EQUITY INVESTMENT CIA 3

Name - Ananyasparsha

Roll No – 1712766

Class – 5 BCOM IF
RELIANCE POWERS

COMPANY ANALYSIS:
➢ CORPORATE PROFILE

▪ About R- Power- Major Products And Services

Reliance Power Ltd is a part of the Reliance Anil Dhirubhai Ambani Group. It was established to develop, construct,
operate and maintain power projects in the Indian and international markets. The company is the sole distributor of
electricity to consumers in the suburbs of Mumbai. It also runs power generation, transmission and distribution
businesses in other parts of Maharashtra, Goa and Andhra Pradesh. It has services like electricity generation,
distribution, natural gas exploration, distribution etc.

▪ Current Position In Industry

With its subsidiaries, it is developing 13 medium and large-sized power projects with a combined planned installed
capacity of 33,480 MW. Reliance Natural Resources merged with Reliance Power in 2010, shortly after its initial
public offering. As of March 2018, Reliance Power has 50 subsidiaries. In Fortune India 500 list of 2017, R-Power
was ranked as the 124th largest corporation in India with 9th rank in 'Power sector' category.

▪ Key Events In History

• January 17, Incorporated as Bawana Power Pvt Ltd

1995 • February 1, Name changed to Reliance Delhi Power Pvt Ltd

• March 19, Name changed to Reliance Energy Generation Ltd

2004
•April 3, The Company entered into a MoU with the Government of Maharashtra for setting
up of thermal power plant of 1,200 MW and a gas based power plant of 2,800 MW at a
2005 suitable location. The plant is now being set up at Shahapur in Raigad district of Maharashtra.
 •September 29, Amalgamation of RPUPL with the Company becomes effective.
2007 •November 30, Letter of Award for Krishnapatnam UMPP awarded to Reliance Power.

•The Company appointed Shri. J P Chalasani, former Whole-time Director of Reliance Energy
Ltd as CEO of the Company.
2008
•Export-Import Bank of the US (Ex-Im) gave its preliminary approval to finance Reliance
Power's 4,000-MW project in Sasan, Madhya Pradesh.
2010 •Reliance Coal Resources Ltd, has entered into Share Purchase Agreements to acquire the
entire share capital of two coal companies in Indonesia.

•Europe's largest oil company, Royal Dutch Shell has joined hands with India's Reliance
Power (RPower) to jointly develop a liquefied natural gas (LNG) import terminal off the
2012 coast of Kakinada in Andhra Pradesh by 2014.
•Reliance Power signed MoU with Ming Yang Holdings Singapore, a subsidiary of China Ming
Yang Wind Power Group Limited to boost power operations in India, overseas.

▪ Sales Composition/ Main Projects

The company’s project sites are broadly located in western India (12,220 MW), northern India (9,080 MW),
northeastern India (4,220 MW) and southern India (4,000 MW). They include six coal-fired projects (14,620 MW) to
be fuelled by reserves from captive mines and supplies from India and abroad, two gas-fired projects (10,280 MW)
to be fuelled primarily by reserves from the Krishna Godavari basin (the "KG Basin") off the east coast of India, and
four hydroelectric projects (3,300 MW), three of them in Arunachal Pradesh and one in Uttarakhand.

▪ Research and Development Activities

Centre for Applied Research & Development (CARD) is the in-house R&D Centre of the Company and has been
recognised by the Department of Science & Technology. CARD is carrying out various activities relating to
environmental measures like monitoring of air, water and soil dump. CARD renders analytical services to production
/ service units of the Company with its well-established analytical facilities. CARD has been granted NABL
accreditation by National Accreditation Board for Testing and Calibration Laboratories (NABL) based on the
International Standard ISO/IEC17025:2005.

They have our own laboratory. This is accredited by the government of India, with a metering team in Mumbai and
Delhi, a team of business analysts to catch tampering and an R&D department that is working on new design
requirements due to the customers getting smarter and smarter.

The total R&D expenditure, incurred during the year 2018-19 was 16.79crore.
▪ Past and planned capital expenditures
- For the year ended 31st March 2019, the company has incurred capital expenditure of 349.13 crores and 168.17
crores in Bithnok and BTPSE project respectively which includes land of 176.92 crores and capital advance of 261.72
crores. On the basis of clarification received from management, current year expenses also have been capitalized in
the project cost.

- For R & D, the capital expenditure for the year ended 31st March 2019 was 3.84 Crores and for 2018 it was 0.18
Crores.

- Under notes to Financial Statements, capital expenditure for reportable segments is given as:

• Lignite Mining- for the Y.E 2019 it is 52.11 crores and for Y.E 2018 it is 189.47 crores.
• Power Generation – for the Y.E 2019 it is 1,924.05 crores and for Y.E 2019 it is 1008.88 crores.

▪ Board Composition and Structure

1. ‘Director’ means a director appointed to the Board of the Company.
2. ‘Key Managerial Personnel’ in relation to the Company means : i) the Chief Executive Officer or the Managing
Director or the Manager ii) the Company Secretary iii) the Whole-time Director iv) the Chief Financial Officer;
and v) such other officer as may be prescribed under theCompanies Act, 2013.
3. ‘Senior Management’ refers to personnel of the Company who are members of its core management team
excluding the Board of Directors and comprises of all members of the management, one level below the
Executive Directors, if any.

Board Members

1. Anil Dhirubhai Ambani, (Chairman - Reliance Group,

Promoter, Non Executive and Non Independent Director)

- Personal:
Anil Dhirubhai Ambani was born on 4th June, 1959, in Mumbai.
He is the younger son of the visionary entrepreneur Shri Dhirubhai Ambani. He graduated (B.Sc. in Science)
from K.C. College, Mumbai University and pursued MBA at Wharton, University of Pennsylvania. He is married to
former actress - Tina Munim and has two sons - Jai Anmol (25 Years) and Jai Anshul (21 Years).
- Corporate:
Anil Dhirubhai Ambani is one of India's leading business leaders and founder of the Reliance Group
He is the Chairman of the Reliance Group.
2. Shri Sateesh Seth- (Non-executive and Non-Independent Director)

Is a Fellow Chartered Accountant and a law graduate. He has vast experience in

general management.

3. Shri K Raja Gopal – (Whole-time Director and Chief Executive Officer )

ME, MBA having over thirty-five years of industry and leadership experience in both
public and private domains. A well acknowledged leader in power industry circles of
the country known for deep insight, vision, team building capability, fostering strong
relationships and a proven track record of execution and operation of large IPPs. Most
recently chaired the 'Association of Power Producers' (APP) and also was a member of
National Committee on Power at CII and FICCI at New Delhi.

4. Shri K Ravikumar - (Independent Director)

Was appointed as an Independent Director from September 26, 2017.

He is the former Chairman and Managing Director (CMD) of Bharat Heavy Electricals
Limited (BHEL). As CMD, he was responsible for maximizing market-share and establishing
BHEL as a total solution provider in the power sector. He had handled a variety of
assignments during his long career spanning over 36 years. His areas of expertise are design
and engineering, construction and project management of thermal, hydro, nuclear, gas
based power plants and marketing of power projects.

5. Shri D. J. Kakalia- (Independent Director)

Is a Commerce and Law Graduate from the University of Bombay. He was enrolled as an
Advocate of the Bombay High Court in 1973 and qualified as a Solicitor from Bombay in
1976. He also qualified as a Solicitor of the Supreme Court of England in 1982. He is a
Director of Companies of repute including Aditya Birla Finance Limited, Hercules Hoists
Limited, Escorts Limited, Reliance Broadcast Network Limited and Rosa Power Supply
Company Limited.
 6. Ms Rashna Khan: - (Independent Director)

A Law graduate from Government Law College Mumbai and qualified as a

Solicitor with the Bombay Incorporated Law Society and Law Society
London. She has specialized in the field of civil litigation. She is also on the
Board of the Supreme Industries Limited, Vidarbha Industries Power Limited
(VIPL) and Sasan Power Limited.

▪ Electoral System
As per the Company’s Act 2013, the members are given the facility to exercise their right to vote on resolutions
proposed to be passed at the Annual General Meetings, by electronic means. The members may cast their votes
using an electronic voting system from a place other than the venue of the meeting.

▪ Anti- takeover provisions

In 2011, SEBI declared an overhaul SEBI (Substantial Acquisitions of Shares and Takeover) Regulations 1997 by
introducing the 2011 regulations. The regulation was mainly added to regulate the acquisition of shares and voting
rights in public listed companies in India.

▪ Corporate Governance
They have adopted the Reliance Anil Dhirubhai Ambani Group Corporate Governance Policies and Code of Conduct
which has prescribed a set of systems, processes and principles confirming to the international standards, aimed at
promoting the interests of all their stakeholders. This is demonstrated in shareholder returns, high credit ratings,
governance processes and an entrepreneurial, performance focused work environment. Their customers have
benefited from high quality products delivered at the most competitive prices. Their employee satisfaction is
reflected in the stability of their senior management, low attrition across various levels and substantially higher
productivity. Above all, they feel honoured to be an integral part of India’s social development through their CSR
Activities.

▪ Efficiency and effectiveness of the management

The turnover ratios indicate the efficiency or effectiveness of a company's management

Some of the turnover ratios are:

• Accounts receivable turnover ratio = 2.54 > 1 - A high receivables turnover ratio can indicate that a company's
collection of accounts receivable is efficient and that the company has a high proportion of quality customers that
 pay their debts quickly. A high ratio can also suggest that a company is conservative when it comes to extending
credit to its customers.

• Inventory turnover ratio = 8.11 > 1 - Inventory turnover measures how fast a company sells inventory. A high
ratio implies either strong sales or insufficient inventory.

• Total assets turnover ratio = 0.18 < 1 - If a company has a low asset turnover ratio, it indicates it is not efficiently
using its assets to generate sales.

• Fixed assets turnover ratio = 0.2 < 1 - It indicates how well the business is using its fixed assets to generate sales.
A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.

▪ Compensation
1. Remuneration i.e. Cost-to-Company (CTC) shall comprise of two broad components; fixed and variable.
2. Fixed portion comprises of Base pay and Choice pay components.
3. Variable pay termed as Performance Linked Incentive (PLI) comprises of a pre-determined maximum that can be
paid as % at the end of the performance year based on the composite score achieved during the relevant
performance year.
4. Performance Year shall be from 1st April - 31st March.
5. PLI is based on the following dimensions with indicated weightages for computing the Composite score based
on: (a) Individual performance rating; (b) Function/Project Annual Operating Plan (AOP) achievement rating;
and (c) Company AOP achievement rating.

▪ Turnover
Sales turnover for the Y.E March 2019 is 43.38 crores and sales turnover for the Y.E March 2018 was 44.27
crores.

▪ Corporate Culture
They have a vision of becoming the largest and the best integrated power company. They are building some of
the biggest power plants and coal mines in the shortest time periods. They are executing one of the biggest
growth stories, one that will impact every other Indian in some way or the other. The passion to stand out and
the passion to do things differently has been their trademark. This is the passion of their employees who strive
for excellence, who have gone that extra mile, who have fought mindsets that say – this is impossible, it’s this
‘can do’ attitude which has made what Reliance is today. They invest first in their people before they invest in
 their business. Working at Reliance is not a job, it’s a mission and it’s a calling. They believe in Equal
Employment Opportunity and Affirmative Action.

▪ Benefits
✓ Insurance, Health & Wellness ✓ Financial & Retirement
Health Care Stock Options
Life Insurance Retirement Plan
Disability Insurance Performance Bonus
✓ Family & Parenting ✓ Vacation
Work from Home
PTO
Maternity Leave Sick Leave
Flexible Hours
Bereavement Leave
✓ Perks & Other Benefits ✓ Professional Support
Employee Discount Diversity Program
Free Lunch or Snacks Job Training & Tuition
Gym Membership Apprenticeship Program

▪ Retirement Plan
The company has adopted Accounting Standard 15, “Employee Benefits”. The Company has classified various
Employee Benefits as under:

Defined Contribution Plans:

(a) Provident fund
(b) Superannuation fund
(c) State defined contribution plans
- Employees’ Pension Scheme 1995
The provident fund and the state defined contribution plan are operated by the Regional Provident Fund
Commissioner and the superannuation fund is administered by the Trust. Under the schemes, the Company is
required to contribute a specified percentage of payroll cost to the retirement benefit schemes to fund the
benefits. These funds are recognised by the Income tax authorities.
Defined Benefit Plans:
(a) Gratuity
(b) Leave Encashment
 (c) Leave Encashment is payable to eligible employees who have earned leaves, during the employment as
per the company’s policy

▪ Influence on Shareholder Value

At Reliance Power, maximizing shareholder value is an article of faith. Keeping this in mind, they invest first
in their people before they invest in their business. An organization is the sum total of its people not its processes.
As a result, these companies get a higher return on investment and overall shareholder value.

▪ Labour Relations
There are no employee associations that are recognized by the Management. Strong deterring policies on
recruitment against child labour/ forced labour/ involuntary labour and discrimination in any manner are made part
of employment process. Similarly, Reliance Power has zero tolerance on sexual harassment.

▪ Insider ownership levels

Information suggests that Reliance Power Ltd insiders own less than 1 % of the company. But they may have indirect
interest.

▪ Legal actions & the Co.’s state of preparedness

The company takes appropriate legal steps to protect the interest of its stakeholders at all times. One such instance
is- Reliance Group last week, accused L & T Finance and Edelweiss Group entities of “illegal” and “motivated” actions
in invoking the pledged shares of Anil Ambani group’s three listed firms including Reliance power and selling them in
open market causing a steep fall in share values.

▪ Management Strengths

▪ SWOT Analysis
STRENGTHTS
1. Huge capacity generation in pipeline
2. Projects are spread across most parts of the country
3. Advanced technology to reduce emissions has led to acquiring of carbon credits
4. Strong backing of the Reliance group makes it a force
5. Largest Portfolio
6. Diversified Fuel Sources and Technologies
 7. Strategically Located Power Projects
8. Fuel Access Security
9. Diversified Power Off- take Arrangements
WEAKNESS
1. Incomplete projects leading to rise in costs which include interest costs
2. Income obtained currently is other income which is due to sale of assets and not due to operations.
Increasing other income leads to decline of share holder trust and decrease in share price.
OPPORTUNITIES
1. Setting up huge power plants in Jharkhand and Orissa which have huge reserves of coal
2. Huge scope in power sector once the projects become operational
3. Investing in Non- conventional energy projects
4. International collaborations
THREATS
1. Fluctuating foreign prices of coal and oil
2. Changes in foreign policies regarding import of coal and oil.
3. Govt. policies and regulations affect operations.

▪ Strategies
o Reduction of cost of power generation
o Ensuring fuel supply
o Focusing on power deficit regions
o Establishing an optimal miss of off-take arrangements

▪ Major Competitors
1. Tata Power
2. Adani Power
3. NTPC

▪ USP
The largest power generation portfolio under development in the private sector in India.
 INDUSTRY ANALYSIS

➢ INDUSTRY BACKGROUND
India at present stands as the 4th largest consumer of energy, whereas in terms of electricity generation capacity it
ranks no. 5th in the world. Power sector is the backbone of industrial, commercial and agricultural sector and as
Indian industries across sectors ramped up their capacities in the decade gone by, generation of power as well as its
distribution gained immediate attention from the authorities to support India’s growth story. The Power sector in
India is categorized into three major segments viz. Generation, Transmission and Distribution.

Electricity generation refers to generation of power from primary sources of energy which is commonly expressed
in kilowatt-hours (kWh). Electricity generation capacities in India are classified on the basis of ownership. State
governments collectively account for ~40% of the total generation capacity, followed by private players (~31%) and
central government (~29%) . India’s power generation capacity has increased from ~143GW in FY08 to ~223 GW in
FY13, witnessing a CAGR of ~11.8%

Transmission in context of power refers to evacuation of electricity from a generator to a distributor. The
transmission systems in the country are categorized into inter-state and intra-state systems. Power Grid Corporation
of India largely owns and operates the inter-state assets, whereas the state utilities own the intrastate assets.
Although the transmission sector in India has been opened up for private players, their presence is negligible.

A distribution system technically acts as a carrier of electricity to the end-user from the transmission network. At
present the Indian power sector has close to 200 million consumers and there are ~73 distribution utilities catering
to their needs. The distribution utilities include electricity departments, private distribution companies and state
electricity boards. Capacities-Classification (Ownership): FY13 Power Generation: Capacity & Actual : FY08-FY13
Although India is amongst the largest consumers in the world, in terms of per capita consumption of power its
ranking in the world is dismal. As per the World Bank database, India’s per capita consumption in 2011 was 684
kWh. However the same for countries like USA and U.K. was 13,246 kWh and 5,516 kWh respectively.
➢ INDUSTRY CHARACTERISTICS

▪ Stage in its life cycle:

Below I have identified the current stage of the Indian power industry in the ‘Industry Life Cycle’ i.e. it is in the

Mature Stage/ Late Stage since it follows the characteristics as described in the two illustrations below:

ILLUSTRATION 1
 ILLUSTRATION 2

▪ Business- Cycle Sensitivity

The power and energy sector is sensitive to the business cycle. The industry works in a more cyclical
fashion. Weather and seasons play critical role in the industry and cause an increase in demand for
gasoline in the summer and a decrease in demand during the winter. Moreover, when people buy less at
the pump it is reflected in less storage and transportation which in turn leads to less drilling and
exploration. One exception to this cyclical fashion is natural gas. Natural gas sees a spike in demand during
the colder months as people use it to heat their homes. Because of cyclical nature of the energy industry
their earnings are also exposed to volatility.

▪ Brand Loyalty
The emergence of smart grids changes the customer-utility relationship. To facilitate the transition
towards a sustainable, reliable and economically viable energy system, utilities need to develop smart grid
products and services that have strong customer acceptance and enable different customer segments to
engage in energy efficiency. Thus, integrating customer feedback on innovative smart grid services early in
the innovation process is of crucial importance. Further, energy providers need to increase customer
loyalty and invest in relationship marketing in order to survive and be successful in a competitive market
 environment. A five-month field experiment was conducted that investigated the effectiveness of different
reward programs in increasing customer loyalty and customer feedback provision in the energy sector. The
results demonstrate that reward programs have a positive effect on behavioral (customer feedback
provision) and attitudinal (e. g. satisfaction with the energy provider) aspects of customer loyalty. The
reward type matters, however. While monetary reward programs are effective in increasing customer
feedback provision, only social reward programs can improve attitudinal aspects of customer loyalty.
Energy providers should therefore consider tailoring the reward type to meet their program objectives
when employing reward programs.

▪ Customer Switching Costs

Switching cost for the buyers is low as of now but is supposed to increase when new players come in the
market as the product in not differentiable i.e. electricity.

▪ Intensity of Competition
Competition is getting intense, but despite there being enough room for many players, shortage of inputs
such as natural gas and regulatory hurdles has dissuaded new entrants.

▪ Analysis of power sector using Porter’s Five Forces Model

▪ Buyer Power

o Based on the following parameters it can be said that Overall the buyer has weak power.
o Low Switching Cost – switching cost for the buyers is low as of now but is supposed to increase when new
players come in the market as the product in not differentiable i.e. electricity.
o Buyer size – Very small.
o Oligopoly Threat – Very Low.
o Undifferentiated product – As the product i.e. electricity is undifferentiated product, so this increases buyer
power.
o Tendency to switch – Buyers will switch to the supplier who is efficient and cost effective.
o Price sensitivity – Not much price sensitive
o Financial muscle – Nothing as compared to PSEs.
o Buyer independence – Low as of now but if more suppliers come into picture as Govt. has sought competition in
this market, the buyer power will increase.
o Product dispensability – Very Low.
▪ Supplier Power
o Based on the following parameters it can be assessed that the supplier Power in High.
o Supplier size – Very Large as the suppliers are Large PSEs.
o Oligopoly threat – Small number of suppliers enjoy monopoly, thereby contributing to the supplier power.
o Switching costs – Very high, as only large govt. companies are the suppliers.
o Player independence – Low
o Substitute inputs – As no substitute inputs, so the firms have no choice.
o Player dispensability – High
o Differentiated input- Inputs are same i.e. electricity in case of company buying electricity from wholesale market
and selling to the end-users, and coal or gas in case the company is in power generation field.
o Bargaining Power of the suppliers – Not very high since the tariff structure is mainly regulated.

▪ Threat of New Entrants

The Threat of new entrants is moderate based on the following parameters.
o Low Switching Cost – Switching cost for the end-user is low, so it increases opportunity for the new entrants.
o Undifferentiated product – Product is not differentiable i.e. electricity, so the users have the incentive to switch
to the low cost supplier. This increases the opportunity for the new efficient entrants.
o Fixed costs – High fixed cost acts as a barrier to entry for new entrants.
o Little regulation – Delicensed generation and multiple licenses in the distribution in the same area of supply acts
as an opportunity for the new entrants.
o Distribution accessible – Increasing the threat of new entrants.
o Suppliers accessible – Increasing the threat of new entrants.
o Market growth – High, leading to great opportunities for new entrants.

▪ Threat of Substitutes
o The Threat of substitutes is Weak as per the following parameters:
o Low Switching Cost – The cost of switching to substitutes like gas, solar penal, etc. is high.
o Number of Companies in the industry is few so the market share is concentrated.

▪ Rivalry among existing firms

o The rivalry among existing firms is low as per the following parameters:
o Competitor size – Very Few companies very large in size like NTPC, NLC, NHPC, NPCIL, PGCIL etc.
o Number of players – Very few.
o Hard to exit
o Ease of expansion – Difficult because of lack of investment and resources.
▪ Barriers to entry:
1. Barriers to entry are high, especially in the transmission and distribution segments, which are largely state
monopolies.
2. Also, entering the power generation business requires heavy investment initially.
3. The other barriers are fuel linkages,
4. Payment guarantees from state governments that buy power and
5. Retail distribution license.

▪ Barriers to exit:
1. Direct costs - preservation and reinstatement costs, site remediation costs and staff redundancy costs.
2. Site leases - Where the land on which generating plant is located is leased, the lease document will usually
include provisions which require the lessee to remove the generating plant and return the site to the state it
was in prior to the commencement of the lease at the end of the lease term.
3. Staff redundancy costs.
4. Indirect opportunity costs- profits foregone by a firm if it leaves an industry such as:
-The operating profits the generator could expect to earn on its plant if it continued operating.
-The proceeds (if any) from the sale of its plant and the expected return on those proceeds.

▪ Technologies used:
1. Coal-based-
Conventional coal-based plants have two major drawbacks - low overall efficiency levels and high pollution levels.
As a result, technological research has focused on the development of non-polluting technologies using coal. The
most popular of these technologies are fluidized bed combustion (FBC) and integrated gasification combined cycle
(IGCC). In Fluidized bed combustion, air is blown at high pressure through finely ground coal. The particles mix with
the air and form a floating or fluidized bed. This bed acts like a fluid in which the constituent particles collide with
one another. The bed contains around 5 per cent coal (or fuel) and 95 per cent of inert material (such as ash or
sand). Integrated gasification combined cycle IGCC technology is used to enhance the thermal efficiency of coal-
based power plants and reduce emissions. In IGCC plants, the coal is gasified using a gasifier. The gaseous coal is
purified to remove pollutants such as sulphur. The purified coal is subsequently burnt to generate hot gases, which
are used to run a gas turbine. The exhaust gases, containing waste heat, are used to boil water and generate steam.
The steam is used to run a steam turbine. IGCC technology can deliver thermal efficiency of up to 48-50 per cent. In
addition, it can be used with other heavy fuels such as refinery residues and petroleum coke. IGCC technology is
also environment friendly, as pollutants such as sulphur dioxide and oxides of nitrogen, are reduced to very low
levels. However, the cost of IGCC plants is higher than conventional plants.
2. Nuclear Power-
Nuclear power plants reduce carbon dioxide emissions. However, safety concerns abound, particularly those
relating to exposure to harmful nuclear radiations. In addition, the cost of a nuclear plant is around three times
higher than that of a gas-based plant. However, new technologies are being developed to address some of the
safety issues associated with nuclear power plants:
• Pebble bed modular reactor-
The pebble bed modular reactor (PBMR) differs from a conventional ‘light water’ reactor as it utilizes no fuel rods
and cooling water. The fuel comprises nearly 15,000 small carbon and ceramic-coated specks of uranium that are
pressed into a small pebble. The pebble is coated with a layer of graphite. Inside the pebble, uranium undergoes
fission and releases heat. However, the graphite layer traps the radioactivity. Around 300,000 pebbles are kept in
a reactor, which is cooled by a flow of helium gas. The helium gas expands due to the heat and spins an electricity
generating turbine. However, since helium is chemically and radiologically inert, it does not become radioactive as
it circulates through the pebble bed. One of the main advantages of PBMR technology is that relatively small units
producing 100-150 MW of power can use it. In addition, the core of the reactor does not melt even at high
temperatures, as the operating temperature continues to remain below the melting point of the ceramic pebbles
that contain the fuel. This helps prevent safety hazards.

3. Distributed generation-
In distributed generation, small generators are located near the consumer site, within the distribution system.
Distributed gencos are not directly connected to the transmission grid. Considering the technological
improvements and reduction in the costs of small generators, the amount of power consumption through
distributed generation is expected to rise in the future.

4. Technology in transmission-
HVDC transmission- One of the pre-requisites for integrating grids is to synchronise their frequencies. In India,
synchronous integration of regional grids was not possible due to variations in frequencies and voltages. Therefore,
the most viable alternative is the asynchronous transfer of power through HVDC transmission links.

5. Advanced Metering Infrastructure-

AMI is not a single technology implementation, but rather a fully configured infrastructure that must be integrated
into existing and new utility processes and applications. This infrastructure includes home network systems,
 including communicating thermostats and other in-home controls, smart meters, communication networks from
the meters to local data concentrators, back-haul communications networks to corporate data centers, meter data
management systems (MDMS) and, finally, data integration into existing and new software application platforms.
Additionally, AMI provides a very ―intelligent step toward modernizing the entire power system. At the consumer
level, smart meters communicate consumption data to both the user and the service provider. Smart meters
communicate with in home displays to make consumers more aware of their energy usage. Going further, electric
pricing information supplied by the service provider enables load control devices like smart thermostats to
modulate electric demand, based on pre-established consumer price preferences. More advanced customers
deploy distributed energy resources (DER) based on these economic signals. And consumer portals process the AMI
data in ways that enable more intelligent energy consumption decisions, even providing interactive services like
prepayment.

▪ Government Regulation

Electricity Act, 2003 provides an enabling framework for accelerated and more efficient development of the power
sector. The Act seeks to encourage competition with appropriate regulatory intervention. Competition is expected
to yield efficiency gains and in turn result in availability of quality supply of electricity to consumers at competitive
rates.

Section 3 (1) of the Electricity Act 2003 requires the Central Government from time to time to prepare the National
Electricity Policy and tariff policy, in consultation with the State Governments and the Authority for development of
the power system based on optimal utilization of resources such as coal, natural gas, nuclear substances or
materials, hydro and renewable sources of energy.

Section 3 (3) of the Act enables the Central Government to review or revise the National Electricity Policy from time
to time.

The National Electricity Policy aims at laying guidelines for accelerated development of the power sector, providing
supply of electricity to all areas and protecting interests of consumers and other stakeholders keeping in view
availability of energy resources, technology available to exploit these resources, economics of generation using
different resources, and energy security issues. The National Electricity Policy has been evolved in consultation with
and taking into account views of the State Governments, Central Electricity Authority (CEA), Central Electricity
Regulatory Commission (CERC) and other stakeholders.

▪ Other Industry Problems

1. Inadequate last mile connectivity is the main problem to supply electricity for all users. The country already has
adequate generation and transmission capacity to meet the full demand temporally and spatially. However, due to
 lack of last-mile link-up with all electricity consumers and reliable power supply, many consumers depend on diesel
generators using costly diesel oil for meeting unavoidable power requirements. Also more than 10 million
households are using battery storage UPS as back-up in case of load shedding.

2. A system of cross-subsidization is practiced based on the principle of 'the consumer's ability to pay'. In general, the
industrial and commercial consumers subsidize the domestic and agricultural consumers.[214][215] Further,
Government giveaways such as free electricity for farmers, partly to curry political favor, have depleted the cash
reserves of state-run electricity-distribution system and led them to a mass debt of ₹2.5 trillion (US$36 billion). This
has financially crippled the distribution network, and its ability to pay for purchasing power to meet the demand in
the absence of subsidy reimbursement from state governments. This situation has been worsened by state
government departments that do not pay their electricity bills.

3. Name plate/declared capacity of the many coal-fired plants owned by IPPs are overrated above the
actual maximum continuous rating (MCR) capacity. The reason for overrating the capacity is to over-invoice the
plant cost.These plants operate 15 to 10% below their declared capacity on daily basis and operate rarely at
declared capacity. Thus these units are not effectively contributing to the online spinning reserves to maintain
power system/grid stabilization. This is also due to the reason that point of connection charges are levied in India
based on energy exported instead of MCR capacity as applicable for national grid in the UK.

4. Coal supply: Despite abundant reserves of coal, the country isn't producing enough to feed its power plants. India's
monopoly coal producer, state-controlled Coal India, is constrained by primitive mining techniques and is rife with
theft and corruption. Poor coal transport infrastructure has worsened these problems. To expand its coal production
capacity, Coal India needs to mine new deposits. However, most of India's coal lies under protected forests or
designated tribal lands. Any mining activity or land acquisition for infrastructure in these coal-rich areas of India, has
been rife with political demonstrations, social activism and public interest litigations. Being a massive consumer of
local and imported coal, India should end the Coal India's coal pricing monopoly and implement coal trading
in commodities stock exchange to arrive at market-determined coal price on daily basis.

5. Poor pipeline connectivity and infrastructure to harness India's abundant coal bed methane and natural gas
potential. The giant new offshore natural gas field has delivered far less gas than claimed to cause a shortage of
natural gas.
6. Average transmission, distribution and consumer-level losses exceeding 30% which includes the auxiliary power
consumption of thermal power stations, fictitious electricity generation by wind generators, solar power plants &
independent power producers (IPPs), etc.

7. The residential building sector is one of the largest consumers of electricity in India. Continuous urbanization and
the growth of population result in increased power consumption in buildings. Thus, while experts express the huge
potential for energy conservation in this sector, the belief still predominates among stakeholders that energy-
efficient buildings are more expensive than conventional buildings, which adversely affects the "greening" of the
building sector.

8. Theft of power: In India, financial loss due to theft of electricity may be around $16 billion yearly. Populist pro-free
power measures also bleed the power companies. Some power companies continue to bleed and lead to bankruptcy
due to one of these factors. This also leads legal users to pay more. This creates a scenario where villages have a
huge cut of power and simultaneously availability of power in the grid with no purchase by DISCOMs.

▪ Other Industry Opportunities

1. The renewable energy sector in India is growing rapidly and presents an opportunity for strong financial returns.

➢ Analysis of Demand

o Demand trends

During the fiscal year 2017-18, the utility energy availability was 1,205 billion KWh with a short fall of requirement by 8
billion KWh (-0.7%) against 1230 billion KWh anticipated. The peak load met was 160,752 MW with a short fall of
requirement by 3,314 MW (-2%) against 169,130 MW anticipated. In LGBR 2018 report, India's Central Electricity
Authority anticipated for the 2018–19 fiscal year, energy surplus and peaking surplus to be 4.6% and 2.5%
respectively.[47] Though few states are expected to face energy shortage, power would be made available adequately from
the surplus regions with the available excess capacity inter regional transmission links.[48] By the end of calendar year
2015, India has become power surplus country despite lower power tariffs.

o Demand drivers
1. Nearly 0.28% of households (0.6 million) have no access to electricity in India. The International Energy
Agency estimates India will add between 600 GW to 1,200 GW of additional new power generation capacity
before 2050.
 2. About 136 million Indians (11%) use traditional fuels. Traditional fuel is an inefficient source of energy, its burning
releases high levels of smoke. Some reports, including one by the World Health Organisation, claim 300,000 to
400,000 people in India die of indoor air pollution and carbon monoxide poisoning every year because of biomass
burning. Traditional fuel burning in conventional cook stoves releases unnecessarily large amounts of pollutants,
between 5 and 15 times higher than industrial combustion of coal, thereby affecting outdoor air quality, haze and
smog, chronic health problems, damage to forests, ecosystems and global climate. The growth of the electricity
sector in India may help find a sustainable alternative to traditional fuel burning.

3. Rural and Urban electrification- As on 28 April 2018, all Indian villages were electrified. India's Ministry of Power
launched Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) as one of its flagship programmes in July 2015 with
the objective of providing round the clock power to the rural areas. It focuses on reforms in the rural power sector
by separation of feeder lines (rural households & agricultural) and strengthening of transmission and distribution
infrastructure.

▪ Outlook- Long Term Demand

The long- term average demand growth rate is expected to remain in the higher single-digit growth levels given the
much lower per capita power consumption in India as compared to the global average. Not only this, the poor
financial state of SEBs could possibly lead to lower demand for power going ahead.
▪ Sources of Demand:

Correlation of Demand with social, demographic, economic variables:

High interest rates, lower GDP, decreased sales in new light duty vehicles, and decrease in employment will result in
lower consumption by consumers and therefore will be harmful to the petroleum industry. Also increased access to
natural resources to heat homes will be harmful to the petroleum industry.
➢ Analysis of Supply

The total installed capacity in the country as on 31st March 2017 was 344 GW as on 31st March 2018, out of this

64.8% is accounted by the thermal power stations. With this the total capacity addition during the 12th plan period is

99,209.5 MW.

▪ Sources of Power Supply:

The power supply market in India consists of renewable and non renewable sources of energy. Major market is
covered by Thermal Power Plants generating about 66% of total power production. The Renewable energy sources
including Wind Energy, Solar Energy and Biomass Energy constitute of 10% installed power capacity. It is to be noted
that the government is taking initiative to expand the installation capacity for renewable sources up to 20,000 MW
by 2020. This will not only reduce the cost of power production but also increase the power capacity to maximum.

Besides being fourth largest energy

consumer in the world and fifth largest
power generator in world, India has noted a
power deficit @ 8.5% in year 2011. The
market is still growing @ 5% annually.

▪ Trading
Bulk power purchasers can buy electricity on a daily basis for short, medium and long term duration from reverse e-
auction facility. The electricity prices transacted under reverse e-auction facility are far less than the prices agreed
under bilateral agreements. Multi Commodity Exchange has sought permission to offer electricity future markets in
India. The Government of India is also planning reverse procurement process in which generators and discoms with
surplus power can seek e-bids for power supply up to one-year period to put an end to bilateral contracts and find
out market-based price discovery for electricity.
 ▪ Demand Supply Gap
The demand supply gap for FY18 was range bound between 0.6-0.9% with few months reporting low peak and base
deficit of 0.6%. The demand, however remains low due to various reasons including the low paying capacity of
financially distressed Discoms and last mile connectivity to all consumers yet to be achieved. This has inturn led to a
heavy financial burden in the form of NPA’s to the banking sector.

➢ Analysis of Pricing
The cost of a power project depends on the type of fuel used. The choice of fuel for a power plant depends on
several factors listed below:
• Relative cost of generation
• Availability of fuel
• Transportation constraints
• Environmental hurdles
The capital cost of power plants also vary significantly based on the source of energy, infrastructure, plant size,
technology, equipments and interest costs incurred during construction.
Tariff:
A power generation project has three party tariff structure.
1. The fixed part of tariff comprising the interest on long term debt, interest on working capital, depreciation,
operation and maintenance expenses and taxes.
2. The variable part of tariff comprising the cost of primary and secondary fuel.
3. Unscheduled interchange to account for the valuation between the actual generation and the scheduled
generation.
The investment costs in the power sector are very high in the infrastructure and since they have very less
competitors and mostly government monitors, the power rates are set as per standards. The demand and supply of
power is also a determining factor for power rates and hence the distribution companies keep the charges
accordingly. In some areas due to lower economic level the government subsidizes the rates and hence the
government will be responsible for filling the gap of subsidy.

➢ Financial Ratios and Measures

[For the Y.E 31st March 2019 (In Crs) using the consolidated financials]

1. LIQUIDITY RATIOS – Measures the company’s ability to meet its short-term obligations.
▪ Current Ratio = Current Assets/ Current Liabilities = 0.56 < 1
 A current ratio below 1 means that the company doesn't have enough liquid assets to cover its total short-
term liabilities.
▪ Quick Ratio =Most Liquid Current Assets/ Total Current Liabilities = 1.22 > 1
A company having a quick ratio higher than 1 can instantly get rid of some of its current liabilities.

2. SOLVENCY RATIOS - Measures the company’s ability to meet its debt obligations.
▪ Debt Equity Ratio= Total Debt/ Total Equity = 1.56 > 1
- If total liabilities are greater than total equity, the debt to equity ratio will be greater than 1 indicating
that more than 50% of the company's assets have been funded by debt. It also means that the owner's
ownership % of assets is going up.
▪ Long- term Debt Equity Ratio = Long Term Debt/ Total Equity = 1.04 > 1
- Same as debt equity ratio but long term debts are taken into consideration.
▪ Financial Leverage = Total Assets/ Total Equity = 7.03
Financial leverage ratio helps in determining the effect of debt on the overall profitability of the company
High financial leverage means the fixed costs of running the business are high.
▪ Interest coverage = 1.07
Lower the interest coverage ratio, the higher the company's debt burden and the greater the possibility of
bankruptcy or default. A higher ratio indicates a better financial health as it means that the company is more
capable of meeting its interest obligations from operating earnings.
▪ Net Debt (Total ST & LT Debt – Total Current Assets) to EBITDA = (27,029.92- 17,675.18) /1113.50 = 8.40
A higher Debt/EBTIDA ratio means that the company is heavily leveraged and it might face difficulties in paying
off its debts.
▪ Net Debt to Capital = 23008.96/ 29835.05 = 0.77
Same as debt to capital.
▪ Debt to Assets = 27,029.92/ 44,407.39 = 0.61
A ratio less than one (<1) means the company owns more assets than liabilities and can meet its obligations by
selling its assets if needed. The lower the debt to asset ratio, the less risky the company.
▪ Debt to Capital = 27,029.92/ 29835.05 = 0.91< 1
A good debt to equity ratio is around 1 to 1.5. It is lesser than 1 so it should improve.

3. PROFITABILITY RATIOS- Measures a company’s ability to generate profitable sales from its resources (assets).
▪ Gross Profit Margin(%) = 37.68
▪ Operating Profit Margin(%) = 47.91
▪ Profit Before Interest And Tax Margin(%) = 36.21
▪ Net Profit Margin(%) = -35.99
▪ Return on capital employed(%) = 7.7
 ▪ Return on Assets (ROA) = NI/Avg. Total Assets = -2,951.82 / 47456.25 = -0.06
▪ Return on Equity (ROE) = NI/ Avg. Total Equity = -2,951.82 / 2805.13 = -1.05
- Higher the profitability ratios the better.

4. FINANCIAL STATISTICS AND RELATED CONSIDERATIONS-

▪ Growth rate of net sales
= [(Current Period Net Sales – Prior Period Net Sales)/Prior Period Net Sales]*100
= [(8,201.31 - 9,839.82)/ 9,839.82]*100
= [-1638.51/9839.82]*100
= [-0.166518]*100
= 16.65 %
▪ Growth rate of gross profit
= [(Current Period Gross Profit – Prior Period Gross Profit)/Prior Period Gross Profit]*100
= [(4,262.58 - 4,664.24)/ 4,664.24]*100
= [-401.66/4664.24]*100
= 8.61 %
▪ EBITDA = 1,113.50
▪ Net loss = -2,951.82
▪ EPS = -10.52

VALUATIONS
Method used – Discounted Cash Flow Method
FCF = Cash from Operating Activities – Capital Expenditures.
Let us calculate the FCF for the last 3 financial years.
(Rupees in Lakhs)
PARTICULAR 2017-2018 2016-2017 2015-2016
Cash from Operating 4,36,472 4,70,536 4,68,207
Activities (after income tax)
Capital Expenditures (45,974) (60,061) (211,911)
FCF 390,498 410,475 256,296

Step 1 – Estimate the average free cash flow:

(390498 + 410475 + 256,296)/3 = Rs. 352,423

Step 2 – Identify the growth rate :

Growth rate of 15 % for 1st 5 years and
Growth rate of 10 % for last 5 years.

Step 3 – Estimate the future cash flows:

We know the avg. cash flow for 2017-18 is Rs. 352,423. At 15 % growth, the cash flow for the year 2018-19 is estimated
to be = 352,423 * (1+15%) = Rs. 405,286.45 and so on.
Sl. No. Year Growth rate Future Cash Flow (INR Lakhs)
01 2015-16 15% 352,423
02 2016-17 15% 405,286.45
03 2017-18 15% 466,079.41
04 2018-19 15% 535,991.32
05 2019-20 15% 616,390
06 2021-22 10% 678,029
07 2022-23 10% 745,831.9
08 2023-24 10% 820,415.09
09 2024-25 10% 902,456.60
10 2025-26 10% 992,702.26

Step 4 - The Terminal Value – is the sum of all the future free cash flow, beyond the 10th year, also called the terminal
year. It can be taken as 3%.
Terminal Value = FCF * (1 + Terminal Growth Rate) / (Discount Rate – Terminal growth rate).
Let us calculate the terminal value considering a DR of 9% and terminal growth rate of 3%
= 9,92,702.26*(1+3%)/(9%-3%)
= 9,92,702.26*(1.03)/(6%)
=9,92,702.26*17.17
=Rs. 1,70,44,697.80
Step 5 – NPV
DR = 9%
Sl. Year GR FCF Discounted CFS Discounted CFS
No.
01 2015-16 15% 352,423 352,423/1.09 3,23,323.85
02 2016-17 15% 405,286.45 405,286.45/(1.09)^2 3,41,121.49
03 2017-18 15% 466,079.41 466,079.4/(1.09)^3 3,59,906.87
04 2018-19 15% 535,991.32 535,991.32/(1.09)^4 3,79,710.19
05 2019-20 15% 616,390 616,390/(1.09)^5 4,00,617.44
06 2021-22 10% 678,029 678,029/(1.09)^6 404,286.56
07 2022-23 10% 745,831.9 745,831.9/(1.09)^7 408,004.32
08 2023-24 10% 820,415.09 820,415.09/(1.09)^8 411,730.94
09 2024-25 10% 902,456.60 902,456.60/(1.09)^9 415,514.80
10 2025-26 10% 992,702.26 992,702.26/(1.09)^10 419,321.72
NPV of Future FCFs = 38,63,538.18

Along with this, we also need to calculate the net present value for the terminal value = 1,70,44,697.80/ (1+9%)^10 =
7,199,875.72.
Therefore, the sum of the present values of the cash flows is = NPV of future free cash flows + PV of terminal value =
38,63,538.18 +7,199,875.72 = Rs. 11063413.9 is the Total PV of FCFs

Step 6 - The Share Price

We are now at the very last step of the DCF analysis. We will now calculate the share price based on the future free cash
flow of the firm. We now know the total free cash flow. We also know the number of shares outstanding in the markets.
Dividing the total free cash flow by the total number of shares would give us the per share price. However before doing
that we need to calculate the value of ‘Net Debt’ from the company’s balance sheet.
For Reliance Power this would be (based on FY18 Balance sheet) –
Net Debt = Current Year Total Debt – Cash & Cash Balance.
= 3,715.41 - 916.49
= 2798.92
This has to be subtracted from the total present value of free cash flows.
= 11,063,413.9 – 2,798.92
= Rs. 11,060,614.98 is the new total PV of FCFs

Share Price = Total Present Value of Free Cash flow / Total Number of shares

We know from Reliance Power’s FY 2017-18 annual report the total number of outstanding shares is. Hence the intrinsic
value or the per share value is – 9,64,895.

= 11,060,614.98/ 9,64,895

=Rs. 11.46/ share

Step 7 - Modeling Error & the intrinsic value band

Lower intrinsic value = 11.46*(1-10%)= 10.314
Upper intrinsic value = 11.46/ (1-10%)= 12.73.
Hence, instead of assuming Rs.11.46 as the fair value of the stock, I would now assume that the stock is fairly valued
between 10.314 and 12.73. This would be the intrinsic value band.
MP of share as on 31st March 2018(CY for our calculation) is Rs. 36.1
Conclusion = Since the MP of stock is above the higher intrinsic value band, the stock is considered overvalued. The
investor can either book profits at these levels or continue to stay put. But should certainly not buy at these levels.

REFERENCES:
• https://en.wikipedia.org/wiki/Electricity_sector_in_India
• RBSA Indian Power Industry Analysis report
• Research Article on “Study on Indian Power Sector : Opportunities and Trend”
• Research Article on “Power Sector Analysis and Project Economics”
• Analysis on Power Supply Market in India -http://power-supply-market-india.blogspot.com/2012/03/analysis-
on-power-supply-market-in.html?m=1
• https://www.electricalindia.in/power-sector-in-2019-beyond/
• https://m.moneycontrol.com/stock/RP/financials/financials-ratio
• Company Annual Reports FY 2015-16, 2016-17, 2017-18.