INDUSTRY ANALYSIS

POWER SECTOR

BY-
SREE VARDHAN REDDY
09-113

INTRODUCTION

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An economy’s growth, development, ability to handle global competition is all dependent on the
availability, reliability and quality of the power sector. As the Indian economy continues to surge
ahead, electrification and electricity services have been expanding concurrently to support the
growth rate. The demand for power is growing exponentially and the scope of growth of this
sector is immense.

Existing generation suffers from several recurrent problems. The efficiency and the availability
of the coal power plants are low by international standards. A majority of the plants use low-
heat-content and high-ash unwashed coal. This leads to a high number of airborne pollutants per
unit of power produced. Moreover, past investments have skewed generation toward coal-fired
power plants at the expense of peak-load capacity. In the context of fast-growing demand, large
T&D losses and poor pooling of loads at the national level exacerbate the lack of generating
capacity.

India is one of the main manufacturers and users of energy. Globally, India is presently
positioned as the 11th largest manufacturers of energy. It is also the worlds’ 6th largest energy
users. In spite of its extensive yearly energy output, Indian power sector is a regular importer of
energy because of huge disparity.

Global and Indian economy have decelerated, but power is one of the few commodities in short
supply in India. So, despite the sluggishness in production and demand for manufactured
products, India remains power hungry, both in terms of normal and peak power demand. Power
is derived from various sources in India. These include thermal power, hydropower or
hydroelectricity, solar power, biogas energy, wind power etc. The distribution of the power
generated is undertaken by Rural Electrification Corporation for electricity power supply.

World Marketed Energy Consumption, 1980 - 2030

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As per the recent survery, the global electrical & electronics market is worth $1,038.8 billion,
which is forecasted to grow to $ 1,216.8 billion at the end of the year 2008. If electrical &
electronics production statistics are considered, the industry accounted for $1,025.8 billion in
2006, which is forcasted to reach $1,051.5 billion in future.

Comparative Per Capita Consumption Of Electricity (Kwh)

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The per capita consumption is seen to be far behind from the world average and very less when
compared to other countries. So there is a need to improve it.

Though India has achieved many milestones in generation still the there is a wide gap between
demand and supply of power. This is the most important issue to be concerned.

POWER SECTOR IN INDIA

The process of electrification commenced in India almost with the developed world, in the
1880s, with the establishment of a small hydroelectric power station in Darjeeling. However,
commercial production and distribution started in 1889, in Calcutta (now Kolkata). In the year
1947, the country had a power generating capacity of 1,362 MW. Generation and distribution of
electrical power was carried out primarily by private utility companies such as Calcutta Electric.
Power was available only in a few urban centers; rural areas and villages did not have electricity.
After 1947, all new power generation, transmission and distribution in the rural sector and the
urban centers (which was not served by private utilities) came under the purview of State and
Central government agencies. State Electricity Boards (SEBs) were formed in all the states.

Legal provisions to support and regulate the sector were put in place through the Indian
Electricity Act, 1910. Shortly after independence, a second Act - The Electricity (Supply) Act,
1948 was formulated, paving the way for establishing Electricity Boards in the states of the
Union.

In 1960s and 70s, enormous impetus was given for the expansion of distribution of electricity in
rural areas. It was thought by policy makers that as the private players were small and did not
have required resources for the massive expansion drive, the production of power was reserved
for the public sector in the Industrial Policy Resolution of 1956. Since then, almost all new
investment in power generation, transmission and distribution has been made in the public
sector. Most of the private players were bought out by state electricity boards.

From the installed capacity of only 1,362mw in 1947, has increased to 97000 MW as on March
2000 which has since crossed 100,000 MW mark India has become sixth largest producer and

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consumer of electricity in the world equaling the capacities of UK and France combined. The
number of consumers connected to the Indian power grid exceeds is 75 million.

India's power system today with its extensive regional grids maturing in to an integrated national
grid, has millions of kilometers of T & D lines criss-crossing diverse topography of the country.

However, the achievements of India's power sector growth looks phony on the face of huge gaps
in supply and demand on one side and antediluvian generation and distribution system on the
verge of collapse having plagued by inefficiencies, mismanagement, political interference and
corruption for decades, on the other. Indian power sector is at the cross road today. A paradigm
shift is in escapable- for better or may be for worse.

INVESTMENTS IN GENERATION

The total fund requirement for generation projects, during the Eleventh Plan period is estimated
at Rs. 4,108,960 million, with Rs. 2,020,670 million being required for the central sector, Rs.
1,237,920 million being required for the state sector and Rs. 850,370 million being required for
the private sector. The total fund requirement includes the fund requirement estimated at Rs.
1,891,950 million for start-up generation projects benefiting in the Twelfth Plan.

SEGMENTS IN POWER GENERATION

THERMAL

Current installed capacity of Thermal Power (as of 12/2008) is 93392.64 MW which is 63.3% of
total installed capacity.

 Current installed base of coal based thermal power is 77458.88MW which comes to
53.3% of total installed base.
 Current installed base of gas based thermal power is 14734.01MW which is 10.5% of
total installed base.
 Current installed base of oil based thermal power is 1199.75 which is .09% of total
installed base.

Comparison of Energy Intensity

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HYDRO POWER

India is blessed with a rich hydro power potential. In the exploitable potential terms, India ranks
fifth in the world. Less than 25% of the potential has been developed as of now. A large hydro
has four main advantages.

    It is a source of green energy.

 It has low variable cost.
    It is grid friendly.
 It can also can sub serve other purposes by irrigation, flood control, etc.

India has 3 major rivers: the Indus, the Brahmaputra, and the Ganga. It also has three major river
systems? Central Indian, west flowing rivers of south India, and east flowing rivers of south
India with a total of 48 river basins. The total potential from these river basins is 600TWh
(Terawatt Hours) of electricity.

As of today, the total identified hydro potential is 1 48 701 MW (mega watt). According to the
list of hydro electric projects in the country, a total of 29 572 MW,19.9% of the total? Has been
harnessed and 13 286 MW is under construction. A total of 3 660 MW of pumped storage
schemes have also been developed.

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Various initiatives for accelerated development have been taken up by the central government to
harness the hydro potential in India. Some of these are

 Hydro Power Policy (1998)

 50 000 MW initiative
 Preparation of viable models for private sector participation
 Ranking of projects
 R&M up gradation and life extension programmes
 Facilitation for trading and co-operation with other countries
 Execution of projects with interstate aspects by Central Public Sector Units

NUCLEAR POWER GENERATION

In India, out of total installed capacity of 126993.97 MW (as on 31 August 2006); the share of
nuclear power is 3% at 3900 MW. From the electricity generation point of view, nuclear power
plants contributed 17 238.89 GWh out of total electricity generation of 6 17 510.44 GWh during
April 2005 - March 2006, amounting to 2.79% of total generation. However, with exponential
growth in energy demand coupled with a finite availability of coal, oil, and gas; there is a
renewed emphasis on nuclear energy. Moreover, nuclear energy is considered to be an
environmentally benign source of energy.

Department of Atomic Energy is carrying out nuclear energy programme in India. The Indian
Nuclear Power Programme has the following three stages.

 The first stage, already commercial now, comprised setting up of PHWRs (pressurised
heavy water reactors) and associated fuel cycle facilities. PHWRs use natural uranium as fuel
and heavy water as moderator and coolant. The design, construction, and operation of these
reactors are undertaken by public sector undertaking the NPCIL (Nuclear Power Corporation of
India Ltd). The company operates 16 reactors (2 Boiling Water Reactors and 14 PHWRs) with a
total capacity of 3900 MWe.

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 In the second stage, it was envisaged to set up FBRs (fast breeder reactors) along with
reprocessing plants and plutonium-based fuel fabrication plants. Plutonium is produced by
irradiation of Uranium-238. The Fast Breeder Programme is in the technology demonstration
stage. Under this stage, the IGCAR (Indira Gandhi Centre for Atomic Research) has completed
design of a 500 MWe PFBR (prototype fast breeder reactor) being implemented by BHAVINI
(Bharatiya Nabhikiya Vidyut Nigam).

 The third stage of the Indian Nuclear Power Programme is based on the thorium-
uranium-233 cycle. Uranium-233 is obtained by irradiation of thorium. Presently this stage is in
technology development phase. The ongoing development of 300 MWe AHWR (advanced
heavy water reactor) at BARC (Bhabha Atomic Research Centre) concerns thorium utilization
and its demonstration.

SOLAR

India is endowed with rich solar energy resource. The average intensity of solar radiation
received on India is 200 MW/km square (megawatt per kilometer square). With a geographical
area of 3.287 million km square, this amounts to 657.4 million MW. However, 87.5% of the land
is used for agriculture, forests, fallow lands, etc., 6.7% for housing, industry, etc., and 5.8% is
either barren, snow bound, or generally inhabitable. Thus, only 12.5% of the land area
amounting to 0.413 million km square can, in theory, be used for solar energy installations. Even
if 10% of this area can be used, the available solar energy would be 8 million MW, which is
equivalent to 5 909 (million tons of oil equivalent) per year.

However, solar energy is a dilute source. The energy collected by 1 m square of a solar collector
in a day is approximately equal to that released by burning 1 kg of coal or 1/2 litre of kerosene.
Thus, large areas are needed for collection. Besides, the efficiency of conversion of solar energy
to useful energy is low. Therefore, the energy actually available would be order of magnitude
lower than the aforementioned estimates. Nonetheless, it is obvious that solar energy can be a
good source of meeting energy demands.

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On the applications side, the range of solar energy is very large. While at the high end there are
megawatt level solar thermal power plants, at the lower end there are domestic appliances such
as solar cooker, solar water heater, and PV lanterns. Then, in between, there are applications
such as industrial process heat, desalination, refrigeration and air-conditioning, drying, large
scale cooking, water pumping, domestic power systems, and passive solar architecture. Solar
energy can be harnessed to supply thermal as well as electrical energy. Those technologies that
use solar energy resource to generate energy are known as solar energy technologies.

Solar energy technologies consists of

 Solar thermal technologies, which utilize sun's thermal energy and
 Solar photovoltaic technology, which convert solar energy directly in to electricity.

Solar energy resource: Since the accurate information about solar energy resource at a specific
location is crucial for designing appropriate solar system. Solar energy resource assessment
becomes an essential activity of any solar energy programme.

WIND

The sun’s energy falling on the earth produces large-scale motions of the atmosphere causing
winds, which are also influenced by small scale flows caused by local conditions such as nature
of terrain, buildings, water bodies, etc. Wind energy is extracted by turbines to convert the
energy into electricity.

A small-scale and large-scale wind industry exists globally. The small-scale wind industry caters
for urban settings where a wind farm is not feasible and also where there is a need for household
electricity generation. The large-scale industry is directed towards contributing to countrywide
energy supply.

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COMPANIES

To study and analyze the power sector better, the comparative and analytical study of the Top 5
and Bottom 5 listed firms of power sector in India are done. The firms are chosen based on their
sales turnover. The below are the firms selected by us for the study,

TOP 3

 NTPC                                                                           

 RELIENCE INFRA

 TATA POWER

NTPC Ltd.

NTPC Limited is the largest power generating and Navratna status company of India; it was
incorporated in the year 1975 as National Thermal Power Corporation Private Limited to
accelerate power development in the country. As a wholly owned company of the Government
of India, NTPC has emerged as a truly national power company, with power generating facilities
in all the major regions of the country. NTPC's core business is engineering, construction and
operation of power generating plants. NTPC as an integrated Power Major with presence in
Hydro Power, Coal mining, Oil & Gas exploration, Power Distribution & Trading and also enter
into Nuclear Power Development. It provides consultancy also in the area of power plant
constructions and power generation to companies in India and abroad. It is providing power at
the cheapest average tariff in the country. With its experience and expertise in the power sector,
also NTPC is extending consultancy services to various organizations in the power business. The
consulting Wing of NTPC is an ISO 9001:2000 accreditation. In the year of 1982, the company
commissioned the first Singrauli unit.  
 The Company's status was converted into a public limited in the year 1985 and the name was
changed to National Thermal Power Corporation Limited. In the year 1989, the company

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commissioned first gas based combined cycle plant (88MW) at Anta, Rajasthan and its
consultancy services division was commissioned during the same year.

Growth of NTPC

NTCP PERFORMANCE

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RELIANCE INFRASTRUCTURE LTD

Reliance Energy Limited (REL), with its corporate lineage going back to 1929. At the time of
incorporation REL was called as Bombay Suburban Electric Supply Limited (BSES). The
company has been in the field of power distribution for nearly eight decades and with its
emphasis on continuous improvements. REL is a fully integrated utility engaged in the
generation, transmission and distribution of electricity. It ranks among India's top listed private
companies on all major financial parameters, including assets, sales, profits and market
capitalization. A key constituent of the Reliance - Anil Dhirubhai Ambani Group, India's third
largest business house. Reliance Energy has emerged as one of the leading players in India in the
Engineering, Procurement and Construction (EPC) segment of the power sector. Reliance
Energy company currently pursue several gas, coal, wind and hydro-based power generation
projects in Maharashtra, Uttar Pradesh, Arunachal Pradesh and Uttaranchal with aggregate
capacity of over 13,510 MW. Reliance Energy is also active in the trading and transmission of
power sector and has forayed as an equity investor in to the infrastructure business, including in
the prestigious Mumbai metro rail project and various road projects of the National Highways
Authority of India.

TATA POWER COMPANY LTD

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. TPC 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.

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RATIO ANALYSIS OF THE INDIVIDUAL COMPANIES
NTPC (National Thermal Power Corporation)

In NTPC the debt-equity ratio has not changed since 2004 as the values the change is only
0.01 during 2004 to 2006 and the change is 0.07 during next two years. This shows the lower
level of financial leverage which is not a good sign for the company. However company’s
profitability determines the debt equity ratio yet the high profitability of the company do not
suggest such a lower value of debt equity ratio. It can be seen exactly same trend in the long term
debt to equity ratio of NTPC.

Current ratio of the company is showing U-shape trend during 2004 to 2008 and like
previous days company has again reached to good liquidity position. The fixed asset turnover
ratio has shown 50% growth in last 5 years but it is still low and company should maximise its
asset utilisation. A high debtor turnover ratio is showing the good debt collection ability of
company. Interest cover ratio of the company is continuously increasing showing that the
company is becoming stronger in the ability of meeting interest expenses.

Ratio Analysis of NTPC (2004-08)

NTPC NTPC NTPC NTPC

YRC
200403 200503 200603 200803
Key Ratios
Debt-Equity Ratio 0.42 0.42 0.43 0.50
Long Term Debt-Equity Ratio 0.42 0.42 0.43 0.50
Current Ratio 2.39 1.65 1.86 2.23
Turnover Ratios
Fixed Assets 0.49 0.55 0.60 0.72
Inventory 10.75 12.84 12.92 14.21
Debtors 2.92 24.65 24.00 17.62
Interest Cover Ratio 2.46 4.47 4.69 6.33
PBIDTM (%) 54.72 43.06 42.66 38.38

Inventory turnover of the company is showing the increasing capability of selling the product
but at the same time it can be observed that company’s profitability is decreasing (decreasing
profit %) and this trend can be attributed to the fact that company is not using debt efficiently to
enhance the business. As it is known that shareholders’ expectations are quite higher than the
interest on debt. The return on capital employed and return on net worth are good in NTPC but it
is not increasing; we can see slight decrease in the return.

Reliance Infra

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 After increasing continuously the debt equity ratio of Reliance Infra has slipped between
2006 and 2008 and it is also very low, thus it suggests that with the two digit rate of return on net
worth company can think to raise the finance (if it is possible at low cost of capital) so that by
starting new projects profitability can be improved. Current ratio is satisfactory for the company
and it has good ability to meet current liabilities.

Ratio Analysis of Reliance Infra (2004-08)

Reliance Reliance Reliance Reliance

YRC Infra Infra Infra Infra
200403 200503 200603 200803
Key Ratios
Debt-Equity Ratio 0.39 0.62 0.67 0.58
Long Term Debt-Equity Ratio 0.39 0.54 0.50 0.51
Current Ratio 1.47 2.23 2.64 2.41
Turnover Ratios
Fixed Assets 0.93 0.96 0.87 1.12
Inventory 38.82 18.16 11.91 20.75
Debtors 6.75 5.94 3.91 4.80
Interest Cover Ratio 6.97 4.80 5.07 4.73
PBIDTM (%) 22.96 23.92 33.42 27.36

The fixed asset turnover has increased slightly but company should still do efforts to increase
the utilisation of its fixed assets. Inventory turnover is lower now as compared to 2004; however
it is not very low as electricity is fast selling product. Interest cover ratio and debtor turnover
ratio are going down which is not good sign for the company and it is showing company’s falling
ability to meet the interest expenses and collecting the receivables from debtors. The profitability
is satisfactory which can be seen in PBIDTM and RONW of the company.

TATA Power

The profitability of TATA Power is going down which can be seen by PBIDTM%, ROCE
and RONW. However the debt to equity ratio of the company is very low but with the decreasing
rate of return it cannot think for debt to increase the ratio. Inventory turnover ratio and the debtor
turnover ratio have not changed significantly and they are showing stability of the firm.

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 The decreasing current ratio is not a good signal for suppliers and creditors of the company,
but at the same time company’s lenders can see the positive thing in the form of increasing
interest cover ratio. The return of the company is not very high but with the sales turnover ratio
size, company comes into top 5 companies of power sector in India.

Table.10: Ratio Analysis of TATA Power (2004-08)

Tata Power TataPower

Tata PowerCo. Tata Power Co.
YRC Co. Co.
2004-03 2005-03
2006-03 2008-03
Key Ratios
Debt-Equity Ratio 0.42 0.45 0.53 0.47
Long Term Debt-Equity Ratio 0.42 0.45 0.52 0.43
Current Ratio 1.52 1.66 2.00 1.81
Turnover Ratios
Fixed Assets 0.78 0.72 0.80 0.93
Inventory 13.15 12.90 12.36 13.65
Debtors 5.27 5.56 5.21 4.11
Interest Cover Ratio 3.59 3.78 4.42 4.57
PBIDTM (%) 31.90 27.50 22.10 18.28

Comparative Ratio Analysis of top 3 companies

The debt to equity ratio in the industry is 0.75 which is a moderately good value and can be taken
as a base to analyze different companies within the industry. As in case of NTPC (0.50),
Reliance Infra (0.58) and TATA Power (0.47) the value of debt to equity ratio is low, showing a
very low risk of business and an opportunity of financial leverage.
Comparative Ratio Analysis

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 NTPC Reliance Infra Tata Power Co.
YRC
200803 200803 200803
Key Ratios:      

Debt-Equity Ratio 0.50 0.58 0.47

Long Term Debt-Equity Ratio 0.50 0.51 0.43

Current Ratio 2.23 2.41 1.81

Turnover Ratios:      

Fixed Assets 0.72 1.12 0.93

Inventory 14.21 20.75 13.65

Debtors 17.62 4.80 4.11

Interest Cover Ratio 6.33 4.73 4.57

PBIDTM (%) 38.38 27.36 18.28

SWOT ANALYSIS
SWOT analysis is a tool for auditing an organization and its environment. It is the first stage of
planning and helps marketers to focus on key issues. SWOT stands for strengths, weaknesses,
opportunities, and threats.

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The aim of any SWOT analysis is to identify the key internal and external factors that are
important to achieving the objective. These come from within the company's unique value chain.
SWOT analysis groups key pieces of information into two main categories:

 Internal factors – The strengths and weaknesses internal to the organization.

 External factors – The opportunities and threats presented by the external environment to
the organization.

SWOT analysis is a flexible concept that can be used in various scenarios from assessing
projects or business ventures, making decisions, solving problems, evaluating candidates
for a position to marketing strategy formulation.

SWOT Analysis

The SWOT analysis provides information that is helpful in matching the firm's resources and
capabilities to the competitive environment in which it operates. As such, it is instrumental in
strategy formulation and selection. The following diagram shows how a SWOT analysis fits into
an environmental scan.

SWOT Analysis Framework

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 Environmental Scan
          / \           
Internal Analysis       External Analysis
/ \                  / \
Strengths   Weaknesses       Opportunities   Threats
|
SWOT Matrix

STRENGHTS AND OPPORTUNITIES OF POWER SECTOR:

 Well established and vast transmission and distribution network.

 Highly qualified engineering and technical personnel.
 Regulatory framework is further facilitated with enactment of Electricity Bill, 2003.
 The Electricity Bill, 2003 holds promises for the power sector and certainly for the
consumer by way of competition reliability and rationalized tariff structure.
 Emergence of strong and globally comparable central utilities (NTPC, POWERGRID).
 India has substantial non-conventional energy resource base and technologies to meet
growing power requirements by tapping this energy.

WEAKNESSES AND THREATS TO POWER SECTOR:

 Poor infrastructure has led to heavy T&D losses. Old and poor transmission and
distribution network has led to frequent power outages and poor quality of power
 Lack of proper metering and theft has led to large scale losses. Only 51% of the power
generated is billed and only 41% is realized

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 Moreover, Government provides power to agricultural sector at subsidized rates and also
free of cost in some states. All these factors have resulted in financial disorder of the State
Electricity Boards (SEBs).
 Restoration of SEBs financial health and improvement in their operating performance
continues to be a critical issue. The Government of India has signed a Memorandum of
Understanding (MOU) with various states reflecting the joint commitment of centre and
states to undertake reforms in a time bound manner
 Poor return to utilities, which affect their profitability and capacity to make further
investments
 Increasing gap between unit cost of supply & revenue, approximately Rs 1.10/ unit
 Non-availability of quality coal may hamper thermal plants’ efficiency in power generation
 Inability of SEBs to raise funds, as most of the SEBs is on the verge of bankruptcy due to
poor operational performance. Adding to the problems, SEBs need huge money to measure
up competition from efficient private players
 The major risk of privatizing a critical sector like power is the precedence of commercial
over public interest. Some of these interests that will take a back seat include development
of environment friendly generation and provision of electricity for rural areas. The new
Electricity Act does not provide any specific financial incentives for private players to
address public issues
 The SBEs which are right now holding 60% of total installed capacity, will be hit
adversely by some provisions of the new electricity act such as delicensing of generation
and open access for IPPs and CPPs, there by such units will take away the most lucrative
customers (like industrial and commercial users) from the SEBs. This will not only affect
SEB’s but also the entire power sector for near term.

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