SUMMER INTERNSHIP REPORT

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SUMMER INTERNSHIP REPORT

PROJECT APPRAISIAL AND FINANCIAL MODELLING

OF A THERMAL POWER PLANT

UNDER THE GUIDANCE OF

Mrs Indu Maheshwari, Dy Director, CAMPS, NPTI

&

Mrs. Priya Kumar, Senior Manager, Project Division, Power Finance

Corporation Limited

At

Power Finance Corporation, New Delhi

Submitted By

Ankit Doveriyal

Roll No. 15

MBA (POWER MANAGEMENT)

(Under ministry of Power, Govt. of India)

Affiliated to

MAHARSHI DAYANAND UNIVERSITY, ROHTAK

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DECLARATION

I, Ankit Doveriyal, Roll No 15, student of MBA-Power Management (2012-14) at National Power Training Institute, Faridabad hereby declare that the Summer Training Report entitled “PROJECT APPRAISIAL AND FINANCIAL MODELLING OF A THERMAL POWER PLANT” is an original work and the same has not been submitted to any other Institute for the award of any other degree.

A Seminar presentation of the Training Report was made on ________________________ and the suggestions as approved by the faculty were duly incorporated.

Presentation In-Charge Signature of the Candidate

(Faculty)

Countersigned

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ACKNOWLEDGEMENT

It is often said that life is a mixture of achievements, failures, experiences, exposures and efforts to make your dream come true. There are people around you who help you realize your dream. I acquire this opportunity with much pleasure to acknowledge the invaluable assistance of Power Finance Corporation and all the people who have helped me through the course of my journey in successful completion of this project.

I wish to express my sincere gratitude to my Company Guide, Mrs. Priya Kumar

(Senior Manager, Project Appraisal Division, PFC) for her guidance, help and

motivation. Apart from the subject of my study, I learnt a lot from her, which I am sure, will be useful in different stages of my life. I would like to thank Mrs. Shweta Vithal

(Dy Manager, Project Appraisal Division) for her help in understanding and formulating

the model design and methodology as well as help me in acquitting to the Power Sector and clearing my concepts and Mr. Natesh Sarma (Officer, Project Appraisal Division) for his review and helpful comments.

I would like to thank Mr. Rakesh Mohan, Senior Manager (HR) for providing me with this wonderful opportunity to work at Power Finance Corporation. I express my thanks to Mrs. Indu Maheshwari, Dy. Director, Faculty guide, NPTI for her kind co-operation during the period of my summer internship.

I feel deep sense of gratitude towards Mr S.K.Chaudhary, Principal Director, CAMPS(NPTI), NPTI and Mrs. Manju Mam, Director, Mrs. Indu Maheshwari, Dy. Director, NPTI for arranging my internship at Power Finance Corporation and being a constant source of motivation and guidance throughout the course of my internship.

I am grateful to my friends who gave me the moral support in my times of difficulties. Last but not the least I would like to express my special thanks to my family for their continuous motivation and support.

Regards,

Ankit Doveriyal

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EXECUTIVE

SUMMARY

Rapid economic growth has increased the burden of India’s infrastructure, one of the country’s week spots. An infrastructure deficit is widely considered to be one of the factors that could severely affect the economic growth of the country. In the past few years, policy makers have recognized the importance of infrastructure in economic growth and have made concrete efforts to accelerate infrastructure development.

Power Sector continues to lag behind despite the introduction of progressive measures. Power shortages, increased tariffs, shortage of coal and dependence on imported fuel are on rise, while the poor health of the distribution continues to inhibit the inflows of investments which have possessed growth risk for the Indian Electricity Sector.

India's demand for electricity is likely to cross 300 GW, in few years earlier than most estimates. Meeting this demand will require a fivefold to tenfold increase in the pace of capacity addition.

With the growing demand of power, there is huge potential of investment in power sector of India. The power sector which is in the concurrent list of the Indian Constitution is under the purview of both the central government and the state government. The power sector which was earlier dominated by public sector undertaking is now seeing effective participation of the private sector which is now accountable for 28% of power generation in the country.

Power Finance Corporation Ltd. (PFC) a public financial institution established In 1986 by the Ministry Of Power as a Financial Institution (FI) to provide financing solution to large capital intensive power project across India including generation, transmission, distribution and RM&U projects.

My Summer Internship Project is “Project & Entity Appraisal of Thermal Power Plant”. It resolves around the appraisal of the power project promoted by the company ABC Power Limited, which has come for financial assistance of its Capital Expenditure and Working Capital Requirements. The project is being appraised after evaluating it on the various parameters set by Central Electricity Regulatory Commission (CERC) and the set parameters at PFC.

My work also include appraisal of Promoters of the project which is based on set parameters at PFC .The aim of the appraisal is to finally arrive at the decision: whether PFC should finance the project or not.

As per the guidelines of PFC the project is evaluated into two parts: Project Appraisal and Entity Appraisal. The format of the project report will be in the form of Agenda Note as per PFC norms.

“Project Appraisal” is carried out by “Project Appraisal Department” which evaluate the financial and technical viability of the project.

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“Entity Appraisal” is carried out by “Entity Appraisal Department” and involves evaluation of the promoter of the company on its financial flexibility and stability, the analysis of their business operations and the competence of the management.

In the end the project involves the subjective analysis on both Project & Entity fronts and come up with the risk involved.

The project reports ends with the Recommendations on whether to finance the project or not.

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LIST OF ABBREVIATIONS

BTG Boiler, Turbine & Generator

BU Billion Units

CEA Central Electricity Authority

CERC Central Electricity Regulatory Commission

COD Commercial Operation Date

DPR Detailed Project Report

EPC Engineering, procurement & construction Contract

FSA Fuel Supply arrangement/agreement

FTA Fuel Transport Agreement

GCV Gross Calorific Value

GoI Government of India

IPP Independent Power Producer

IDC Interest During Construction

Kcal Kilo Calories

KV Kilo Volts

KWh Kilo Watt Hour

MoP Ministry of Power

MoEF Ministry of Environment & Forest

NOC No Objection Certificate

O&M Operations & Maintenance

PFC Power Finance Corporation Ltd.

PGCIL Power Grid Corporation of India Limited

PLF Plant Load Factor

PPA Power Purchase Agreement

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LIST OF FIGURES

Figure 1: Power Sector Structure………...4

Figure 2: Energy Production in Billion kWh (2010)………..5

Figure 3: All India Generation capacity……….7

Figure 4: Business Strategy of PFC……….13

Figure 5: Project Finance Structure………..19

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LIST OF TABLES

Table 1: All India Region wise generation capacity………..6

Table 2: Different Rating by major rating agencies……….11

Table 3: Sanctions & Disbursements for the respective financial years………..14

Table 4: Major Projects Funded by PFC………..14

Table 5: Financial Highlights for the year 2011-12……….14

Table 6: Approvals and Agreement Status………...22

Table 7: Preliminary appraisal……….…24

Table 8: Detailed Appraisal………..26

Table 9: Approval and Agreement Status………...38

Table 10: Project Cost Details……….….39

Table 11: Power requirement and availability for Tamil Nadu………40

Table 12: Project details………..……….41

Table 13: Snapshot of project financial projections……….45

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2.1 BACKGROUND...………...………..10 2.2 MISSION……….……….………..10 2.3 CREDIT RATINGS………...………10 2.4 OBJECTIVE OF PFC………..…………...11 2.5 CLIENTS OF PFC………...………..12 2.6 RANGE OF SERVICES………12 2.7 REFORMS……….………13 2.8 SWOT ANALYSIS……….…………...15

CHAPTER 3: OBJECTIVE AND SCOPE………..16

3.1 OBJECTIVE OF THE PROJECT………..16

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CHAPTER 4: LITERATURE REVIEW AND RESEARCH

METHODOLOGY………...17 4.1 LITERATURE REVIEW…...………17 4.2 PROJECT FINANCE……….18 4.3 PROJECT APPRAISAL………19 4.4 CALCULATION OF TARIFF………...20 4.5 RESEARCH METHODOLOGY………...21

CHAPTER 5: PROJECT APPRAISAL & FINANCIAL MODELLING……....22

5.1 GUIDING PRINCIPAL FOR PROJECT APPRAISAL………22

5.2 PROJECT & ENTITY APPRAISAL……….23

5.3 FINANCIAL MODELLING……….……….28

CHAPTER 6: CASE STUDY………29

6.1 PROJECT PURPOSE & SCOPE………...29

6.2 PROJECT DETAILS……….……….29

6.3 PROJECT COST………...…….38

CHAPTER 7: RISK ANALYSIS & SWOT ANALYSIS………...47

7.1 RISK ANALYSIS………..47

7.2 SWOT ANALYSIS………49

7.3 LIMITATIONS………..50

CHAPTER 8: CONCLUSION, RECOMMENDATION & LEARNING………52

8.1 CONCLUSION………..52

8.2 RECOMMENDATIONS………...53

8.3 LEARNING……….………...53

BIBILIOGRAPHY………..………...54

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Project Appraisal & Financial Modeling

CHAPTER 1: INTRODUCTION

1.1. INDIAN POWER SECTOR

Electricity is one of the most vital infrastructure inputs for economic development of a country. The demand of electricity in India is enormous and is growing steadily. The vast Indian electricity market, today offers one of the highest growth opportunities for private developers.

At the time of independence in 1947, the country had a power generating capacity of 1,362 MW. Prior to independence the power sector was regulated by “The Indian Electricity Act, 1910” which was the first basic legal framework for the electricity sector in the country. “Supply of energy” was the main concept around which various provisions were woven. The act talked about the Licence for generating and supplying electricity, Competition in generation and supply areas, Framework of wires and works, Licensee and Consumer relationship, Safety Measures and Theft of electricity in the power sector.

Post independence our priorities changed, the supply of electricity which was limited to cities and towns was to be spread across the country, especially in rural areas. This was seen as a social responsibility of the Government to provide electricity to all. Thus “The Electricity Supply Act, 1948” was passed in the Central legislature to facilitate the establishment of regional co-ordination in the development of electricity which envisaged formation of State Electricity Boards (SEB) as an arm of State Government to discharge their responsibility of providing electricity to all. The act mandated that every State shall constitute a SEB. SEB’s were entrusted with the task of developing power generation, transmission as well as distribution facilities. The Act also called for formation of Central Electricity Authority (CEA), which was envisaged as the main technical arm of the Central Government. It also had to perform the role of technical advisor to the State Government, SEB, Generation Company or any other agency and form regulations on certain aspects of which the most important was the techno-economic clearance of generation projects.

However, in 1970s SEBs started making losses largely on account of political interference, mismanagement and inefficiencies in operations. Flat rate tariff (near zero usage charge) were introduced for the agricultural connections and high tariff was imposed on industrial & commercial users, such cross-subsidy led to increase in theft and the losses increased. As the boards were not able to make money, they became increasingly dependent on the government for funding. Because of the shortage of funds, SEB’s were unable to increase generation capacity and were not maintaining their assets. Therefore, SEB’s went into a vicious cycle that led to further drop in the performance of their operations and subsequently increased their losses. In 1980s, the SEBs were able to show about 3% of statutory returns with the help of flawed accounting system but in practice the accruals were not sufficient for growth and the boards sought assistance from state governments. In this situation, the government decided to create central generating utilities i.e. National thermal power corporation (NTPC) & National Hydro Power Corporation (NHPC) to improve the condition of power sector. The government also tried to connect the generating entities scattered all over the country non-uniformly

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by forming “The National Grid” and thus trying to overcome generation demand supply gap prevalent in different states.

In response to the balance-of-payment crisis in 1991, the government of India decided to open up various sectors in the economy including power sector. The power generation sector was de-licensed and the private parties were allowed to setup generating facilities. The change in notification gave numerous incentives to private sector such as 16% return on equity for plants that operated at plant load factor (PLF) of 68.5%, five year tax holiday, two part tariff, equity requirements as low as 20% of project cost and selective guarantees from central government for payment default by SEBs. This liberal set of policies initially created excitement among the private investors to setup plants. However, the excitement soon subsided because of the large political risks and payment capacity of the already bleeding SEBs. The state board’s losses were increasing mainly due to theft and had to increasingly depend upon government subsidy. Less than 17,000 MW were added vis-à-vis a planned addition 40,000 MW in the period 1971-1992. Further, such generous incentives given by the government to the foreign investors wherein almost all the risks were borne by the state board drew lot of criticism. SEBs were earning 12.2% internal rate of return on their own plants and therefore paying 16% return to IPPs which did not make sense.

Under the 1910 and 1948 Acts, powers of regulation including tariff regulations were vested on the Government. This concentration of power in the Government and Government organizations resulted in inefficiencies of various sorts, the most prominent manifestation was being lack of rational and professional approach to tariff fixation. As part of reforms strategy, it was, therefore, considered necessary to distance the sensitive aspect of tariff regulation from the political executives on the independent Regulatory Commissions. Thus, Government brought in “The Electricity Regulatory Commissions (ERC) act, 1998” which was the first step taken by the government to move itself away from the regulatory aspect of the power sector and fixation of tariff for the energy being used by the consumer. By this act the various losses occurring at the SEBs level and the bottleneck caused due to bureaucracy prevalent in the government organizations and political interference were tried to minimize by formation of Central Electricity Regulatory Commissions (CERC) at central level and State Electricity Regulatory Commissions (SERC) at every state. The CERC and SERC had main responsibility of tariff determination for Central Government and State Government owned generating stations respectively.

Bullish economic growth story of any country depends on a robust power generation & delivery model.

1.2. POWER SECTOR REFORMS

1.2.1. THE ELECTRICITY ACT 2003: A REVOLUTION

Competition with regulatory oversight is the framework around which the Electricity Act, 2003 is woven - competition to encourage efficiency in performance and regulatory oversight, to safeguard consumer’s interest and at the same time ensure recovery of costs for the investors. The journey of distancing of Government from regulations that started in 1998 has culminated in The Electricity Act of 2003. According to the new law The

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Government is distanced from all forms of regulation, viz., licensing, control over generation, captive generation, tariff fixation etc. Now the Government remains there only as a facilitator.

The Act talks about the need and ways of implementing Competition in the power sector while considering the concerns associated with it, about the electrification of rural areas and about liberalization of power sector. While Liberalization is the mantra, the Electricity Act does not encourage an unbridled growth for the sector. The regulatory Commission have been envisaged as the watchdogs which have a responsibility to put a check on the cost of generation through powers to regulate tariffs for supply of electricity from a generating company to the distribution licensees on long term power purchase agreements, as also with power to look into the costs of generation.

The act also provides the bases for formation of National Electricity Policy (NEP), National Tariff Policy (NTP), Rural Electrification, Open access in transmission, phased open access in distribution, Mandatory SERCs, licence free generation and distribution, power trading, mandatory metering and stringent penalties for theft.

SERCs provide Regulatory guidelines on quality of service standards that are to be achieved and maintained by the utility and ensure their compliance by providing for Complaint Redressal Mechanism & Appointment of Ombudsman. SERCs mentions about the consequences that are to be followed by the utility for non-compliance of the guidelines.

1.2.2. NATIONAL ELECTRICITY POLICY

In pursuance of the provisions of the Electricity Act, 2003 the Central Government came out with National Electricity Policy on 6th February 2005.

The policy prescribes the following objectives:

 Providing universal access in next five years for which significant capacity addition and expansion would be required.

 Meeting the demand fully by 2012 and to have spinning reserves after meeting peak requirements.

 Bringing about improvements in quality of supply at reasonable rates.  Increasing per capita availability to over 1000 kWh per year by 2012.

 Ensuring a minimum lifeline consumption of 365 kWh per year per household as a merit good by 2012.

 Financial turnaround and attainment of commercial viability of all entities in the sector.

 Protection of consumers’ interest.

1.2.3. NATIONAL TARIFF POLICY

In pursuance with section 3 of the Electricity Act 2003, the Central Government notified the Tariff Policy on 6th January 2006. According to the Act, the CERC and SERCs are to be guided by the Tariff Policy in framing its regulations.

It lays out the following objectives:

 Ensuring availability of electricity to consumers at reasonable and competitive rates;

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Projject Appraisa    1.2.4. R

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1.3 INTRODUCTION TO INDIAN POWER SECTOR

Electricity is one of the most vital infrastructure inputs for economic development of a country. The demand of electricity in India is enormous and is growing steadily. The vast Indian electricity market, today offers one of the highest growth opportunities for private developers.

Since independence, the Indian electricity sector has grown many folds in size and capacity. The generating capacity has increased from a meagre 1,362 MW in 1947 to more than 225,113 MW by May 2013, a gain of almost 200 times in capacity addition. India's per capita energy consumption is 778kWh in 2011 -- a rise of almost 400 percent since 1980. Although, India's energy consumption per unit of output is still rising, but it is expected to level off and to decline in the future. India consumes two-thirds more energy per dollar of gross domestic product (GDP) as the world average. India consumes only about 18 percent of the energy per person as the world average. Over 65 per cent of India's electricity is produced in thermal facilities using coal or petroleum products. Almost 19 per cent electricity is generated by hydroelectric facilities. In its quest for increasing availability of electricity, the country has adopted a blend of thermal, hydro and nuclear sources. Out of these, coal based thermal power plants and in some regions, hydro power plants have been the mainstay of electricity generation. Of late, emphasis is also being laid on non-conventional energy sources i.e. solar, wind and tidal which constitutes about 12 percent of the total energy generation.

Figure 2: Energy Production in Billion kWh (2010)

Source: wikipedia.org

India is one of the main manufacturers and users of energy. Globally, India is presently positioned as the fifth largest manufacturer of energy, representing roughly 2.4% of the overall energy output per annum. It is also the world’s fifth largest energy user, comprising about 3.3% of the overall global energy expenditure per year. In spite of its

4,326 4,207 1,145 1,037 ₉₂₂ 630 621 ₅₇₃ ₄₉₇ ₄₈₅ 381 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

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extensive yearly energy output, Indian Power Sector is a regular importer of energy, because of the huge disparity between oil production and utilization.

Usually energy, especially electricity, has a major contribution in speeding up the economic development of the country. The existing production of per capita electricity in India is above 778 kWh per annum. Ever since 1990s, India’s gross domestic product (GDP) has been increasing very rapidly and it is estimated that it will maintain the pace in couple of decades. The rise in GDP should be followed by an increase in the expenditure of key energy other than electricity. The gross electricity production capability of Indian Power Sector is placed at around 2,25,133 MW as on May 2013. Though, this is still not enough.

All the Regions in the Country namely Northern, Western, Southern, Eastern and North- Eastern regions continued to experience energy as well as peak power shortage of varying magnitude on an overall basis, although there were short-term surpluses depending on the season or time of day. The energy shortage varied from 19.1% in the Southern Region to 1.2% in the Western Region. As per CEA’s forecast for 2013-2014 among the regions, only the Eastern region would have a surplus of 10.2%. Region-wise picture in regard to actual power supply position in the country during the year 2013 -14 is given below:

Table 1: All India Region wise generation capacity

Sl

No. Region Coal Gas DSL Total Nuclear Hydro R.E.S Total

1 Northern 33073.50 5031.26 12.99 38117.75 1620.00 15467.75 5589.25 60794.75 2 Western 49584.51 8988.31 17.48 58590.30 1840.00 7447.50 8986.93 76864.73 3 Southern 25182.50 4962.78 939.32 31084.60 1320.00 11353.03 12251.85 56009.48 4 Eastern 23727.88 190.00 17.20 23935.08 0.00 4113.12 454.91 28503.11 5 N. Eastern 60.00 1187.50 142.74 1390.24 0.00 1242.00 252.68 2884.92 6 Islands 0.00 0.00 70.02 70.02 0.00 0.00 6.10 76.12 7 All India 131628.39 20359.85 1199.75 153187.99 4780.00 39623.40 27541.71 225133.10

Source: Power ministry as on 31-5-2013

In the past, the power sector growth has not kept pace with the economic expansion and this has resulted in India experiencing a 13 per cent shortage in peak capacity and 8 per cent in energy terms, on an overall basis. Driven by the requirement to enhance the budgetary allocations to social sectors to meet the emerging requirements of sustainable growth, the Government has envisaged a manifold increase in the role of the private sector in the financing and operations of the power sector. Significant structural and regulatory reforms have paved the way for increased private sector participation in all aspects of the sector. Many of the legal and regulatory requirements to enable this are in place, while the operational provisions are in different stages of implementation in different states.

As per CEA’s forecast for 2013-14 18,432 MW of capacity is expected to be added, comprising 15,234 MW of thermal power, 1,198 MW of hydropower and 2000 MW of nuclear power. Capacity addition during 2012-13 stood at 20,502 MW.

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1.4 POWER SECTOR: KEY DEVELOPMENTS AND CURRENT

STATUS

Indian government forecasted the economic growth to be 6.1% - 6.7% for the year 2013-2014 and to sustain this growth it is imperative for the power sector to grow with the same pace. Therefore, it becomes essential to assess the power sector by analysing its current status, the key challenges faced by it, and its future growth drivers.

Power is considered to be a core industry as it facilitates development across various sectors of the Indian economy, such as manufacturing, agriculture, commercial enterprises and railways. Though India currently has the fifth largest electricity generation capacity in the world pegged at 2,25,133 MW, the growth of the economy is expected to boost electricity demand in coming years.

Figure 3: All India Generation Capacity

Source: powermin.gov.in

India saw a total capacity addition of approximately 54,000 MW during the 11th Five Year plan, of which approximately 47 per cent was contributed by the central government, 34 per cent from the state government, and a little over 19 per cent from the private sector. As per the Planning Commission report capacity addition of 88000MW is estimated in 12th five year plan. Some examples of top public sector companies include National Thermal Power Corporation (NTPC), Damodar Valley Corporation (DVC) and National Hydroelectric Power Corporation (NHPC). Some key companies in the private sector include Tata Power and Reliance Energy Limited. In India, power is primarily generated from thermal and nuclear fuels, hydro energy and renewable sources.

India’s power generation capacity has significantly increased since 2008, and is also expected to show a strong growth in the future. However, India faced a power deficit of approximately 8.5 per cent and a peak demand deficit of over 10 per cent in FY11 primarily due to fuel shortage. This shortage can be attributed to aggregate technical and commercial (AT&C) losses, which is about 30 per cent with a high variance across various utilities. Therefore, it is essential for the government to work proactively to increase the sector’s generation capacity in a sustainable manner by addressing key

153188 4780 39623 27542 225133.1 34444.12 0 50000 100000 150000 200000 250000

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challenges, such as supply shortage and distribution losses without damaging the environment, to attain a high growth rate during the 12th Five Year Plan.

To cope with the demand deficit, the Indian government has implemented various progressive measures to maximise the country’s power generation capacity and improve distribution. Some examples of such measures include rural electrification programmes and ultra mega power projects. In particular, the inflow of foreign direct investments is expected to step up capacity addition significantly. The government has allowed FDI of up to 100 per cent through the automatic route in all segments of the power sector except for nuclear energy. Consequently, the sector has drawn about US$ 4.6 billion investment over the past decade, of which US$ 1.6 billion came in FY12 alone.

Hence, we can comfortably say that the Indian power sector has strong future growth prospects. Consequently, we need to assess the various policy initiatives that have had a positive impact on the sector, and capitalise upon them further to ensure a strong future growth.

1.5 MAJOR ISSUES

The most important sector in infrastructure is the power sector. There is about 90 GW of capacity under various stages of construction and attending to the outstanding issues facing these projects must be given a high priority. However, given the time lag involved in implementing power projects, it is necessary to ensure that projects which will be commissioned only in the Thirteenth Plan can also move ahead satisfactorily. Almost half the capacity in the Twelfth Plan is projected to come from the private sector and the position is likely to be the same in the Thirteenth Plan. Private sector investors in power generation have faced many problems in recent times. They include

(i) Inadequate supply of domestic coal and unanticipated increase in prices of imported coal.

(ii) Difficulties with clearances for captive mines, as well as for generating stations. (iii) Land availability

(iv) Poor financial health of some state electricity distribution companies which are the main customers and which suffer from insufficient tariff adjustment plus inefficiencies in collection.

(v) Inadequate availability of domestic natural gas. (vi) Inadequate fuel supply agreements for coal.

(vii) More recently, difficulties in obtaining finance from both external and domestic sources.

1.6 INITIATIVES

PPP IN POWER

To attract private sector participation, government has permitted the private sector to set up coal, gas or liquid-based thermal, hydel, wind or solar projects with foreign equity participation up to 100 per cent under the automatic route. The government has also launched Ultra Mega Power Projects (UMPPs) with an initial capacity of 4,000 MW to attract 160–200 billion of private investment. Out of the total nine UMPPs, four UMPPs at Mundra (Gujarat), Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya Dam (Jharkhand) have already been awarded. The remaining five UMPPs,

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namely in Sundergarh District (Orissa), Cheyyur (Tamil Nadu), Girye (Maharashtra), Tadri (Karnataka) and Akaltara (Chattisgarh) are yet to be awarded. To create Transmission Super Highways, the government has allowed private sector participation in the transmission sector. A PPP project at Jhajjar in Haryana for transmission of electricity was awarded under the PPP mode. Further, to enable private participation in distribution of electricity, especially by way of PPP, a model framework is being developed by the Planning Commission.

ADVANCED TECHNOLOGIES

It has already been announced that 50 per cent of the Twelfth Plan target and the coal-based capacity addition in the Thirteenth Plan would be through super-critical units, which reduce the use of coal per unit of electricity produced. Supercritical (SC) power plants, which operate at steam conditions 560oC/250 bars, can achieve a heat rate of 2,235 kCal/kWh as against a heat rate of 2,450 kCal/kWh for sub-critical power plants. The specific CO2 emission for super-critical plants is 0.83 kg/ kWh as against 0.93 kg/kWh for sub-critical plants. Super-critical technology is now mature and is only marginally more expensive than sub-critical power plants. Determined efforts are needed to achieve these results, and prioritisation of coal linkages will be necessary to incentivise adoption of super-critical technology.

ULTRA SUPER CRITICAL

An Ultra Super Critical (USC) coal-based power plant has an efficiency of 46 per cent compared with 34 per cent for a sub critical plant and 40 per cent for a Super Critical (SC) plant. Thus, with an USC or SC plant, the savings in coal consumption and reduction in CO2 emission can be substantial. A 10,000 MW power plant will generate 60 billion units of electricity per year at around 70 per cent load factor. It has a specific heat of 1,870 kcal/kwh compared to 2,530 kcal/kwh for a sub-critical plant. Thus, every unit generated with USC will save 0.165 kg [(2,530-1,870)/4,000] coal of 4,000 kcal/kg; and 60 billion units will save 9.9 million tonnes of coal per year.

1.7 OPPORTUNITIES

1. Long-term health of power sector seriously undermined (losses Rs 70,000 crore per year). However, aggregate technical and commercial (AT&C) losses are slowly coming down. State Governments must push distribution reform.

2. Hydropower development seriously hindered by forest and environment clearance procedures. Need to look at special dispensation for these States, especially Arunachal Pradesh.

3. A time-bound plan to operationalize development and evacuation of hydropower from NER required. Road connectivity is an issue for expeditious project completion. 4. Given limited connectivity of NER with other parts of the country (through Siliguri

corridor), access through Bangladesh needs to be explored.

5. Electricity tariffs not being revised to reflect rising costs. Regulators are being held back from allowing justified tariff increases.

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CHAPTER 2: COMPANY PROFILE

2.1 BACKGROUND

PFC was established in July 1986 as a Development Public Financial Institution (PFI) under Section 4A of the Companies Act, 1956. It is dedicated to the Power Sector. It is a wholly owned by Government of India. A Nav-Ratna public Sector Undertaking. It has highest safety ratings from domestic and international credit rating agencies and also ISO 9001-2000 Certification for the Project Appraisal System.

PFC provides financial assistance to all types of power projects like Generation, R&M, Transmission, Distribution, system improvement, etc. PFC encourages optimal growth and balance development of all segments of power sector through assigning priorities for financing different categories of projects. The state sector utilities are the main beneficiary of PFC’s financial assistance. PFC has also been funding private sector projects for last 5-6 years.

2.2 MISSION

PFC's mission is to excel as a pivotal developmental financial institution in the power sector committed to the integrated development of the power and associated sectors by channelling the resources and providing financial, technological and managerial services for ensuring the development of economic, reliable and efficient systems and institutions.

* Consistently rated ‘Excellent’ for its overall performance against the targets set in Memorandum of Understanding (MoU) by the Government of India (GoI) since 1993-94. * Nav-Ratna Public Sector Undertaking.

* Ranked among the top 10 PSUs for the last four years.

2.3 CREDIT RATINGS

Placed at Sovereign Rating by International Rating Agencies - Moody’s and Standard & Poor’s for long term foreign currency debt.

Placed at the highest safety ratings by accredited rating agencies in India - CRISIL and ICRA

Domestic borrowings include term loans and bonds; External borrowings take the form of Syndicated Loans, Fixed & Floating Notes.

Consistently rated ‘Excellent’ by the Government of India (GOI) for overall performance against the targets set in Memorandum of Understanding (MoU) between GOI and PFC.

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Table 3: Sanctions & Disbursements for the respective financial years

Particulars Financial Year

2007-08 2008-09 2009-10 2010-11 2011-12

Sanctions 69498 57030 65466 75197 69024

Disbursement 16211 21054 25808 34121 41418

Source: PFC website

Table 4: Major Projects Funded by PFC

Name of the Project Capacity (MW) Cost (Crs) Amount funded

Malwa TPS 2x500 4054 2730

Khaperkheda TPS Extn. 1x500 2191 1753

Kameng HEP 4x150 2485 1740

Koradi TPS 3x660 10019 6250

Mejia Extn. Unit 2x250 2800 1456

Sagardighi TPS PH1 2x300 2754 1925

Chandrapura Extn. Unit

7&8 2x250 2053 1435

Panipat TPS Stage V 2x250 1785 1428

Source: PFC website

Table 5: Financial Highlights for the year 2011-12

Profit after Tax Rs 3032 Crore

Loans and Grants Sanctioned Rs 69024 Crore

Loans and Grants Disbursed Rs 41418 Crore

Net Worth Rs 19493 Crore

Reserves and Surplus Rs 19388 Crore

No. of Employees 379

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2.8 SWOT Analysis

Strengths

 Govt. of India’s undertaking.  Good quality management

 Well established, long standing relations in the power industry Implementing agency for Mop’s schemes including AG &SP and APDRP Highest credit rating (due to government ownership)

Weaknesses

 Poor asset quality with most of the lending to SEBs, whose loan repayment capabilities in the long run is doubtful.

 Concentration risk attributed to lending in single sector.

Opportunities

 Power sector presents significant investment opportunities.

 Providing investment gateways & consultancy for domestic and external financial agencies.

 Having new business opportunities to cover the entire range of activities in the Power sector.

Threats

 PFC has significant exposures entities which are loss making, financially weak an dare defaulting to most of their creditors. Delinquencies by these entities to PFC could impair the currently sound Balance Sheet of PFC.

 With increasing exposure to SEB’s, their weak balance sheet may affect PFC’s creditworthiness.

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CHAPTER 3: OBJECTIVE AND SCOPE

3.1 OBJECTIVE OF THE PROJECT

The objective of the Project Report is:

1. Finding out the factors affecting a project’s capital and operational expenditure which in turn have an impact on the cash outlay and revenue flow of the project and their study. Thus, performing Project Appraisal of a 660 MW Coal Based Super-critical Thermal Power Project.

2. A financial model of a 660 MW Coal Based Super-critical Thermal Power Project so as to study the effect of above factors on tariff and revenue flows.

3. To find out probable values of IRR, DSCR among other ratios using the financial model to study the feasibility and attractiveness of a 660 MW Coal Based Super-critical Thermal Project.

3.2 SCOPE

Scope of project covers installation, commissioning, operation and maintenance of 660 MW coal fired Thermal Power Plant and associated systems.

Indian power sector wants to ramp up the installed capacity to meet the growing demand. Large Power Projects enjoy economics of scale and help in lowering the tariff of supply. This project helps to find out the factors that will affect the project cost and thus have an impact on total investment and operational expenses of the project. The assessment and analysis of these factors will help in determining the project cost, the associated risks and ultimately the tariff for supply from the project and thus the revenue and cash flows. Such information is vital in making financial decisions and project appraisal. The study may also help in understanding of ways to mitigate the risks.

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CHAPTER 4: LITERATURE REVIEW AND

RESEARCH METHODOLOGY

4.1. LITERATURE REVIEW

The literature survey was carried out by reviewing various journals on project appraisal and financial model of a power plant. Few journals reviewed are:

P.L.Kingston [1973] in IBM System Journals suggested, The use of computers in financial planning has become an area of increasing interest to financial management and data processing users. Computing systems facilitate the use of financial models in that they allow for the storage and retrieval of a representation of a financial plan and also for the evaluation of the consequences of “what if” conditions. Thus a financial model is a tool that can assist in the entire business planning process whether it be forecasting, cash management, or projection of profits. This paper presents introductory concepts that provide a basis for systems design and implementation of financial models. Described are the terminology, the basic components of financial models, and two general approaches to the construction of these models.

W Wetekamp [2011] suggests how Net Present Value (NPV) can be used as a proper tool to ensure effective project management. The author proves that investment project's appraisal methods, such as e.g. NPV, can and should be used as an ongoing monitor of project health. What is more, even in case of project turbulences Net Present Value can be used as a key instrument for finding the most appropriate solutions.

Robert Lundmark et al [2012] analyzed how market and policy uncertainties affect the general profitability of new investments in the power sector, and investigate the associated investment timing and technology choices. They developed an economic model for new investments in three competing energy technologies in the Swedish electric power sector. The model takes into account the policy impacts of the EU ETS and the Swedish green certificate scheme. By simulating and modeling policy effects through stochastic prices the results suggest that bio-fuelled power is the most profitable technology choice in the presence of existing policy instruments and under our assumptions. The likelihood of choosing gas power increases over time at the expense of wind power due to the relative capital requirement per unit of output for these technologies. Overall the results indicate that the economic incentives to postpone investments into the future are significant.

Reports of similar projects for thermal power plants were also reviewed. The reports of previous batches on similar topic and the referenced data were helpful in determining data for this project. The literature available within the company helped a lot in understanding Project Finance and factors of project cost which are summarized as:

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4.2 PROJECT FINANCE

Project financing is an innovative and timely financing technique that has been used on many high profile corporate projects, including infrastructural and power. Employing a carefully engineered financing mix, it has long been used to fund large scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide.

Project financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.

Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction rather the identification, analysis, allocation and management of every risk associated with the project is given more importance.

Project finance is the financing of long term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. Usually, a project financing scheme involves a number of equity investors, known as sponsors. As well as a syndicate of banks which provide loans to the operations. The loans are most commonly non-recourse loans, which are secured by the project itself and paid entirely from its cash flow, rather than from the general assets or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Project finance is often more complicated than alternative financing methods. It is most commonly used in the mining, transportation, telecommunication and public utility industries.

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Figure 5: Project Finance Structure

Source: PFC Library

Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanced able). To cope with these risks, project sponsors in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a contractual network with each other that allocates risk in a way that allows financing to take place. The various patterns of implementation are sometimes referred to as "project delivery methods." The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved.

4.3 PROJECT APPRAISAL

It is an assessment of a project in terms of its economic, social and financial viability. A lending financial institution makes an independent and objective assessment of various aspects of an investment proposition. It is defined as taking a second look critically and carefully at a project by a person who is in no way involved or connected with its preparation. He is able to take independent, dispassionate and objective view of the project in totality, along with its various components. There are some steps for Project appraisal.

 Management Appraisal: Management appraisal is related to the technical and managerial competence, integrity, knowledge of the project, managerial competence of the promoters etc. The promoters should have the knowledge and ability to plan, implement and operate the entire project effectively. The past record of the promoters is to be appraised to clarify their ability in handling the projects.

Construction Contracts O&M Support Licenses Certification Zoning Local Permits Tariff for such electricity Obligation to buy electricity Electricity Deliveries Electricity Payments Debt Debt Service Dividend Sponser(s) _Lenders Project Company Equipment Provider Connections Civil Works Regulatory Authorities Power Purchaser Equity

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 Technical Feasibility: Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the technical inputs required and formation of conclusion there from. The availability of the raw materials, power, sanitary and sewerage services, transportation facility, skilled man power, engineering facilities, maintenance, local people etc are coming under technical analysis. This feasibility analysis is very important since its significance lies in planning the exercises, documentation process, and risk minimization process and to get approval.

 Financial feasibility: One of the very important factors that a project team should meticulously prepare is the financial viability of the entire project. This involves the preparation of cost estimates, means of financing, financial institutions, financial projections, break-even point, ratio analysis etc. The cost of project includes the land and sight development, building, plant and machinery, technical know-how fees, preoperative expenses, contingency expenses etc. The means of finance includes the share capital, term loan, special capital assistance, investment subsidy, margin money loan etc. The financial projections include the profitability estimates, cash flow and projected balance sheet. The ratio analysis will be made on debt equity ratio and current ratio.

 Commercial Appraisal: In the commercial appraisal many factors are coming. The scope of the project in market or the beneficiaries, customer friendly process and preferences, future demand of the supply, effectiveness of the selling arrangement, latest information availability an all areas, government control measures, etc. The appraisal involves the assessment of the current market scenario, which enables the project to get adequate demand. Estimation, distribution and advertisement scenario also to be here considered into.

 Economic Appraisal: How far the project contributes to the development of the sector; industrial development, social development, maximizing the growth of employment, etc. are kept in view while evaluating the economic feasibility of the project.

 Environmental Analysis: Environmental appraisal concerns with the impact of environment on the project. The factors include the water, air, land, sound, geographical location etc.

4.4 CALCULATION OF TARIFF BASED ON CERC REGULATIONS

The tariff for supply of electricity from a thermal generating station shall comprise two parts, namely, capacity charge (for recovery of annual fixed cost consisting of the components) and energy charge (for recovery of primary fuel cost and limestone cost where applicable).

 Annual Fixed Cost: The annual fixed cost (AFC) of a generating station or a transmission system shall consist of the following components

 Return on equity: 15.5% tax free return on total equity. Only 30% of the project cost can be treated as equity.

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 Interest on loan capital: Year to year loan interest is calculated on full debt amount by weightage average rate of interest.

 Depreciation: Depreciation up to 90% of the capital cost of asset is allowed. Depreciation shall be calculated annually based on Straight Line Method and rate defined in CERC guidelines.

 Interest on working capital: Working capital shall include Cost of coal or lignite and limestone, if applicable, for 1½ months for pit-head generating stations and two months for non-pit-head generating stations.

 Cost of secondary fuel oil for two months.

 Operation and maintenance expenses for one month.

 Maintenance spares @ 20% of operation and maintenance expenses.

 Receivables equivalent to two months of capacity charges and energy charges for sale of electricity.

 Energy Cost: It is also calculated on norms of CERC, the yearly consumption of primary fuel and secondary fuel is taken for the calculation.

DPR (Detailed Project Report) of various projects of similar kinds helped in understanding the project technically. Reports and notifications available on various websites listed in bibliography also helped in adding value to the project. The data mainly obtained by interviews with experts and experience of plant operations and form the basis of assumptions taken for modelling. The data thus analysed was processed in model for finding out the required ratios and check the project feasibility.

4.5 RESEARCH METHODOLOGY

Methodology used for the project:

Project Appraisal: To evaluate the project rating and conducting the feasibility report of a project based on the DPR/information memorandum/application form and other related materials submitted by the borrower.

 Assesses the capital needs of the business project and how these needs will be met.

 Calculating the cost of generation and relevance

 Calculation of DSCR, IRR and sensitivity analysis.

Entity Appraisal: To assess the financial health of organizations that approach PFC for credit for power projects. This would entail undertaking of the following procedures:

 Analysis of past and present financial statements  Examination of Profitability statements

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CHAPTER 5: OVERVIEW OF PROJECT

APPRAISAL & FINANCIAL MODELLING

5.1. GUIDING PRINCIPAL FOR PROJECT APPRAISAL AT PFC

“Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analysed. Credit should be disbursed only after ascertaining satisfactory financial performance. Based on the financial health of an organization, PFC assigns integrated ratings. These credit ratings are used to fix the interest rate, exposure limit and security criteria.”

5.1.1. ENTITY ELIGIBILITY CRITERIA: While considering the eligibility of an entity, last two year Auditor’s report and notes to annual accounts along with Income tax assessment order for last three years be also examined. Type of securities and mode of repayments is also to be suggested by the help of entity rating.

5.1.2. STATUTORY CLEARANCES: All statutory clearances requires at Central/State level for the implementation of the project are to be ensured. Depending on the cost of project, techno economic clearances of CEA/SEB may be asked.

Clearances/Agreements required for implementation of project: 1. Land Acquisition

2. Water Availability

3. Stack Height: Airport Authority of India

4. Forest Clearance: Such that no sanctuary, reserve, national park within the project 5. No defence establishment

6. Ministry of environment and Forest

7. Fuel Supply Arrangement/Agreement through various coal linkages 8. Fuel Transportation Arrangement

9. PPA for selling Electricity

10. Transmission agreement with Transmission agency 11. Pollution Control Board

Table 6: Approvals and Agreement Status

Major Clearances/ Agreements

S No Requirement Agency Status

1 Consent to establish /

NoC Tuticorin Airport Certified

2 Environment Clearance MoEF

The Company has applied for the clearance.

3 Forest clearance MoEF The Company has

applied for the clearance

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5 Stack height Clearance Airport Authority of

India (AAI) Approved 6 Pollution control board

NOC for power plant

Tamil Nadu Pollution control board (TNPCB)

All the required standards of Pollution control board are met 7 Land Availability State Government 600 acres has been

acquired

8 Primary Fuel Coal India Limited Long term agreement made on 15 April 2010 9 Transportation of Fuel Aspinwall Co Ltd Fuel Transport

Agreement made

10 Transmission Line PGCIL

Open Access and Transmission Agreement made 11 EPC / package contract

Consolidated Construction Consortium Ltd.

Agreement made on 18 June 2010

5.1.3. COST ESTIMATE: The base date for estimation of cost shall not be more than six month old at the time of talking up the project for appraisal. Physical contingencies and the price contingencies shall be made depending on the project completion period of 1,2,3,4 and 5 years as per PFC guidelines. Also IDC, to be considered to arrive at project cost.

5.1.4. PROJECT COST-BENEFIT ANALYSIS: Calculate Financial Internal rate of return (FIRR). Techno-economically sound with Financial IRR not less than the minimum required rate. Sensitivity analysis is also done.

5.1.5. PROJECT ANALYSIS: The project is evaluated on various parameters and then ranked according to the PFC guidelines. The method is explained later on.

5.2. PROJECT & ENTITY APPRAISAL

The Project Analysis is intended for arriving at a relative measure of merit for the project. This model involves:

1. Entity rating 2. Project rating

5.2.1. ENTITY APPRAISAL METHODOLOGY

Analysis and critical comments on the strength and weakness of organization, management, its working result, financial position etc. are made on the basis of organization set up, capital/financial structure, operating/working results, credit worthiness, financial result, entity related risks and mitigation measures proposed. Power Sector entities are evaluated with reference to a set of qualitative and quantitative factors to arrive at the Aggregate Entity Score. In addition to the performance parameters, milestones giving weightage to core reform activities have also been included in the overall grading mechanism. Both the public and private entities are evaluated separately on set of measures.

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It is a two-stage process i.e. preliminary evaluation and detailed evaluation in which all the promoters are evaluated for their ability to contribute equity, carry the project to completion and operate the project as per the contracts.

PRELIMINARY APPRAISAL

In this, the scrutiny is based on the analysis of quantitative parameters, so as to access the financial strength of the promoters, track record of the project implementation and the credit worthiness. The scoring of all the factors is on a six- point scale, with 6 being the best and 1 being the worst. It involves analysis under two categories for Preliminary Evaluation:

 Business analysis  Financial flexibility

I. BUSINESS ANALYSIS

Business analysis evaluates the performance of the present business of the promoters. The analysis involves evaluation of the market position and financial position of the company along with a view on management expertise and integrity of the promoters. The parameters and factors used in business analysis have been enumerated below:

a) Market Position

Here relative market share of the company is determined. It is calculated as the ratio of the turnover of the promoting company divided by the turnover of the market leader in the business. In case of diversified companies the same process is repeated for each division.

b) Financial Risk

It evaluates the past financial performance of the promoting companies. Performance of at least the last three years is evaluated. Financial risk parameter is represented by 5 ratios, which cover various aspects of company’s financial performance:

Table 7: Preliminary appraisal

Ratios Meaning of Scoring Attribute

Return on Capital Employed (ROCE)

Quantitative Return on Investment Operating Margin Quantitative Profitability of the Business Debt Service Coverage Ratio

(DSCR)

Quantitative Coverage Ratio

Total Debt to Net Worth Quantitative Gearing Cash Flow From Operation

to Total Debt

Quantitative Cash Flow

 Return on Capital Employed (ROCE) ROCE = PBIT/ Opening capital employed

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Here, Capital Employed = (Capital + Reserves + Short term debt + Long term debt evaluation reserves –Capital work in progress)ROCE is scored as a simple average of the last three years but if the latest ROCE is lower than one for the preceding year then the latest ROCE should be used for calculation instead of the average.  Operating Margin

OM = Operating Profit before Depreciation, Interest and Taxes/ Income from operations

 Debt Service Coverage Ratio (DSCR)

DSCR = (PBIT – Taxes)/ (Repayment due to Long term Loan + Interest on long term and Short term loans)

 Total Debt/Total Net Worth

Total debt/ total net worth = (Long term loans + Short term loans + Working Capital loans)/(Capital + Reserves – Revaluation reserve – Loss brought forward – Intangible Assets)

 Cash Flow from Operation / Total Debt

Cash flow from operations/ Total debt = Cash flow from Operations/ (Long term loans + Short term loans + Working Capital Loans from Banks)

II. FINANCIAL FLEXIBILITY

It is used to judge the ability of promoters to financially manage the project. Thus, key points evaluated are:

 Ability to contribute equity to the project  Ability to bring the project to financial closure  Ability to fund temporarily funding mismatches

Ratios Meaning Attribute being Evaluated

Equity Funding Potential Quantitative Equity Raising Potential Bridge Finance Ability Quantitative Quarterly cash surplus from

operations

Track Record of Fund raised Quantitative Funds raised in last 10 years Aggregate Project cost

Handled

Quantitative Projects established in last 10 years

 Equity Funding Potential: A Promoting company can contribute equity to the project by raising debt on its books or raising equity or through cash surpluses in the books.

 Bridge Financing Ability: This parameter basically judges the ability of company to fund short term cash flow imbalances in the project. This attribute is useful to prevent delay in project implementation due to small disbursals from the institutions.

SUMMER INTERNSHIP REPORT