMPANY OVERVIEW
India?s largest Electric Power Transmission Utility.
-” by Fitch and S&P.
Domestic Stable/ Highest Safety rating “AAA” by CARE,CRISIL & ICRA.
4
BRIEF OF COMPANY
gigantic Transmission network.
emerging markets of South Asia, Middle-east Asia CIS & African countries.
-2012).
-14 Rs. 20,000 Crore successfully met (about Capex of Rs. 42,700 Crore
already done in first two years' of XII Plan).
system so as to develop an efficient and low-loss transmission network.
from this Company is also pursuing its Rehabilitation Action Plan (RAP) and
Resettlement and Rehabilitation (R&R) activities during Project implementation stage.
Corporate Governance and believes that good
governance should entail trusteeship, empowerment and accountability of the management while
remaining proactive to the Government policies.
Company?s objectives and specific targets by empowering people at appropriate levels, to respond
to the challenges and the emerging opportunities and to play a pivotal role in the economic
development of the country.
ch five were whole-time
Directors including the Chairman & Managing Director, two Government nominees and seven
Independent Directors.
Enterprise, SEBI and other statutory bodies.
5
BUSINESS OVERVIEW
6
VISION AND MISSION
Keeping pace with changing business environment, POWERGRID had set its Vision and aligned
its mission and objectives as a vanguard of foresight.
VISION
World Class, Integrated, Global Transmission Company With Dominant Leadership in Emerging
Power Markets Ensuring Reliability, Safety and Economy.
MISSION
We will become a Global Transmission Company with Dominant Leadership in Emerging Power
Markets with World Class Capabilities by:
? World Class: Setting superior standards in capital project management and operations for the
industry and ourselves
? Global: Leveraging capabilities to consistently generate maximum value for all stakeholders in
India and in emerging and growing economies.
? Inspiring, nurturing and empowering the next generation of professionals.
? Achieving continuous improvements through innovation and state of the art technology.
7
Various Sources of Borrowing
BONDS
In finance, bonds is a debt instrument, in which the issuer owes the holders a debt and, depending
upon the terms of the bond, is obliged to pay interest (the coupon) and also to repay the principal
at a later date, termed maturity. It is a formal contract to repay borrowed money with interest at
fixed intervals.
Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the coupon
is the interest. Bonds provide the borrower with external funds to finance long-term investments.
Bonds
Term Loan
Commercials Papers
Cash Credit
Debt With Equity warrants
Lease
Retained Earnings
Reserves
8
Issuing Bonds
Bonds are issued by public authorities, credit institutions, companies and supranational institutions
in the primary markets. The most common process of issuing bonds is through underwriting. In
underwriting, one or more firms or banks, forming a syndicate, buy an entire issue of bonds from
an issuer and re-sell them to investors. The firm takes the risk of being unable to sell the issue to
end investors. However government bonds are instead typically auctioned.
Fund Raising through Bonds
POWERGIRD has been raising domestic finance through issue of bonds under private placement
since its inception. It has so far raised 50th Issue. The bonds were raised for financing its annual
capital outlay except the XI, XIII and XIV issues which were raised for prepayment of its high
cost bank loans and GOI loans respectively. Issue of bonds has always remained a major source of
domestic financing for POWERGIRD. In future also it is expected to remain so.
Up to 1996-97, POWERGIRD bonds used to be in bullet repayment structure. However, from
1997-98 onwards (VIth issue) bonds are being issued in the form of staggered repayment basis
usually with a moratorium of 3-4 years. This is mainly to suit the long gestation period of
transmission line projects. Because of the staggered repayment structure of the bonds there is no
pressure on cash flow due to redemption even though each issue size is approx. Rs. 750-1000
Crore.
Public Sector Undertaking Bonds (PSU Bonds)
These are medium or long term debt instruments issued by Public Sector Undertakings (PSUs).
The term usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under the
administrative control of the Government of India). Most of the PSU bonds are sold on Private
Placement Basis to the targeted investors at market determined interest rates. Often investment
bankers are roped in as arrangers to this issue. Most of the PSU bonds are transferable and
endorsement at delivery.
In case of tax-free bonds, normally such bonds accompany postdated interest cheque/warrants.
9
TERM LOANS
Term loan is a loan for land, equipment and working capital that is paid off like a mortgage in
between one year and ten years.
This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets
which will benefit the borrower over a long period (exceeding at least one year). Purchases of
plant and machinery, constructing building for factory, setting up new projects fall in this
category. Financing for purchase of automobiles, consumer durables, real estate and creation of
infra-structure also falls in this category.
A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term
loans usually last between one and ten years, but it may last as long as 30 years in some cases. A
term loan usually involves an unfixed interest rate that will add additional balance to be repaid.
Term loans can be given on an individual basis but are often used for small business loans. The
ability to repay over a long period of time is attractive for new or expanding enterprises, as the
assumption is that they will increase their profit over time. Term loans are a good way of quickly
increasing capital in order to raise a business? supply capabilities or range. For instance, some
new companies may use a term loan to buy company vehicles or rent more space for their
operations.
Choosing a term loan may be in your best interest, depending on your circumstances. But one
must be aware of extremely long repayment periods, as generally speaking, the longer the term,
the more you will owe because the interest accrues over a long period of time.
Classification of Term Loans
Bankers tend to classify term loans into two categories:
Intermediate-Term Loans: Usually running less than three years, these loans are generally
repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow.
According to the American Bankers Association, repayment is often tied directly to the useful life
of the asset being financed.
Long-Term Loans: These loans are commonly set for more than three years. Most are
between 3 and 10 years, and some run for as long as 20 years. Long-term loans are collateralized
by a business's assets and typically require quarterly or monthly payments derived from profits or
cash flow. These loans usually carry wording that limits the amount of additional financial
commitments the business may take on (including other debts but also dividends or principals'
salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan.
10
Term loans are most appropriate for established small businesses that can leverage sound financial
statements and substantial down payments to minimize monthly payments and total loan costs.
Repayment is typically linked in some way to the item financed. Term loans require collateral and
a relatively rigorous approval process but can help reduce risk by minimizing costs. Before
deciding to finance equipment, borrowers should be sure they can they make full use of
ownership-related benefits, such as depreciation, and should compare the cost with that leasing.
Process of Raising Funds through Term Loan
Term Loan from banks/FIs can be drawn relatively at a short notice compared to formalities
involved in raising funds through bonds. The loan may also be drawn in more than one tranches to
suit the fund requirements of POWERGIRD.
The loan structure may also be designed to suit the project commissioning schedule of
POWERGIRD i.e. with a moratorium of 3-4 years and thereafter repayable in 12 equal
installments. The long term loans are generally raised as secured loans.
The drawl of loan is within powers of the Board as per provisions of the Companies act 1956.
Accordingly the board approval taken at the beginning of the year must be followed.
Short Term and Debt Loan
To meet the temporary needs of funds and bridge the gap between raising of long term loan/bonds
are bridge loan/short term loan raised. This bridge/short term loan is generally repaid out of the
bonds/term loans raised subsequently during the year. The same bidding procedure is followed for
raising bridge/short term loan as laid down for long term loans from Banks or financial
institutions.
11
COMMERCIAL PAPER
In the global money market, commercial paper is an unsecured promissory note with a fixed
maturity of one to 270 days. Commercial Paper is a money-market security issued (sold) by large
banks and corporations to get money to meet short term debt obligations (for example, payroll),
and is only backed by an issuing bank or corporation's promise to pay the face amount on the
maturity date specified on the note. Since it is not backed by collateral, only firms with excellent
credit ratings from a recognized rating agency will be able to sell their commercial paper at a
reasonable price. Commercial paper is usually sold at a discount from face value, and carries
shorter repayment dates than bonds. The longer the maturity on a note, the higher the interest rate
the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically
lower than banks' rates.
A major benefit of commercial paper is that it does not need to be registered with the Securities
and Exchange Board of India (SEBI) as long as it matures before nine months (270 days), making
it a very cost-effective means of financing. The proceeds from this type of financing can only be
used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new
plant, without SEBI involvement.
Issuance of Commercial Papers
There are two methods of issuing paper. The issuer can market the securities directly to a buy and
hold investor such as most money funds. Alternatively, it can sell the paper to a dealer, who then
sells the paper in the market. The dealer market for commercial paper involves large securities
firms and subsidiaries of bank holding companies. Direct issuers of commercial paper usually are
financial companies that have frequent and sizable borrowing needs and find it more economical
to sell paper without the use of an intermediary.
Are All Corporates Eligible to Issue Commercial Papers?
No. A corporate would be eligible to issue CP provided:
? The tangible net worth of the company, as per the latest audited balance sheet, is not less
than Rs.4Crores
? Company has been sanctioned working capital limit by bank(s) or all-India financial
institution(s); and
? The borrower account of the company is classified as a Standard Asset by the financing
bank(s)/ institution(s)
12
Rating Requirement for Issuance of Commercial Papers
All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from
Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and
Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or
the FITCH Ratings India Pvt Ltd. or such other credit rating agency (CRA) as may be specified by
the Reserve Bank of India from time to time, for the purpose.
Eligible participants/issuers shall obtain credit rating for issuance of CP from any one of the SEBI
registered CRAs. The minimum credit rating shall be „A3? as per rating symbol and definition
prescribed by SEBI. The issuers shall ensure at the time of issuance of the CP that the rating so
obtained is current and has not fallen due for review.
The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has
not fallen due for review and the maturity date of the CP should not go beyond the date up to
which the credit rating of the issuer is valid. Currently, the commercial papers are not being issued
by POWERGIRD.
CASH CREDIT
Cash credit is a short-term cash loan to a company. A bank provides this type of funding, but
only after the required security is given to secure the loan. Once a security for repayment has been
given, the business that receives the loan can continuously draw from the bank up to a certain
specified amount. This type of financing is similar to a line of credit.
With many of the advantages of a standard line of credit, cash credit is the issuance of a short term
cash loan to a business. A cash loan of this type is often utilized to meet the expenses associated
with a specific task or project, with repayment expected within a period of one year or less.
Successfully receiving cash credit and paying off the loan within terms can open the way for the
business to be extended a more liberal line of credit for future use.
As with many types of financial assistance, cash credit is extended under terms that are set and
controlled by the institution that provides the loan. Typically, cash credit involves the presentation
of some form of security in order to cover the amount of cash credit that is extended by the bank
or loan agency. The security of collateral remains accessible to the lender until the cash credit is
repaid in full.
One of the advantages for a new company is that cash credit can be an excellent way of setting the
stage for a long term working relationship with a lender. Upon successfully complying with the
terms of the cash credit agreement, the company may become eligible for other forms of
assistance from the financial institution, including other forms of cash loans and the establishment
of a conventional line of credit.
13
DEBT WITH EQUITY WARRANTS
Equity warrant bonds are debt securities that incorporate warrants, which give the holder the
option to purchase equity in the issuer, its parent company, or another company during a
predetermined period or on one particular date at a fixed contract price. The warrants are
detachable and may be traded separately from the debt security. The exercise of the equity warrant
will normally increase the total capital funds of the issuer because the debt is not replaced by
equity but remains outstanding until the date of its redemption. The issue of equity warrant bonds
reduces the funding costs for borrowers because the investor will generally accept a lower yield in
anticipation of the future profit to be gained from exercising the warrant.
LEASE
It has become increasingly more common in recent years for companies to lease equipment. Each
leasing agreement needs to be read through carefully to understand the terms and conditions
within said lease.
Typically a lease can run anywhere from one to five years. Most equipment necessary in
commercial businesses today, including technical equipment, can be leased. Some leases provide
an option to then purchase the equipment at substantially less money when at the end of the term
of the lease. By leasing equipment, if structured properly, one can maintain its credit availability,
as the lease debt does not have to be considered a direct liability on the financial statements. This
is advantageous, as it does not limit the ability to borrow from lending sources.
Advantages
? It offers fixed rate financing; you pay at the same rate monthly.
? Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate
as when you began the lease, therefore making your dollar stretch farther. (In addition, the
lease is not connected to the success of the business. Therefore, no matter how well the
business does, the lease rate never changes.)
? There is less upfront cash outlay; you do not need to make large cash payments for the
purchase of needed equipment.
? Leasing better utilizes equipment; you lease and pay for equipment only for the time you
need it.
? There is typically an option to buy equipment at end of lease term.
CHAPTER 4
RESEARCH
METHODOLOGY
14
Research Methodology
The first chapter of the study gives the purpose and objective of the study. This chapter discusses
the methodologies that were used to fulfill these objectives. This chapter covers universe of the
study, locale of the study, sample of the study, data collection, and data analysis.
Universe of the Study
The data collected belongs by and large to the power sector of the Country. Indian power sector is
fifth largest in the world. It has an installed capacity of 199.88 Giga Watt (Mar 2013). The thermal
power plants have majority in as they produce around 66% of the total power generated in the
country. Hydro-electricity consists 19% while rest is the combination of biomass, nuclear etc.
The study is conducted to analyze the capital structure of Power Grid Corporation of India with its
past performance and other companies in the industry.
Locale of the Study
The study was conducted for PGCIL. Power Grid is India?s largest grid operator. It transmits
about 51% of power generated in India. It has a pan India presence with more than 82,000 km of
transmission network and more than 135 substations.
Sample of the Study
The sample or the data was collected for Power Grid Corporation of India from the
documents provided by the Company. A brief profile of the company is given in
following table.
•POWERGRID
•GURGAON
NAME AND
ADDRESS
•STATE OWNED ENTERPRISE
•ESTABLISHED IN 1989
TYPES AND
ESTABLISHMENT
•ELECTIRCITY UTILITY
•AROUND 10,000 EMPLOYEES
NATURE OF
PRODUCTION AND
NO. OF EMPLOYEES
15
Data Collection
The data collection for Power Grid was from the different documents provided by the company.
These documents also include projection of capital expansion and fund raising plans for next five
years of the company and also Manuals related to provisions regarding sources used by POWER
GRID to fund its project. Most of the data collected was from annual reports of different years of
the company.
The data for different companies (along with NTPC) was collected from the annual reports of the
respective companies. Data for calculating beta for Power Grid and NTPC was collected from the
website of Bombay Stock Exchange and data regarding the calculation of risk free return(rf) is
collected from RBI database.
Data Analysis
Different steps were taken to complete the calculations and analysis of the study.
1) The first part of the project was to study the composition of source of funds and application of
funds implemented by the POWERGRID.
2) The second part deals computation of costs of various sources of finance used by
POWERGRID. These include computation of costs of bonds, term loans, foreign loans and cost of
equity by CAPM approach:
3) In the third part of the project deals with the calculation of WACC of PGCIL and its impact on
the PGCIL capital structure. Comparative analysis has been done for lasts 5 years.
LIMITATION OF PROJECT:
All analysis is dependent on secondary data that might be turned to be inaccurate any aspects of it
is proved false.
Cost of equity is calculated with the help of CAPM approach which is entirely depend on data
available from the bse site.
Less time period for conducting analysis is major limitation of this study. As it doesn?t allowed to
conduct the research properly.
CHAPTER 5
LITERATURE REVIEW
16
Literature Review
Government Ownership and the Cost of Debt: Evidence from Government Investments in
Publicly Traded Firms, PBC Research Paper (2012)
The research examines how government ownership affects firms? cost of debt. As documented by
Faccio, Masulis, and McConnell (2006) and Brown and Dinç (2005), governments are generally
reluctant to allow state-owned firms to default. Accordingly, government ownership might
provide an implicit debt guarantee reducing the chance of default and, hence, the cost of corporate
debt. On the other hand, the implicit debt guarantee might induce moral hazard for managers, by
reducing the probability of disciplinary replacement, by eliminating takeover threats, and by
minimizing the risk of bankruptcy. Such an increase in moral hazard is thus likely to lead to higher
risk taking and, thus, to a higher cost of debt. Also, government ownership could increase the cost
of debt by imposing social and political goals that reduce corporate profitability and thus increase
default risk. The results show that the value of a debt guarantee is greater the higher the likelihood
of default. Stock ownership by domestic governments improves the perceived creditworthiness of
corporate bond issuers by providing an implicit bond payment guarantee. This guarantee becomes
especially valuable during a financial crisis or in the presence of firm-specific distress factors. On
the other hand, during non-crisis years, government ownership is associated with higher spreads.
Risk Management-Profiling and Hedging, Stern Papers (2003)
The paper talks about how a company should develop their risk profile. It also gives why it is
worth for a company to spend in money hedging against the possible risks.
Risk Profiling in an Organisation
There are four steps involved in this process of developing a risk profile for a business. In the first
step, we list all risks that a firm is exposed to, from all sources and without consideration to the
type of risk. We categorize these risks into broad groups in the second step and analyze the
exposure to each risk in the third step. In the fourth step, we examine the alternatives available to
manage each type of risk and the expertise that the firm brings to dealing with the risk.
17
The benefits of Hedging
There are several reasons why firms may choose to hedge risks, and they can be broadly
categorized into five groups. First, the tax laws may benefit those who hedge risk. Second,
hedging against catastrophic or extreme risk may reduce the likelihood and the costs of distress,
especially for smaller businesses. Third, hedging against risks may reduce the under investment
problem prevalent in many firms as a result of risk averse managers and restricted capital markets.
Fourth, minimizing the exposure to some types of risk may provide firms with more freedom to
fine tune their capital structure. Finally, investors may find the financial statements of firms that
do hedge against extraneous or unrelated risks to be more informative than firms that do not.
Power Sector in India, White Paper on Implementation Challenges and Opportunities,
KPMG (Jan 2010)
It is an annual report on Power Sector published by KPMG. This paper throws light on Industry
overview, the value chain and different players in each business operation namely generation,
transmission and distribution. The paper also discusses the regulations in this sector which needs
to be tackled. Some of the prominent challenges are the project execution, scarcity of fuels,
equipment shortage, manpower shortage, problems in land acquisition and environmental
clearance.
SEBI (Disclosure and Investor Protection) Guidelines, 2000
The Security and Exchange Board of India, the sole regulator of Capital Markets in India, issues
various guidelines to regulate the capital markets of the nation. The DIP Guidelines were issued
for the purpose of protecting the investors from fraudulent practices by issuers and to also ensure
maximum disclosure. It has guidelines ranging from Offer letters to lock-in period and guidelines
on advertising the issue. The copy of the above mentioned guidelines has many regulations which
were not in the purview of the study. Thus only few aspects were studied.
The main objectives of the guidelines are:
protection
CHAPTER 6
FUND RAISING OPTIONS
18
Fund Raising
Domestic
Debt Equity
International
Debt
19
Sources of funds at Power Grid
Power Grid has various sources of funds like share capital, reserves and surplus, loans, bonds, current
liabilities, etc... Following pie-chart shows various sources of funds at Power Grid and its composition
for the year 2013-2014.
From the above pie chart, one can note that:
? The company has only 25.6% of its sources which are not borrowed i.e. in the form of
shareholder's funds. Of which, 4.52% exists as share capital and high proportion of the rest
21.08% is ploughed back in business as reserves and surplus to provide for capital requirements of
the firm. So, we can say that the firm has a high gearing ratio, or in other words, it is highly
leveraged.
? Such high dependence on borrowed funds is due to its nature of business i.e. national power
transmitter. For the past some time, the firm is involved in the implementation of its ambitious
project of establishing the national grid. Besides that also the firm has a big order book, so, it has
to depend on borrowed funds largely.
? Unsecured loans i.e. short term loans constitute only 1.78%, and also loans from banks and
financial institutions is also zero as the firm does not prefer them due to high interest rates.
Bonds
(including
foreign
currency
bonds),
43.91%
Reserves,
21.08%
Foreign
currency
loans, 18.87%
Deferred tax
& net current
liabilities,
7.78%
Short tern
loans, 1.95%
Grants, 0.11%
Loans from
banks &
financial
institutions,
1.78%
Equity, 4.52%
Soureces O f Fund 2013-14
20
APPLICATION OF FUNDS
? Being a capital intensive firm, the 60% of the funds are invested in Net Block i.e. in fixed assets
like transmission grids, transmitters etc
? As high as 19% of the resources are invested in Capital WIP (Work in progress), this signifies that
the company is in the path of expansion and is undertaking many projects. The Capital WIP
implies the funds given as advance to the contractors, the under construction buildings and plants,
etc.
? Just 1% of the funds are into Investment and 20% in current assets. From this, we can infer that
either the firm has operational excellence in Working capital management or since it is Under
Expansion stage the investment in short term assets is low.
From the Sources and Applications it can be analyzed that 20% of short term Assets (CA) is
wholly financed by the Current liabilities which is 10%. This implies the firm is able to cover half
of its short term requirements with short term sources. This may be termed as aggressive strategy
because the Permanent and temporary working capital is being financed by the short term funds.
After analyzing the various sources and Applications of funds, it is now necessary to analyze the
trend in each component of the sources and application over the years.
Funds Raised through Equity and Reserves
The share capital has been constant over the years; this is because of the companies? borrowing
from Government of India by allotment of shares. Pre-Listing i.e. before 2007, the company used
to allot shares for this purpose. In the year 2008, there has been a rise in shares allotted because of
the Initial Public Offer of Power Grid on 26th September 2007. In the year 2008 to 2009, the
number of shares and the share capital is constant implying no further issue of share capital is
made. However, there is news of further disinvestment through FPO in the year 2010, so there
may be change in share capital in the year 2010-11. The main reason for disinvestment of equity
capital more dependence on borrowing funds.
Ater paying all the liabilities, the company uses its net Profit after tax (PAT) to pay dividends.
But, not all the profit is paid as dividend on its shares. Some amount is retained back by
the0020company to provide for its funding requirements.
The Reserves in the form of General reserve, Capital Reserve, Share Premium, Debenture
Redemption reserve and Profit and Loss Account's Credit balance are maintained. There has been
continuous increase in the reserves over the years. Over the 5 years the reserves and surplus
21
amount is continuously increasing i.e. from rs10409 in 2008-2009 to 21610 in 2012-2013 years. It
has almost shown 100% growth over the 5 years.
Funds Raised through Bonds
Power Grid has been raising domestic finance through issue of bonds under private placement
since its inception. It has so far raised 45 series of bonds amounting to Rs. 43085Crores. The
bonds were raised for financing its annual capital outlay. Issue of bonds has always remained a
major source of domestic financing for Power Grid. In future also it is expected to remain so.
Up to 1996-97, Power Grid bonds used to be in bullet repayment structure. However, from 1997-
98 onwards (i.e. VIth issue onwards), bonds are being issued in the form of staggered repayment
basis usually with a moratorium of 3-4 years followed by 10-12 equal annual instalments. This is
mainly to suit the long gestation period of transmission line projects. Because of the staggered
repayment structure of the bonds there is no pressure on cash flow due to redemption even though
each issue size is approx. Rs.750-1000crore.
4209 4209
4630 4630 4630
10409
11730
16737
18858
21610
0
5000
10000
15000
20000
25000
2009-10 2010-11 2011-12 2012-13 2013-14
Equity & Reserves
equity
reserves
22
The main advantage of using bond financing for capital improvements and expansion is the low
interest rate that the not-for-profit receives. This may help the company to keep their fund intact
(and earning interest), to get their capital expenditures done now, and have the bond repaid with
future funds. The organization is also generally able to prepay the bond upon giving a 30-day
notice.
The Power Grid Corporation of India Limited issues bonds with fixed coupon rate determined by
the book building procedure. The average maturity of most of the bonds is 15 years (4 years of
moratorium and then repayment of loan in 12 equal annual; instalments). Apart from this it has
also issued different structure bonds of 6 years Maturity ( 1 year moratorium and 6 annual equal
repayments), 12 years maturity ( 3 years moratorium and 10 equal annual repayments) etc.
The interest rate is determined based on the prevailing interest rate on 10 year GSec ( for a 15 year
PG bond, since the average tenure turns up to be 9 years because of equally annual repayments)
and a spread defined by FIMMDA for a AAA rated bond for 10 years is added to define a range
for bidding by investors. Then the rate obtained by the book building process is taken as the
coupon rate for the bond issue.
23
Features of Bonds Issued by Power Grid
1. Secured: Power Grid issues secured bonds.
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which
then becomes a secured debt owed to the creditor who gives the loan.
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan
through securing the debt, the creditor is relieved of most of the financial risks involved because it
allows the creditor to take the property in the event that the debt is not properly repaid.
Accordingly charge is to be created on the assets of the company to secure interest as well as the
interest on the bonds. The security is to be created in favor of the trustees for the bonds.
Various bonds are secured through different means:
I. Equitable mortgage of properties
II. By floating charge over the fixed assets of the corporation
III. By way of Debenture Trust Deed ranking pari-passu on immovable properties
Of Power Grid.
IV. Hypothecation of assets of various projects i.e. Transmission Lines and Sub-
stations set up by Power Grid for transmission of electricity.
2. Separately transferrable, redeemable Principal Parts (STRPPs)
Each bond is divided into separately tradable and transferrable parts which are called STRPPs.
Presently, Power Grid issues bonds divided into 12 STRPPs of 12.5 lakhs each. Earlier it was
mandatory to have each STRPPs of Rs.10 lakhs but this norm is no more a compulsion.
3. D-Mat (Electronic mode)
At present all the bonds are issued through D-Mat A/C (electronic mode), while earlier bonds
were also issued in physical form. Though many of them, with time, have converted to electric
mode and the remaining ones are still traded in their own format.
4. Green shoe option
This option is a feature attached to Power Grid Bonds where by the issuer can retain over-
subscription over the issue size
5. WDM (Wholesale Debt Market)
This term is used to define the debt component of NSE where the fixed interest earning bonds are
issued in the stock exchange
24
6. NSDL, CDSL
Depositories are companies registered under the Companies Act, 1956 and registered with SEBI
as Depository. Depositories provide facilities to keep securities in their electronic form (in D-mat
Account) through its participants. There are two depositories: National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL).
7. Non- convertible
As the name suggests, these bonds cannot be converted into any other form of security and their
existence can be put to an end only by their redemption.
8. Redeemable
It says that the bonds have a maturity and would have to be repaid when the maturity period ends.
9. Taxable
The term defines that the person earning on the investment in the bonds i.e. the investor who will
earn by the way of interest will have to pay tax on that income.
10. Arrangers
Merchant bankers are the institutions who put in to arrange funds for the company in case it is not
confident of doing so on its own.
Power Grid also appoints arrangers from time to time depending upon the market conditions.
11. Private placement
The company doesn't raise money through inviting public at large for it. It can just ask for
investment privately and there also the people or organizations invited should not exceed 49.
12. Execution of Depository Participant
Depository Participant is an agent of depository through which it interfaces with investor. DP can
be banks or financial institutions; they maintain the records of investors. If an investor wants to
transfer his bonds, he has to contact his corresponding Depository Participant in order to facilitate
the process.
25
Funds Raised through Term Loans
The domestic borrowing of Power Grid is generally a mix of borrowing through bonds and term
loans from banks and Financial Institutions. The borrowings are to be resorted in accordance with
provisions as mentioned in SEBI norm.
Term loans from banks /FIs can be drawn relatively at a short notice compared to formalities
involved in raising funds through bonds. The loan may also be drawn in more than one tranches to
suit the fund requirements of Power Grid. The loan structure may also be designed to suit the
project commissioning schedule of Power Grid i.e. with a moratorium of 3-4 years and thereafter
repayable in 12 equal instalments .The interest payments also can be on quarterly, semi-annually
or annual basis.
The capital expenditure of Power Grid, i.e. investments in its net block like various transmission
grids and transmission lines, is majorly financed by funds raised through bonds, whereas the funds
raised through term loans are used for meeting its various other funding requirements like paying
advances to suppliers, provisions, etc... Also, short term loans are taken by Power Grid to meet
any deficit between the funds available with it and its working capital requirements.
The term loans raised by Power Grid are generally raised as secured loans. A security worth 1.1
times the amount of borrowed loan is given. Generally, the security offered is the property owned
by Power Grid, or the fixed assets owned by it.
Mostly, the loans raised by Power Grid are at fixed interest rate, but some are at floating rate also.
The floating rate is quoted in variation with the PLR range set by the Reserve Bank of India
(RBI). For e.g. The loan taken by Power Grid from Punjab National Bank (PNB) in 1999, with
quarterly interest payments and annual redemptions, the interest rate is defined as PLR-2.85%.
This rate is revised every quarter, and then the interest for the next quarter would be accrued on
the new rate.
The Term Loans from Institutions mainly has the loans from LIC at different rates. This amount is
depleting over the years as it is redeemed in equal instalments every year. And also since they are
raised at rate of 10% or high, the firm is proffering to repay the amount.
26
0
100
200
300
400
500
600
2009-10 2010-11 2011-12 2012-13 2013-14
Term loan
Term loan
0
200
400
600
800
1000
1200
1400
1600
2009-10 2010-11 2011-12 2012-13 2013-14
Term loan from bank
Term loan from bank
27
Funds Raised through Foreign Loans
Internationally, Power Grid raises various loans from foreign banks and institutions. It is second
largest sources of funding through debt at Power Grid as it is very cheap as compared to other
sources and the tenure of the loans is very long keeping in tune with the longer gestation periods
of its projects i.e. of 15-16 years.
Mostly, the foreign loans raised are also secured. Some are at fixed interest rate having longer
duration, while, most of them are at floating interest rate with shorter duration, varying with
LIBOR, i.e. London Inter-Bank Offer Rate.
LIBOR: An interest rate at which banks can borrow funds, in marketable size, from other banks in
the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers'
Association. The LIBOR is derived from a filtered average of the world's most creditworthy
banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
This rate is applicable to the short-term international interbank market, and applies to very large
loans borrowed for anywhere from one day to five years. This market allows banks with liquidity
requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding
excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a
day by a small group of large London banks, but the rate changes throughout the day.
The major lenders of Power Grid are ADB and IBRD, both of them issuing loans on LIBOR base.
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
2009-10 2010-11 2011-12 2012-13 2013-14
Foreign loans
Foreign loans
28
Domestic Financing
Role of Domestic Financing in POWERGIRD
POWERGIRD is engaged in the construction of the National Grid by the end of the 12th Plan i.e.
by 2012. An estimated expenditure of approx. Rs. 50,000 Crores is required to be done by
POWERGIRD directly and another Rs. 20,000 Crores is to be spent through Independent Power
Transmission Companies (IPTC) and Joint Venture route.
Out of Rs. 50,000 Crores, approximately Rs. 21,000 Crore are to be mobilized by POWERGIRD
through Internal Resources and domestic borrowing (Rs. 8,000 Crore and Rs. 13,000 Crore
respectively). Thus approx. 26% of the total funding has to be mobilized by POWERGIRD from
domestic sources which is a huge task ahead and entail upon the Finance department a big role
and responsibility.
CHAPTER 7
BALANCE SHEET
AND
P/L ACCOUNT
29
Power Grid Corporation
of India
Standalone Balance Sheet ------------------- in Rs. Cr. -------------------
Sources Of Funds
Total Share Capital 5,231.59 5,231.59 4,629.73 4,629.73 4,629.73
Equity Share Capital 5,231.59 5,231.59 4,629.73 4,629.73 4,629.73
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 32,935.00 29,228.04 21,609.74 18,858.05 16,737.27
Networth 38,166.59 34,459.63 26,239.47 23,487.78 21,367.00
Secured Loans 89,316.95 76,946.91 66,107.98 51,446.77 36,637.03
Unsecured Loans 6,021.80 7,060.77 2,685.89 2,098.69 2,028.81
Total Debt 95,338.75 84,007.68 68,793.87 53,545.46 38,665.84
Total Liabilities 133,505.34 118,467.31 95,033.34 77,033.24 60,032.84
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Application Of Funds
Gross Block 118,088.93 96,392.63 80,525.70 63,347.47 50,332.20
Less: Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Less: Accum. Depreciation 28,402.72 23,238.56 19,125.06 15,685.17 13,108.22
Net Block 89,686.21 73,154.07 61,400.64 47,662.30 37,223.98
Capital Work in Progress 39,882.19 31,851.41 19,114.92 28,183.54 23,712.93
Investments 926.42 998.68 1,147.50 1,284.45 1,398.35
Inventories 717.75 712.40 551.53 440.31 381.51
Sundry Debtors 2,118.65 1,578.46 1,434.09 1,497.49 1,114.00
Cash and Bank Balance 2,062.98 4,417.52 1,661.97 2,336.88 3,680.06
Total Current Assets 4,899.38 6,708.38 3,647.59 4,274.68 5,175.57
Loans and Advances 22,906.68 26,876.53 25,822.91 8,803.38 8,210.74
Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Total CA, Loans & Advances 27,806.06 33,584.91 29,470.50 13,078.06 13,386.31
Current Liabilities 23,003.36 19,629.37 14,889.28 11,696.95 12,813.27
Provisions 1,792.18 1,492.39 1,210.94 1,478.16 2,875.46
Total CL & Provisions 24,795.54 21,121.76 16,100.22 13,175.11 15,688.73
Net Current Assets 3,010.52 12,463.15 13,370.28 -97.05 -2,302.42
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 133,505.34 118,467.31 95,033.34 77,033.24 60,032.84
Contingent Liabilities 32,089.37 35,582.73 47,462.01 44,320.81 30,612.06
Book Value (Rs) 72.95 65.87 56.68 50.73 46.15
30
Power Grid Corporation of India
Consolidated Profit & Loss account ------------------- in Rs. Cr. -------------------
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Income
Sales Turnover 17,658.51 15,675.43 13,163.90 10,311.52 8,611.76
Excise Duty 0.00 0.00 0.00 0.00 0.00
Net Sales 17,658.51 15,675.43 13,163.90 10,311.52 8,611.76
Other Income 579.66 470.69 563.22 762.06 660.78
Stock Adjustments 0.00 0.00 0.00 0.00 0.00
Total Income 18,238.17 16,146.12 13,727.12 11,073.58 9,272.54
Expenditure
Raw Materials 1.02 219.40 63.59 0.10 0.05
Power & Fuel Cost 174.35 0.00 115.23 83.52 73.52
Employee Cost 1,124.41 1,033.61 974.72 921.41 785.68
Other Manufacturing Expenses 0.00 0.00 289.63 250.75 213.37
Selling and Admin Expenses 0.00 0.00 0.00 0.00 0.00
Miscellaneous Expenses 1,232.53 1,158.54 506.88 492.09 427.58
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Total Expenses 2,532.31 2,411.55 1,950.05 1,747.87 1,500.20
Operating Profit 15,126.20 13,263.88 11,213.85 8,563.65 7,111.56
PBDIT 15,705.86 13,734.57 11,777.07 9,325.71 7,772.34
Interest 4,081.23 3,253.66 2,599.44 1,985.75 1,665.76
PBDT 11,624.63 10,480.91 9,177.63 7,339.96 6,106.58
Depreciation 5,173.33 4,079.38 3,427.80 2,637.39 2,272.92
Profit Before Tax 6,451.30 6,401.53 5,749.83 4,702.57 3,833.66
Extra-ordinary items -47.19 -42.53 25.80 -12.91 -4.37
PBT (Post Extra-ord Items) 6,404.11 6,359.00 5,775.63 4,689.66 3,829.29
Tax 1,357.86 1,811.42 1,463.02 1,386.67 1,157.38
Reported Net Profit 5,046.25 4,547.58 4,312.61 3,302.99 2,671.91
Net P/L After Minority Interest & Share
Of Associates
5,088.31 4,590.11 4,286.81 3,315.90 2,676.28
Total Value Addition 2,531.29 2,192.15 1,886.46 1,747.77 1,500.15
Equity Dividend 1,118.48 1,405.60 1,321.38 1,020.47 885.02
Corporate Dividend Tax 227.60 239.85 218.51 165.52 140.76
Per share data (annualised)
Shares in issue (lakhs) 52,315.90 52,315.90 46,297.25 46,297.25 46,297.25
Earning Per Share (Rs) 9.65 8.69 9.32 7.13 5.77
Book Value (Rs) 73.47 66.32 57.03 50.94 46.26
CHAPTER 8
Corporate Finance analysis
31
Corporate Finance analysis
Equity or Debt
The Company has planned a capital expenditure of Rs. 100,000 Crores for the next five years.
This expenditure is in line with what Planning Commission of India was to do in power
transmission industry.
The Company has made a comprehensive plan for raising debt and equity for the capital
expansion. Rs. 70,000 Crores is to be raised using debt. This debt will consist of domestic debt
and foreign debt. Foreign debt is generally taken from the multi-lateral agencies like World Bank
and Asian Development Bank. The interest rates for these loans in based on London Interbank
Offered Rate (LIBOR). LIBOR is the average of interest rates that some leading banks based in
London charge when they lend to other banks. These loans can vary from one day to few years.
Like Power Grid, many institutions around the world use these rates to decide the lending rates.
For Power Grid, the rates are LIBOR rates for that day plus 50 basis points plus 1.2% government
guarantee.
Domestic Debt for Power Grid consists of loans from Government of India, Financial Institutes
like Power Finance Corporation, bonds and bank loans. Bonds constitute the highest among the
among debt sources. The debt is so designed that the interest and principle payment starts after the
project they are related to is functional. For example, one of the bond structures can be to pay the
interest half yearly after 3 years moratorium and 10 equal instalments of principle payment.
In such cases, the bond cab be divided into ten Separately Transferable Redeemable Principle
Parts (STRPPs).Mostly the Company issues bonds in following structures:
? 1 year moratorium period + 5 equal instalments
? 3 years moratorium period + 10 equal instalments
? 4 years moratorium period + 12 equal instalments
? 5 years moratorium period + 10 equal instalments
For the purpose of this project, it is assumed that interest payment starts from the same year when
debt was taken. The bonds of the Company have a long history of top ratings from different rating
agencies. The interest rates are decided by adding a component for AAA rating above the G-Sec
yield of 10 years government bonds. Power Grid came up with the IPO in September 2007. It
raised Rs. 3,000 Crores in the IPO. Prior to this, Government of India used to provide equity to the
company. In November 2010, the Company again came up with a FPO where Government of
India diluted 10% equity and 10% new equity was issued. About Rs. 7,600 Corers was raised in
32
the FPO. At present, Government of India?s holding in the company stands at 69.42%. As per
Government?s conditions, its holding in the company should not drop below 51%.
Cost of Capital Basis
The Company estimates that it will be able to generate Rs. 22,750 Corers from internal
generations and from the proceeds of previous equity raisings.
To analyse the given condition, the first part was divided in into two parts: first part assumes that
whole Rs. 7,250 Corers is taken as equity. While second assumes that Rs. 7,250 Corers is taken as
debt.
Following is the plan of the Company to raise Rs. 100,000 Crores if Rs. 7,250 Crores is taken as
equity through new fund raisings
Equity (in Rs.
Crores)
2013(actual) 2014 2015 2016 2017 2018 Total
Internal
generation
5110 3850 3600 4300 5100 5900 22750
New Issues 4600 2650 725
0
Total New Equity 5110 3850 8200 4300 7750 5900 30000
Debt (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018 Total
External
Borrowings
2016 3047 4163 2580 1803 2407 14000
Domestic
Borrowings
10688 13103 8937 10820 11597 11543 56000
Total New Debt 12704 16150 13100 13400 13400 13950 70000
New Funds Raised 17814 20000 21300 17700 21150 19850 100000
Interest Incurred 976.24 1210.99 877.25 1001.56 1049.81 1059.99
Table : Fund Raising Plan of the Company (Equity)(only estimation)
The figure for year 2013 are actual while rest others are expected. The last row gives the sum for
the years from 2013 to 2017. Figure for internal generation for 2012-13 (Rs. 3850 Crores ) also
contains proceeds (Rs. 750 Crores ) from the previous FPO. The Company plans to come out
with new FPOs during 2014 and 2016. After the FPO in 2016, Government of India?s holding in
the Company would be down to 51%.
The external borrowing would come from Asian Development Bank and World Bank. Domestic
debt would be raised majorly through bonds. The interest rate for foreign loan is taken as 2.46%
33
and for domestic bonds it is 8.67%.These rates were calculated taking into account the past and
future circumstances and were provided by the company.
The following table gives the total debt and equity for the Company. The new issues of debt and
equity are added to the previous years to get the data
Equity (in Rs.
Crores)
2013(actual) 2014 2015 2016 2017 2018
Previous year 21351.37 26461.4 30311 38511.4 42811.4 50561.4
Internal generation 5110 3850 3600 4300 5100 5900
New Issues 0 0 4600 0 2650 0
Total Equity 26461.37 30311.4 38511 42811.4 50561.4 56461.4
Debt (in Rs. Crores )
External Borrowings 14237.55 17284.6 21448 24027.6 25830.6 28237.6
Domestic Borrowings 39349.22 52452.2 61389 72209.2 83806.2 95349.2
Total Debts 53586.77 69736.8 82837 96236.8 109637 123587
Table: Capital Structure of PGCIL/(Only Estimate)
The interests incurred on these bonds are given in the last row of the table above. To calculate the
interest incurred on all the debt held by the company in that year, these interest were added to the
previous interest incurred figures. The interest incurred in 2011-12 was Rs. 2791.90 cr. To get the
interest incurred for 2013, interest incurred on the debt issued in 2013 was added to this figure
(Rs. 2791.90 Crores + Rs. 976.24 Crores = Rs. 3768.14 Crores)
(in Rs. Crores
)
2013(actual) 2014 2015 2016 2017 2018
Interest
Incurred
3768.14 4979.13 5856.4 6857.93 7907.75 8967.74
Interest Rate 7.03% 7.14% 7.07% 7.13% 7.21% 7.26%
Tax Rate 33.00% 33.00% 33.00% 33.00% 33.00% 33.00%
Cost of Debt 4.71% 4.78% 4.74% 4.77% 4.83% 4.86%
Table : Cost of Debt/(Only Estimate)
The interest rates for the respective years are calculated by dividing the interest incurred by the
total debt outstanding for the Company. The effective tax rate for the Company at present is close
to 33% and the same is taken for all the future years. Cost of Debt is calculated by using the
following formula:
34
Cost of Debt = Interest Rate (1 – Tax Rate)
To calculate the expected beta for the years after 2012, asset beta for the present year (2012) was
calculated. The equity beta was calculated using data from the website of National Stock
Exchange. To calculate the asset beta following formula was used:
Asset Beta = Equity Beta * Equity Percentage in Capital Structure
It was assumed that the asset beta (0.19992) for the 2012 would continue for the concerned period.
Using the above formula, the asset beta for the respective years was re-levered. Following table
gives the figures for beta and cost of equity for the respective years
2013(actual) 2014 2015 2016 2017 2018
Risk Free Rates (G-Sec) 0.0854 0.0854 0.0854 0.0854 0.0854 0.0854
Asset Beta 0.19992 0.19992 0.1999 0.19992 0.19992 0.19992
Beta 0.6048 0.6599 0.6299 0.6493 0.6334 0.6375
Market Premium 12.51% 12.51% 12.51% 12.51% 12.51% 12.51%
Cost of Equity 16.10% 16.79% 16.42% 16.66% 16.46% 16.51%
Table: Cost of Equity for PGCIL/ (Only Estimate)
The risk free rate was provided by the company through Reuters Database. Market Premium is
taken from a study done at IIM, Ahmedabad. The cost of equity was calculated using following
formula:
Cost of Equity = Risk Free Rate + Equity Beta * (Market Return – Risk Free Rate)
= Risk Free Rate + Equity Beta * Market premium
Using the cost of debt and cost of equity calculated above, Weighted Average Cost of Capital was
calculated. The formula for the same is as follow:
WACC = (Cost of Debt*Debt Percentage) + (Cost of Equity*Equity Percentage)
The following table gives the WACC for the company.
2013(actual) 2014 2015 2016 2017 2018
Debt
Percentage
66.94% 69.70% 68.26% 69.21% 68.44% 68.64%
Equity
Percentage
33.06% 30.30% 31.74% 30.79% 31.56% 31.36%
WACC 8.48% 8.42% 8.44% 8.43% 8.50% 8.52%
Table: WACC for PGCIL/ (Only Estimate)
35
After this, in the next part, it was assumed that the remaining Rs.7,250 crores is taken as domestic
debt in the form of debt. The plan for raising debt and equity is as following:
Equity (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018 Total
Internal Generation 5110 3850 3600 4300 5100 5900 22750
New Issue 0 0 0 0 0 0 0
Total New Equity 5110 3850 3600 4300 5100 5900 22750
Debt Raised
External Borrowings 2016 3047 4163 2580 1803 2407 14000
Domestic Borrowings 10688 13103 11237 13120 13097 12693 63250
Total New Debt 12704 16150 15400 15700 14900 15100 7725
New Fund Raised 17814 20000 19000 20000 20000 21000 100000
Interest Incurred on
New Debt
976.24 1210.99 1076.7 1200.97 1179.86 1159.7
Table: Fund Raising Plan for the Company (Debt)
The amount to be raised is distributed among domestic debt raising in different years. The new
capital structure for the Company would be as following
Equity (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018
Previous Year 21351.37 26461.4 30311 33911.4 38211.4 43311.4
Internal Generation 5110 3850 3600 4300 5100 5900
New Issue 0 0 0 0 0 0
Total Equity 26461.37 30311.4 33911 38211.4 43311.4 49211.4
Debt
External Borrowings 14237.55 17284.6 21448 24027.6 25830.6 28237.6
Domestic Borrowings 39349.22 52452.2 63689 76809.2 89906.2 102599
Total Debt 53586.77 69736.8 85137 100837 115737 130837
Interest Incurred on
New Debt
976.24 1210.99 1076.7 1200.97 1179.86 1159.7
Table 3.7: Capital Structure for the Company/(Only Estimate)
The cost of debt, cost of equity and weighted average cost of capital for the company is calculated
in the same way as the previous case. They are shown in the table below.
2013(actual) 2014 2015 2016 2017 2018
Cost of Debt 4.71% 4.78% 4.77% 4.82% 4.88% 4.91%
Cost of
Equity
16.10% 16.79% 17.32% 17.64% 17.72% 17.69%
WACC 8.48% 8.42% 8.34% 8.34% 8.38% 8.41%
Table: Cost of equity, Cost of debt and WACC for the Company/(Only Estimate)
CHAPTER 9
FINDINGS
36
Summary of Findings
After studying capital structure, some of concluding remarks that can be made are:
Here, the last three represent domestic borrowing.
-09. WACC is affected by both cost
of debt and equity. But, despite increase in cost of debt in those years due to bad market
conditions, the overall WACC decreased due to fall in cost of equity, which is a measure of
investors? expectations.
investors were not
expecting high return in 2008-09. So the cost of equity decreased drastically. This effect was
further escalated by its IPO in the same year.
especially in the last 5 years. The amount of debt has been increasing due to more and more issue
of bonds. The cost of capital is reducing when the debt /equity ratio is increasing, as debt is a
cheaper source of finance as compared to equity.
? The company tries to maintain a minimum of debt equity ratio. Now, the debt is almost
the 2 times of equity. If the company will go for more debt, the financing of projects with
more debt will be difficult. To continue its debt financing, a company is supposed to
maintain a minimum level of equity.
? The company is high on leverage and is still able to get more loans. One reason might be
the collateral it keeps for securing loans. The securities it keeps for loans and bonds are
generally 1.1 times the value of the loan.
? While doing the risk analysis for POWERGRID share PRICE with its WACC, it can
reasonably conclude that WACC is the key sensitive factor in case of price valuation of
POWER GRID share.
CHAPTER 10
CONCLUSION
37
Conclusion
capital could be done only in the following four components:
Despite high leveraging, the company is able to raise more and more funds through debt
because of its high credit ratings and no default risks being a „Navratna? PSU. The cost of capital
has increased in 2009-10, but this is due to increase in cost of equity, i.e. investor?s expectations.
This is due to improved market conditions and the performance of the company which is
improving constantly over the years. It uses state-of-the-art infrastructure and technologies to
improve its operational and technical efficiency over time. Also, the future outlook of the
company looks bright, as it is constantly undertaking new projects which are slated to give
handsome profits in future.
in light of
fluctuating market conditions during the past 5 years, the company?s debt equity ratio has been
increasing over the years, i.e. company is getting more leveraged over the years. This can pose a
threat of liquidity and solvency issues to the company during the periods of cash crunch.
CHAPTER 11
RECOMMENDATIONS
38
Recommendations
? If see the trend of cost of foreign loans, it is clear that international financing is a much cheaper
option than borrowing from India itself. Consequently, it is recommended that Power Grid
should borrow from abroad as much as possible. However, it should also be noted that
international borrowing suffers from exchange rate fluctuations which might increase the cost of
finance so Hedging should be done
? Furthermore, it was found that there is an upper limit on the amount of funds which a company
can borrow from abroad. Beyond that limit, the company has to look for domestic sources.
? In the domestic market, the business requirement required me to determine whether Power Grid
should maintain a line of credit with banks or not. As per the study, it is recommended that
Power Grid should not go for line of credit; instead it should go for Zero Coupon Convertible
Bonds as it has no cost associated with it and it will also increase the Equity after sometime.
? COMMERCIAL Papers are also an option to raise funds as they are very cost effective but they
have just one limitation that Maturity period is only 1 year. A major benefit of commercial paper
is that it does not need to be registered with the Securities and Exchange Board of India (SEBI)
as long as it matures before nine months (270 days), making it a very cost-effective means of
financing.
? CP is not backed by collateral and only firms with excellent credit ratings from a recognized
rating agency are able to sell their commercial paper at a reasonable price. Hence, being AAA
rated, it makes all the more sense for Power Grid to issue CP.
? To sum up it is recommended that PGCIL should expand their equity by 5% through ZERO
COUPON FULLY CONVERTIBLE BONDS, should go for ECB and hedge for risk of currency
fluctuations. It can also consider increasing the quantum of bank loans in view of the falling
interest scenario.
39
BIBLIOGRAPY
Documents
[1]REC Guidelines of financing Norms, Entity Appraisal and project appraisal for Private
Transmission projects.
[2]PFC Guideline of project Appraisal
[3]Central electricity Regulatory Commission Regulations,2009
[4]Ministry of Power Annual Report 2011-12
[5]Ministry of Power Annual Report 2010-2011
[6] Report on “The Working Group on Power for Twelfth Plan (2012-2017)”- Ministry of
Power, Government of India
[7]Guidelines for RAPDRP during XI Plan 2011-12
[8]Guideline for National Electricity Fund(Interest Subsidy Scheme)
[9]REC 42nd Annual Report 2010-11
[10]REC 43rd Annual Report 2011-12
[11]PFC guideline for RAPDRP
[12]Brown, R.E ,”Transmission and Distribution Conference and Exhibition”, 2005/2006 IEEE
PES
[13] Financial Management: by I.M.Pandey
Websites-
[14]www.recindia.nic.in
[15]www.powermin.nic.in
[16]www.cea.nic.in
[17]www.cercind.gov.in
[18]www.mptransco.nic.in
[19]www.ntpc.co.in
[20]www.mppgenco.nic.in
[21]www.mnre.gov.in
[22]www.essar.com
75
[23]www.forumofregulators.com
[24]www.cpri.in
[25 ] www.scribd.com/doc/91071555/8/Literature-Survey
[26] www.apdrp.gov.in
doc_534335126.pdf
on
The study of Financial Analysis Of
POWERGRID
Corporation Of India Ltd.
Submitted in Partial fulfilment of requirement of award of MBA degree of
GGSIPU, New Delhi
Submitted By:
ANKIT SHARMA
05815603914
MBA III Semester
Batch: 2014-16
Northern India Engineering College
(Affiliated to GGSIPU)
FC-26, Shastri Park, Delhi-110053
DECLARATION
This is to certify that the Project Report titled, “To Study Financial Analysis Of
POWERGRID Corporation Of India Ltd.” Which is submitted by me in partial
fulfilment of the requirement for the award of degree “Master of Business
Administration” from “Guru Gobind Singh Indraprastha University” at Northern India
Engineering College, Delhi comprises only my original work and has not been
submitted in part or full for any other degree or diploma of any university.
Date:
Place: DELHI ANKIT SHARMA
ACKNOWLEDGEMENT
“As we express our gratitude, we must never forget that the highest appreciation is not to
utter words, but to live by them.”
My heartfelt gratitude and warm salutations are also due to Faculty guide, Ms. Ashima kapoor for
inculcating in me the principles of dedication and hard work, and providing his guidance and support
throughout the Project. I would like to thank him for making the doubts clear during the presentation and
also for his constructive criticism of the approach to the problem and the result obtained during the course
of this work has helped me to a great extent in bringing work to its present shape.
Behind every fruitful endeavour lie the advice, guidance and inspiration of all the people directly
or indirectly involved with the report. I wish to express my gratitude to all the people involved in
the completion of this report. I am thankful to all of them for their help and encouragement
throughout the completion of the report. They have been a constant source of support for me.
I would also like to thank our Head of the Department, Ms. Divya Gangwar for her support and
guidance.
I would like to extend my sincere gratitude to the management of POWERGRID
CORPORATION OF INDIA LIMITED for providing me the enriching opportunity of working
with the organization and its team for a period of 2 months. In particular, I would like to thank my
Company Guide and mentor, Mr. B.K SAHOO (Asst. GM, Finance), PGCIL, for sparing the
time to provide me with necessary guidance and advice from time to time, with utmost patience, in
spite of his extremely busy schedule. I would also like to thank and Mr. TILAK MATTA
(Senior Accounts Officer), PGCIL for making my doubts clear from time to time
Ankit Sharma
05815603914
TABLE OF CONTENT
SR
NO.
PARTICULARS PAGE NO.
1 OBJECTIVE OF THE STUDY 1
2 INTRODUCTION 2
3 COMPONY PROFILE 3-13
4 RESEARCH METHODOLOGY 14-15
5 LITERATURE REVIEW 16-17
6 FUND RAISING OPTIONS 18-28
7 BALANCE SHEET AND PROFIT AND LOSS ACCOUNT 29-30
8 Corporate Finance analysis 31-35
9 FINDINGS 36
10 CONCLUSION 37
11 RECOMMENDATION 38
Bibliography 39
SR
NO.
PARTICULARS PAGE NO.
1 OBJECTIVE OF THE STUDY
2 INTRODUCTION
3 COMPONY PROFILE
4 RESEARCH METHODOLOGY
5 LITERATURE REVIEW
6 FUND RAISING OPTIONS
7 BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
8 Corporate Finance analysis
9 FINDINGS
10 CONCLUSION
11 RECOMMENDATION
Bibliography
CHAPTER 1
OBJECTIVES
OF THE STUDY
1
Objectives of the Project
To meet these many management planning and control needs, it becomes necessary to understand the process
of FINANCIAL ANALYSIS. So the objectives of this project are:
1) To study the composition of source of funds and application of funds implemented by the
POWERGRID.
2) To study the costs of various sources of finance used by POWERGRID.
3) To calculate the WACC of PGCIL and study its impact on the PGCIL capital structure.
CHAPTER 2
INTRODUCTION
2
INTRODUCTION
Power Grid Corporation of India ltd. (POWERGRID), India?s principal player in Electric power
transmission and a “Navratna” company, was incorporated on October 23, 1989 as a public
limited company, wholly owned by the Government of India. It has been carrying out its
responsibilities efficiently in the construction, operation and maintenance if inter-state
transmission systems and operation of Regional Power Grids. It has been notified as the Central
Transmission Utility (CTU) of the country.
This project undertakes the exploration of various financial instruments for the company to find
out the optimal instruments to use for the requirements of financing of its projects, and a critical
analysis of the relative merits and demerits of different options. Basically, analysis has been done
while comparing different financial instruments, which are used by PGCIL.
The Project Report can be divided into four parts:
(1) Presentation of the concepts relevant for the study
(2) calculation of WACC of PGCIL and study its impact on the PGCIL capital structure
(3) Detailed and critical analysis of data from various angles
(4) Recommendations for the most suitable fund raising options for the company.
Through recommendations, optimal fund raising options have been suggested, which incurred
more profit and less risk. However, the selection of instruments is more depended upon the
economic condition of the firm, and the country.
The project involves the studying of “Portfolio Management” for the organization and analyzing
the optimal financial instrument as a source for financing. Starting with the introduction, this
section outlines detail about the project, its relevance & significance as well as the purpose &
objective of the study. Subsequent to this section, comes the methodology. This section gives a
detailed note about the data collection, sampling and data analysis. Then, literature review is
included, which contains various concepts relevant to the study of the project. Then, an analysis
of various financial instruments has been conducted. Lastly, conclusion and recommendations
are given providing the results of the analysis, and suggestions towards the selection of financial
instrument for financing.
CHAPTER 3
COMPANY PROFILE
3
COMPANY OVERVIEW
India?s largest Electric Power Transmission Utility.
-” by Fitch and S&P.
Domestic Stable/ Highest Safety rating “AAA” by CARE,CRISIL & ICRA.
4
BRIEF OF COMPANY
gigantic Transmission network.
emerging markets of South Asia, Middle-east Asia CIS & African countries.
-2012).
-14 Rs. 20,000 Crore successfully met (about Capex of Rs. 42,700 Crore
already done in first two years' of XII Plan).
system so as to develop an efficient and low-loss transmission network.
from this Company is also pursuing its Rehabilitation Action Plan (RAP) and
Resettlement and Rehabilitation (R&R) activities during Project implementation stage.
Corporate Governance and believes that good
governance should entail trusteeship, empowerment and accountability of the management while
remaining proactive to the Government policies.
Company?s objectives and specific targets by empowering people at appropriate levels, to respond
to the challenges and the emerging opportunities and to play a pivotal role in the economic
development of the country.
ch five were whole-time
Directors including the Chairman & Managing Director, two Government nominees and seven
Independent Directors.
Enterprise, SEBI and other statutory bodies.
5
BUSINESS OVERVIEW
6
VISION AND MISSION
Keeping pace with changing business environment, POWERGRID had set its Vision and aligned
its mission and objectives as a vanguard of foresight.
VISION
World Class, Integrated, Global Transmission Company With Dominant Leadership in Emerging
Power Markets Ensuring Reliability, Safety and Economy.
MISSION
We will become a Global Transmission Company with Dominant Leadership in Emerging Power
Markets with World Class Capabilities by:
? World Class: Setting superior standards in capital project management and operations for the
industry and ourselves
? Global: Leveraging capabilities to consistently generate maximum value for all stakeholders in
India and in emerging and growing economies.
? Inspiring, nurturing and empowering the next generation of professionals.
? Achieving continuous improvements through innovation and state of the art technology.
7
Various Sources of Borrowing
BONDS
In finance, bonds is a debt instrument, in which the issuer owes the holders a debt and, depending
upon the terms of the bond, is obliged to pay interest (the coupon) and also to repay the principal
at a later date, termed maturity. It is a formal contract to repay borrowed money with interest at
fixed intervals.
Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the coupon
is the interest. Bonds provide the borrower with external funds to finance long-term investments.
Bonds
Term Loan
Commercials Papers
Cash Credit
Debt With Equity warrants
Lease
Retained Earnings
Reserves
8
Issuing Bonds
Bonds are issued by public authorities, credit institutions, companies and supranational institutions
in the primary markets. The most common process of issuing bonds is through underwriting. In
underwriting, one or more firms or banks, forming a syndicate, buy an entire issue of bonds from
an issuer and re-sell them to investors. The firm takes the risk of being unable to sell the issue to
end investors. However government bonds are instead typically auctioned.
Fund Raising through Bonds
POWERGIRD has been raising domestic finance through issue of bonds under private placement
since its inception. It has so far raised 50th Issue. The bonds were raised for financing its annual
capital outlay except the XI, XIII and XIV issues which were raised for prepayment of its high
cost bank loans and GOI loans respectively. Issue of bonds has always remained a major source of
domestic financing for POWERGIRD. In future also it is expected to remain so.
Up to 1996-97, POWERGIRD bonds used to be in bullet repayment structure. However, from
1997-98 onwards (VIth issue) bonds are being issued in the form of staggered repayment basis
usually with a moratorium of 3-4 years. This is mainly to suit the long gestation period of
transmission line projects. Because of the staggered repayment structure of the bonds there is no
pressure on cash flow due to redemption even though each issue size is approx. Rs. 750-1000
Crore.
Public Sector Undertaking Bonds (PSU Bonds)
These are medium or long term debt instruments issued by Public Sector Undertakings (PSUs).
The term usually denotes bonds issued by the central PSUs (i.e. PSUs funded by and under the
administrative control of the Government of India). Most of the PSU bonds are sold on Private
Placement Basis to the targeted investors at market determined interest rates. Often investment
bankers are roped in as arrangers to this issue. Most of the PSU bonds are transferable and
endorsement at delivery.
In case of tax-free bonds, normally such bonds accompany postdated interest cheque/warrants.
9
TERM LOANS
Term loan is a loan for land, equipment and working capital that is paid off like a mortgage in
between one year and ten years.
This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets
which will benefit the borrower over a long period (exceeding at least one year). Purchases of
plant and machinery, constructing building for factory, setting up new projects fall in this
category. Financing for purchase of automobiles, consumer durables, real estate and creation of
infra-structure also falls in this category.
A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term
loans usually last between one and ten years, but it may last as long as 30 years in some cases. A
term loan usually involves an unfixed interest rate that will add additional balance to be repaid.
Term loans can be given on an individual basis but are often used for small business loans. The
ability to repay over a long period of time is attractive for new or expanding enterprises, as the
assumption is that they will increase their profit over time. Term loans are a good way of quickly
increasing capital in order to raise a business? supply capabilities or range. For instance, some
new companies may use a term loan to buy company vehicles or rent more space for their
operations.
Choosing a term loan may be in your best interest, depending on your circumstances. But one
must be aware of extremely long repayment periods, as generally speaking, the longer the term,
the more you will owe because the interest accrues over a long period of time.
Classification of Term Loans
Bankers tend to classify term loans into two categories:
Intermediate-Term Loans: Usually running less than three years, these loans are generally
repaid in monthly instalments (sometimes with balloon payments) from a business's cash flow.
According to the American Bankers Association, repayment is often tied directly to the useful life
of the asset being financed.
Long-Term Loans: These loans are commonly set for more than three years. Most are
between 3 and 10 years, and some run for as long as 20 years. Long-term loans are collateralized
by a business's assets and typically require quarterly or monthly payments derived from profits or
cash flow. These loans usually carry wording that limits the amount of additional financial
commitments the business may take on (including other debts but also dividends or principals'
salaries), and they sometimes require that a certain amount of profit be set-aside to repay the loan.
10
Term loans are most appropriate for established small businesses that can leverage sound financial
statements and substantial down payments to minimize monthly payments and total loan costs.
Repayment is typically linked in some way to the item financed. Term loans require collateral and
a relatively rigorous approval process but can help reduce risk by minimizing costs. Before
deciding to finance equipment, borrowers should be sure they can they make full use of
ownership-related benefits, such as depreciation, and should compare the cost with that leasing.
Process of Raising Funds through Term Loan
Term Loan from banks/FIs can be drawn relatively at a short notice compared to formalities
involved in raising funds through bonds. The loan may also be drawn in more than one tranches to
suit the fund requirements of POWERGIRD.
The loan structure may also be designed to suit the project commissioning schedule of
POWERGIRD i.e. with a moratorium of 3-4 years and thereafter repayable in 12 equal
installments. The long term loans are generally raised as secured loans.
The drawl of loan is within powers of the Board as per provisions of the Companies act 1956.
Accordingly the board approval taken at the beginning of the year must be followed.
Short Term and Debt Loan
To meet the temporary needs of funds and bridge the gap between raising of long term loan/bonds
are bridge loan/short term loan raised. This bridge/short term loan is generally repaid out of the
bonds/term loans raised subsequently during the year. The same bidding procedure is followed for
raising bridge/short term loan as laid down for long term loans from Banks or financial
institutions.
11
COMMERCIAL PAPER
In the global money market, commercial paper is an unsecured promissory note with a fixed
maturity of one to 270 days. Commercial Paper is a money-market security issued (sold) by large
banks and corporations to get money to meet short term debt obligations (for example, payroll),
and is only backed by an issuing bank or corporation's promise to pay the face amount on the
maturity date specified on the note. Since it is not backed by collateral, only firms with excellent
credit ratings from a recognized rating agency will be able to sell their commercial paper at a
reasonable price. Commercial paper is usually sold at a discount from face value, and carries
shorter repayment dates than bonds. The longer the maturity on a note, the higher the interest rate
the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically
lower than banks' rates.
A major benefit of commercial paper is that it does not need to be registered with the Securities
and Exchange Board of India (SEBI) as long as it matures before nine months (270 days), making
it a very cost-effective means of financing. The proceeds from this type of financing can only be
used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new
plant, without SEBI involvement.
Issuance of Commercial Papers
There are two methods of issuing paper. The issuer can market the securities directly to a buy and
hold investor such as most money funds. Alternatively, it can sell the paper to a dealer, who then
sells the paper in the market. The dealer market for commercial paper involves large securities
firms and subsidiaries of bank holding companies. Direct issuers of commercial paper usually are
financial companies that have frequent and sizable borrowing needs and find it more economical
to sell paper without the use of an intermediary.
Are All Corporates Eligible to Issue Commercial Papers?
No. A corporate would be eligible to issue CP provided:
? The tangible net worth of the company, as per the latest audited balance sheet, is not less
than Rs.4Crores
? Company has been sanctioned working capital limit by bank(s) or all-India financial
institution(s); and
? The borrower account of the company is classified as a Standard Asset by the financing
bank(s)/ institution(s)
12
Rating Requirement for Issuance of Commercial Papers
All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from
Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and
Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or
the FITCH Ratings India Pvt Ltd. or such other credit rating agency (CRA) as may be specified by
the Reserve Bank of India from time to time, for the purpose.
Eligible participants/issuers shall obtain credit rating for issuance of CP from any one of the SEBI
registered CRAs. The minimum credit rating shall be „A3? as per rating symbol and definition
prescribed by SEBI. The issuers shall ensure at the time of issuance of the CP that the rating so
obtained is current and has not fallen due for review.
The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has
not fallen due for review and the maturity date of the CP should not go beyond the date up to
which the credit rating of the issuer is valid. Currently, the commercial papers are not being issued
by POWERGIRD.
CASH CREDIT
Cash credit is a short-term cash loan to a company. A bank provides this type of funding, but
only after the required security is given to secure the loan. Once a security for repayment has been
given, the business that receives the loan can continuously draw from the bank up to a certain
specified amount. This type of financing is similar to a line of credit.
With many of the advantages of a standard line of credit, cash credit is the issuance of a short term
cash loan to a business. A cash loan of this type is often utilized to meet the expenses associated
with a specific task or project, with repayment expected within a period of one year or less.
Successfully receiving cash credit and paying off the loan within terms can open the way for the
business to be extended a more liberal line of credit for future use.
As with many types of financial assistance, cash credit is extended under terms that are set and
controlled by the institution that provides the loan. Typically, cash credit involves the presentation
of some form of security in order to cover the amount of cash credit that is extended by the bank
or loan agency. The security of collateral remains accessible to the lender until the cash credit is
repaid in full.
One of the advantages for a new company is that cash credit can be an excellent way of setting the
stage for a long term working relationship with a lender. Upon successfully complying with the
terms of the cash credit agreement, the company may become eligible for other forms of
assistance from the financial institution, including other forms of cash loans and the establishment
of a conventional line of credit.
13
DEBT WITH EQUITY WARRANTS
Equity warrant bonds are debt securities that incorporate warrants, which give the holder the
option to purchase equity in the issuer, its parent company, or another company during a
predetermined period or on one particular date at a fixed contract price. The warrants are
detachable and may be traded separately from the debt security. The exercise of the equity warrant
will normally increase the total capital funds of the issuer because the debt is not replaced by
equity but remains outstanding until the date of its redemption. The issue of equity warrant bonds
reduces the funding costs for borrowers because the investor will generally accept a lower yield in
anticipation of the future profit to be gained from exercising the warrant.
LEASE
It has become increasingly more common in recent years for companies to lease equipment. Each
leasing agreement needs to be read through carefully to understand the terms and conditions
within said lease.
Typically a lease can run anywhere from one to five years. Most equipment necessary in
commercial businesses today, including technical equipment, can be leased. Some leases provide
an option to then purchase the equipment at substantially less money when at the end of the term
of the lease. By leasing equipment, if structured properly, one can maintain its credit availability,
as the lease debt does not have to be considered a direct liability on the financial statements. This
is advantageous, as it does not limit the ability to borrow from lending sources.
Advantages
? It offers fixed rate financing; you pay at the same rate monthly.
? Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate
as when you began the lease, therefore making your dollar stretch farther. (In addition, the
lease is not connected to the success of the business. Therefore, no matter how well the
business does, the lease rate never changes.)
? There is less upfront cash outlay; you do not need to make large cash payments for the
purchase of needed equipment.
? Leasing better utilizes equipment; you lease and pay for equipment only for the time you
need it.
? There is typically an option to buy equipment at end of lease term.
CHAPTER 4
RESEARCH
METHODOLOGY
14
Research Methodology
The first chapter of the study gives the purpose and objective of the study. This chapter discusses
the methodologies that were used to fulfill these objectives. This chapter covers universe of the
study, locale of the study, sample of the study, data collection, and data analysis.
Universe of the Study
The data collected belongs by and large to the power sector of the Country. Indian power sector is
fifth largest in the world. It has an installed capacity of 199.88 Giga Watt (Mar 2013). The thermal
power plants have majority in as they produce around 66% of the total power generated in the
country. Hydro-electricity consists 19% while rest is the combination of biomass, nuclear etc.
The study is conducted to analyze the capital structure of Power Grid Corporation of India with its
past performance and other companies in the industry.
Locale of the Study
The study was conducted for PGCIL. Power Grid is India?s largest grid operator. It transmits
about 51% of power generated in India. It has a pan India presence with more than 82,000 km of
transmission network and more than 135 substations.
Sample of the Study
The sample or the data was collected for Power Grid Corporation of India from the
documents provided by the Company. A brief profile of the company is given in
following table.
•POWERGRID
•GURGAON
NAME AND
ADDRESS
•STATE OWNED ENTERPRISE
•ESTABLISHED IN 1989
TYPES AND
ESTABLISHMENT
•ELECTIRCITY UTILITY
•AROUND 10,000 EMPLOYEES
NATURE OF
PRODUCTION AND
NO. OF EMPLOYEES
15
Data Collection
The data collection for Power Grid was from the different documents provided by the company.
These documents also include projection of capital expansion and fund raising plans for next five
years of the company and also Manuals related to provisions regarding sources used by POWER
GRID to fund its project. Most of the data collected was from annual reports of different years of
the company.
The data for different companies (along with NTPC) was collected from the annual reports of the
respective companies. Data for calculating beta for Power Grid and NTPC was collected from the
website of Bombay Stock Exchange and data regarding the calculation of risk free return(rf) is
collected from RBI database.
Data Analysis
Different steps were taken to complete the calculations and analysis of the study.
1) The first part of the project was to study the composition of source of funds and application of
funds implemented by the POWERGRID.
2) The second part deals computation of costs of various sources of finance used by
POWERGRID. These include computation of costs of bonds, term loans, foreign loans and cost of
equity by CAPM approach:
3) In the third part of the project deals with the calculation of WACC of PGCIL and its impact on
the PGCIL capital structure. Comparative analysis has been done for lasts 5 years.
LIMITATION OF PROJECT:
All analysis is dependent on secondary data that might be turned to be inaccurate any aspects of it
is proved false.
Cost of equity is calculated with the help of CAPM approach which is entirely depend on data
available from the bse site.
Less time period for conducting analysis is major limitation of this study. As it doesn?t allowed to
conduct the research properly.
CHAPTER 5
LITERATURE REVIEW
16
Literature Review
Government Ownership and the Cost of Debt: Evidence from Government Investments in
Publicly Traded Firms, PBC Research Paper (2012)
The research examines how government ownership affects firms? cost of debt. As documented by
Faccio, Masulis, and McConnell (2006) and Brown and Dinç (2005), governments are generally
reluctant to allow state-owned firms to default. Accordingly, government ownership might
provide an implicit debt guarantee reducing the chance of default and, hence, the cost of corporate
debt. On the other hand, the implicit debt guarantee might induce moral hazard for managers, by
reducing the probability of disciplinary replacement, by eliminating takeover threats, and by
minimizing the risk of bankruptcy. Such an increase in moral hazard is thus likely to lead to higher
risk taking and, thus, to a higher cost of debt. Also, government ownership could increase the cost
of debt by imposing social and political goals that reduce corporate profitability and thus increase
default risk. The results show that the value of a debt guarantee is greater the higher the likelihood
of default. Stock ownership by domestic governments improves the perceived creditworthiness of
corporate bond issuers by providing an implicit bond payment guarantee. This guarantee becomes
especially valuable during a financial crisis or in the presence of firm-specific distress factors. On
the other hand, during non-crisis years, government ownership is associated with higher spreads.
Risk Management-Profiling and Hedging, Stern Papers (2003)
The paper talks about how a company should develop their risk profile. It also gives why it is
worth for a company to spend in money hedging against the possible risks.
Risk Profiling in an Organisation
There are four steps involved in this process of developing a risk profile for a business. In the first
step, we list all risks that a firm is exposed to, from all sources and without consideration to the
type of risk. We categorize these risks into broad groups in the second step and analyze the
exposure to each risk in the third step. In the fourth step, we examine the alternatives available to
manage each type of risk and the expertise that the firm brings to dealing with the risk.
17
The benefits of Hedging
There are several reasons why firms may choose to hedge risks, and they can be broadly
categorized into five groups. First, the tax laws may benefit those who hedge risk. Second,
hedging against catastrophic or extreme risk may reduce the likelihood and the costs of distress,
especially for smaller businesses. Third, hedging against risks may reduce the under investment
problem prevalent in many firms as a result of risk averse managers and restricted capital markets.
Fourth, minimizing the exposure to some types of risk may provide firms with more freedom to
fine tune their capital structure. Finally, investors may find the financial statements of firms that
do hedge against extraneous or unrelated risks to be more informative than firms that do not.
Power Sector in India, White Paper on Implementation Challenges and Opportunities,
KPMG (Jan 2010)
It is an annual report on Power Sector published by KPMG. This paper throws light on Industry
overview, the value chain and different players in each business operation namely generation,
transmission and distribution. The paper also discusses the regulations in this sector which needs
to be tackled. Some of the prominent challenges are the project execution, scarcity of fuels,
equipment shortage, manpower shortage, problems in land acquisition and environmental
clearance.
SEBI (Disclosure and Investor Protection) Guidelines, 2000
The Security and Exchange Board of India, the sole regulator of Capital Markets in India, issues
various guidelines to regulate the capital markets of the nation. The DIP Guidelines were issued
for the purpose of protecting the investors from fraudulent practices by issuers and to also ensure
maximum disclosure. It has guidelines ranging from Offer letters to lock-in period and guidelines
on advertising the issue. The copy of the above mentioned guidelines has many regulations which
were not in the purview of the study. Thus only few aspects were studied.
The main objectives of the guidelines are:
protection
CHAPTER 6
FUND RAISING OPTIONS
18
Fund Raising
Domestic
Debt Equity
International
Debt
19
Sources of funds at Power Grid
Power Grid has various sources of funds like share capital, reserves and surplus, loans, bonds, current
liabilities, etc... Following pie-chart shows various sources of funds at Power Grid and its composition
for the year 2013-2014.
From the above pie chart, one can note that:
? The company has only 25.6% of its sources which are not borrowed i.e. in the form of
shareholder's funds. Of which, 4.52% exists as share capital and high proportion of the rest
21.08% is ploughed back in business as reserves and surplus to provide for capital requirements of
the firm. So, we can say that the firm has a high gearing ratio, or in other words, it is highly
leveraged.
? Such high dependence on borrowed funds is due to its nature of business i.e. national power
transmitter. For the past some time, the firm is involved in the implementation of its ambitious
project of establishing the national grid. Besides that also the firm has a big order book, so, it has
to depend on borrowed funds largely.
? Unsecured loans i.e. short term loans constitute only 1.78%, and also loans from banks and
financial institutions is also zero as the firm does not prefer them due to high interest rates.
Bonds
(including
foreign
currency
bonds),
43.91%
Reserves,
21.08%
Foreign
currency
loans, 18.87%
Deferred tax
& net current
liabilities,
7.78%
Short tern
loans, 1.95%
Grants, 0.11%
Loans from
banks &
financial
institutions,
1.78%
Equity, 4.52%
Soureces O f Fund 2013-14
20
APPLICATION OF FUNDS
? Being a capital intensive firm, the 60% of the funds are invested in Net Block i.e. in fixed assets
like transmission grids, transmitters etc
? As high as 19% of the resources are invested in Capital WIP (Work in progress), this signifies that
the company is in the path of expansion and is undertaking many projects. The Capital WIP
implies the funds given as advance to the contractors, the under construction buildings and plants,
etc.
? Just 1% of the funds are into Investment and 20% in current assets. From this, we can infer that
either the firm has operational excellence in Working capital management or since it is Under
Expansion stage the investment in short term assets is low.
From the Sources and Applications it can be analyzed that 20% of short term Assets (CA) is
wholly financed by the Current liabilities which is 10%. This implies the firm is able to cover half
of its short term requirements with short term sources. This may be termed as aggressive strategy
because the Permanent and temporary working capital is being financed by the short term funds.
After analyzing the various sources and Applications of funds, it is now necessary to analyze the
trend in each component of the sources and application over the years.
Funds Raised through Equity and Reserves
The share capital has been constant over the years; this is because of the companies? borrowing
from Government of India by allotment of shares. Pre-Listing i.e. before 2007, the company used
to allot shares for this purpose. In the year 2008, there has been a rise in shares allotted because of
the Initial Public Offer of Power Grid on 26th September 2007. In the year 2008 to 2009, the
number of shares and the share capital is constant implying no further issue of share capital is
made. However, there is news of further disinvestment through FPO in the year 2010, so there
may be change in share capital in the year 2010-11. The main reason for disinvestment of equity
capital more dependence on borrowing funds.
Ater paying all the liabilities, the company uses its net Profit after tax (PAT) to pay dividends.
But, not all the profit is paid as dividend on its shares. Some amount is retained back by
the0020company to provide for its funding requirements.
The Reserves in the form of General reserve, Capital Reserve, Share Premium, Debenture
Redemption reserve and Profit and Loss Account's Credit balance are maintained. There has been
continuous increase in the reserves over the years. Over the 5 years the reserves and surplus
21
amount is continuously increasing i.e. from rs10409 in 2008-2009 to 21610 in 2012-2013 years. It
has almost shown 100% growth over the 5 years.
Funds Raised through Bonds
Power Grid has been raising domestic finance through issue of bonds under private placement
since its inception. It has so far raised 45 series of bonds amounting to Rs. 43085Crores. The
bonds were raised for financing its annual capital outlay. Issue of bonds has always remained a
major source of domestic financing for Power Grid. In future also it is expected to remain so.
Up to 1996-97, Power Grid bonds used to be in bullet repayment structure. However, from 1997-
98 onwards (i.e. VIth issue onwards), bonds are being issued in the form of staggered repayment
basis usually with a moratorium of 3-4 years followed by 10-12 equal annual instalments. This is
mainly to suit the long gestation period of transmission line projects. Because of the staggered
repayment structure of the bonds there is no pressure on cash flow due to redemption even though
each issue size is approx. Rs.750-1000crore.
4209 4209
4630 4630 4630
10409
11730
16737
18858
21610
0
5000
10000
15000
20000
25000
2009-10 2010-11 2011-12 2012-13 2013-14
Equity & Reserves
equity
reserves
22
The main advantage of using bond financing for capital improvements and expansion is the low
interest rate that the not-for-profit receives. This may help the company to keep their fund intact
(and earning interest), to get their capital expenditures done now, and have the bond repaid with
future funds. The organization is also generally able to prepay the bond upon giving a 30-day
notice.
The Power Grid Corporation of India Limited issues bonds with fixed coupon rate determined by
the book building procedure. The average maturity of most of the bonds is 15 years (4 years of
moratorium and then repayment of loan in 12 equal annual; instalments). Apart from this it has
also issued different structure bonds of 6 years Maturity ( 1 year moratorium and 6 annual equal
repayments), 12 years maturity ( 3 years moratorium and 10 equal annual repayments) etc.
The interest rate is determined based on the prevailing interest rate on 10 year GSec ( for a 15 year
PG bond, since the average tenure turns up to be 9 years because of equally annual repayments)
and a spread defined by FIMMDA for a AAA rated bond for 10 years is added to define a range
for bidding by investors. Then the rate obtained by the book building process is taken as the
coupon rate for the bond issue.
23
Features of Bonds Issued by Power Grid
1. Secured: Power Grid issues secured bonds.
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which
then becomes a secured debt owed to the creditor who gives the loan.
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan
through securing the debt, the creditor is relieved of most of the financial risks involved because it
allows the creditor to take the property in the event that the debt is not properly repaid.
Accordingly charge is to be created on the assets of the company to secure interest as well as the
interest on the bonds. The security is to be created in favor of the trustees for the bonds.
Various bonds are secured through different means:
I. Equitable mortgage of properties
II. By floating charge over the fixed assets of the corporation
III. By way of Debenture Trust Deed ranking pari-passu on immovable properties
Of Power Grid.
IV. Hypothecation of assets of various projects i.e. Transmission Lines and Sub-
stations set up by Power Grid for transmission of electricity.
2. Separately transferrable, redeemable Principal Parts (STRPPs)
Each bond is divided into separately tradable and transferrable parts which are called STRPPs.
Presently, Power Grid issues bonds divided into 12 STRPPs of 12.5 lakhs each. Earlier it was
mandatory to have each STRPPs of Rs.10 lakhs but this norm is no more a compulsion.
3. D-Mat (Electronic mode)
At present all the bonds are issued through D-Mat A/C (electronic mode), while earlier bonds
were also issued in physical form. Though many of them, with time, have converted to electric
mode and the remaining ones are still traded in their own format.
4. Green shoe option
This option is a feature attached to Power Grid Bonds where by the issuer can retain over-
subscription over the issue size
5. WDM (Wholesale Debt Market)
This term is used to define the debt component of NSE where the fixed interest earning bonds are
issued in the stock exchange
24
6. NSDL, CDSL
Depositories are companies registered under the Companies Act, 1956 and registered with SEBI
as Depository. Depositories provide facilities to keep securities in their electronic form (in D-mat
Account) through its participants. There are two depositories: National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL).
7. Non- convertible
As the name suggests, these bonds cannot be converted into any other form of security and their
existence can be put to an end only by their redemption.
8. Redeemable
It says that the bonds have a maturity and would have to be repaid when the maturity period ends.
9. Taxable
The term defines that the person earning on the investment in the bonds i.e. the investor who will
earn by the way of interest will have to pay tax on that income.
10. Arrangers
Merchant bankers are the institutions who put in to arrange funds for the company in case it is not
confident of doing so on its own.
Power Grid also appoints arrangers from time to time depending upon the market conditions.
11. Private placement
The company doesn't raise money through inviting public at large for it. It can just ask for
investment privately and there also the people or organizations invited should not exceed 49.
12. Execution of Depository Participant
Depository Participant is an agent of depository through which it interfaces with investor. DP can
be banks or financial institutions; they maintain the records of investors. If an investor wants to
transfer his bonds, he has to contact his corresponding Depository Participant in order to facilitate
the process.
25
Funds Raised through Term Loans
The domestic borrowing of Power Grid is generally a mix of borrowing through bonds and term
loans from banks and Financial Institutions. The borrowings are to be resorted in accordance with
provisions as mentioned in SEBI norm.
Term loans from banks /FIs can be drawn relatively at a short notice compared to formalities
involved in raising funds through bonds. The loan may also be drawn in more than one tranches to
suit the fund requirements of Power Grid. The loan structure may also be designed to suit the
project commissioning schedule of Power Grid i.e. with a moratorium of 3-4 years and thereafter
repayable in 12 equal instalments .The interest payments also can be on quarterly, semi-annually
or annual basis.
The capital expenditure of Power Grid, i.e. investments in its net block like various transmission
grids and transmission lines, is majorly financed by funds raised through bonds, whereas the funds
raised through term loans are used for meeting its various other funding requirements like paying
advances to suppliers, provisions, etc... Also, short term loans are taken by Power Grid to meet
any deficit between the funds available with it and its working capital requirements.
The term loans raised by Power Grid are generally raised as secured loans. A security worth 1.1
times the amount of borrowed loan is given. Generally, the security offered is the property owned
by Power Grid, or the fixed assets owned by it.
Mostly, the loans raised by Power Grid are at fixed interest rate, but some are at floating rate also.
The floating rate is quoted in variation with the PLR range set by the Reserve Bank of India
(RBI). For e.g. The loan taken by Power Grid from Punjab National Bank (PNB) in 1999, with
quarterly interest payments and annual redemptions, the interest rate is defined as PLR-2.85%.
This rate is revised every quarter, and then the interest for the next quarter would be accrued on
the new rate.
The Term Loans from Institutions mainly has the loans from LIC at different rates. This amount is
depleting over the years as it is redeemed in equal instalments every year. And also since they are
raised at rate of 10% or high, the firm is proffering to repay the amount.
26
0
100
200
300
400
500
600
2009-10 2010-11 2011-12 2012-13 2013-14
Term loan
Term loan
0
200
400
600
800
1000
1200
1400
1600
2009-10 2010-11 2011-12 2012-13 2013-14
Term loan from bank
Term loan from bank
27
Funds Raised through Foreign Loans
Internationally, Power Grid raises various loans from foreign banks and institutions. It is second
largest sources of funding through debt at Power Grid as it is very cheap as compared to other
sources and the tenure of the loans is very long keeping in tune with the longer gestation periods
of its projects i.e. of 15-16 years.
Mostly, the foreign loans raised are also secured. Some are at fixed interest rate having longer
duration, while, most of them are at floating interest rate with shorter duration, varying with
LIBOR, i.e. London Inter-Bank Offer Rate.
LIBOR: An interest rate at which banks can borrow funds, in marketable size, from other banks in
the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers'
Association. The LIBOR is derived from a filtered average of the world's most creditworthy
banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
This rate is applicable to the short-term international interbank market, and applies to very large
loans borrowed for anywhere from one day to five years. This market allows banks with liquidity
requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding
excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a
day by a small group of large London banks, but the rate changes throughout the day.
The major lenders of Power Grid are ADB and IBRD, both of them issuing loans on LIBOR base.
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
2009-10 2010-11 2011-12 2012-13 2013-14
Foreign loans
Foreign loans
28
Domestic Financing
Role of Domestic Financing in POWERGIRD
POWERGIRD is engaged in the construction of the National Grid by the end of the 12th Plan i.e.
by 2012. An estimated expenditure of approx. Rs. 50,000 Crores is required to be done by
POWERGIRD directly and another Rs. 20,000 Crores is to be spent through Independent Power
Transmission Companies (IPTC) and Joint Venture route.
Out of Rs. 50,000 Crores, approximately Rs. 21,000 Crore are to be mobilized by POWERGIRD
through Internal Resources and domestic borrowing (Rs. 8,000 Crore and Rs. 13,000 Crore
respectively). Thus approx. 26% of the total funding has to be mobilized by POWERGIRD from
domestic sources which is a huge task ahead and entail upon the Finance department a big role
and responsibility.
CHAPTER 7
BALANCE SHEET
AND
P/L ACCOUNT
29
Power Grid Corporation
of India
Standalone Balance Sheet ------------------- in Rs. Cr. -------------------
Sources Of Funds
Total Share Capital 5,231.59 5,231.59 4,629.73 4,629.73 4,629.73
Equity Share Capital 5,231.59 5,231.59 4,629.73 4,629.73 4,629.73
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 32,935.00 29,228.04 21,609.74 18,858.05 16,737.27
Networth 38,166.59 34,459.63 26,239.47 23,487.78 21,367.00
Secured Loans 89,316.95 76,946.91 66,107.98 51,446.77 36,637.03
Unsecured Loans 6,021.80 7,060.77 2,685.89 2,098.69 2,028.81
Total Debt 95,338.75 84,007.68 68,793.87 53,545.46 38,665.84
Total Liabilities 133,505.34 118,467.31 95,033.34 77,033.24 60,032.84
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Application Of Funds
Gross Block 118,088.93 96,392.63 80,525.70 63,347.47 50,332.20
Less: Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Less: Accum. Depreciation 28,402.72 23,238.56 19,125.06 15,685.17 13,108.22
Net Block 89,686.21 73,154.07 61,400.64 47,662.30 37,223.98
Capital Work in Progress 39,882.19 31,851.41 19,114.92 28,183.54 23,712.93
Investments 926.42 998.68 1,147.50 1,284.45 1,398.35
Inventories 717.75 712.40 551.53 440.31 381.51
Sundry Debtors 2,118.65 1,578.46 1,434.09 1,497.49 1,114.00
Cash and Bank Balance 2,062.98 4,417.52 1,661.97 2,336.88 3,680.06
Total Current Assets 4,899.38 6,708.38 3,647.59 4,274.68 5,175.57
Loans and Advances 22,906.68 26,876.53 25,822.91 8,803.38 8,210.74
Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Total CA, Loans & Advances 27,806.06 33,584.91 29,470.50 13,078.06 13,386.31
Current Liabilities 23,003.36 19,629.37 14,889.28 11,696.95 12,813.27
Provisions 1,792.18 1,492.39 1,210.94 1,478.16 2,875.46
Total CL & Provisions 24,795.54 21,121.76 16,100.22 13,175.11 15,688.73
Net Current Assets 3,010.52 12,463.15 13,370.28 -97.05 -2,302.42
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 133,505.34 118,467.31 95,033.34 77,033.24 60,032.84
Contingent Liabilities 32,089.37 35,582.73 47,462.01 44,320.81 30,612.06
Book Value (Rs) 72.95 65.87 56.68 50.73 46.15
30
Power Grid Corporation of India
Consolidated Profit & Loss account ------------------- in Rs. Cr. -------------------
Mar '15 Mar '14 Mar '13 Mar '12 Mar '11
Income
Sales Turnover 17,658.51 15,675.43 13,163.90 10,311.52 8,611.76
Excise Duty 0.00 0.00 0.00 0.00 0.00
Net Sales 17,658.51 15,675.43 13,163.90 10,311.52 8,611.76
Other Income 579.66 470.69 563.22 762.06 660.78
Stock Adjustments 0.00 0.00 0.00 0.00 0.00
Total Income 18,238.17 16,146.12 13,727.12 11,073.58 9,272.54
Expenditure
Raw Materials 1.02 219.40 63.59 0.10 0.05
Power & Fuel Cost 174.35 0.00 115.23 83.52 73.52
Employee Cost 1,124.41 1,033.61 974.72 921.41 785.68
Other Manufacturing Expenses 0.00 0.00 289.63 250.75 213.37
Selling and Admin Expenses 0.00 0.00 0.00 0.00 0.00
Miscellaneous Expenses 1,232.53 1,158.54 506.88 492.09 427.58
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Total Expenses 2,532.31 2,411.55 1,950.05 1,747.87 1,500.20
Operating Profit 15,126.20 13,263.88 11,213.85 8,563.65 7,111.56
PBDIT 15,705.86 13,734.57 11,777.07 9,325.71 7,772.34
Interest 4,081.23 3,253.66 2,599.44 1,985.75 1,665.76
PBDT 11,624.63 10,480.91 9,177.63 7,339.96 6,106.58
Depreciation 5,173.33 4,079.38 3,427.80 2,637.39 2,272.92
Profit Before Tax 6,451.30 6,401.53 5,749.83 4,702.57 3,833.66
Extra-ordinary items -47.19 -42.53 25.80 -12.91 -4.37
PBT (Post Extra-ord Items) 6,404.11 6,359.00 5,775.63 4,689.66 3,829.29
Tax 1,357.86 1,811.42 1,463.02 1,386.67 1,157.38
Reported Net Profit 5,046.25 4,547.58 4,312.61 3,302.99 2,671.91
Net P/L After Minority Interest & Share
Of Associates
5,088.31 4,590.11 4,286.81 3,315.90 2,676.28
Total Value Addition 2,531.29 2,192.15 1,886.46 1,747.77 1,500.15
Equity Dividend 1,118.48 1,405.60 1,321.38 1,020.47 885.02
Corporate Dividend Tax 227.60 239.85 218.51 165.52 140.76
Per share data (annualised)
Shares in issue (lakhs) 52,315.90 52,315.90 46,297.25 46,297.25 46,297.25
Earning Per Share (Rs) 9.65 8.69 9.32 7.13 5.77
Book Value (Rs) 73.47 66.32 57.03 50.94 46.26
CHAPTER 8
Corporate Finance analysis
31
Corporate Finance analysis
Equity or Debt
The Company has planned a capital expenditure of Rs. 100,000 Crores for the next five years.
This expenditure is in line with what Planning Commission of India was to do in power
transmission industry.
The Company has made a comprehensive plan for raising debt and equity for the capital
expansion. Rs. 70,000 Crores is to be raised using debt. This debt will consist of domestic debt
and foreign debt. Foreign debt is generally taken from the multi-lateral agencies like World Bank
and Asian Development Bank. The interest rates for these loans in based on London Interbank
Offered Rate (LIBOR). LIBOR is the average of interest rates that some leading banks based in
London charge when they lend to other banks. These loans can vary from one day to few years.
Like Power Grid, many institutions around the world use these rates to decide the lending rates.
For Power Grid, the rates are LIBOR rates for that day plus 50 basis points plus 1.2% government
guarantee.
Domestic Debt for Power Grid consists of loans from Government of India, Financial Institutes
like Power Finance Corporation, bonds and bank loans. Bonds constitute the highest among the
among debt sources. The debt is so designed that the interest and principle payment starts after the
project they are related to is functional. For example, one of the bond structures can be to pay the
interest half yearly after 3 years moratorium and 10 equal instalments of principle payment.
In such cases, the bond cab be divided into ten Separately Transferable Redeemable Principle
Parts (STRPPs).Mostly the Company issues bonds in following structures:
? 1 year moratorium period + 5 equal instalments
? 3 years moratorium period + 10 equal instalments
? 4 years moratorium period + 12 equal instalments
? 5 years moratorium period + 10 equal instalments
For the purpose of this project, it is assumed that interest payment starts from the same year when
debt was taken. The bonds of the Company have a long history of top ratings from different rating
agencies. The interest rates are decided by adding a component for AAA rating above the G-Sec
yield of 10 years government bonds. Power Grid came up with the IPO in September 2007. It
raised Rs. 3,000 Crores in the IPO. Prior to this, Government of India used to provide equity to the
company. In November 2010, the Company again came up with a FPO where Government of
India diluted 10% equity and 10% new equity was issued. About Rs. 7,600 Corers was raised in
32
the FPO. At present, Government of India?s holding in the company stands at 69.42%. As per
Government?s conditions, its holding in the company should not drop below 51%.
Cost of Capital Basis
The Company estimates that it will be able to generate Rs. 22,750 Corers from internal
generations and from the proceeds of previous equity raisings.
To analyse the given condition, the first part was divided in into two parts: first part assumes that
whole Rs. 7,250 Corers is taken as equity. While second assumes that Rs. 7,250 Corers is taken as
debt.
Following is the plan of the Company to raise Rs. 100,000 Crores if Rs. 7,250 Crores is taken as
equity through new fund raisings
Equity (in Rs.
Crores)
2013(actual) 2014 2015 2016 2017 2018 Total
Internal
generation
5110 3850 3600 4300 5100 5900 22750
New Issues 4600 2650 725
0
Total New Equity 5110 3850 8200 4300 7750 5900 30000
Debt (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018 Total
External
Borrowings
2016 3047 4163 2580 1803 2407 14000
Domestic
Borrowings
10688 13103 8937 10820 11597 11543 56000
Total New Debt 12704 16150 13100 13400 13400 13950 70000
New Funds Raised 17814 20000 21300 17700 21150 19850 100000
Interest Incurred 976.24 1210.99 877.25 1001.56 1049.81 1059.99
Table : Fund Raising Plan of the Company (Equity)(only estimation)
The figure for year 2013 are actual while rest others are expected. The last row gives the sum for
the years from 2013 to 2017. Figure for internal generation for 2012-13 (Rs. 3850 Crores ) also
contains proceeds (Rs. 750 Crores ) from the previous FPO. The Company plans to come out
with new FPOs during 2014 and 2016. After the FPO in 2016, Government of India?s holding in
the Company would be down to 51%.
The external borrowing would come from Asian Development Bank and World Bank. Domestic
debt would be raised majorly through bonds. The interest rate for foreign loan is taken as 2.46%
33
and for domestic bonds it is 8.67%.These rates were calculated taking into account the past and
future circumstances and were provided by the company.
The following table gives the total debt and equity for the Company. The new issues of debt and
equity are added to the previous years to get the data
Equity (in Rs.
Crores)
2013(actual) 2014 2015 2016 2017 2018
Previous year 21351.37 26461.4 30311 38511.4 42811.4 50561.4
Internal generation 5110 3850 3600 4300 5100 5900
New Issues 0 0 4600 0 2650 0
Total Equity 26461.37 30311.4 38511 42811.4 50561.4 56461.4
Debt (in Rs. Crores )
External Borrowings 14237.55 17284.6 21448 24027.6 25830.6 28237.6
Domestic Borrowings 39349.22 52452.2 61389 72209.2 83806.2 95349.2
Total Debts 53586.77 69736.8 82837 96236.8 109637 123587
Table: Capital Structure of PGCIL/(Only Estimate)
The interests incurred on these bonds are given in the last row of the table above. To calculate the
interest incurred on all the debt held by the company in that year, these interest were added to the
previous interest incurred figures. The interest incurred in 2011-12 was Rs. 2791.90 cr. To get the
interest incurred for 2013, interest incurred on the debt issued in 2013 was added to this figure
(Rs. 2791.90 Crores + Rs. 976.24 Crores = Rs. 3768.14 Crores)
(in Rs. Crores
)
2013(actual) 2014 2015 2016 2017 2018
Interest
Incurred
3768.14 4979.13 5856.4 6857.93 7907.75 8967.74
Interest Rate 7.03% 7.14% 7.07% 7.13% 7.21% 7.26%
Tax Rate 33.00% 33.00% 33.00% 33.00% 33.00% 33.00%
Cost of Debt 4.71% 4.78% 4.74% 4.77% 4.83% 4.86%
Table : Cost of Debt/(Only Estimate)
The interest rates for the respective years are calculated by dividing the interest incurred by the
total debt outstanding for the Company. The effective tax rate for the Company at present is close
to 33% and the same is taken for all the future years. Cost of Debt is calculated by using the
following formula:
34
Cost of Debt = Interest Rate (1 – Tax Rate)
To calculate the expected beta for the years after 2012, asset beta for the present year (2012) was
calculated. The equity beta was calculated using data from the website of National Stock
Exchange. To calculate the asset beta following formula was used:
Asset Beta = Equity Beta * Equity Percentage in Capital Structure
It was assumed that the asset beta (0.19992) for the 2012 would continue for the concerned period.
Using the above formula, the asset beta for the respective years was re-levered. Following table
gives the figures for beta and cost of equity for the respective years
2013(actual) 2014 2015 2016 2017 2018
Risk Free Rates (G-Sec) 0.0854 0.0854 0.0854 0.0854 0.0854 0.0854
Asset Beta 0.19992 0.19992 0.1999 0.19992 0.19992 0.19992
Beta 0.6048 0.6599 0.6299 0.6493 0.6334 0.6375
Market Premium 12.51% 12.51% 12.51% 12.51% 12.51% 12.51%
Cost of Equity 16.10% 16.79% 16.42% 16.66% 16.46% 16.51%
Table: Cost of Equity for PGCIL/ (Only Estimate)
The risk free rate was provided by the company through Reuters Database. Market Premium is
taken from a study done at IIM, Ahmedabad. The cost of equity was calculated using following
formula:
Cost of Equity = Risk Free Rate + Equity Beta * (Market Return – Risk Free Rate)
= Risk Free Rate + Equity Beta * Market premium
Using the cost of debt and cost of equity calculated above, Weighted Average Cost of Capital was
calculated. The formula for the same is as follow:
WACC = (Cost of Debt*Debt Percentage) + (Cost of Equity*Equity Percentage)
The following table gives the WACC for the company.
2013(actual) 2014 2015 2016 2017 2018
Debt
Percentage
66.94% 69.70% 68.26% 69.21% 68.44% 68.64%
Equity
Percentage
33.06% 30.30% 31.74% 30.79% 31.56% 31.36%
WACC 8.48% 8.42% 8.44% 8.43% 8.50% 8.52%
Table: WACC for PGCIL/ (Only Estimate)
35
After this, in the next part, it was assumed that the remaining Rs.7,250 crores is taken as domestic
debt in the form of debt. The plan for raising debt and equity is as following:
Equity (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018 Total
Internal Generation 5110 3850 3600 4300 5100 5900 22750
New Issue 0 0 0 0 0 0 0
Total New Equity 5110 3850 3600 4300 5100 5900 22750
Debt Raised
External Borrowings 2016 3047 4163 2580 1803 2407 14000
Domestic Borrowings 10688 13103 11237 13120 13097 12693 63250
Total New Debt 12704 16150 15400 15700 14900 15100 7725
New Fund Raised 17814 20000 19000 20000 20000 21000 100000
Interest Incurred on
New Debt
976.24 1210.99 1076.7 1200.97 1179.86 1159.7
Table: Fund Raising Plan for the Company (Debt)
The amount to be raised is distributed among domestic debt raising in different years. The new
capital structure for the Company would be as following
Equity (in Rs. Crores ) 2013(actual) 2014 2015 2016 2017 2018
Previous Year 21351.37 26461.4 30311 33911.4 38211.4 43311.4
Internal Generation 5110 3850 3600 4300 5100 5900
New Issue 0 0 0 0 0 0
Total Equity 26461.37 30311.4 33911 38211.4 43311.4 49211.4
Debt
External Borrowings 14237.55 17284.6 21448 24027.6 25830.6 28237.6
Domestic Borrowings 39349.22 52452.2 63689 76809.2 89906.2 102599
Total Debt 53586.77 69736.8 85137 100837 115737 130837
Interest Incurred on
New Debt
976.24 1210.99 1076.7 1200.97 1179.86 1159.7
Table 3.7: Capital Structure for the Company/(Only Estimate)
The cost of debt, cost of equity and weighted average cost of capital for the company is calculated
in the same way as the previous case. They are shown in the table below.
2013(actual) 2014 2015 2016 2017 2018
Cost of Debt 4.71% 4.78% 4.77% 4.82% 4.88% 4.91%
Cost of
Equity
16.10% 16.79% 17.32% 17.64% 17.72% 17.69%
WACC 8.48% 8.42% 8.34% 8.34% 8.38% 8.41%
Table: Cost of equity, Cost of debt and WACC for the Company/(Only Estimate)
CHAPTER 9
FINDINGS
36
Summary of Findings
After studying capital structure, some of concluding remarks that can be made are:
Here, the last three represent domestic borrowing.
-09. WACC is affected by both cost
of debt and equity. But, despite increase in cost of debt in those years due to bad market
conditions, the overall WACC decreased due to fall in cost of equity, which is a measure of
investors? expectations.
investors were not
expecting high return in 2008-09. So the cost of equity decreased drastically. This effect was
further escalated by its IPO in the same year.
especially in the last 5 years. The amount of debt has been increasing due to more and more issue
of bonds. The cost of capital is reducing when the debt /equity ratio is increasing, as debt is a
cheaper source of finance as compared to equity.
? The company tries to maintain a minimum of debt equity ratio. Now, the debt is almost
the 2 times of equity. If the company will go for more debt, the financing of projects with
more debt will be difficult. To continue its debt financing, a company is supposed to
maintain a minimum level of equity.
? The company is high on leverage and is still able to get more loans. One reason might be
the collateral it keeps for securing loans. The securities it keeps for loans and bonds are
generally 1.1 times the value of the loan.
? While doing the risk analysis for POWERGRID share PRICE with its WACC, it can
reasonably conclude that WACC is the key sensitive factor in case of price valuation of
POWER GRID share.
CHAPTER 10
CONCLUSION
37
Conclusion
capital could be done only in the following four components:
Despite high leveraging, the company is able to raise more and more funds through debt
because of its high credit ratings and no default risks being a „Navratna? PSU. The cost of capital
has increased in 2009-10, but this is due to increase in cost of equity, i.e. investor?s expectations.
This is due to improved market conditions and the performance of the company which is
improving constantly over the years. It uses state-of-the-art infrastructure and technologies to
improve its operational and technical efficiency over time. Also, the future outlook of the
company looks bright, as it is constantly undertaking new projects which are slated to give
handsome profits in future.
in light of
fluctuating market conditions during the past 5 years, the company?s debt equity ratio has been
increasing over the years, i.e. company is getting more leveraged over the years. This can pose a
threat of liquidity and solvency issues to the company during the periods of cash crunch.
CHAPTER 11
RECOMMENDATIONS
38
Recommendations
? If see the trend of cost of foreign loans, it is clear that international financing is a much cheaper
option than borrowing from India itself. Consequently, it is recommended that Power Grid
should borrow from abroad as much as possible. However, it should also be noted that
international borrowing suffers from exchange rate fluctuations which might increase the cost of
finance so Hedging should be done
? Furthermore, it was found that there is an upper limit on the amount of funds which a company
can borrow from abroad. Beyond that limit, the company has to look for domestic sources.
? In the domestic market, the business requirement required me to determine whether Power Grid
should maintain a line of credit with banks or not. As per the study, it is recommended that
Power Grid should not go for line of credit; instead it should go for Zero Coupon Convertible
Bonds as it has no cost associated with it and it will also increase the Equity after sometime.
? COMMERCIAL Papers are also an option to raise funds as they are very cost effective but they
have just one limitation that Maturity period is only 1 year. A major benefit of commercial paper
is that it does not need to be registered with the Securities and Exchange Board of India (SEBI)
as long as it matures before nine months (270 days), making it a very cost-effective means of
financing.
? CP is not backed by collateral and only firms with excellent credit ratings from a recognized
rating agency are able to sell their commercial paper at a reasonable price. Hence, being AAA
rated, it makes all the more sense for Power Grid to issue CP.
? To sum up it is recommended that PGCIL should expand their equity by 5% through ZERO
COUPON FULLY CONVERTIBLE BONDS, should go for ECB and hedge for risk of currency
fluctuations. It can also consider increasing the quantum of bank loans in view of the falling
interest scenario.
39
BIBLIOGRAPY
Documents
[1]REC Guidelines of financing Norms, Entity Appraisal and project appraisal for Private
Transmission projects.
[2]PFC Guideline of project Appraisal
[3]Central electricity Regulatory Commission Regulations,2009
[4]Ministry of Power Annual Report 2011-12
[5]Ministry of Power Annual Report 2010-2011
[6] Report on “The Working Group on Power for Twelfth Plan (2012-2017)”- Ministry of
Power, Government of India
[7]Guidelines for RAPDRP during XI Plan 2011-12
[8]Guideline for National Electricity Fund(Interest Subsidy Scheme)
[9]REC 42nd Annual Report 2010-11
[10]REC 43rd Annual Report 2011-12
[11]PFC guideline for RAPDRP
[12]Brown, R.E ,”Transmission and Distribution Conference and Exhibition”, 2005/2006 IEEE
PES
[13] Financial Management: by I.M.Pandey
Websites-
[14]www.recindia.nic.in
[15]www.powermin.nic.in
[16]www.cea.nic.in
[17]www.cercind.gov.in
[18]www.mptransco.nic.in
[19]www.ntpc.co.in
[20]www.mppgenco.nic.in
[21]www.mnre.gov.in
[22]www.essar.com
75
[23]www.forumofregulators.com
[24]www.cpri.in
[25 ] www.scribd.com/doc/91071555/8/Literature-Survey
[26] www.apdrp.gov.in
doc_534335126.pdf