ANALYSIS OF FINANCIAL STATEMENTS

OF NTPC
Winter Project submitted to Asia-Pacific Institute of Management, New Delhi for the partial fulfilment of the requirements of the two years full-time

POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)

BY

ME
Roll No. :

ASIA-PACIFIC INSTITUTE OF MANAGEMENT 3&4, Institutional Area, Jasola, New Delhi 110025

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DECLERATION
I hereby declare that that the project Report titled “Analysis of Financial Statements of NTPC” is my own work and has been carried out under the guidance of Prof. Shiladitya Dasgupta, Faculty, Asia-Pacific Institute of Management, New Delhi. All care has been taken to keep this Report error free and I sincerely regret for any unintended discrepancies that might have crept into this report.

Thank You Mrinalini

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ACKNOWLEDGEMENT
I express my heartiest feelings of gratitude to my supervisor Prof. Shiladitya Dasgupta, Faculty- Finance, ASIA PACIFIC INSTITUTE OF MANAGEMENT, New Delhi for his keen interest, constant encouragement, and sympathetic attitude, parental advice at every step that enabled us to face and encounter all the difficulties that came in our way to reach this stage. I shall be highly grateful to him always. I would also like to pay thanks to Almighty God for giving us power and the mind to do work efficiently and effectively. At last but not the least we are thankful to all the library members and staff of the computer lab department for every possible help.

CONTENTS
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CHAPTER ABSTRACT 1. 1.1 1.2 1.3 1.4 2. 2.1 2.2 2.3 2.4 3. 3.1 3.2 4. 4.1 4.2 5. 5.1 5.2 5.3 INTRODUCTION Background Objectives Rational/Relevance of the Study Scope and Uses of Study CONCEPT AND DEVELOPMENT About NTPC Introduction to Ratio Analysis Advantages and Limitations of Ratio Analysis Various Types of Ratios METHODOLOGY Methodology (Sampling details) Methodology (Various Ratios) DATA ANALYSIS AND FINDINGS Analysis of Classified Data Findings / Results LIMITATIONS, SUGGESTIONS AND CONCLUSION Limitations of the Study Suggestions Conclusion

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1 to 10 1 3 3

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APPENDICES
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Appendix 1 BIBLIOGRAPHY

Abstract

Introduction
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Scenario of Power in India
Growth of economy calls for watching the rate of growth in infrastructure facilities. Power sector is one of the major aspects of this infrastructure building. Some prominent people like the Ex Chairman of GE Jack Welch have gone to the extent of saying, “you don’t have a chance to stand in the 21st century without lots of power………Without this you miss the next revolution.” Moreover, the growth rate of demand for power in developing countries is generally higher than that of GDP. In India, the elasticity ratio was 3.06 in 1st plan, & peaked at 5.11 during 3rd plan and came down to 1.65 in 80’s. For 90’s a ratio of around 1.5 was projected. Hence, in order to support a growth of GDP of around 7%, the rate of growth of power supply of 10% is required. If we look at current scenario, electricity consumption in India has more than doubled in the last decade, outpacing the economic growth. If we analyze the various statistics of Indian power sector, we will find that the generating capacity has gone up tremendously from a meager 1712MW in 1950 to a whooping 147000MW today. The critical role played by the power industry in the economic progress of a country has to be emphasized. A self sufficient power industry is vital for a nation to achieve economic stability

Indian Power Industry Before Independence

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The British controlled the Indian power industry firmly before Independence. Then legal and policy framework was contributing to private ownership, with not much regulation with regard to operational safety.

Post Independence
Immediately after Independence, the country was faced with capacity restraint. India adopted a socialist structure for economic growth and all the major industries were controlled by public sector enterprises. By 1970's, India had nationalized most of its energy assets, due to its commitment to social goals. By the late 1980's, the Indian economy felt the strain of the socialist agenda followed since independence. Faced with a serious deterioration in public finance and balance of payment crisis, the Union government as part of its policy of economic liberalization allowed greater investment by private sector in the power industry. The electricity sector in India is predominantly controlled by Government of India's public sector undertakings (PSUs). Major PSUs involved in the generation of electricity include National Thermal Power Corporation (NTPC), National Hydroelectric Power Corporation (NHPC) and Nuclear Power Corporation of India (NPCI). Besides PSUs, several state-level corporations, such as Maharashtra State Electricity Board (MSEB), are also involved in the generation and intra-state distribution of electricity. The Power Grid Corporation of India is responsible for the inter-state transmission of electricity and the development of national grid. India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. In March 2009, the installed power generation capacity of India stood at 147,000 MW while the per capita power consumption stood at 612 kWh. The country's annual power production increased from about 190 billion kWH in 1986 to more than 680 billion kWH in 2006. The Indian government has set an ambitious target to add approximately 78,000 MW of installed generation capacity by 2012. The total demand for electricity in India is expected to cross 950,000 MW by 2030. Electricity losses in India during transmission and distribution are extremely high and vary between 30 to 45%. In 2004-05, electricity demand outstripped supply by 7-11%. Due to shortage of electricity, power cuts are common throughout India and this has adversely effected the country's economic growth.
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Generation
Grand Total Installed Capacity is 147,402.81 MW

Thermal Power
 Current installed capacity of Thermal Power (as of 12/2010) is 93,392.64 MW which

is 63.3% of total installed capacity.
 Current installed base of Coal Based Thermal Power is 77,458.88 MW which comes

to 53.3% of total installed base.
 Current installed base of Gas Based Thermal Power is 14,734.01 MW which is 10.5%

of total installed base.
 Current installed base of Oil Based Thermal Power is 1,199.75 MW which is 0.9% of

total installed base. The state of Maharashtra is the largest producer of thermal power in the country.

Hydro Power
India was one of the pioneering states in establishing hydro-electric power plants, The power plant at Darjeeling and Shimsa (Shivanasamudra) was established in 1898 and 1902 respectively and is one of the first in Asia. The installed capacity as of 2008 was approximately 36647.76. The public sector has a predominant share of 97% in this sector.

Nuclear Power
Currently, 17 nuclear power reactors produce 4,120.00 MW (2.9% of total installed base).

Renewable Power
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Current installed base of Renewable energy is 13,242.41 MW which is 7.7% of total installed base with the southern state of Tamil Nadu contributing nearly a third of it (4379.64 MW) largely through wind power.

Power for ALL by 2012
The Government of India has an ambitious mission of POWER FOR ALL BY 2012. This mission would require that our installed generation capacity should be at least 200,000 MW by 2012 from the present level of 144,564.97 MW. Power requirement will double by 2020 to 400,000MW. Today’s environment is a tough environment to survive, with the new industries and the new sectors coming up so strongly and financially sound. But to gain an extra edge over others they ought to have an extra or special added advantage. “Our people are our most important asset.” Nearly every organization report contains a phrase like this & for good reason. Today, the last great source of competitive advantage is human capital.

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Rationale The purpose of the research was to criteria on which investment of the company is raised every year and a favorable rate of return is arrived at, increasing the net result of the company as per their budget. Objective The study is aimed at:  To gain the overall idea about the organization.  To find out the financial performance of the organization  To find out the future requirement of finance in business

Scope of the Study
The study on the financial statements will help the interested parties to know about the overall financial health of the company. The ratios are helpful to forecast the future of the organization based on the past performance.

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Company Profile

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Background of NTPC
NTPC – a global giant in power sector
NTPC Limited is the largest power generating company of India. A public sector company, it was incorporated in the year 1975 to accelerate power development in the country as a wholly owned company of the Government of India. At present, Government of India holds 89.5% of the total equity shares of the company & the balance 10.5% is held by FIIs, Domestic Banks, Public and others. Today, it has emerged as an ‘Integrated Power Major’, with a significant presence in the entire value chain of power generation business. Based on 1998 data, carried out by Data monitor UK, an ISO 9001:2000 certified company, NTPC is the 6th largest in terms of thermal power generation & the second most efficient in terms of capacity utilization amongst the thermal utilities in the world. Within a span of 33 years, NTPC has emerged as a truly national power company, with power generating facilities in all the major regions of the country. Driven by its vision to lead, it has charted out an ambitious growth plan of becoming a 75000 MW plus company by 2017.

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Vision
“A world class integrated power major, powering India’s growth, with increasing global presence."

Mission
“Develop and provide reliable power, related products and services at competitive prices, integrating multiple energy sources with innovative and eco-friendly technologies and contribute to society.”

Core Values – BCOMIT B – Business Ethics C – Customer Focus (External & Internal) O – Organizational & Professional Pride M – Mutual Respect & Trust I – Innovation & Speed T – Total Quality for Excellence
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BOARD OF DIRECTORS

The Management of the Company is vested with the Board of Directors. In terms of the Articles of Association of the Company the Board of Directors can have minimum four Directors and maximum twenty Directors.
The Composition of the Board of Directors is given below

Name A K Singhal B P Singh Shanti Narain K Dharmarajan Kanwal Nath A K Sanwalka I C P Keshari D K Jain S P Singh I J Kapoor M N Buch P K Sengupta M Govinda Rao Adesh C Jain Santosh Nautiyal Rakesh Jain Arup Roy Choudhury

Designation Director (Finance) Director (Projects) Director Director Director Director Director Director (Technical) Director (Human Resources) Director (Commercial) Director Director Director Director Director Director Chairman and Managing director 14

N N Misra

Director (Operations)

Market Capitalisation of Power Sector Companies (Generation and Distribution)
Market Cap Company Name NTPC Power Grid Corp Reliance Power NHPC Tata Power Adani Power Neyveli Lignite Reliance Infra JSW Energy Torrent Power SJVN Jaiprakash Pow IndiaBPower GVK Power KSK Energy Vent CESC BF Utilities Guj Ind Power Orient Green Entegra Indowind Energy Energy Dev Suryachakra Pow (Rs. cr) 1,45,367.54 44,561.11 32,216.37 29,091.26 28,396.18 25,495.51 16,768.71 16,465.07 11,644.39 10,431.66 8,686.92 8,298.89 4,692.69 4,390.20 4,095.21 3,720.78 2,689.47 1,321.94 1,134.84 254.86 96.25 89.93 88.28 Market Cap in % 36.34206126 11.14033153 8.054131563 7.272850273 7.099079431 6.373908413 4.192197832 4.116287464 2.911111619 2.607927648 2.171740533 2.074732562 1.17317819 1.097555323 1.023807465 0.930199511 0.672370761 0.330486603 0.283711376 0.063715309 0.024062617 0.022482609 0.022070107

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Graphical Presentation of Market Capitalisation

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Achievements
Recognizing its excellent performance and vast potential, Government of the India has identified NTPC as one of the jewels of Public Sector 'Navratnas'- a potential global giant. A) NTPC ranked 317th in the ‘2009, Forbes Global 2000’ ranking of the World’s biggest companies. B) NTPC has been rated as one of the top most “Best Employer” of the country for the year 2003, 2004 & 2005 in a row. C) It has also been rated as one of the “Best Companies to Work for in India” by Mercer HR Consulting- Business Today Survey 2004, it has developed into a multi-location and multi-fuel company over the past three decades. D) NTPC has been awarded No.1, Best Workplace in India among large organizations for the year 2008, by the Great Places to Work Institute, India Chapter in collaboration with The Economic Times. E) Leadership Award for CMD, NTPC in the 4th Global Leadership Summit by Amity University for Sectoral Excellence in Power industry for his outstanding contribution to the growth of Indian business & bringing glory to the country through his pioneering leadership. F) Ranked #1 independent power producer in Asia in the THIRD ANNUAL PLATTS TOP 250 GLOBAL ENERGY COMPANY AWARDS 2008 for outstanding Global financial & Industrial performance at the award ceremony in Singapore. The corporation has been simultaneously ranked #15, overall in Asia amongst the energy companies. G) NTPC’s excellence in executing power projects & its initiative in Decentralized Distributed Power Generation has been recognized and awarded at IEEMA Power Awards 2008. NTPC Vindhyachal Stage-III (2x 500MW) has been conferred the IPMA SILVER MEDAL for Project Excellence by International Project Management Association, at the IPMA Congress, held in Rome, Italy, for implementation of project in record time & achieving excellent environmental, economic performance and giving outstanding support to the local community.
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Some major awards given to the Company in the areas of environment management & Corporate Social Responsibility include:
1) 2nd India Power Awards 2009

Organized by the Council of Power Utilities and KW Conferences Pvt. Ltd. The award was received by Shri A. C. Chaturvedi, ED(R&R, Safety & CSR) on 17th November, 2009 at the India Habitat Centre, New Delhi NTPC awarded in the category of 'Social and Community Impact' of 2nd India Power Awards 2009 for pioneering in Corporate Social Responsibility strides.
2) CII ITC Sustainability Award

Instituted by CII-ITC Centre of Excellence for Sustainable Development The award was received by Shri R.C. Shrivastav, Director(HR) from Mr. Jairam Ramesh, Hon'ble Minister of Environment & Forests during the presentation ceremony held on 26-112009 at India Habitat Centre, New Delhi. NTPC – CSR has been conferred with CII-ITC Sustainability Award for the Commendation for Significant Achievement among Large Business Organizations for the year 2009. NTPC was a worthy winner after a rigorous two-stage assessment including a site visit, followed by scrutiny by the Awards Jury.

SWOT Analysis Strengths: 1. Good corporate Image.
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2. Complete range of product for transmission & distribution. 3. Established brand name with executive oriented program. 4. Strong & wide networks of manpower across India. 5. Considered to be having technology & design ability. Weakness: 1. The procurement process in the companies is cumbersome and subject to auditing. 2. Low exposure to the needs & dynamics of distribution business. 3. Role clarity on the requirement of being an equipment supplier or a solution provider. As there are very few supplier of equipment manufacturing plant. Opportunities: 1. Huge Investment leading to greater demand of goods and services. 2. Demand leading to Industry operating at full & over capacity. 3. Better Price realization. 4. Early birds to learn faster and thus achieve repeat orders. Policy to bid from ultra mega power plant. 5. Vertical integration for supply chain management of coal by acquiring coal blogs. Threats: 1. Purchases preference may be extended to distribution sector. 2. Increase in no. of small contractors leading to price war. 3. Emergence of competitors in the market like Schneider, Reliance, Tata etc. 4. Change in government policies for open trade or stock trading or energy trading. 5. Reduce the time lag.

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Ratio Analysis

INTRODUCTION

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Financial analysis is the process of identifying the financial strengths and weaknesses of the firm and establishing relationship between the items of the balance sheet and profit & loss account. Financial ratio analysis is a fascinating topic to study because it can teach us so much about accounts and businesses. When we use ratio analysis we can work out how profitable a business is, we can tell if it has enough money to pay its bills and we can even tell whether its shareholders should be happy! Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In addition to ratio analysis being part of an accounting and business studies syllabus, it is a very useful thing to know anyway! The overall layout of this section is as follows: We will begin by asking the question, what do we want ratio analysis to tell us? Then, what will we try to do with it? This is the most important question, funnily enough! The answer to that question then means we need to make a list of all of the ratios we might use: we will list them and give the formula for each of them. Once we have discovered all of the ratios that we can use we need to know how to use them, who might use them and what for and how will it help them to answer the question we asked at the beginning? At this stage we will have an overall picture of what ratio analysis is, who uses it and the ratios they need to be able to use it. All that's left to do then is to use the ratios; and we will do that step- by-step, one by one.

Ratio analysis

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Ratio analysis is one of the techniques of financial analysis to evaluate the financial condition and performance of a business concern. Simply, ratio means the comparison of one figure to other relevant figure or figures. According to Myers , “Ratio analysis of financial statements is a study of relationship among various financial factors in a business as disclosed by a single set of statements and a study of trend of these factors as shown in a series of statements." Advantages and Uses of Ratio Analysis There are various groups of people who are interested in analysis of financial position of a company. They use the ratio analysis to work out a particular financial characteristic of the company in which they are interested. Ratio analysis helps the various groups in the following manner:  To work out the profitability: Accounting ratio help to measure the profitability of the business by calculating the various profitability ratios. It helps the management to know about the earning capacity of the business concern. In this way profitability ratios show the actual performance of the business.  To work out the solvency: With the help of solvency ratios, solvency of the company can be measured. These ratios show the relationship between the liabilities and assets. In case external liabilities are more than that of the assets of the company, it shows the unsound position of the business. In this case the business has to make it possible to repay its loans.  Helpful in analysis of financial statement: Ratio analysis help the outsiders just like creditors, shareholders, debenture-holders, bankers to know about the profitability and ability of the company to pay them interest and dividend etc.  Helpful in comparative analysis of the performance: With the help of ratio analysis a company may have comparative study of its performance to the previous years. In this way company comes to know about its weak point and be able to improve them.  To simplify the accounting information: Accounting ratios are very useful as they briefly summarize the result of detailed and complicated computations.

Limitations of Ratio Analysis
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In spite of many advantages, there are certain limitations of the ratio analysis techniques and they should be kept in mind while using them in interpreting financial statements. The following are the main limitations of accounting ratios:
 Limited Comparability: Different firms apply different accounting policies.

Therefore the ratio of one firm cannot always be compared with the ratio of other firm. Some firms may value the closing stock on LIFO basis while some other firms may value on FIFO basis. Similarly there may be difference in providing depreciation of fixed assets or certain of provision for doubtful debts etc.
 False Results: Accounting ratios are based on data drawn from accounting records.

In case that data is correct, then only the ratios will be correct. For example, valuation of stock is based on very high price, the profits of the concern will be inflated and it will indicate a wrong financial position. The data therefore must be absolutely correct.
 Effect of Price Level Changes: Price level changes often make the comparison of

figures difficult over a period of time. Changes in price affect the cost of production, sales and also the value of assets. Therefore, it is necessary to make proper adjustment for price-level changes before any comparison.
 Qualitative factors are ignored: Ratio analysis is a technique of quantitative analysis

and thus, ignores qualitative factors, which may be important in decision making. For example, average collection period may be equal to standard credit period, but some debtors may be in the list of doubtful debts, which is not disclosed by ratio analysis.
 Effect of window-dressing : In order to cover up their bad financial position some

companies resort to window dressing. They may record the accounting data according to the convenience to show the financial position of the company in a better way.

Procedure (Stages) For Ratio-analysis
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Classification of Ratios Ratios may be classified in a number of ways to suit any particular purpose. Different kinds of ratios are selected for different types of situations. Mostly, the purpose for which the ratios are used and the kind of data available determine the nature of analysis. The various accounting ratios can be classified as follows: A. Profitability ratios : 1 Gross profit ratio 2 Net profit ratio 3 Operating ratio 4 Return on shareholders’ investment or net worth 5 Return on equity capital 6 Earnings Per Share Ratio

B. Liquidity ratios : 1 Current ratio 2 Liquid /Acid test / Quick ratio

C. Activity ratios : 1 Inventory/Stock turnover ratio 2 Debtors/Receivables turnover ratio 3 Working capital turnover ratio 4 Fixed assets turnover ratio

D. Leverage ratios or long term solvency ratios :
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1 Debt equity ratio 2 Proprietary or Equity ratio 3 Ratio of fixed assets to shareholders funds 4 Current Assets to Proprietor's Fund Ratio 5 Interest coverage or debt service ratio

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Methodology

Methodology (Sampling details) Research design Research design helps in proper collection and analysis of the data. It helps in further
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course of action. Research approaches The most appropriate research is descriptive. This is because the goal of the study is clear research will help to understand to concept better. Classification of data Secondary data ₪ This includes the information gathered from various websites. Sample Size ₪ The sample size selected is of five years i.e. from 2006-2010. Sampling technique ₪ The sampling procedure employed for this is judgmental sampling a convenience sampling technique in which elements are based on the judgment of researcher Software tools used for the data analysis The software tools used for data analysis in MS WORD & MS EXCEL

Methodology (Ratios Used for Financial Analysis)
A. Profitability ratios:
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1. Gross profit ratio (GP ratio ):Gross profit ratio is the ratio of gross profit to net sales expressed as a percentage. It expresses the relationship between gross profit and sales.
Gross Profit Ratio= (Gross Profit/Net Sales)*100

Significance: Gross profit ratio may be indicated to what extent the selling prices of goods per unit may be reduced without incurring losses on operations. It reflects efficiency with which a firm produces its products. As the gross profit is found by deducting cost of goods sold from net sales, higher the gross profit better it is. There is no standard GP ratio for evaluation. It may vary from business to business. However, the gross profit earned should be sufficient to recover all operating expenses and to build up reserves after paying all fixed interest charges and dividends. Hence, an analysis of gross profit margin should be carried out in the light of the information relating to purchasing, mark-ups and markdowns, credit and collections as well as merchandising policies. 2. Net profit ratio: Net profit ratio is the ratio of net profit (after taxes) to net sales. It is expressed as percentage. Components of net profit ratio: The two basic components of the net profit ratio are the net profit and sales. The net profits are obtained after deducting income-tax and, generally, non-operating expenses and incomes are excluded from the net profits for calculating this ratio. Thus, incomes such as interest on investments outside the business, profit on sales of fixed assets and losses on sales of fixed assets, etc are excluded.

Net Profit Ratio = Net Profit / Net sales *100

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Here, Operating Net Profit = Gross Profit – Operating Expenses such as Office and Administrative Expenses, Selling and Distribution Expenses, Discount, Bad Debts, Interest on short-term debts etc. Significance: NP ratio is used to measure the overall profitability and hence it is very useful proprietors. The ratio is very useful as if the net profit is not sufficient, the firm shall not be able to achieve a satisfactory return on its investment. This ratio also indicates the firm's capacity to face adverse economic conditions such as price competition, low demand, etc. Obviously, higher the ratio the better is the profitability. But while interpreting the ratio it should be kept in minds that the performance of profits also be seen in relation to investments or capital of the firm and not only in relation to sales. 3. Operating ratio : Operating ratio is the ratio of cost of goods sold plus operating expenses to net sales. It is generally expressed in percentage. It measures the cost of operations per dollar of sales. This is closely related to the ratio of operating profit to net sales. Components: The two basic components for the calculation of operating ratio are operating cost (cost of goods sold plus operating expenses) and net sales. Operating expenses normally include (a) administrative and office expenses and (b) selling and distribution expenses. Financial charges such as interest, provision for taxation etc. are generally excluded from operating expenses. Formula of operating ratio:

Operating Ratio = Cost of Goods Sold + Operating Expenses/ Net Sales *100

Where, Cost of Goods Sold = Opening Stock + Purchases + Carriage + Wages + Other Direct Expenses - Closing Stock
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Operating Expenses = Office and Administration Exp. + Selling and Distribution Exp. + Discount + Bad Debts + Interest on Short- term loans Significance:- Operating Ratio is a measurement of the efficiency and profitability of the business enterprise. The ratio indicates the extent of sales that is absorbed by the cost of goods sold and operating expenses. Lower the operating ratio is better, because it will leave higher margin of profit on sales. 4. Return on share holder’s investment:It is the ratio of net profit to share holder's investment. It is the relationship between net profit (after interest and tax) and share holder's/proprietor's fund. This ratio establishes the profitability from the share holders' point of view. The ratio is generally calculated in percentage. Components: The two basic components of this ratio are net profits and shareholder's funds. Shareholder's funds include equity share capital, (preference share capital) and all reserves and surplus belonging to shareholders. Net profit means net income after payment of interest and income tax because those will be the only profits available for share holders.

Formula of return on shareholder's investment or net worth Ratio:
Return on Net Worth= {(Net Profit after Tax – Preference Dividend)/Shareholder’s Fund}*100

Significance: This ratio is one of the most important ratios used for measuring the overall efficiency of a firm. As the primary objective of business is to maximize its earnings, this ratio indicates the extent to which this primary objective of businesses being achieved. This ratio is of great
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importance to the present and prospective shareholders as well as the management of the company. 5. Return on Equity Capital (ROEC) Ratio In real sense, ordinary shareholders are the real owners of the company. They assume the highest risk in the company. (Preference share holders have a preference over ordinary shareholders in the payment of dividend as well as capital. Preference share holders get a fixed rate of dividend irrespective of the quantum of profits of the company). The rate of dividends varies with the availability of profits in case of ordinary shares only. Thus ordinary shareholders are more interested in the profitability of a company and the performance of a company should be judged on the basis of return on equity capital of the company. Return on equity capital which is the relationship between profits of a company and its equity, can be calculated as follows: Formula of return on equity capital or common stock: Formula of return on equity capital ratio is:

Return on Equity Capital = {(Net profit after tax- Preference dividend)/Equity share capital}*100

Components: Equity share capital should be the total called-up value of equity shares. As the profit used for the calculations are the final profits available to equity shareholders as dividend, therefore the preference dividend and taxes are deducted in order to arrive at such profits.

Significance: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Interpretation of the ratio is similar to the interpretation of return on shareholder's investments and higher the ratio better is.
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6. Earnings per Share (EPS) Ratio:- Definition: Earnings per share ratio (EPS Ratio) are a small variation of return on equity capital ratio and are calculated by dividing the net profit after taxes and preference dividend by the total number of equity shares. Formula of Earnings per Share Ratio: The formula of earnings per share is:
Earnings Per Share= Net Earnings /Number of shares outstanding

B. Liquidity Ratios
1. Current Ratio: This ratio explains the relationship between current assets and current liabilities of a business. Formula:

Current Ratio =

Current Assets/ Current Liabilities

Current Assets:-‘Current assets’ includes those assets which can be converted into cash with in a year’s time. Current Assets = Cash in Hand + Cash at Bank + B/R + Short Term Investment + Debtors(Debtors – Provision) + Stock(Stock of Finished Goods + Stock of Raw Material + Work in Progress) + Prepaid Expenses. Current Liabilities :- ‘Current liabilities’ include those liabilities which are repayable in a year’s time. Current Liabilities = Bank Overdraft + B/P + Creditors + Provision for Taxation + Proposed Dividend + Unclaimed Dividends + Outstanding Expenses + Loans Payable within a Year.

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Significance :- According to accounting principles, a current ratio of 2:1 is supposed to be an ideal ratio. It means that current assets of a business should, at least, be twice of its current liabilities. The higher ratio indicates the better liquidity position. The firm will be able to pay its current liabilities more easily. If the ratio is less than 2:1, it indicates lack of liquidity and shortage of working capital. The biggest drawback of the current ratio is that it is susceptible to “window dressing”. This ratio can be improved by an equal decrease in both current assets and current liabilities.

2. Quick Ratio Quick ratio indicates whether the firm is in a position to pay its current liabilities within a month or immediately. Formula:

Quick Ratio = Liquid Assets/ Current

‘Liquid Assets’ means those assets, which will yield cash very shortly. Liquid Assets = Current Assets – Stock – Prepaid Expenses Significance :- An ideal quick ratio is said to be 1:1. If it is more, it is considered to be better. This ratio is a better test of short-term financial position of the company.

C. Activity

Ratio or Turnover Ratio

Activity Ratio or Turnover Ratio:- These ratio are calculated on the bases of ‘cost of sales’ or sales, therefore, these ratio are also called as ‘Turnover Ratio’. Turnover indicates the speed or number of times the capital employed has been rotated in the process of doing business. Higher turnover ratio indicates the better use of capital or resources and in turn lead to higher profitability. It includes the following :

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a. Stock Turnover Ratio:- This ratio indicates the relationship between the cost of goods during the year and average stock kept during that year.

Formula:

Stock Turnover Ratio = Cost of Goods Sold / Average Stock
Here, Cost of goods sold = Net Sales – Gross Profit Average Stock = Opening Stock + Closing Stock/2 Significance:- This ratio indicates whether stock has been used or not. It shows the speed with which the stock is rotated into sales or the number of times the stock is turned into sales during the year. The higher the ratio, the better it is, since it indicates that stock is selling quickly. In a business where stock turnover ratio is high, goods can be sold at a low margin of profit and even than the profitability may be quite high. b. Debtors Turnover Ratio :- This ratio indicates the relationship between credit sales and average debtors during the year :

Formula:

Debtor Turnover Ratio = Net Credit Sales / Average Debtors + Average B/R

While calculating this ratio, provision for bad and doubtful debts is not deducted from the debtors, so that it may not give a false impression that debtors are collected quickly. Significance :- This ratio indicates the speed with which the amount is collected from debtors. The higher the ratio, the better it is, since it indicates that amount from debtors is being collected more quickly. The more quickly the debtors pay, the less the risk from baddebts, and so the lower the expenses of collection and increase in the liquidity of the firm. By comparing the debtors turnover ratio of the current year with the previous year, it may be assessed whether the sales policy of the management is efficient or not. c. Working Capital Turnover Ratio: Definition:

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Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio represents the number of times the working capital is turned over in the course of year and is calculated as follows: Following formula is used to calculate working capital turnover ratio Working Capital turnover Ratio = Cost Of Sales/Net Working Capital

The two components of the ratio are cost of sales and the net working capital. If the information about cost of sales is not available the figure of sales may be taken as the numerator. Net working capital is found by deduction from the total of the current assets the total of the current liabilities. Significance: The working capital turnover ratio measures the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation.

d. Fixed asset Turnover Ratio: This ratio reveals how efficiently the fixed assets are being utilized.

Formula:-

Fixed Assets Turnover Ratio = Cost of Goods Sold/ Net Fixed Assets
Here, Net Fixed Assets = Fixed Assets – Depreciation

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Significance:- This ratio is particular importance in manufacturing concerns where the investment in fixed asset is quit high. Compared with the previous year, if there is increase in this ratio, it will indicate that there is better utilization of fixed assets. If there is a fall in this ratio, it will show that fixed assets have not been used as efficiently, as they had been used in the previous year.

D. Leverage or capital structure ratio
Leverage or Capital Structure Ratio :- This ratio disclose the firm’s ability to meet the interest costs regularly and Long term indebtedness at maturity.

These ratio include the following ratios : 1. Debt Equity Ratio:- This ratio can be expressed in two ways:
 First Approach : According to this approach, this ratio expresses the relationship

between long term debts and shareholder’s fund. Formula:

Debt Equity Ratio=Long term Loans/Shareholder’s Funds or Net Worth
Long Term Loans:- These refer to long term liabilities which mature after one year. These include Debentures, Mortgage Loan, Bank Loan, Loan from Financial institutions and Public Deposits etc. Shareholder’s Funds :- These include Equity Share Capital, Preference Share Capital, Share Premium, General Reserve, Capital Reserve, Other Reserve and Credit Balance of Profit & Loss Account.
 Second Approach : According to this approach the ratio is calculated as follows:-

Formula:

Debt Equity Ratio=External Equities/internal Equities
Debt equity ratio is calculated for using second approach.
36

Significance :- This Ratio is calculated to assess the ability of the firm to meet its long term liabilities. Generally, debt equity ratio of is considered safe. If the debt equity ratio is more than that, it shows a rather risky financial position from the long-term point of view, as it indicates that more and more funds invested in the business are provided by long-term lenders. The lower this ratio, the better it is for long-term lenders because they are more secure in that case. Lower than 2:1 debt equity ratio provides sufficient protection to long-term lenders.

2. Proprietary or Equity Ratio: This is a variant of the debt-to-equity ratio. It is also known as equity ratio or net worth to total assets ratio. This ratio relates the shareholder's funds to total assets. Proprietary / Equity ratio indicates the long-term or future solvency position of the business.

Formula of Proprietary/ Equity Ratio:

Proprietary Ratio = Shareholder’s Funds/ Total Assets

Components: Shareholder's funds include equity share capital plus all reserves and surpluses items. Total assets include all assets, including Goodwill. Some authors exclude goodwill from total assets. In that case the total shareholder's funds are to be divided by total tangible assets. As the total assets are always equal to total liabilities, the total liabilities, may also be used as the denominator in the above formula. Significance: This ratio throws light on the general financial strength of the company. It is also regarded as a test of the soundness of the capital structure. Higher the ratio or the share of shareholders in the total capital of the company better is the long-term solvency position of the company. A low proprietary ratio will include greater risk to the creditors.

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3. Fixed Assets to Proprietor's Fund Ratio: Definition: Fixed assets to proprietor’s fund ratio establish the relationship between fixed assets and shareholders’ funds. The purpose of this ratio is to indicate the percentage of the owner's funds invested in fixed assets. Formula:

Fixed Assets to Shareholder’s Fund: Fixed Assets/ Shareholder’s Fund

The fixed assets are considered at their book value and the proprietor's funds consist of the same items as internal equities in the case of debt equity ratio. Significance: The ratio of fixed assets to net worth indicates the extent to which shareholder's funds are sunk into the fixed assets. Generally, the purchase of fixed assets should be financed by shareholder's equity including reserves, surpluses and retained earnings. If the ratio is less than 100%, it implies that owners’ funds are more than fixed assets and a part of the working capital is provided by the shareholders. When the ratio is more than the 100%, it implies that owners’ funds are not sufficient to finance the fixed assets and the firm has to depend upon outsiders to finance the fixed assets. There is no rule of thumb to interpret this ratio by 60 to 65 percent is considered to be a satisfactory ratio in case of industrial undertakings.

4. Current Assets to Proprietor's Fund Ratio: Current Assets to Proprietor’s Fund Ratio establishes the relationship between current assets and shareholder's funds. The purpose of this ratio is to calculate the percentage of shareholder’s funds invested in current assets. Formula:

Current Assets to Proprietor’s Fund Ratio: Current Assets / Shareholder’s Fund

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Significance: Different industries have different norms and therefore, this ratio should be studied carefully taking the history of industrial concern into consideration before relying too much on this ratio.

5. Interest Coverage Ratio: This ratio is also termed as ‘Debt Service Ratio’. This ratio is calculated as follows: Formula:

Interest Coverage Ratio = Net Profit before charging interest and tax / Fixed Interest Charges
Significance :- This ratio indicates how many times the interest charges are covered by the profits available to pay interest charges. This ratio measures the margin of safety for long-term lenders. This higher the ratio, more secure the lenders is in respect of payment of interest regularly. If profit just equals interest, it is an unsafe position for the lender as well as for the company also , as nothing will be left for shareholders. An interest coverage ratio of 6 or 7 times is considered appropriate.

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40

Data Analysis

Profitability Ratios 1. Gross Profit Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Gross Profit Margin 32.62 33.28 25.31 19.48 21.1

41

Gross Profit Margin on NTPC was 32.62% in 2005-2006 it went upto 33.28 in 2006-2007 but than it had fallen for consecutive 2 yrs to reach to the levelof 19.48 in 2008-09. It showed some improvement in 2009-10 but reached only till 21.1% not even close to the earlier levels. The reduction in the profits could be due to inefficiency or even may be because on the global economic slow down. But even in the slowdown period it was enough to recover the operating expenses and maintain reserves

2. Net Profit Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Net Profit Margin 20.2 19.39 18.51 18.11 17.72

42

The net profit margin for NTPC for the year 2005-06 was 20.2 since then it has been decreasing constantly reaching a level of 17.72 in the year 2009-10. The constant fall in the net profit shows loss to the proprietors.

3. Operating Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Operating Ratio 28.4 31.13 31.07 25.11 26.81

43

Operating Profit Margin for NTPC for the Year 2005-06 has been 28.4% then it showed some improvement for the next two years by reaching upto the level of 31.07% in the year 2007-08 but slipped to 25.11% in the year 2008-2009 then again recovered in 2009-10 and reached to 26.81%.

4. Return On Shareholder’s Investment
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Return on Net worth 12.95 14.13 13.66 13.9 13.69 44

Return on Net worth for NTPC in the year 2005-06 has been 12.95 then it

5. Return on Equity Capital
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Return on Equity Capital 0.71 0.83 0.9 1 1.06

45

6. Earnings Per Share
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 EPS 7.06 8.33 8.99 9.995 10.59

46

Liquidity Ratios 1. Current Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Current Ratio 2.11 2.42 2.36 2.89 2.81

47

2. Quick Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Quick Ratio 1.84 2.18 2.16 2.59 2.5

48

Activity Ratios 1. Inventory Turnover Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 Inventory Turnover Ratio 12.31 14.1 33.59 28.21 49

2009-2010

27.54

2. Debtors Turnover Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Debtors Turnover Ratio 23.32 30.78 17.52 12.78 9.06

50

3. Working Capital Turnover Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Working Capital Turnover Ratio 131.98 167.21 171.01 173.56 154.07

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4. Fixed Assets Turnover Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Fixed Assets Turnover Ratio 0.76 0.82 0.7 0.67 0.7 52

Leverage Ratios 1. Debt Equity Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Debt Equity Ratio 0.46 0.52 0.5 0.59 0.59

53

2. Proprietary Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Proprietary Ratio 0.69 0.66 0.66 0.63 0.63

54

3. Ratio of Fixed assets to shareholder’s fund
Year 2005-2006 2006-2007 2007-2008 2008-2009 Fixed Assets to Shareholder's Fund 0.51 0.53 0.48 0.56 55

2009-2010

0.54

4. Current Assets to Proprietor’s Fund
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Current Assets to Shareholders Fund 0.075 0.093 0.11 0.12 0.17 56

5. Interest Coverage Ratio
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Interest Coverage Ratio 11.59 9.49 10.28 11.91 12.18 57

Findings:

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Limitations

The Limitations for the research are  The data analysed that is the financial statements for the five years is not exhaustive to determine the future performance on the company.  The data analysed is only quantitative and not qualitative like the human resource available to the company in the form of its management.  The factors analysed are only the internal factors the external factors that is the effect of the changes in the economy are not considered.

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61

Conclusion

The electricity supply has been in the public domain in most of the developing countries. Under public ownership, the sector has not been able to catch up with the growing demand for electricity. The operational inefficiency and financial losses often lead to poor quality of supply and underinvestment. A wave of reforms has swept through a number of developing countries. These reforms were primarily targeted to improve the performance of the state owned companies and to provide a conducive atmosphere for private investment in the sector. The erstwhile vertically integrated SEBs in India has been riddled with inefficiencies due to a lack of accountability and administrative bottlenecks. Reforms in the Indian power sector were initiated to restructure the SEBs and to set up independent regulatory institutions.
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The Electricity Act 2003 led to deepening of the reform process by enabling competition in the wholesale electricity market and retail electricity supply, in phases. Thirteen SEBs have so far unbundled into separate generation, transmission and distribution companies. Beginning with the establishment of an independent regulatory commission in Orissa in 1996, the SERCs have been set up in all states. Some of the smaller states in the North East have established a Joint Electricity Regulatory Commission. The process of tariff determination has become more transparent and limited tariff rationalization has been undertaken against consumer opposition and political meddling. The emerging competition in the bulk power market and phased direct access to large consumers is aimed at reducing the risks associated with sales to financially weak state utilities. The policy and regulatory developments are promising, but more needs to be done to improve the performance of distribution utilities. Amongst other factors, the autonomy to manage these utilities in a commercial manner remains a key issue. In the long-run, the state’s objectives are best served by nurturing a financially sustainable sector that can improve access for poor and rural consumers. This research undertook a review of the policy and regulatory developments in the Indian power sector. A review of the literature and a comparative policy analysis helped us to unravel some of the lessons to be learned for the process of reform in developing countries in general. The initial phase of power sector reform in India allowed commercially-oriented IPPs to sell power to financially weak SEBs, which do not rely on sound commercial principles. This marriage of convenience is not sustainable. The initial phase of reforms in developing countries should be aimed to restructure the sector and to set up an independent regulator. As private participation grows, it would be suitable to introduce competition in the sector. This would not only help lower the cost of power purchase, it would also provide greater incentive for performance improvement. The experience of private sector investment in Latin American countries relied on the introduction of commercial interest in the bulk power market by inviting IPPs as well as introducing commercial principles at the end of buyer utilities through their divestiture. The experience in East Asia and Latin America suggests that macroeconomic stability remains a key to attracting sustainable and increased investment in the infrastructure sectors. India continues to demonstrate macroeconomic stability along with prudent currency management. Future growth prospects in the power sector hold substantial potential for
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private investment. However, the financial performance of the state owned distribution utilities remains a key concern for investors. A positive outcome of existing distribution privatization programs would guide such future plans, which remain politically sensitive. The regulatory challenge is to provide incentives for improvement in technical efficiency and financial performance. The unavailability of sovereign guarantees can be adequately addressed if state utilities become viable through greater commercialization, if not privatization. Inability of the domestic capital market to provide long-term debt for the power sector needs to be adequately addressed by encouraging contractual saving through life insurance and pension funds, and channel zing these for the power sector. Securitization of project loans after the construction period and development of secondary bond market would help garner funds for investment in the sector. The long-term interest of the consumers can only be served if reasonably priced electricity is available over the long-run. Political interests would best be served by depoliticizing tariffs, which would be beneficial to consumers in the long-term through improved quality and reliability of supply. Given the objective to electrify all villages by 2010 and to double the generating capacity in the country by 2012, the need to improve the policy environment and strengthen the regulatory framework cannot be ignored.

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APPENDIX

Balance Sheet of NTPC
Mar '06 Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth 8,245.50 8,245.50 0 0 36,713.20 0 44,958.70 8,245.50 8,245.50 0 0 40,351.30 0 48,596.80 8,245.50 8,245.50 0 0 46,021.90 0 54,267.40 8,245.50 8,245.50 0 0 50,749.40 0 58,994.90 Mar '07 Mar '08 Mar '09

(in Rs. Cr.) Mar '10 8,245.50 8,245.50 0 0 55,478.60 0 63,724.10 65

Secured Loans Unsecured Loans Total Debt Total Liabilities

6,173.50 14,464.60 20,638.10 65,596.80 Mar '06

7,479.60 17,661.50 25,141.10 73,737.90 Mar '07

7,314.70 19,875.90 27,190.60 81,458.00 Mar '08

8,969.60 25,598.20 34,567.80 93,562.70 Mar '09

9,079.90 28,717.10 37,797.00 1,01,521.10 Mar '10

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities Book Value (Rs) 45,917.60 22,950.10 22,967.50 13,756.00 19,289.10 2,340.50 867.8 176.8 3,385.10 6,555.10 8,294.60 18,234.80 0 4,910.30 3,740.30 8,650.60 9,584.20 0 65,596.80 16,429.80 54.53 50,604.20 25,079.20 25,525.00 16,962.30 16,094.30 2,510.20 1,252.30 750.1 4,512.60 8,781.70 12,564.50 25,858.80 0 5,422.20 5,280.30 10,702.50 15,156.30 0 73,737.90 25,218.80 58.94 53,368.00 27,274.30 26,093.70 22,478.30 15,267.20 2,675.70 2,982.70 473 6,131.40 9,936.20 14,460.20 30,527.80 0 5,548.40 7,360.60 12,909.00 17,618.80 0 81,458.00 29,361.80 65.81 62,353.00 29,415.30 32,937.70 26,404.90 13,983.50 3,243.40 3,584.20 271.8 7,099.40 7,826.10 15,999.80 30,925.30 0 7,439.20 3,249.50 10,688.70 20,236.60 0 93,562.70 66,083.20 71.55 66,663.80 32,088.80 34,575.00 32,290.60 14,807.10 3,347.70 6,651.40 634 10,633.10 6,357.10 13,825.50 30,815.70 0 7,896.80 3,070.50 10,967.30 19,848.40 0 1,01,521.10 40,044.00 77.28

Profit & Loss account of NTPC

------------------- in Rs. Cr. ------------------66

Mar '06 Income Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Total Income Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses 25 16,497.10 1,137.50 705.1 353.2 247.2 -256.4 18,708.70 Mar '06 26,318.60 175.7 26,142.90 2,897.90 0 29,040.80

Mar '07

Mar '08

Mar '09

Mar '10

32,817.30 185.6 32,631.70 2,875.60 0 35,507.30 23.7 19,947.60 1,362.60 842.9 410.8 292.4 -418.4 22,461.60 Mar '07

37,302.40 211.4 37,091.00 3,119.70 0 40,210.70 26.8 22,160.70 2,229.30 920 389.8 368.2 -544.7 25,550.10 Mar '08

42,196.80 221.6 41,975.20 3,012.80 0 44,988.00 31 27,292.30 2,897.60 940 473.2 394.9 -637.4 31,391.60 Mar '09

46,623.60 245.9 46,377.70 2,872.80 0 49,250.50 31.1 29,689.10 2,946.80 1,096.60 578.5 436.4 -866.9 33,911.60 Mar '10

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs)

7,434.20 10,332.10 2,004.60 8,327.50 2,047.70 1.3 6,278.50 633.7 6,912.20 1,082.40 5,820.20 18,683.70 0 2,308.70 323.8

10,170.10 13,045.70 2,055.70 10,990.00 2,075.40 9.9 8,904.70 134.2 9,038.90 2,163.70 6,864.70 22,437.90 0 2,638.50 389.6

11,540.90 14,660.60 1,982.20 12,678.40 2,138.50 3.1 10,536.80 -114 10,422.80 2,994.20 7,414.80 25,523.30 0 2,885.90 490.5

10,583.60 13,596.40 1,737.00 11,859.40 2,364.50 3.6 9,491.30 1,305.20 10,796.50 2,554.70 8,201.30 31,360.60 0 2,968.30 501.7

12,466.10 15,338.90 1,861.90 13,477.00 2,650.10 4.3 10,822.60 616.1 11,438.70 2,682.70 8,728.20 33,880.50 0 3,133.20 527.6

82,454.64

82,454.64

82,454.64

82,454.64

82,454.64 67

Earning Per Share (Rs) Equity Dividend (%) Book Value(Rs)

7.06 28 54.53

8.33 32 58.94

8.99 35 65.81

9.95 36 71.55

10.59 38 77.28

Cash Flow of NTPC

------------------- in Rs. Cr. ------------------Mar '06 Mar '07 Mar '08 Mar '09 9467.8 9688.1 Mar '10 10807.6 10594.2

Net Profit Before Tax Net Cash Flow From Operating Activities

6271.2 6206.4 2713.6 1099.7

8896.5 10529.4 8065.3 10171.1

Net Cash (used in)/from Investing Activities

-3145.8

-6203.8

-7500.4

-10498

Net Cash (used in)/from Financing Activities

-76.3

-2348.7

-849.3

-1908.6

Net (decrease)/increase In Cash and Cash Equivalent

2393.1

4843.2

1618.6

1338.4

-1812.1

Opening Cash & Cash Equivalents

6078.3

8471.4 13314.6 14933.2

16271.6 68

Closing Cash & Cash Equivalents

8471.4 13314.6 14933.2 16271.6

14459.5

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