Main Project On Working Capital

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1.1 INTRODUCTION TO STUDY
Working capital management is a significant fact of financial management due to the fact
that it plays a pivotal role in keeping wheels of business enterprise running. Shortage of
funds for working capital has caused many businesses to fail and in many cases, has
recorded poor growth. Lack of efficient and effective utilization of working capital leads
to earn low rate of return on capital employed or even compels to sustain losses. Working
capital is the flow of ready funds necessary working of the enterprise. It consists of funds
invested in current assets or those assets which in the ordinary course of business can be
turned into cash within a brief period without undergoing diminution in value and without
disruption of the organization.
Financial analysis is the process of identifying the financial strengths and weaknesses of
the firm by properly establishing relationships between the items of the balance sheet and
the profit and loss account. It refers to an assessment of the viability, stability and
profitability of a business, sub-business or project. The future plans of the firm should be
laid down in view of the firm’s financial strengths and weaknesses. Thus, financial
analysis is the starting point for making plans, before using any sophisticated forecasting
and planning procedures. Understanding the past is a prerequisite for anticipating the
future.
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1.2 OBJECTIVE OF THE PROJECT
 To analyse factors that considers their (Tata Power) working capital requirement.
 To understand Working Capital Policies.
 To analyse Inventory management of Tata Power Company Limited
 To study the general problems faced in Supply Chain
 To analyse the financial statement of Tata Power
 To do analysis of company’s performance
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1.3 COMPANY PROFILE
Company name Tata Power Company Ltd
Year of Establishment 1919
Chairman Mr. R N Tata
Industry Electricity generation

Electricity transmission
Electricity distribution
Website http://www.tatapower.com
Production Capacity 2300MW
Annual Generation 14807 MUs
Tata Power Company Limited (TPC), India's largest integrated Electric Power Utility in
private sector with a reputation for reliability, incorporated in the year 1919 at Mumbai.
Tata Power Company Limited pioneered the generation of electricity in India nine
decades ago. The core business of Tata Power Company is to generate, transmit and
distribute electricity. The Company operates in two business segments: Power and Other.
The Power segment is engaged in generation, transmission and distribution of electricity.
The other segment deals with electronic equipment, project consultancy.
In the year 2007, Tata Power Company Limited has signed a MoU with the Government
of Chhattisgarh for the setting up of a 1000 MW coal fired mega power plant in the State.
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The company has roped in Korea-based Doosan Heavy Industries and Construction Ltd
for supercritical boilers for its Mundra ultra mega power project. The acquisition of
Coastal Gujarat Power Ltd was med by the company and a Special Purpose Vehicle
(SPV) formed for Mundra Ultra Mega Power Project (UMPP). Tata Power Company
Limited has signed an EPC contract for supply of five (5) 800 MW Steam Turbine
Generators with Toshiba Corporation for the first 4000 MW Ultra Mega Power Project
(UMPP) in India to be located at Mundra, Gujarat in August 2007.
As on February 2008, The Tata Power Company Limited (Tata Power) and Damodar
Valley Corporation (DVC) jointly completed its financing for the 1050 MW coal based
thermal power project, being set up in Dhanbad District of Jharkhand State. Recognising
the steady and stable performance in generating quality and reliable energy, the Central
Electricity Authority has awarded Tata Power's Bhira Hydro generation facility with the
Silver Shield award for the meritorious performance in March 2008. April of the year
2008, Tata Power completes the Signing of Financial Agreements for 4000 MW Ultra
Mega Power Project, coming up at Mundra, Gujarat. The cost of the project is estimated
at INR 17000 crores (USD 4.2 billion). Tata Power announced in September of the year
2008, it would acquire a 11.4 per cent stake in Geodynamics Ltd, an Australian company
specialising in geothermal energy, for Rs 165 crore.
Tata Power is surging ahead, lighting up lives through its activities from its inception.
The challenge of fulfilling the ever growing needs of power has been met by Tata Power
through efficient generation, transmission, distribution and constant up gradation of its
technology in every aspect.
VISION
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 To be the most admired Integrated Power and Energy Company delivering
sustainable value to all stakeholders.
MISSION
We will become the most admired company delivering sustainable value by:
 Being a Partner of Choice and exceeding stakeholder expectations.
 Ensuring profitable growth and value to stakeholders.
 Innovating and deploying cutting edge solutions based on eco-friendly

technologies.
 Relentlessly pursuing opportunities, capitalising on synergies in the power and

energy value chain, and expanding our presence in related businesses of interest.
 Being an Employer of Choice and creating a culture of empowerment and high

performance.
 Caring for the safety of the environment and well-being of customers,

employees and communities.
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1.3.1 HIGHLIGHTS OF THE YEAR
 Consolidated revenues from operations up by 61% at Rs. 17,587.53 crores.
 Consolidated PAT at Rs. 1,218.74 crores rose an increase of 16%.
 Annual Generation highest at 14807 MUs.
 Commissioned 250 MW ‘Unit 8’ at the Trombay Thermal Power Station.
 Commissioned 90 MW in Haldia.
 Commissioned additional 80.6 MW wind power capacity in Gujarat, Karnataka

and Maharashtra.
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Financial Highlights
 The Company’s revenues from operations increased 22.3% to Rs. 7, 236.23 crores
as compared to Rs. 5,915.91 crores in the previous year.
 Profit After Tax (PAT) stood at Rs. 922.20 crores as against Rs. 869.90 crores for
the previous year, a growth of 6%, the highest so far.
 Net Profit after Tax and Statutory Appropriations stood at Rs. 967.50 crores as
against Rs. 811.31 crores for the previous year, an increase of 19.25%.
 Dividend recommended at Rs. 11.50 per share, the highest ever so far.
 The Company’s consolidated revenues from operations increased 61.49% to Rs.

17,587.53 crores as compared to Rs. 10,890.86 crores in the previous year.
 The consolidated PAT for the year stood at Rs. 1,218.74 crores as against Rs.
1,055.07 crores for the previous year, a rise of 15.51%.
 Tata Power Trading Company Limited (TPTCL): TPTCL’s revenues increased

146.2% to Rs. 2,171.93 crores from Rs. 882.12 crores in the previous year. PAT
also increased to Rs. 7.63 crores from Rs. 4.30 crores in the previous year.
 Powerlinks Transmission Limited (Powerlinks): The revenues of Powerlinks, the

first public-private joint venture in power transmission in India increased 3.65%
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to Rs. 254.49 crores from Rs. 245.52 crores in the previous year. PAT also
increased to Rs. 65.34 crores from Rs. 58.41 crores in the previous year.
 North Delhi Power Limited (NDPL): NDPL’s revenues increased 7.90% to Rs.
2,467.87 crores from Rs. 2,287.23 crores in the previous year. PAT for the current
year is lower
 at Rs. 171.47 crores as compared to Rs. 281.58 crores in the previous year
primarily on account of an exceptional credit of Rs.182 crores in the previous
year.
Operational Highlights of the Year
 The Company generated 14,807 Million Units (MUs) of power from all its power
plants during the year as compared to 14,717 MUs in the previous year.
 The Trombay Thermal Power Station generated 9,845 MUs during the year as
compared to 10,002 MUs generated in the previous year, a decrease by 1.57%.
The generation was lower on account of major overhaul of Unit 6 and Unit 7.
 The three hydro stations collectively generated 1,151 MUs during the year, as
against 1,489 MUs generated in the previous year, a decrease of 22.7%. The
generation was lower on account of the restriction imposed by Krishna Water
Tribunal Award.
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 The Jojobera Thermal Power Station recorded a generation of 3,009 MUs during
the year as compared to 2,862 MUs in the previous year, an increase of 5.12%.
The power station achieved the highest ever generation, crossing the 3,000 MU
mark for the first time while surpassing the previous record of 2,862 MUs in
FY08.
 The Belgaum Independent Power Plant (IPP) generated 447 MUs during the year
as compared to 237 MUs in the previous year, an increase of 88.61% due to
increased demand from Karnataka Power Transmission Corporation Ltd.
 In a major expansion of distribution network, power supply has been made

available to 2,366 new consumers and 34 new consumer sub stations were
commissioned.
New Projects
 250 MW expansion Project at Trombay, Unit 8:
The 250 MW Unit 8 imported coal based plant at Trombay was commissioned
during the year and started commercial operations from end March 2009.
 120 MW Power Project at Haldia:
During the year, the Company commissioned Units 1 and 2 of 45 MW each. The
30 MW Unit 3 is scheduled to be commissioned in Q1 of FY10.
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 Captive Power Projects for Tata Steel:
Industrial E nergy Limited (IEL), a joint venture between Tata Power (74%) and
Tata Steel (26%) is implementing the following projects:
120 MW Power House # 6 for Tata Steel Works, Jamshedpur:
The 120 MW power plant being constructed at Tata Steel works, Jamshedpur for
use by Tata Steel was inaugurated in May 2009. The Gas based Power House # 6,
will be supplying the entire generated capacity to Tata Steel Limited thereby
meeting the increasing demand for power for the Company’s Jamshedpur works.
Unit 5 at Jojobera:
A 120 MW power plant is being constructed at the Company’s existing site at

Jojobera. IEL has placed orders for major equipment and construction work is in
full swing. The project is expected to be commissioned in the third quarter of
FY10.
 4,000 MW, Mundra Ultra Mega Power Project on Fast Track
 1,050 MW Maithon Joint Venture Project between the Company (74%) and
Damodar Valley Corporation (DVC) (26%)
 Wind Farm Projects:
During the year, the Company commissioned additional 80.6 MW wind power
capacity. This included 36 MW at Gadag (Karnataka), 29.6 MW at Samana
(Gujarat) and 15 MW at Sadawaghapur (Maharashtra). The collective generation
by these wind farms was 177 MUs during the year as against 127 MUs generated
in the previous year.
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1.3.2 REWARDS & RECOGNITION
 Greentech Safety Award 2009 in Gold Category in Power Sector for Trombay
Thermal Power Station.
 Civic Award in the category social development instituted by Bombay Chambers

for the Year 2007-08.
 First prize in ash management from Jharkhand State Pollution Control Board
for Jojobera Thermal Power Station.
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 Bhira and Bhira Pump Storage Scheme adjudged as second best performing
station (Silver Shield) in the country for the year 2007-08. This is the second
consecutive year Bhira division has won this award.
 Power Deal of the Year by Power Finance International (PFI) in their year book
2009 for the 4,000 MW Ultra Mega Power Project (UMPP) at Mundra.
 Power Deal of the Year by the Infrastructure Journal Awards 2008 for Mundra
UMPP.
 Green Governance Award from Bombay Natural History Society for CSR
activities, for the year 2007-08.
 ICAI Awards (Gold Shield) for Excellence in Financial Reporting for the
Annual Report and Accounts of the organization for the year ended March 31,
2008 in the ‘Infrastructure & Construction Sector’.
National Par Excellence, Excellence and Distinguished awards won at NCQC, Vadodara
by our 10 Quality Circle teams.
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REVIEWS
1. Padachi Kesseven’s (2006) analysis says that a well designed and implemented
working capital management is expected to contribute positively to the creation of a
firm’s value The purpose of this paper is to examine the trends in working capital
management and its impaction firms’ performance. The trend in working capital
needs and profitability of firms are examined to identify the causes for any significant
differences between the industries. The dependent variable, return on total assets is
used as a measure of profitability and the relation between working capital
management and corporate profitability is investigated for a sample of 58small
manufacturing firms, using panel data analysis for the period 1998 –2003. The
regression results show that high investment in inventories and receivables is
associated with lower profitability. The key variables used in the analysis are
inventories days, accounts receivables days, accounts payable days and cash
conversion cycle. A strong significant relationship between working capital
management and profitability has been found in previous empirical work. An analysis
of the liquidity, profitability and operational efficiency of the five industries shows
significant changes and how best practices in the paper industry have contributed to
performance. The findings also reveal an increasing trend in the short-term
component of working capital financing.
2. Lazaridis Dr Ioannis, Tryfonidis Dimitrio’s (2004) analysis says that the relationship
of corporate profitability and working capital management. We used a sample of 131
companies listed in the Athens Stock Exchange (ASE) for the period of 2001-2004.
The purpose of this paper is to establish a relationship that is statistical significant
between profitability, the cash conversion cycle and its components for listed firms in
the ASE. The results of our research showed that there is statistical significance
between profitability, measured through gross operating profit, and the cash
conversion cycle. Moreover managers can create profits for their companies by
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handling correctly the cash conversion cycle and keeping each different component
(accounts receivables, accounts payables, inventory) to an optimum level.
3. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has
historically been a major benchmark of the surety and credit-granting institutions. In
today’s environment, because of the tight bond and credit markets, both institutions
are scrutinizing the amount and quality of working capital more than ever. The fewer
resources that need to be invested in working capital, after recognizing liquidity risk,
the better.
4. Weinraub Herbert, Visscher Sue (1998) studies that this study looked at ten diverse
industry groups over an extended time period to examine the relative relationship
between aggressive and conservative working capital practices. Results strongly show
that the industries had significantly different current asset management policies.
Additionally, the relative industry ranking of the aggressive/conservative asset
policies exhibited remarkable stability over time. Industry policies concerning relative
aggressive/conservative liability management were also significantly different.
Interestingly, it is evident there is a high and significant negative correlation between
industry asset and liability policies. Relatively aggressive working capital asset
management seems balanced by relatively conservative working capital financial
management.
5. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting
process. It has shown that it is reasonable to expect that the cost of capital will
increase at the same rate as the rate of inflation on an ex ante basis, and that this
increase will be a multiplicative relationship. In addition, the paper has shown that the
capital budgeting process is not neutral with respect to inflation, even if output prices
rise at the same rate as costs. Of critical importance is the degree of net working
capital as a proportion of the overall financing required, the higher the net working
capital the greater being the impact of inflation on capital spending. Finally, it would
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appear that corporate financial behavior is influenced by inflation. Inflation will cause
the firm to reduce its capital budget, to attempt to reduce net working capital, and to
alter the debt/asset ratio using short term debt, thus driving up short term rates relative
to long term rates.
6. Schwartz (2008), Studies the business of NAILD distributor through this article. The
NAILD is an organisation supporting lighting distributors in the US with publications,
training, and conferences. According to him, recent changes and trends in the lighting
market provide new opportunities. The keys to taking advantage of the opportunities
is to understand the market, know where to get more information, provide updates to
your customers, and turn information into active marketing and promotional efforts.
The Energy Independence and Security Act of 2007 add to the programs and efforts
introduced in EPACT 2005. A key component of the ENERGY STAR qualified light
fixtures program is the Advanced Lighting Package (ALP). As market trends and
legislation move purchasers away from inefficient technologies and towards energy-
efficient products, NAILD distributors that become ENERGY STAR Partners have an
opportunity to increase sales and profits.
7. Kumar, Khetan & Thapa (2005) highlights that India has set itself an ambitious
target of more than doubling per-capita electricity consumption by 2011. Indian
power sector, with current electricity shortages of over 11% of peak and 7% of
energy, will be one of the key determinants to future growth. The Indian government
has worked steadily to liberalise the sector and initiated reforms that culminated in the
Electricity Act 2003. The Act brought together structural and regulatory reforms
designed to foster competitive markets, encourage private participation and transform
the state’s role from service provider to regulator. The Act afforded consumers the
ability to directly source their electricity from suppliers using existing networks and
recognised trading as a separate line of business. Despite the potential offered by the
India’s power sector, investors have long been weary of the sector’s bureaucracy and
regulatory complexity. With a critical mass of progress in regulatory reforms and
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soaring economic growth, the Indian power sector is now primed for take off. How
India deals with the remaining challenges of the restructuring process and emerging
fuel shortages will dictate what happens in the years to come.
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RESEARCH METHODOLOGY
Research comprises of defining & redefining problems, formulating hypothesis or

suggested solutions, collecting, organizing & evaluating data, making deductions &
reaching conclusions. In research design we decide about:
• Type of data
• From whom to get data
• How to analyze data
• How to make report
DATA TYPE
Data collected was both Primary and Secondary in nature
RESEARCH DESIGN
STEP 1 - To study the Financial Statement of Tata Power Company.
STEP 2 – Data Analysis of working capital through Estimation of Working Capital.
STEP 3 – Analysis of Inventory Management of Tata Power Company.
STEP 4 – Comparison of Tata Power Company Limited with NTPC
DATA COLLECTION
The information is collected through the PRIMARY SOURCES like:
 Interviewing the employees of the department.

 Getting information from MIS department.
 Discussion with the head of the department Mr. A. M. Dharam (Sr. Manager. Fuel
Procurement)
Data was collected from following SECONDARY SOURCES like
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1. Corporate department
a) Fuel Procurement department
b) Finance department
2. Accounting Department
3. MIS Department
The collected information was edited & tabulated for the purpose of analysis.
TOOLS USED FOR PROJECT
While making the project file various tools were used. These tools helped in doing the
work. These are:-
 Microsoft Excel
 Microsoft Word
 Various analysis tools like Bar Graphs, Pie Graphs, tables
LIMITATIONS OF STUDY
In the due course time, the main limitation was with searching the data. The data was not
completed in the main files of Tata Power Company Limited. The training period of six
weeks was too short to study the organization in detail. In some cases budgets are
available but actual figures are not available for comparison. Tata Power Company
Limited is a big unit so it was very difficult to study the whole budgeted data.
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4.1 COMPUTATION OF WORKING CAPITAL
The two components of working capital (WC) are current assets (CA) and current
liabilities (CL). They have a bearing on the cash operating cycle. In order to calculate
working capital needs, what is required is the holding period of various types of
inventories, the credit collection period and the credit payment period . Working capital
also depends on the budgeted level of activity in terms of productivity / sales. The
calculation of WC is based on the assumption that the productivity is carried on evenly
throughout the year and all costs accrue similarly. As the working capital requirements
are related to the cost excluding depreciation and not to the sale price, WC is computed
with reference to cash cost. The cash cost approach is comprehensive and superior to the
operating cycle approach based on holding period of debtors and inventories and payment
period of creditors.
Estimation of Current Assets –
Raw Material Inventory: The investment in raw materials inventory is estimated on the
basis of,
Raw material inventory = Budgeted Cost of raw Average inventory
Production X material(s) X holding period
(in units ) per unit ( months/days )
12 months / 365 days
For 2008,
Trombay
The investment in Coal
= 2030000(MT) X 2907 (Rs /MT) X 30days = Rs.48.5 crores

365 Days
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The investment in Oil
= 1035000 (MT) X 25194 (Rs /MT) X 20days = Rs.142.88 crores

365 Days
The investment in Gas
= 219000 (MT) X 4547 (Rs /MT) X 12days = Rs.3.27 crores

365 Days
Jojobera
= 1883771.75(MT) X 1422 (Rs /MT) X 30days = Rs.22.1 crores

365 Days
Belgaum
= 41485.35(MT) X 26594.69 (Rs /MT) X 20days = Rs.6.1 crores

365 Days
Debtors: The WC tied up in debtors should be estimated in relation to total cost price
(excluding depreciation), symbolically
Budgeted Cost of sales per Average debt
Credit sale X unit excluding X collection period
( in units ) depreciation ( months / days )
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For 2008,
5512 (Rs. in crores) X 87Days = Rs.1090.8* crores

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* Tariff adjustment Rs. 223 Crores (excluded)
Railways, RCF Ltd. BARC, HPCL, Ordinance Factory, BMC Bhandup Complex,
BPCL, Mahindra & Mahindra and Mumbai Port Trust are debtors of the Tata Power.
Cash and Bank Balances: Apart from WC needs for financing inventories and debtors ,
firms also find it useful to have some minimum cash balances with them . It is difficult to
lay down the exact procedure of determining such an amount. This would primarily based
on the motives for holding cash balances of the business firm , attitude of management
toward risk , the access to the borrowing sources in times of need and past experience ,
and so on .
For Tata Power Company Limited cash and bank balance is Rs.28.70 crores
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Estimation of Current Liabilities –
The working capital needs of business firms are lower to that extent such needs are met
through the current liabilities (other than bank credits) arising in the ordinary course of
business. The important current liabilities (CL), in this context are, trade creditors, wages
and overheads:
Trade Creditors:
Budgeted yearly Raw material Credit period
Production X requirement X allowed by creditors
( in units ) per unit ( months / days )
Note: proportional adjustment should be made to cash purchase of raw materials.
For 2008,
Trombay
For Coal
= 2030000(MT) X 2907 (Rs /MT) X 20days = Rs.32.33 crores

365 Days
For Oil
= 1035000 (MT) X 25194 (Rs /MT) X 30days = Rs.214.32crores

365 Days
For Gas
= 219000 (MT) X 4547 (Rs /MT) X 12days = Rs.3.27crores

365 Days
Jojobera
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= 1883771.75(MT) X 1422 (Rs /MT) X 20days = Rs.14.67 crores

365 Days
Belgaum
= 41485.35(MT) X 26594.69 (Rs /MT) X 30days = Rs.9.1 crores
365 Days
PT Adaro Indonesia, Samtan Mines Indonesia, HPCL, BPCL, IOC, and Gail are
creditors of the Tata Power.
Direct Wages:
Budgeted yearly Direct Labour Average time-lag in

Production X cost per unit X payment of wages
( in units ) ( months / days )
= 180.99(Rs. crores) X 3days = 1.48 crores
365
The average credit period for the payment of wages approximates to a half-a-month in the
case of monthly wage payment: The first days’ wages are , again , paid on the 30th day of
the month , extending credit for 28 days and so in . Average credit period approximates to half-a-
month.
Overheads (Other Than Depreciation and Amortization)
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Budgeted yearly Overhead Average time lag in
Production X cost per unit X payment of overheads
( in units ) ( months / days )
= 232.79(Rs. crores) X 3 days = 2 crores

365
The amount of overheads may be separately calculated for different types of overheads.
In case of selling overheads, the relevant item would be sales volume instead of
production volume.
Determination of Working Capital
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Estimation of Current Assets Amount
(Rs. crores)
1. Minimum desired cash and bank balances 28.70
2. Inventories
Raw Material 222.85
3. Debtors 1090.8
{A} Total Current Assets 1342.35
Estimation of Current Liabilities
4. Creditors 273.69
5. Wages 1.48
6. Overheads 2
{B} Total Current Liabilities 277.17
{A - B} Net Working Capital 1065.18
Add margin for contingency 106.518
Net Working Capital Required 1171.698
4.2 WORKING CAPITAL FINANCE
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Line of Credit
A line of credit is an open-ended loan with a borrowing limit that the business can draw
against or repay at any time during the loan period. This arrangement allows a company
flexibility to borrow funds when the need arises for the exact amount required. Interest is
paid only on the amount borrowed, typically on a monthly basis. A line of credit can be
either unsecured, if no specific collateral is pledged for repayment, or secured by specific
assets such as accounts receivable or inventory. The standard term for a line of credit is 1
year with renewal subject to the lender’s annual review and approval. A line of credit is
designed to address cyclical working capital needs and not to finance long-term assets;
lenders usually require full repayment of the line of credit during the annual loan period
and prior to its renewal. This repayment is sometimes referred to as the annual cleanup.
Two other costs, beyond interest payments, are associated with borrowing through a line
of credit. Lenders require a fee for providing the line of credit, based on the line’s credit
limit, which is paid whether or not the firm uses the line. A second cost is the requirement
for a borrower to maintain a compensating balance account with the bank. Under this
arrangement, a borrower must have a deposit account with a minimum balance equal to a
percentage of the line of credit, perhaps 10% to 20%. If a firm normally maintains this
balance in its cash accounts, then no additional costs are imposed by this requirement.
However, when a firm must increase its bank deposits to meet the compensating balance
requirement, then it is incurring an additional cost. In effect, the compensating balance
reduces the business’s net loan proceeds and increases its effective interest rate.
The lending terms for a line of credit include financial covenants or minimal financial
standards that the borrower must meet. Typical financial covenants include a minimum
current ratio, a minimum net worth, and a maximum debt-to-equity ratio.
The advantages of a line of credit are twofold. First, it allows a company to minimize the
principal borrowed and the resulting interest payments. Second, it is simpler to establish
and entails fewer transaction and legal costs, particularly when it is unsecured.
The disadvantages of a line of credit include the potential for higher borrowing costs
when a large compensating balance is required and its limitation to financing cyclical
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working capital needs. With full repayment required each year and annual extensions
subject to lender approval, a line of credit cannot finance medium-term or long-term
working capital investments.
Accounts Receivable Financing
Loans secured by accounts receivable are a common form of debt used to finance
working capital. Under accounts receivable debt, the maximum loan amount is tied to a
percentage of the borrower’s accounts receivable. When accounts receivable increase, the
allowable loan principal also rises. However, the firm must use customer payments on
these receivables to reduce the loan balance. The borrowing ratio depends on the credit
quality of the firm’s customers and the age of the accounts receivable. A firm with
financially strong customers should be able to obtain a loan equal to 80% of its accounts
receivable. Additionally, a lender may exclude receivables beyond a certain age (e.g., 60
or 90 days) in the base used to calculate the loan limit. Older receivables are considered
indicative of a customer with financial problems and less likely to pay. Since accounts
receivable are pledged as collateral, when a firm does not repay the loan, the lender will
collect the receivables directly from the customer and apply it to loan payments. The bank
receives a copy of all invoices along with an assignment that gives it the legal right to
collect payment and apply it to the loan. In some accounts receivable loans, customers
make payments directly to a bank-controlled account (a lock box).
Firms gain several benefits with accounts receivable financing. With the loan limit tied to
total accounts receivable, borrowing capacity grows automatically as sales grow. This
automatic matching of credit increases to sales growth provides a ready means to finance
expanded sales, which is especially valuable to fast-growing firms.
One disadvantage of accounts receivable financing is the higher costs associated with
managing the collateral, for which lenders may charge a higher interest rate or fees.
Factoring
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Factoring entails the sale of accounts receivable to another firm, called the factor, who
then collects payment from the customer. Through factoring, a business can shift the costs
of collection and the risk of non-payment to a third party. In a factoring arrangement, a
company and the factor work out a credit limit and average collection period for each
customer. As the company makes new sales to a customer, it provides an invoice to the
factor. The customer pays the factor directly, and the factor then pays the company based
on the agreed upon average collection period, less a slight discount that covers the
factor’s collection costs and credit risk. In addition to absorbing collection risk, a factor
may advance payment for a large share of the invoice, typically 70% to 80%, providing
the company with immediate cash flow from sales. In this case, the factor charges an
interest rate on this advance and then deducts the advance amount from its final payment
to the firm when an invoice is collected.
Factoring has several advantages for a firm over straight accounts receivable financing.
First, it saves the cost of establishing and administering its own collection system.
Second, a factor can often collect accounts receivable at a lower cost than a small
business, due to economies of scale, and transfer some of these savings to the company.
Third, factoring is a form of collection insurance that provides an enterprise with more
predictable cash flow from sales.
The disadvantages of factoring are costs may be higher than a direct loan, especially
when the firm’s customers have poor credit that lead the factor to charge a high fee.
Furthermore, once the collection function shifts to a third party, the business loses control
over this part of the customer relationship, which may affect overall customer relations,
especially when the factor’s collection practices differ from those of the company.
Inventory Financing
Inventory financing is a secured loan, in this case with inventory as collateral. Inventory
financing is more difficult to secure since inventory is riskier collateral than accounts
receivable. Some inventory becomes obsolete and loses value quickly, and other types of
inventory, like partially manufactured goods, have little or no resale value. Loan amounts
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also vary with the quality of the inventory pledged as collateral, usually ranging from
50% to 80%.
Lenders need to control the inventory pledged as collateral to ensure that it is not sold
before their loan is repaid. Two primary methods are used to obtain this control: (1)
warehouse storage; and (2) direct assignment by product serial or identification numbers.
Under warehouse arrangement, pledged inventory is stored in a public warehouse and
controlled by an independent party. A warehouse receipt is issued when the inventory is
stored, and the goods are released only upon the instructions of the receipt-holder. When
the inventory is pledged, the lender has control of the receipt and can prevent release of
the goods until the loan is repaid. Since public warehouse storage is inconvenient for
firms that need on-site access to their inventory, an alternative arrangement, known as a
field warehouse, can be established. Here, an independent public warehouse company
assumes control over the pledged inventory at the firm’s site. In effect, the firm leases
space to the warehouse operator rather than transferring goods to an off-site location.
Direct assignment by serial number is a simpler method to control inventory used for
manufactured goods that are tagged with a unique serial number. The lender receives an
assignment or trust receipt for the pledged inventory that lists all serial numbers for the
collateral. The company houses and controls its inventory and can arrange for product
sales. A release of the assignment or return of the trust receipt is required before the
collateral is delivered and ownership transferred to the buyer. This release occurs with
partial or full loan repayment.
While inventory financing involves higher transaction and administrative costs than other
loan instruments, it is an important financing tool for companies with large inventory
assets. This form of financing can be cost effective when inventory quality is high and
yields a good loan-to-value ratio and interest rate.
Term Loan
A term loan is a form of medium-term debt in which principal is repaid over several
years, typically in 3 to 7 years. Term loans have a fixed repayment schedule that can take
33
several forms. Level principal payments over the loan term are most common. In this
case, the company pays the same principal amount each month plus interest on the
outstanding loan balance. A second option is a level loan payment in which the total
payment amount is the same every month but the share allocated to interest and principle
varies with each payment. Finally, some term loans are partially amortizing and have a
balloon payment at maturity. Term loans can be either unsecured or secured; a business
with a strong balance sheet and a good profit and cash flow history might obtain an
unsecured term loan, but many small firms will be required to pledge assets. Moreover,
since loan repayment extends over several years, lenders include financial covenants in
their loan agreements to guard against deterioration in the firm’s financial position over
the loan term. Typical financial covenants include minimum net worth, minimum net
working capital (or current ratio), and maximum debt-to-equity ratios. Finally, lenders
often require the borrower to maintain a compensating balance account equal to 10% to
20% of the loan amount.
The major advantage of term loans is their ability to fund long-term working capital
needs. As discussed at the beginning of the chapter, businesses benefit from having a
comfortable positive net working capital margin, which lowers the pressure to meet all
short-term obligations and reduces bankruptcy risk. Term loans provide the medium-term
financing to invest in the cash, accounts receivable, and inventory balances needed to
create excess working capital. They also are well suited to finance the expanded working
capital needed for sales growth. Furthermore, a term loan is repaid over several years,
which reduces the cash flow needed to service the debt.
The disadvantages of term loans are that they come with higher interest rates and less
financial flexibility. Term loans carry a higher interest rate than short-term loans. When
provided with a floating interest rate, term loans expose firms to greater interest rate risk
since the chances of a spike in interest rates increase for a longer repayment period. Due
to restrictive covenants and collateral requirements, a term loan imposes considerable
financial constraints on a business. Moreover, these financial constraints are in place for
several years and cannot be quickly reversed, as with a 1-year line of credit.
34
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.
Commercial paper is a lower cost alternative to a line of credit with a bank. Once a
business becomes established, and builds a high credit rating, it is often cheaper to draw
on a commercial paper than on a bank line of credit. Nevertheless, many companies still
maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the
line of the credit that does not have a balance. While these fees may seem like pure profit
for banks, if the company ever actually needs to use the line of credit, it would likely be
in serious trouble and have difficulty repaying its liabilities.
It was introduced in India in 1990 with a view to enabling highly rated corporate
borrowers/ to diversify their sources of short-term borrowings and to provide an
additional instrument to investors. Subsequently, primary dealers and satellite dealers
were also permitted to issue CP to enable them to meet their short-term funding
requirements for their operations.
 They are unsecured debts of corporates and are issued in the form of promissory
notes, redeemable at par to the holder at maturity.
 Only corporates who get an investment grade rating can issue CPs, as per RBI
rules.
 It is issued at a discount to face value
35
 Attracts issuance stamp duty in primary issue
 Has to be mandatorily rated by one of the credit rating agencies
 It is issued as per RBI guidelines
 It is held in Demat form
 CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount

invested by a single investor should not be less than Rs.5 lakh (face value).
 Issued at discount to face value as may be determined by the issuer.
 Bank and FI’s are prohibited from issuance and underwriting of CP’s.
 Can be issued for a maturity for a minimum of 15 days and a maximum upto one
year from the date of issue.
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Sources of Working Capital for Businesses
Commercial banks are the largest financing source for external business debt, including
working capital loans, and they offer a large range of debt products. Commercial banks
are multistate institutions that increasingly focus on lending to small business with large
borrowing needs that pose limited risks.
Savings banks and thrift lenders are increasingly providing small business loans, and, in
some regions, they are important small business and commercial real estate lenders.
Commercial finance companies are important working capital lenders since, as non-
regulated financial institutions, they can make higher risk loans.
Asset-based lending in which a lender carefully evaluates and lends against asset
collateral value, placing less emphasis on the firm’s overall balance sheet and financial
ratios.
Trade credit extended by vendors is a fourth alternative for small firms. Trade credit helps
address short-term borrowing needs. Extending payment periods and increasing credit
limits with major suppliers is a fast and cost-effective way to finance some working
capital needs that can be part of a firm’s overall plan to manage seasonal borrowing
needs.
Business development corporations (BDCs) are a second alternative source for working
capital loans.
Venture capital firms also finance working capital, especially permanent working capital
to support rapid growth.
Government and non-profit revolving loan funds also supply working capital loans.
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4.2.1 PRACTICES FOLLOWED IN TATA POWER
Tata Power uses the Inventory loan option as its financial instrument for working capital
loan. Generally Tata Power gets 75% of inventory value as loan amount. Tata Power
takes working capital loan from SBI, ICICI, IDBI and unsecured loan from HDFC, Kotak
Mahindra and Standard Chartered Bank.
Tata Power uses Cash-Credit facility and prefers it over short-term loan. Cash-Credit
Account is a primary method in which Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can be
withdrawn from this account is not restricted to the amount deposited in the account.
Instead, the account holder is permitted to withdraw a certain sum called "limit" or "credit
facility" in excess of the amount deposited in the account. Cash Credits are, in theory,
payable on demand. These are, therefore, counter part of demand deposits of the Bank.
Even though the interest rate on Cash-Credit facility is higher than that on short term
loan, the advantage is that one may repay the entire loan any time as against a short-term
loan where one has to pay a penalty for repaying the loan before the stipulated period.
Under Cash-Credit facility the Bank giving the facility has an obligation to keep the
committed amount with them. The statutory requirement for using the Cash-Credit
facility is that the user of the facility must use at least 60% of the allotted amount. The
interest rate on Cash-Credit facility is PLR+ where the amount above the PLR varies
from bank to bank.
Tata Power also uses Commercial Paper for its working capital funding.
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4.3 INVENTORY MANAGEMENT
Major portion of the inventory is made-up by coal, oil, gas required for generation of
electricity. Tata Power imports all the coal required for generation of electricity from
Indonesia. Tata Power imports 50% of the total oil requirement from Singapore. Tata
Power has a Power generation plant at Trombay. Unit 5 and Unit 8 are coal fired
generation plant.
Overview of Inventory at Tata Power
Coal: Coal is the cheapest fuel amongst the three raw materials. Daily consumption of
coal at Trombay is 9000 MT per day. The contamination due to foreign particles is likely
to happen in coal, particularly in the bottom-most part in the coal yard at the plant
premises.
Oil: Oil is the most safest and stable alternate for coal. It’s a backup fuel. It is costliest
fuel amongst the three raw materials. Contamination due to foreign elements is at
minimum level.
Gas: Gas is cleanest source but the availability is scarce. There is likely variation in
pressure and supply due to problems from the off-shore end.
The major source for electricity generation is coal.
The trombay power plant is ranked 2nd for the safety and eco-friendly standards.
Overview of Supply Chain of Raw Materials
Supply cycle of coal: For 1 Shipment it takes 5 days for loading, 11 days for
transportation from Indonesia to India (Mumbai Port Trust), 5 days for unloading and 11
days for the vessel to return to Indonesia. One cycle takes 32 days. This is under ideal
conditions. During summers each shipment carries 70000 MT of coal and in monsoon
50000 MT of coal.
39
General problems faced in Supply Chain:
1. International Market: Companies enter into a contract with shipping companies

fixing the freight charges for a particular route. Now if the freight market is tight
there is likely unavailability of vessels. This causes delay in procuring the raw
material.
2. Likely threat of shipment being lost and piracy. Though the shipment is insured,
the raw material is lost.
3. Restrictions due to inadequate Infrastructure: Mumbai Port Trust has only 2

anchorages. This restricts the swift movement of loading and unloading. Most of
the big vessels keep waiting on the high seas. Also during low tide the barge
movement is restricted.
4. Political Instability of the source nation (Indonesia from where Tata Power
sources coal has politically fragile environment).
5. High Lead Time.
Generally all over the globe the Electricity companies maintain 60 - 90 days of inventory.
This is done by taking into account the safety, security and reliability factors. In case of
war or other calamities or instability of the nation from where we source the raw material
can throw our calculations out of the window. Singapore government maintains 60 days
of inventory. MERC guidelines also say to maintain inventory for 60 days. At Tata
Power, Coal inventory is hold for 30 days, Oil for 20 days and since we can’t store Gas,
JIT is automatically followed. Gas is utilized depending on the availability.
Tata Power sources the entire requirement of coal from Indonesia. The reason being, the
eco-friendly quality coal in the entire world is found in Indonesia only. The coal available
there is low in sulphur (less than 0.2% of sulphur) and low on ash (less than 3% of ash).
Indian coal has 35% to 40% ash. Since Environmental norms are adhered strictly, the
Trombay plant is ranked 2nd best in the world. In a way a big risk is being taken by Tata
Power to source the entire requirement from only one place.
40
Oil contracts are closed in one month advanced. The lead time is high.
Thus it is difficult to implement the Economic Order Quantity (EOQ) method for
inventory.
Factors Working in favour of Tata Power:
As we can’t store Electricity, there is no average holding period for finished goods.
Likewise there is no average holding period for Work-In-Progress (WIP) because once
the coal or oil is fired, it takes 3 to 4 hours to generate steam and it is fed to the turbines
and electricity is generated. As there is no holding period for Finished Goods and WIP.
The value of current assets reduces.
While calculating Tariff MERC takes into account the holding period of raw materials at
60 days. Now when Tata Power is able to maintain the holding period of below 60 days it
stands to gain. This also acts as source for working capital.
For cost accounting purpose the average cost method is used which evens out the
fluctuations in the coal prices in the international market.
Method to reduce working capital requirement
General Formula
Working Capital = [Raw Material Inventory + Work-In-Progress Inventory + Finished

Goods Inventory + Debtors + Cash and Bank balance] – [Creditors + Wages +
Overheads]
Formula applicable for Power Industry
Working Capital = [Raw Material Inventory + Debtors + Cash and Bank balance] –
[Creditors + Wages + Overheads]
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Possible ways to reduce the working capital,
1. Raw Material: Tata Power holds inventory to for 30 days. It is now planning to
hold the coal inventory for 20 days and oil inventory for 15 days. This will
certainly reduce the current assets side but as discussed about the problems in
supply chain and the generally followed practice over the world, Tata Power is
certainly trading a risky path sacrificing safety and reliability.
2. Debtors: The Days Sales Outstanding (DSO) ratio for 2009 is 80 days. This means
it takes 80 days to realise the sale into cash. Tata Power needs to bring down this
ratio to 30 days or 45 days. This will help to reduce the working capital.
3. Tata Power can also reduce the Cash and Bank balance to statutory minimum
level.
4. Creditors: Currently Tata Power gets 30 credit period on Oil and 12 days on Gas.
Tata Power gets 15 days credit period on coal, thus the company can ask for
extension in credit period.
5. Wages: Paying the wages at 15th of every month earns a credit period of 15 days.
6. Overheads: The overhead expenses must be reduced by effective cost

management.
Ideally Tata Power must look forward to reduce working capital but without
compromising on the Raw material inventory. It is very crucial to maintain adequate
inventory and follow the internationally followed practice. Ample amount of raw material
will provide safety, security and reliability.
Working Capital in Tata Power varies according to demand. During winter the demand is
lower as compared to summer. Thus fewer units are generated and we save on the
working capital.
In monsoon we hold more inventory not because of demand but due to infrastructure
problems associated with shipping industry which causes delay in procurement of raw
material. Thus the actual quantity of raw material held in summer, monsoon and winter
may vary for the same inventory holding period.
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43
44
5.1 RATIO ANALYSIS – TATA POWER
Financial ratios are one of the most common tools of managerial decision making.
Financial ratios involve the comparison of various figures from the financial statements in
order to gain information about a company's performance. It is the interpretation, rather
than the calculation, that makes financial ratios a useful tool for business managers.
Ratios may serve as indicators, clues, or red flags regarding noteworthy relationships
between variables used to measure the firm's performance in terms of profitability, asset
utilization, liquidity, leverage, or market valuation.
There are basically two uses of financial ratio analysis:
o To track individual firm performance over time, and
o To make comparative judgments regarding firm performance.
Firm’s performance is evaluated using trend analysis—calculating individual ratios on a

per-period basis, and tracking their values over time. This analysis can be used to spot
trends that may be cause for concern, such as an increasing average collection period for
outstanding receivables or a decline in the firm's liquidity status. In this role, ratios serve
as red flags for troublesome issues, or as benchmarks for performance measurement.
Another common usage of ratios is to make relative performance comparisons. For

example, comparing a firm's profitability to that of a major competitor or observing how
the firm stacks up versus industry averages enables the user to form judgments
concerning key areas such as profitability or management effectiveness. Users of
financial ratios include parties both internal and external to the firm. External users
include security analysts, current and potential investors, creditors, competitors, and other
industry observers. Internally, managers use ratio analysis to monitor performance and
pinpoint strengths and weaknesses from which specific goals, objectives, and policy
initiatives may be formed.
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5.1.1. Liquidity Ratio: Liquidity refers to the ability of a firm to meet its short-
term financial obligations when and as they fall due. The main concern of
liquidity ratio is to measure the ability of the firms to meet their short-term
maturing obligations. Failure to do this will result in the total failure of the
business, as it would be forced into liquidation. Liquidity Ratios are ratios that
come off the Balance Sheet and hence measure the liquidity of the company as on
a particular day i.e. the day that the Balance Sheet was prepared.
1 Current Ratio: The Current Ratio expresses the relationship between the
firm’s current assets and its current liabilities. Current assets normally include
cash, marketable securities, accounts receivable and inventories. Current
liabilities consist of accounts payable, short term notes payable, short-term
loans, current maturities of long term debt, accrued income taxes and other
accrued expenses (wages). This ratio is a rough indication of a firm's ability to
serve its current obligations. The number of times that short-term assets can
cover short-term debts. Generally, higher the current ratio, greater is the
"cushion" between current obligations and the firm's ability to pay them. The
stronger ratio reflects a numerical superiority of current assets over current
liabilities. However, the composition and quality of current assets is a critical
factor in the analysis of a firm's liquidity. If the ratio is too high then it
indicates inefficient use of capital as current assets generally have the lowest
return. A current ratio of 2:1 or more is considered satisfactory.
FY 05 FY 06 FY 07 FY 08 FY 09
Inventories (Rs. Crore) 297.03 442.26 396.42 473.61 644.14
Sundry Debtors 693.21 1058.2 1478.2 1414.5 1587.97
(Rs. Crore) 3 2 2
Cash & Bank balances 979.6 990.55 1367.7 28.7 45.5
(Rs. Crore) 2
Other Current Assets 12.87 18.06 29.03 59.36 48.53
(Rs. Crore)
Loans & Advances 552.67 463.94 770.4 1899.3 2355
46
(Rs. Crore) 2
Total Current Assets 2535.3 2973.0 4041.7 3875.5 4681.14
(Rs. Crore) 8 4 9 1
Total Current 706.87 731.81 1125.7 1253.8 1419.33
Liabilities (Rs. Crore) 2 7
Current Ratio (times) 3.59 4.06 3.59 3.09 3.3
The formula: Current Ratio = Total Current Assets/ Total Current Liabilities
Current ratio of Tata Power is well above the generally accepted thumb rule of
2:1 for all the Financial Years considered here. The company is in strong
position as far as liquidity is considered to meet its short term obligations.
In 2007 Tata Power Company Limited shows increase in current liabilities by 53.83%
because
a) Increase in sundry creditors by 58.09%
b) Sundry deposits increased by126% in 2007
c) Advance and progress payment increased by 126% as compared to 2006
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d) In current assets the Term deposits with schedule banks as well as deposits
under Escro agreement with credit Suisse became nil in 2008
e) Margin Money deposit with a scheduled bank also became nil in 2008.
In current assets, TATA POWER COMPANY LIMITED has blocked high

part of funds (i.e. 13% of sales) in sundry debtors because collection period
of that company is longer. Whereas in NTPC has less debtors because of they
have good credit policy (their collection period is short).
2 Quick Ratio: This ratio is obtained by dividing the 'Total Quick Assets' of a
company by its 'Total Current Liabilities'. Sometimes a company could be
carrying heavy inventory as part of its current assets, which might be obsolete
or slow moving. Thus eliminating inventory from current assets and then
doing the liquidity test is measured by this ratio. The ratio is regarded as an
acid test of liquidity for a company. It expresses the true 'working capital'
relationship of its cash, accounts receivables, prepaid and notes receivables
available to meet the company's current obligations. The ratio will be lower
than the current ratio, but the difference between the two (the gap) will
indicate the extent to which current assets consist of stock. The ratio expresses
the degree to which a company's current liabilities are covered by the most
liquid current assets. Generally, any value of less than one to one implies a
reciprocal dependency on inventory or other current assets to liquidate short-
term debt.
FY 05 FY 06 FY 07 FY 08 FY 09
Sundry Debtors 693.21 1058.2 1478.2 1414.5 1587.97
(Rs. Crore) 3 2 2
Cash & Bank 979.6 990.55 1367.7 28.7 45.5
balances 2
(Rs. Crore)
48
Other Current 12.87 18.06 29.03 59.36 48.53
Assets(Rs. Crore)
Loans & 552.67 463.94 770.4 1899.3 2355
Advances 2
(Rs. Crore)
Total Quick 2238.3 2530.7 3645.3 3401.9 4037
Assets(Rs. Crore) 5 8 7
Total Current 706.87 731.81 1125.7 1253.8 1419.33
Liabilities 2 7
(Rs. Crore)
Quick Ratio 3.16 3.46 3.24 2.71 2.84
(times)
The formula: Quick Ratio = Total Quick Assets/ Total Current Liabilities
Quick Assets = Total Current Assets (minus) Inventory
49
Quick ratio of Tata Power is well above the generally accepted thumb rule of
1:1 for all the Financial Years considered here. The company is in strong
position as far as liquidity is considered to meet its short term obligations.
1) Tata Power Company Limited shows increase in quick liabilities by 53.81% in

2007 because
a) Increase in sundry creditors by 58.09%.
b) Sundry deposits increased by 126% in 2007.
c) Advance and progress payment increased by 126% as compared
to 2006.
d) In quick assets (under cash and bank balance) the Term deposits
with schedule banks as well as deposits under Escro agreement
with credit Suisse got became in 2008. Margin Money deposit
with a scheduled bank also got became in 2008.
5.1.2. Asset Management Ratio: Asset Management Ratios attempt to measure

the firm's success in managing its assets to generate sales. For example, these
ratios can provide insight into the success of the firm's credit policy and inventory
management. These ratios are also known as Activity or Turnover Ratios. Asset
utilization ratios are especially important for internal monitoring concerning
performance over multiple periods, serving as warning signals or benchmarks
from which meaningful conclusions may be reached on operational issues.
1 Fixed Asset Turnover: The fixed assets turnover ratio measures the
efficiency with which the firm has been using its fixed assets to generate sales.
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Generally, high fixed assets turnovers are preferred since they indicate a better
efficiency in fixed assets utilisation.
FY 05 FY 06 FY 07 FY 08 FY 09
3930.4 4562.7 4715.3 5915.9
Sales (Rs. Crore) 4 9 2 1 7236.23
Fixed Assets 5465.8 5924.7 6229.7 6481.9
(Rs. Crore) 4 4 1 9 8985.86
Fixed Asset
Turnover (times) 0.72 0.77 0.76 0.91 0.81
The formula: Fixed Asset Turnover = Net Sales / Fixed Assets
Fixed Asset Turnover ratio improved steadily from financial year 2005 to
financial year 2008. But it declined in financial year 2009. In the situation we
see here, we will always find that whilst the business is growing, it is growing
51
in such a way that its ratios cannot stay constant. Here we have a 22% increase
in sales and a 39% increase in fixed assets which means that the fixed asset
turnover will get worse.
What this means is that whilst the business has invested heavily in new fixed
assets, turnover has not increased enough to reflect the new investments.
2 Total Asset Turnover: This ratio offers managers a measure of how well the
firm is utilizing its assets in order to generate sales revenue. An increasing
Total Asset Turnover would be an indication that the firm is using its assets
more productively. The asset turnover ratio simply compares the turnover with
the assets that the business has used to generate that turnover. In its simplest
terms, we are just saying that for every Rs. 1 of assets, the turnover is Rs. X.
FY 05 FY 06 FY 07 FY 08 FY 09
3930.4 4562.7
Sales (Rs. Crore) 4 9 4715.32 5915.91 7236.23
Total Assets 9307.6 9631.6 11429.4 12994.4
(Rs. Crore) 7 5 7 3 16076.31
Total Asset
Turnover (times) 0.42 0.47 0.41 0.46 0.45
The formula: Total Asset Turnover = Net Sales / Total Assets
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In the financial year 2009 the turnover increased by 22% but the Total Assets
grew by 24% thus the decline is seen. In the financial year 2007 the turnover
increased by 9% whereas the Total assets grew by 19% because of which there
was a steep fall in the ratio. In the financial year 2006 the turnover increased
by 17% whereas Total assets grew by 3% which explains the steep rise. In
financial year 2009 the company must have made major investments in its
assets that have yet to generate their previous level of sales.
3 Inventory Turnover: Inventory is an important economic variable for

management to monitor since capital invested in inventory have not yet
resulted in any return to the firm. Inventory is an investment, and it is
important for the firm to strive to maximize its inventory turnover. The
inventory turnover ratio is used to measure this aspect of performance. This
ratio is obtained by dividing the 'Total Sales' of a company by its 'Total
Inventory'. The ratio is regarded as a test of Efficiency and indicates the
rapidity with which the company is able to move its merchandise. Inventory
turnover represents the average number of times per year that inventory "turns
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over" or that all goods are sold from inventory. A higher, more rapid turnover
is generally favourable, with goods being sold more quickly. Rapid turnover
may result from good inventory management, but it can be a symptom of an
inventory shortage as well.
A lower, less rapid turnover may indicate overstocking or the presence of

obsolescent goods. Slow inventory turnover often coincides with liquidity
problems, since working capital is tied up in inventory. Slow inventory
turnover may also result from planned seasonal build-ups or from making a
large, bulk purchase to obtain a good price.
FY 05 FY 06 FY 07 FY 08 FY 09
3930.4 4562.7 4715.3 5915.9
Sales (Rs. Crore) 4 9 2 1 7236.23
Inventories
(Rs. Crore) 297.03 442.26 396.42 473.61 644.14
Inventory
Turnover (times) 13.23 10.32 11.89 12.49 11.23
The formula: Inventory Turnover = Net Sales / Inventories
54
The inventory turnover ratio is nearly consistent over the years. In the
financial year 2009 the company was able to rotate its inventory in sales 11.23
times. The best ratio was achieved in fiscal year 2008 and was 12.49. The
reason for decline is that though sales grew by 22% the inventory increased by
36% thus the ratio reduced as compared to previous year.
4 Days Sales Outstanding: The average collection period measures the quality
of debtors since it indicates the speed of their collection. The shorter the
average collection period, the better the quality of debtors, as a short
collection period implies the prompt payment by debtors. The average
collection period should be compared against the firm’s credit terms and
policy to judge its credit and collection efficiency. An excessively long
collection period implies a very liberal and inefficient credit and collection
performance. The delay in collection of cash impairs the firm’s liquidity. On
the other hand, too low a collection period is not necessarily favourable, rather
55
it may indicate a very restrictive credit and collection policy which may curtail
sales and hence adversely affect profit.
FY 05 FY 06 FY 07 FY 08 FY 09
Sundry Debtors 1058.2 1478.2 1414.5
(Rs. Crore) 693.21 3 2 2 1587.97
Sales 3930.4 4562.7 4715.3 5915.9
(Rs. Crore) 4 9 2 1 7236.23
DSO (Days) 64 85 114 87 80
The formula: DSO = Sundry Debtors / (Sales/365)
For the financial year 2009 the company takes approximately 80 days to
convert its accounts receivables into cash. This is an improvement over the
last 2 years where it was 114 days in fiscal year 2007 and 87 days in fiscal
year 2008.
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The major factor contributing to increase in DSO is the Fuel Adjustment Charges
(FAC). MERC while calculating tariff assumes some amount for cost of
generation. Now if the actual amount of cost of generation exceeds the assumed
amount then MERC allows Tata Power to recover the difference from customers
only after 2 months. Because of this guideline the FAC charges for March will be
recovered in May and thus for the financial year ending at March the FAC
amount is booked in debtors account leading to rise in debtors account. This
causes the DSO to increase.
5.1.3. Debt Management Ratio: The degree to which an investor or business is

utilizing borrowed money. Companies that are highly leveraged may be at risk of
bankruptcy if they are unable to make payments on their debt; they may also be
unable to find new lenders in the future. Financial leverage is not always bad,
however; it can increase the shareholders' return on their investment and often
there is tax advantages associated with borrowing. These are extremely important
for potential creditors, who are concerned with the firm's ability to generate the
cash flow necessary to make interest payments on outstanding debt. Thus, these
ratios are used extensively by analysts outside the firm to make decisions
concerning the provision of new credit or the extension of existing credit
arrangements. It is also important for management to monitor the firm's use of
debt financing. The commitment to service outstanding debt is a fixed cost to a
firm, resulting in decreased flexibility and higher break-even production rates.
Therefore, the use of debt financing increases the risk associated with the firm.
Managers and creditors must constantly monitor the trade-off between the
57
additional risk that comes with borrowing money and the increased opportunities
that the new capital provides. Leverage ratios provide a means of such
monitoring.
1 Debt Equity Ratio: This ratio indicates the extent to which debt is covered
by shareholders’ funds. It reflects the relative position of the equity holders
and the lenders and indicates the company’s policy on the mix of capital
funds. Ratio is obtained by dividing the 'Total Liability or Debt ' of a company
by its 'Owners Equity / Net Worth'. The ratio measures how the company is
leveraging its debt against the capital employed by its owners. If the liabilities
exceed the net worth then in that case the creditors have more stake than the
shareowners.
FY 05 FY 06 FY 07 FY 08 FY 09
2331.0
Secured Loans (Rs. Crore) 1059.07 946 1354.3 9 3931.71
2279.0
Unsecured Loans (Rs. Crore) 1800.94 1809 6 706.18 1266.49
3633.3 3037.2
Debt (Rs. Crore) 2860.01 2755 6 7 5198.2
Share Capital (Rs. Crore) 197.92 197.92 197.92 220.72 221.44
5259.4 7237.5
Reserves & Surplus (Rs. Crore) 4363.13 4782.3 2 1 7888.45
Special Appropriation Towards
Project Cost (Rs. Crore) 533.61 533.61 533.61 533.61 533.61
Capital Contribution from Consumers
(Rs. Crore) 41.81 41.81 42.16 46.08 48.86
5555.6 6033.1 8037.9
Equity (Rs. Crore) 5136.47 4 1 2 8692.36
58
Debt Equity Ratio (%) 56 50 60 38 60
The formula:
Debt to Equity Ratio = Total Liabilities / Owners Equity or Net Worth
The company has very less debt. For financial year 2009 for every Rs. 1 of
shareholders equity the company had a debt of 60 paise. This will work in
favour of company if it wishes to raise equity from market for its new projects
by debt funding. Supporting to it is the excellently maintained Current ratio.
2 Debt Asset Ratio: The debt/asset ratio shows how great a proportion of a
company's assets are financed through debt. If the ratio is less than one, than
the majority of the company's assets is financed using equity. If the ratio is
greater than one, the majority of the company's assets are financed using debt.
59
Highly leveraged companies have high debt/asset ratios and could be in
danger if creditors start to demand increased payment on debt. The debt/asset
ratio equals total liabilities divided by total assets.
FY 05 FY 06 FY 07 FY 08 FY 09
Secured Loans 1059.0
(Rs. Crore) 7 946 1354.3 2331.09 3931.71
Unsecured
Loans 1800.9
(Rs. Crore) 4 1809 2279.06 706.18 1266.49
Debt 2860.0
(Rs. Crore) 1 2755 3633.36 3037.27 5198.2
Total Assets 9307.6 9631.6 11429.4 12994.4
(Rs. Crore) 7 5 7 3 16076.31
Debt Asset
Ratio (%) 30 29 32 23 32
Debt Asset Ratio = Total Liabilities / Total Assets
60
For the past five years the debt asset ratio has been consistently below 1 which
indicates that the majority of the company's assets are financed using equity.
3 Times Interest Earned: The times-interest-earned (TIE) ratio, also known as

the EBIT coverage ratio, provides a measure of the firm's ability to meet its
interest expenses with operating profits. The higher this ratio, the more
financially stable the firm and the greater the safety margin in the case of
fluctuations in sales and operating expenses. This ratio is particularly
important for lenders of short-term debt to the firm, since short-term debt is
usually paid out of current operating revenue.
The formula: Times Interest Earned = EBIT / Interest Charges
FY 05 FY 06 FY 07 FY 08 FY 09
952.7
PBIT (Rs. Crore) 2 835.46 723.44 936.64 1140.94
191.4
Interest (Rs. Crore) 4 165.28 189.5 141.86 327.76
TIE (times) 4.98 5.05 3.81 6.6 3.48
61
Indicates how many times a company can cover its interest charges on a pre-
tax basis. Company has very sound TIE ratio over the five years considered.
5.1.4. Profitability Ratio: Profitability Ratios show how successful a company

is in terms of generating returns or profits on the Investment that it has made in
the business. If a business is liquid and efficient it should also be Profitable. A
company should earn profits to survive and grow over a long period of time. The
profitability ratios show the combined effects of liquidity, asset management
(activity) and debt management (gearing) on operating results. The overall
measure of success of a business is the profitability which results from the
effective use of its resources.
1 Operating Profit Margin: Operating profit for a certain period divided by

revenues for that period. Operating profit margin indicates how effective a
62
company is at controlling the costs and expenses associated with their normal
business operations. A business that has a higher operating margin than its
industry’s average tends to have lower fixed costs and a better gross margin,
which gives management more flexibility in determining prices. This pricing
flexibility provides an added measure of safety during tough economic times.
FY 05 FY 06 FY 07 FY 08 FY 09
PBIT (Rs. Crore) 952.72 835.46 723.44 936.64 1140.94
3930.4 4562.7 4715.3 5915.9
Sales (Rs. Crore) 4 9 2 1 7236.23
Operating Profit
Margin (%) 24 18 15 15.8 15.7
The formula: Operating Profit Margin = Operating Profit / Sales
The operating profit margin over the years has been consistently between 20
% and 26 %. Major portion of operating expenses is constituted by fuel and
power purchase costs. Operating profit of Tata Power Company Limited is
63
15.83 % of its sales (where sales are considered 100%) which suggests that
operating expenses of Tata Power are high.
2 Net Profit Margin: The net profit margin ratio tells us the amount of net
profit per Rs.1 of turnover a business has earned. That is, after taking account
of the cost of sales, the administration costs, the selling and distributions costs
and all other costs, the net profit is the profit that is left, out of which they will
pay interest, tax, dividends and so on.
FY 05 FY 06 FY 07 FY 08 FY 09
PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2
3930.4 4562.7 4715.3 5915.9
Sales (Rs. Crore) 4 9 2 1 7236.23
Profit Margin (%) 14 13 15 15 13
The formula: Net Profit Margin = PAT / Sales
64
Over the years the Profit Margin ratio has shown a consistent trend, which
indicates that, the company has managed to keep its cost of sales, the
administration costs, the selling and distributions costs and all other costs to
minimum.
3 Return on Assets: Return on assets (ROA) measures how effectively the

firm's assets are used to generate profits net of expenses. This is an extremely
useful measure of comparison among firms’ competitive performance, for it is
the job of managers to utilize the assets of the firm to produce profits. Return
on assets comes from net profit after taxes divided by total assets. This ratio is
the key indicator of profitability for a firm. It matches operating profits with
the assets available to earn a return. Companies efficiently using their assets
will have a relatively high return while less well-run businesses will be
relatively low.
The ratio measures the percentage of profits earned per Rupee of Asset and
thus is a measure of efficiency of the company in generating profits on its
assets.
FY 05 FY 06 FY 07 FY 08 FY 09
PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2
Total Assets 9307.6 9631.6 11429.4 12994.4
(Rs. Crore) 7 5 7 3 16076.31
ROA (%) 6 6.3 6 6.7 5.7
The formula: Return on Assets = PAT / Total Assets
65
ROA must improve. Old and obsolete assets must be replaced with new assets.
Regular maintenance of assets should be undertaken.
4 Return on Equity: Return on net worth (return on equity) is obtained by

dividing net profit after tax by net worth. This ratio is used to analyze the
ability of the firm’s management to realize an adequate return on the capital
66
invested by the owners of the firm. Tendency is to look increasingly to this
ratio as a final criterion of profitability. Generally, a relationship of at least 10
percent is regarded as a desirable objective for providing dividends plus funds
for future growth.
FY 05 FY 06 FY 07 FY 08 FY 09
PAT (Rs. Crore) 551.36 610.54 696.8 869.9 922.2
5136.4 5555.6 6033.1 8037.9
Equity (Rs. Crore) 7 4 1 2 8692.36
ROE (%) 10.7 10.9 11.5 10.8 10.6
The formula: Return on Equity = PAT / Equity
In the past five financial years the company has obtained more than 10%
returns on the capital invested. Tata Power being a Generation company and is
bound to MERC regulation, under MERC regulation the ROE is capped to
14%.
67
5.1.5. Market Value Ratio: Market Value Ratios relate an observable market
value, the stock price, to book values obtained from the firm's financial
statements.
1 Earnings per Share: Earnings Per Share is the Net Income (profit) of a
company divided by the number of outstanding shares. Earnings per Share are
the single most popular variable in dictating a share's price. EPS indicates the
profitability of a company. Earnings per share (EPS) tells an investor how
much of the company's profit belongs to each share of stock. The figure is
important because it allows analysts to value the stock based on the price to
earnings ratio (or P/E ratio for short).
FY 05 FY 06 FY 07 FY 08 FY 09
PAT (Distributable)
(Rs. Crore) 555.09 575.25 673.97 811.31 967.5
Average Outstanding 19812817 20994553
Shares 198128172 198128172 2 8 221427866
EPS (Rs.) 28.02 29.03 34.02 38.64 43.69
68
EPS has been steadily rising from 2005 to till date which indicates that the
company is making fairly good amount of profits.
69
5.2 COMPANY COMPARISON
NTPC
NTPC (Formerly National Thermal Power Corporation), India's largest power

company, was set up in 1975 to accelerate power development in India. Today, it has
emerged as an ‘Integrated Power Major’, with a significant presence in the entire value
chain of power generation business. NTPC ranked 317th in the ‘2009, Forbes Global
2000’ ranking of the World’s biggest companies. With a current generating capacity of
30,644 MW, NTPC has embarked on plans to become a 75,000 MW company by 2017.
It is an Indian public sector company listed on the

Bombay Stock Exchange although at present the
Government of India holds 89.5% of its equity. The
company's plants (including joint ventures) have a
combined capacity of more than 30,240 MW and
feed distribution grids throughout India; prices are
determined by India's Electricity Act.
NTPC's core business is engineering, construction and operation of power generating

plants and providing consultancy to power utilities in India and abroad.
State-run NTPC, which generates almost 29% of India's power supply, has 22 coal and
gas-fired power plants and interests in four more through its SAIL Power Supply joint
venture.
Tata Power
The Tata Power Company Ltd (Tata Power) was incorporated in 1919. In 2000, The
Andhra Valley Power Supply Co and The Tata Hydro-Electric Power Co Ltd merged
with Tata Power. Tata Power’s core business is to generate, distribute, and transmit
electricity.
70
Tata Power is engaged in generation, distribution, and transmission of power, operating in
Maharashtra, Karnataka, and Jharkhand. The company has a thermal power station at
Trombay, Mumbai and Jojobera, Jharkhand. It has three hydro power plants at Bhira,
Bhivpuri, and Khopoli in Maharahstra. It has an independent power plant at Belgaum,
Karnataka and a wind farm at Ahmednagar, Maharashtra.
71
COMPANY COMPARISON
5.2.1. Liquidity Ratios:

1 Current Ratio:
Company Name FY 05 FY 06 FY 07 FY 08
Tata Power 3.59 4.06 3.59 3.09
NTPC 2.47 3.2 4.17 4.6
Both the companies have a very healthy current ratio and they are in a financially
sound position to meet their short term obligations.
72
1) The current ratio of NTPC shows improvement because current assets are
increased in 2007 by 41.07%. It means NTPC is good in meeting their short
term debts. because
f) sundry debtors increased by 44.31%
g) cash and bank balance increased by 51.17% due to increase in Term
Deposit by 51.51% as well as increase in current account by 453%.
h) But loans and advances decreased by 86.54%
Short term solvency of NTPC is good. NTPC has adequate working capital. But this
is also signifies the NTPC has blocked a high part of funds in Working Capital.
2) At the same time in 2007 Tata Power Company Limited shows increase in current
liabilities by 53.83% because
a) Increase in sundry creditors by 58.09%
b) Sundry deposits increased by126% in 2007
c) Advance and progress payment increased by 126% as compared to 2006
d) In current assets the Term deposits with schedule banks as well as deposits
under Escro agreement with credit Suisse became nil in 2008
e) Margin Money deposit with a scheduled bank also became nil in 2008.
3) In current assets of Tata Power Company Limited has blocked high part of funds
(i.e. 13% of sales) in sundry debtors because collection period of that company is
longer. Whereas in NTPC has less debtors because of they have good credit
policy (their collection period is short).
73
2 Quick Ratio:
Tata Power 3.16 3.46 3.24 2.71
NTPC 2.13 2.73 3.01 4.12
Both the companies have a very healthy quick ratio and they are in a financially
sound position to meet their short term obligations.
74
2) The quick ratio of NTPC shows improvement because quick assets is increased
in 2008 by 42.67% because
a) sundry debtors increased by 138%
b) cash and bank balance increased by 51.17% in 2007 due to
increase in Term Deposit by 51.51% as well as increase in
current account by 453%.
c) But loans and advances decreased by 890% in 2008
3) at the same time Tata Power Company Limited shows increase in quick liabilities
by 53.81% in 2007 because
a) increase in sundry creditors by 58.09%
b) Sundry deposits increased by 126% in 2007
c) Advance and progress payment increased by 126% as compared
to 2006
d) In quick assets (under cash and bank balance) the Term deposits
with schedule banks as well as deposits under Escro agreement
with credit Suisse got became in 2008
e) Margin Money deposit with a scheduled bank also got became in
2008.
75
5.2.2. Asset Management Ratios:
1 Inventory Turnover Ratio:
76
Tata Power 13.23 10.32 11.89 12.49
NTPC 13.01 11.17 13 13.86
1. NTPC leads Tata Power in Inventory Turnover ratio which means that NTPC’s
inventory turns over more times than that of Tata Power.
2. It indicates that 13 times NTPC can replace its inventory or NTPC has 13 times
cycling of inventory during the 2008. It means NTPC are more efficient in
inventory management.
3. But it also signifies that NTPC has lower level of inventory (3% of sales) as
compare to TCS which invites problems of frequency stock outs and loss of
sales and customer goodwill. At the same time Tata Power Company Limited
has good volume of inventory.
77
2 Days Sales Outstanding:
Tata Power (days) 64 85 114 87
NTPC (days) 22 12 14 29
1) Days sales outstanding of NTPC is much better than Tata Power which indicates
that they have an effective credit policy as compared to the credit policy of Tata
Power.
2) The debtors’ collection period is 29 days for NTPC while it is 87 days for Tata
Power Company this shows NTPC has good credit policy which helps to have a
low working capital. It means Receivable cycle of Tata Power is longer.
3) The longer period of Tata Power indicates leniency of the credit policy or
slackness of collection machinery.
78
79
5.2.3. Profitability Ratios:
1 Operating Profit Margin:
Tata Power (%) 24.2 18.3 15.3 15.8
NTPC (%) 31.8 28.7 30.9 31.1
High operating profit margin of NTPC indicates profitability of entire business

after meeting all operating costs including direct and indirect costs of
administrative and distribution expenses. The low operating profit margin of Tata
Power indicates higher operating costs. Major portion of operating expenses is
constituted by fuel and power purchase costs. Operating profit of Tata Power
Company Limited is 15.83 % of its sales (where sales is considered 100%) and
that of NTPC is 31.14% of its respective sales (where sales is considered 100%)
80
which suggests that operating expenses of Tata Power Company Limited are
higher than that of NTPC.
2 Net Profit Margin:
Tata Power (%) 14 13.4 14.7 14.7
NTPC (%) 25 22 21 20
NTPC clearly leads Tata Power here but the trend is a declining one as compared to
Tata Powers which is consistent straight line with slight increase. Net Profit margin
will always be lower than Operating profit margin.
81
3 Return on Assets:
Tata Power (%) 6 6.3 6 6.7
NTPC (%) 8.8 8.1 8.5 8
NTPC has higher ROA than Tata Power which means it generating profits on its
assets more efficiently than Tata Power.
82
4 Return on Equity:
Tata Power (%) 10.7 10.9 11.5 10.8
83
NTPC (%) 13.9 12.9 14.1 14.1
NTPC leads Tata Power in ROE but both the companies are having ROE well
above the generally accepted rule of having at least 10% ROE. ROE is regulated
by MERC and for Generation Company it is capped to 14%.
For the year 2008 the authorised capital of NTPC was Rs. 10,000 Crore and the
Issued, Subscribed and Paid-up capital was Rs. 8,245.5 Crore. For Tata Power
Company Limited the authorised capital for the same period was Rs. 529 Crore
and the Issued, Subscribed and Paid-up capital was Rs. 220.72 Crore.
5.2.4. Debt Management:
1 Debt Equity Ratio:
84
Tata Power (%) 56 50 60 38
NTPC (%) 41 45 50 52
Both Tata Power and NTPC have Debt Equity ratio below 1. Both companies
have current ratio above the generally accepted norm. Thus both the companies
are having good financial status and can easily raise capital via debt funding. The
ideal debt equity ratio is 2:1, thus Tata Power Company Limited can fund their
projects by way of debt financing.
2 Times Interest Earned:
85
Tata Power 4.98 5.05 3.81 6.60
NTPC 4.35 4.26 5.43 6.43
Amount available to cover the interest payment as and when they are due is
Times Interest Earned. For financial year 2008 both the companies have nearly 6
times the interest amount, thus they can easily make the interest payments and the
lender need not worry of defaulting.
86
3 Debt Asset Ratio:
Tata Power (%) 31 29 32 23
NTPC (%) 26 28 30 30
For both the companies the ratio is less than 1 which indicates that in both the
companies the assets are equity funded.
87
LIMITATIONS
Working capital and Analysis of Financial Statements is powerful tool of determining

company’s strength and weakness. But the analysis is based on the information available
in the financial statements, which are as follows:
 It is only a study of interim report.
 Working capital study is only based upon monetary information and non-
monetary factors are ignored.
 It does not consider change in price level.
 As working capital is prepared on the basis of going concern, it does not give
extract position. Thus accounting concept and conventions causes a serious
limitation to financial analysis.
 Analysis is only a mean and not an end in itself. Different people may interpret
the same analysis in different ways.
 Due to non availability of annual report of 2009 we could not compare NTPC and
Tata Power.
88
89
RECOMMENDATIONS AND SUGGESTIONS
• Tata Power Company Limited can match the gigantic NTPC if it undertakes
certain measures to utilize the resources in an optimum manner.
• Considering the Liquidity part, both the companies have the current and the quick
ratios well above the generally accepted norm. Both are financially stable to meet
the short term obligations.
• Under Asset Management, Tata Power needs to improve the day’s sales
outstanding ratio. A large part of its working capital is blocked by debtors. Tata
Power needs to revise its credit policy and improve its collection mechanism.
• Efforts are needed to be taken to increase the operating profit and the net profit by
reducing operating expenses. Hedging can be tried as an option against rising fuel
price. This might help to control the operating expenses.
• Efforts must be taken to use the assets in optimum way to get better returns.
Regular maintenance, replacing the old obsolete assets with new assets will
facilitate optimum utilization.
• Efforts must be taken to improve ROE. But ROE is regulated by MERC. As
stipulated by MERC the ROE for generation is 14%, for Transmission is 14% and
for Distribution is 16%. Thus Tata Power is bound to this rule.
• With a healthy current ratio and quick ratio, the debt equity ratio can be raised up
to the generally accepted norms and all the upcoming projects can be debt funded.
Also the funding of assets can be done by debt financing.
90
91
CONCLUSION
Summarizing the overall project work done during these 2 months, it can be said that the
project was a good learning experience. Through it, I got an opportunity to communicate
with entire staff of Finance department as well as MIS department. The entire staff of
finance department was very cooperative and they helped me in all the phases of my
project. I also got the opportunity to learn about inventory management at the same time
problems faced by the Tata Power Company.
These two months has given me an opportunity to conceptualize and implement a new
initiative. I learned how to interpret working capital and ratio analysis with the help of
guidance given by Mr. Amit Kundu Head of Accounts Department.
There were lot of difficulties in the beginning of the project but slowly it got the grip on
the road towards future.
92
93
BIBLIOGRAPHY
WEBSITES:
• www.allbusiness.com
• www.moneycontrol.com
• www.capitalmarket.com
• www.investopedia.com
• www.indexmundi.com
• www.energywatch.org.in
• www.ntpc.co.in
WEB PAGES:
• http://www.allbusiness.com/accounting-reporting/reports-statements-
cash/391085-1.html
• http://www.moneycontrol.com/india/stockpricequote/powergenerationdistribution
/tatapowercompany/15/05/balancesheet/marketprice/TPC
• http://www.investopedia.com/terms/b/balancesheet.asp
• http://www.excelsia.ch/htmlgb/blog/index.php?entry=entry090108-234052
• http://www.indexmundi.com/India/electricity_production.html
• http://www.topnews.in/business-news/power-sector.html
• http://www.tatapower.com/investor-relations/pdf/Financial-statistics-2008-09.pdf
• http://www.sebi.gov.in/dp/ntpc.pdf
ARTICLES & MAGAZINES
• http://www.ibef.org/Attachment/Investment%20opportunities%20in%20Power
%20Sector.pdf
• Annual Report of Tata power Company
94
• Annual Report of NTPC
LITERATURE REFERENCE:
• Brigam and Houston – Financial management

• Prasanna Chandra – Financial Management
• Augustine .A(2007), “Modeling Indian Power Sector”, pp: 173-181.
• www.cs.utexas.edu/~achal/IndianPowerSector.pdf
• Banerjee. R (2004), “Comparison of options for distributed generation in India”,

Journal of Energy Policy, Elsevier - Article in Press, 6th June, 2004, Vol – 37 (1),
pp: 1-11.
• http://www.whrc.org/Policy/COP/India/Banerejee_Energy%20Policy%20(in
%20press).pdf
• Kumar. S, A. Khetan & B. Thapa (2005),“Indian Power Sector – Emerging

Challenges to Growth”. Reprinted from World Power, pp: 1-5.
• http://www.icfi.com/Markets/Energy/doc_files/indian-power-sector.pdf
95
96
Excel Sheet
Calculations for Company Comparison
Liquidity Ratios
Current Ratio
TPC FY 05 FY 06 FY 07 FY 08
(Rs. crores) (Rs. crores) (Rs. crores) (Rs. crores)
Inventories 297.03 442.26 396.42 473.61
Sundry Debtors 693.21 1058.23 1478.22 1414.52
Cash & Bank balances 979.6 990.55 1367.72 28.7
Other Current Assets 12.87 18.06 29.03 59.36
Loans & Advances 552.67 463.94 770.4 1899.32
Total Current Assets 2535.38 2973.04 4041.79 3875.51
Total Current 706.87 731.81 1125.72 1253.87
Liabilities
Current Ratio 3.59 4.06 3.59 3.09
NTPC FY 05 FY 06 FY 07 FY 08
Inventories 1781.9 2340.5 2510.2 2675.7
Sundry Debtors 1374.7 867.8 1252.3 2982.7
Loans & Advances 2699.3 3028.7 4047.6 4035.4
Total Current Assets 12910.6 15724.5 22182.7 25548.8
Total Current 5230.6 4910.2 5323.5 5548.3
Liabilities
Current Ratio 2.47 3.2 4.17 4.6
Quick Ratio
97
Sundry Debtors 693.21 1058.23 1478.22 1414.52
Loans & Advances 552.67 463.94 770.4 1899.32
Total Quick Assets 2238.35 2530.78 3645.37 3401.9
Total Current 706.87 731.81 1125.72 1253.87
Liabilities
Quick Ratio 3.16 3.46 3.24 2.71
NTPC FY 05 FY 06 FY 07 FY 08
Sundry Debtors 1374.7 867.8 1252.3 2982.7
Loans & Advances 2699.3 3028.7 4047.6 4035.4
Total Quick Assets 11128.7 13384 19672.5 22873.1
Total Current 5230.6 4910.2 5323.5 5548.3
Liabilities
Quick Ratio 2.13 2.73 3.01 4.12
Asset Management Ratios
Inventory Turnover
98
FY 05 FY 06 FY 07 FY 08
TPC (Rs. crores) (Rs. crores) (Rs. crores) (Rs. crores)
Sales 3930.44 4562.79 4715.32 5915.91
Inventories 297.03 442.26 396.42 473.61
Inventory Turnover 13.23 10.32 11.89 12.49
FY 05 FY 06 FY 07 FY 08
NTPC (Rs. crores) (Rs. crores) (Rs. crores) (Rs. crores)
Sales 23188.5 26145.2 32635.8 37097.4
Inventories 1781.9 2340.5 2510.2 2675.7
Inventory Turnover 13.01 11.17 13 13.86
Days Sales Outstanding
FY 05 FY 06 FY 07 FY 08
Sundry Debtors 693.21 1058.23 1478.22 1414.52
Sales 3930.44 4562.79 4715.32 5915.91
DSO (Days) 64 85 114 87
FY 05 FY 06 FY 07 FY 08
Sundry Debtors 1374.7 867.8 1252.3 2982.7
Sales 23188.5 26145.2 32635.8 37097.4
DSO (Days) 22 12 14 29
Profitability Ratios
Operating Profit Margin
99
FY 05 FY 06 FY 07 FY 08
PBIT 952.72 835.46 723.44 936.64
Sales 3930.44 4562.79 4715.32 5915.91
Operating Profit
Margin (%) 24 18 15 15.8
FY 05 FY 06 FY 07 FY 08
PBIT 7376.5 7510 10097.8 11552.8
Sales 23188.5 26145.2 32635.8 37097.4
Operating Profit 31.8 28.7 30.9 31.1
Margin (%)
Net Profit Margin
FY 05 FY 06 FY 07 FY 08
PAT 551.36 610.54 696.8 869.9
Sales 3930.44 4562.79 4715.32 5915.91
Profit Margin (%) 14 13 15 15
FY 05 FY 06 FY 07 FY 08
PAT 5807 5820.2 6864.7 7414.8
Sales 23188.5 26145.2 32635.8 37097.4
Profit Margin (%) 25 22 21 20
Return on Assets
FY 05 FY 06 FY 07 FY 08
100
PAT 551.36 610.54 696.8 869.9
Total
Assets 9307.67 9631.65 11429.47 12994.43
ROA (%) 6 6.3 6 6.7
FY 05 FY 06 FY 07 FY 08
PAT 5807 5820.2 6864.7 7414.8
Total
Assets 65948.3 71737.1 80768.8 89388.0
ROA (%) 8.8 8.1 8.5 8
Return on Equity
FY 05 FY 06 FY 07 FY 08
PAT 551.36 610.54 696.8 869.9
Equity 5136.47 5555.64 6033.11 8037.92
ROE (%) 10.7 10.9 11.5 10.8
FY 05 FY 06 FY 07 FY 08
PAT 5807 5820.2 6864.7 7414.8
Equity 41776.1 44958.7 48596.8 52638.6
ROE (%) 13.9 12.9 14.1 14.1
Debt Management Ratios
Debt Equity Ratio
101
Secured Loans 1059.07 946 1354.3 2331.09
Unsecured Loans 1800.94 1809 2279.06 706.18
Debt 2860.01 2755 3633.36 3037.27
Share Capital 197.92 197.92 197.92 220.72
Reserves & Surplus 4363.13 4782.3 5259.42 7237.51
Special Appropriation Towards
Project Cost 533.61 533.61 533.61 533.61
Capital Contribution from
Consumers 41.81 41.81 42.16 46.08
Equity 5136.47 5555.64 6033.11 8037.92
Debt Equity Ratio (%) 56 50 60 38
FY 05 FY 06 FY 07 FY 08
Secured Loans 4440.7 5732.7 6822.9 7314.7
Unsecured Loans 12647.1 14464.6 17661.5 19875.9
Debt 17087.8 20197.3 24484.4 27190.6
Share Capital 8245.5 8245.5 8245.5 8245.5
Reserves & Surplus 33530.8 36713.2 40351.3 44393.1
Equity 41776.3 44958.7 48596.8 52638.6
Debt Equity Ratio (%) 41 45 50 52
Times Interest Earned
FY 05 FY 06 FY 07 FY 08
PBIT 952.72 835.46 723.44 936.64
Interest 191.44 165.28 189.5 141.86
TIE 4.98 5.05 3.81 6.6
FY 05 FY 06 FY 07 FY 08
PBIT 7376.5 7510 10097.8 11552.8
Interest 1695.5 1763.2 1859.4 1798.1
TIE 4.35 4.26 5.43 6.43
Debt Asset Ratio
FY 05 FY 06 FY 07 FY 08
Secured Loans 1059.07 946 1354.3 2331.09
Unsecured Loans 1800.94 1809 2279.06 706.18
102
Debt 2860.01 2755 3633.36 3037.27
Total Assets 9307.67 9631.65 11429.47 12994.43
Debt Asset Ratio (%) 0.3 0.29 0.32 0.23
FY 05 FY 06 FY 07 FY 08
Secured Loans 4440.7 5732.7 6822.9 7314.7
Unsecured Loans 12647.1 14464.6 17661.5 19875.9
Debt 17087.8 20197.3 24484.4 27190.6
Total Assets 65948.3 71737.1 80768.8 89388.0
Debt Asset Ratio (%) 0.26 0.28 0.30 0.30
103

Main Project On Working Capital

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Main Project On Working Capital

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1

1.1 INTRODUCTION TO STUDY

 To understand Working Capital Policies.

 To analyse Inventory management of Tata Power Company Limited

 To study the general problems faced in Supply Chain

 To analyse the financial statement of Tata Power

 To do analysis of company’s performance

Company name Tata Power Company Ltd

Year of Establishment 1919

Chairman Mr. R N Tata

Industry Electricity generation

Production Capacity 2300MW

Annual Generation 14807 MUs

 Being a Partner of Choice and exceeding stakeholder expectations.

 Ensuring profitable growth and value to stakeholders.

 Innovating and deploying cutting edge solutions based on eco-friendly

 Relentlessly pursuing opportunities, capitalising on synergies in the power and

 Being an Employer of Choice and creating a culture of empowerment and high

 Caring for the safety of the environment and well-being of customers,

 Consolidated revenues from operations up by 61% at Rs. 17,587.53 crores.

 Consolidated PAT at Rs. 1,218.74 crores rose an increase of 16%.

 Annual Generation highest at 14807 MUs.

 Commissioned 250 MW ‘Unit 8’ at the Trombay Thermal Power Station.

 Commissioned additional 80.6 MW wind power capacity in Gujarat, Karnataka

 The Company’s consolidated revenues from operations increased 61.49% to Rs.

 Tata Power Trading Company Limited (TPTCL): TPTCL’s revenues increased

 Powerlinks Transmission Limited (Powerlinks): The revenues of Powerlinks, the

Operational Highlights of the Year

 In a major expansion of distribution network, power supply has been made

 250 MW expansion Project at Trombay, Unit 8:

 120 MW Power Project at Haldia:

120 MW Power House # 6 for Tata Steel Works, Jamshedpur:

A 120 MW power plant is being constructed at the Company’s existing site at

 4,000 MW, Mundra Ultra Mega Power Project on Fast Track

 Wind Farm Projects:

 Civic Award in the category social development instituted by Bombay Chambers

Research comprises of defining & redefining problems, formulating hypothesis or

Data collected was both Primary and Secondary in nature

STEP 1 - To study the Financial Statement of Tata Power Company.

STEP 2 – Data Analysis of working capital through Estimation of Working Capital.

STEP 3 – Analysis of Inventory Management of Tata Power Company.

STEP 4 – Comparison of Tata Power Company Limited with NTPC

The information is collected through the PRIMARY SOURCES like:

 Interviewing the employees of the department.

Data was collected from following SECONDARY SOURCES like

TOOLS USED FOR PROJECT

Estimation of Current Assets –

Raw material inventory = Budgeted Cost of raw Average inventory

Production X material(s) X holding period

(in units ) per unit ( months/days )

12 months / 365 days

The investment in Coal

= 2030000(MT) X 2907 (Rs /MT) X 30days = Rs.48.5 crores

= 1035000 (MT) X 25194 (Rs /MT) X 20days = Rs.142.88 crores

= 219000 (MT) X 4547 (Rs /MT) X 12days = Rs.3.27 crores

The investment in Coal

= 1883771.75(MT) X 1422 (Rs /MT) X 30days = Rs.22.1 crores

The investment in Oil

= 41485.35(MT) X 26594.69 (Rs /MT) X 20days = Rs.6.1 crores

Budgeted Cost of sales per Average debt

Credit sale X unit excluding X collection period

( in units ) depreciation ( months / days )

12 months / 365 days