Working capital management of NTPC

INTRODUCTION

NTPC Limited (Formerly National Thermal Power Corporation) is the largest power generation company in India. Forbes Global 2000 for 2009 ranked it 317th in the world. It is an Indian public sector company listed on the Bombay Stock Exchange although at present the Government of India holds 89.5% of its equity. It was founded on November 7, 1975.

NTPC's core business is engineering, construction and operation of power generating plants and providing consultancy to power utilities in India and abroad.

OBJECTIVES OF THE STUDY

The main objective of the present study is to examine the effectiveness of management of finances of NTPC Ltd. Towards this end, and to set a direction for the study, the following objectives are set forth:

  1. To profile the power scene in India in its various facets so as to provide a meaningful backdrop for the study involving NTPC which is a premier power utility in the Indian power sector;
  2. To study the performance highlights and critical issues of NTPC so as to identify the areas of NTPC's strengths and those which could adversely affect its performance;
  3. To study the management of long-term finances of NTPC for the purpose of identifying the problems involved in its project financing;
  4. To study the management of short-term finances of NTPC so that the specific problems faced in the management of different components of working capital are identified;
  5. To study the management of finances in NTPC through its long-run tariff policy
  6. To study the efficacy of the internal management system as is being evolved and operated by NTPC for the management of its finances; and finally
  7. To suggest suitable measures that may contribute to the effective overall management of NTPC's finances.

RESEARCH METHODOLOGY

Research Design

Design used for this research is Explorative Research. As hidden insights are to be find out from this research, in depth analysis is done to explore the facts.

Data Collection

The data collection for this research used is Secondary Data.

  • Website of the company.
  • Different research papers.

This study mostly makes use of secondary data relevant for the purpose of analysis and draws inferences which will throw light on the subject. They include NTPC's published annual reports for the relevant period, Annual plan documents, Company manuals and records from NTPC's Corporate Budget, International Finance, Power Bond Cell, also site cash books and other relevant records. In addition to these, Bulk Power Supply Agreements (BPSAs) entered into by NTPC with the beneficiary State Electricity Boards (SEBs), Bureau of Industrial Costs and Prices (BICP) and K.P. Rao Committee Reports on NTPC's tariffs, relevant electricity legislation like Indian Electricity Act, 1910, Electricity (Supply) Act, 1948 and other company records at NTPC's Corporate Centre are used for the study of tariffs.

COMPANY ANALYSIS

NTPC Limited (Formerly National Thermal Power Corporation) is the largest power generation company in India. Forbes Global 2000 for 2009 ranked it 317th in the world. It is an Indian public sector company listed on the Bombay Stock Exchange although at present the Government of India holds 89.5% of its equity. It was founded on November 7, 1975.

NTPC's core business is engineering, construction and operation of power generating plants and providing consultancy to power utilities in India and abroad.

Facts about company:

NTPC's share at 31 Mar 2001 of the total installed capacity of the country was 24.51% and it gvg generated 29.68% of the power of the country in 2008-09. Every fourth home in India is lit by NTPC. 170.88BU of electricity was produced by its stations in the financial year 2005-2006. The Net Profit after Tax on March 31, 2006 was INR 58,202 million. Net Profit after Tax for the quarter ended June 30, 2006 was INR 15528 million, which is 18.65% more than for the same quarter in the previous financial year. 2005).

Pursuant to a special resolution passed by the Shareholders at the Company's Annual General Meeting on September 23, 2005 and the approval of the Central Government under section 21 of the Companies Act, 1956, the name of the Company "National Thermal Power Corporation Limited" has been changed to "NTPC Limited" with effect from October 28, 2005. The primary reason for this is the company's foray into hydro and nuclear based power generation along with backward integration by coal mining.

National Thermal Power (NTPC) the 138 position in 2009 10 Indian companies make it to FT's top 500

ANALYSIS OF TOPIC

FINANCE is the life blood of a business. The business cannot run efficiently if it does not have adequate finance to meet its requirements. Finance has rightly been termed as the 'master key' providing access to all other sources required for running business activities. Hence, efficient management of business enterprises is closely linked with the efficient management of their finance.

Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.

The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).

ACCOUNTING POLICIES

BASIS OF PREPARATION

The financial statements are prepared on accrual basis of accounting under historical cost convention in accordance with generally accepted accounting principles in India and the relevant provisions of the Companies Act, 1956 including accounting standards notified there under.

USE OF ESTIMATES

The preparation of financial statements requires estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses during the reporting period. Although such estimates and assumptions are made on a reasonable and prudent basis taking into account all available information, actual results could differ from these estimates & assumptions and such differences are recognized in the period in which the results are crystallized.

GRANTS-IN-AID

  1. Grants-in-aid received from the Central Government or other authorities towards capital expenditure as well as consumers' contribution to capital works are treated initially as capital reserve and subsequently adjusted as income in the same proportion as the depreciation written off on the assets acquired out of the grants.
  2. Where the ownership of the assets acquired out of the grants vests with the government, the grants are adjusted in the carrying cost of such assets.
  3. Grants from Government and other agencies towards revenue expenditure are recognized over the period in which the related costs are incurred and are deducted from the related expenses.

FIXED ASSETS

  1. Fixed Assets are carried at historical cost less accumulated depreciation.
  2. Expenditure on renovation and modernisation of fixed assets resulting in increased life and/or efficiency of an existing asset is added to the cost of related assets.
  3. Intangible assets are stated at their cost of acquisition less amortisation.
  4. Capital expenditure on assets not owned by the Company is reflected as a distinct item in Capital Work-in-Progress till the period of completion and thereafter in the Fixed Assets.
  5. Deposits, payments/liabilities made provisionally towards compensation, rehabilitation and other expenses relatable to land in possession are treated as cost of land.
  6. In the case of assets put to use, where final settlement of bills with contractors is yet to be effected, capitalisation is done on provisional basis subject to necessary adjustment in the year of final settlement.
  7. Assets and systems common to more than one generating unit are capitalised on the basis of engineering estimates/assessments.

CAPITAL WORK-IN-PROGRESS

  1. In respect of supply-cum-erection contracts, the value of supplies received at site and accepted is treated as Capital Workin-Progress.
  2. Administration and general overhead expenses attributable to construction of fixed assets incurred till they are ready for their intended use are identified and allocated on a systematic basis to the cost of related assets.
  3. Deposit works/cost plus contracts are accounted for on the basis of statements of account received from the contractors.
  4. Claims on the Company for price variation/exchange rate variation in case of contracts are accounted for on acceptance.

OIL AND GAS EXPLORATION COSTS

  1. The Company follows 'Successful Efforts Method' for accounting of oil & gas exploration activities.
  2. Cost of surveys and prospecting activities conducted in search of oil and gas are expensed off in the year in which these are incurred.
  3. All acquisition costs are initially capitalized as 'Exploratory Wells-in-Progress' under Capital Work-in-Progress.

DEVELOPMENT OF COAL MINES

Expenditure on exploration of new coal deposits is capitalized as 'Development of coal mines' under Capital Work-in-Progress till the mines project is brought to revenue account.

FOREIGN CURRENCY TRANSACTIONS

  1. Foreign currency transactions are initially recorded at the rates of exchange ruling at the date of transaction.
  2. At the balance sheet date, foreign currency monetary items are reported using the closing rate. Non-monetary items denominated in foreign currency are reported at the exchange rate ruling at the date of transaction.
  3. Exchange differences (loss), arising from translation of foreign currency loans relating to fixed assets/capital work-in-progress to the extent regarded as an adjustment to interest cost are treated as borrowing cost.
  4. Exchange differences arising from settlement / translation of foreign currency loans (other than regarded as borrowing cost), deposits / liabilities relating to fixed assets / capital work-in-progress in respect of transactions entered prior to 01.04.2004, are adjusted in the carrying cost of related assets. Such exchange differences arising from settlement / translation of long term foreign currency monetary items in respect of transactions entered after 01.04.2004 are adjusted in the carrying cost of related assets.
  5. Other exchange differences are recognized as income or expense in the period in which they arise.

BORROWING COSTS

Borrowing costs attributable to the fixed assets during construction/renovation and modernisation are capitalised. Such borrowing costs are apportioned on the average balance of capital work-in-progress for the year. Other borrowing costs are recognised as an expense in the period in which they are incurred.

INVESTMENTS

  1. Current Investments are valued at lower of cost and fair value determined on an individual investment basis.
  2. Long term investments are carried at cost. Provision is made for diminution, other than temporary, in the value of such investments.
  3. Premium paid on long term investments is amortised over the period remaining to maturity.

INVENTORIES

  1. Inventories are valued at the lower of cost, determined on weighted average basis, and net realizable value.
  2. The diminution in the value of obsolete, unserviceable and surplus stores and spares is ascertained on review and provided for.

PROFIT AND LOSS ACCOUNT

INCOME RECOGNITION

  1. Sale of energy is accounted for based on tariff rates approved by the Central Electricity Regulatory Commission (CERC). In case of power stations where the tariff rates are yet to be approved/agreed, provisional rates are adopted.
  2. The incentives/disincentives are accounted for based on the norms notified/approved by the CERC. In cases of power stations where the same have not been notified/ approved, incentives/ disincentives are accounted for on provisional basis.
  3. Advance against depreciation, forming part of tariff to facilitate repayment of loans, is reduced from sales and considered as deferred revenue to be included in sales in subsequent years.
  4. Exchange differences on account of translation of foreign currency borrowings recoverable from or payable to the beneficiaries in subsequent periods as per CERC Tariff Regulations are accounted as 'Deferred Foreign Currency Fluctuation Asset/Liability'. The increase or decrease in depreciation or interest and finance charges for the year due to the accounting of such exchange differences as per accounting policy no. 8 is adjusted in sales.
  5. Exchange differences arising from translation/settlement of monetary items denominated in foreign currency to the extent recoverable from or payable to the beneficiaries in subsequent periods as per CERC Tariff Regulations are accounted as 'Deferred Foreign Currency Fluctuation Asset/Liability' during construction period and adjusted in the year in which the same becomes recoverable/payable.
  6. The surcharge on late payment/overdue sundry debtors for sale of energy is recognized when no significant uncertainty as to measurability or collectability exists.
  7. Interest/surcharge recoverable on advances to suppliers as well as warranty claims/liquidated damages are not treated as accrued due to uncertainty of realisation/acceptance and are therefore accounted for on receipt/acceptance.
  8. Income from consultancy services is accounted for on the basis of actual progress/technical assessment of work executed, in line with the terms of respective consultancy contracts.
  9. Claims for reimbursement of expenditure are recognized as other income, as per the terms of consultancy service contracts.
  10. Scrap other than steel scrap is accounted for as and when sold.
  11. Insurance claims for loss of profit are accounted for in the year of acceptance. Other insurance claims are accounted for based on certainty of realisation.

EXPENDITURE

  1. Depreciation is charged on straight line method at the rates specified in Schedule XIV of the Companies Act, 1956 except for the following assets at the rates mentioned below:
    1. Kutcha Roads 47.50 %
    2. Enabling works
      • residential buildings including their internal electrification. 06.33 %
      • non-residential buildings including their internal electrification, water supply, 19.00 % sewerage & drainage works, railway sidings, aerodromes, helipads and airstrips.
    3. Personal computers and Laptops including peripherals 19.00 %
    4. Photocopiers and Fax Machines 19.00 %
    5. Air conditioners, Water coolers and Refrigerators 08.00 %
  2. Depreciation on additions to/deductions from fixed assets during the year is charged on pro-rata basis from/up to the month in which the asset is available for use/disposal.
  3. Assets costing up to Rs.5000/- are fully depreciated in the year of acquisition.
  4. Cost of software recognized as intangible asset, is amortised on straight line method over a period of legal right to use or 3 years, whichever is earlier.
  5. Where the cost of depreciable assets has undergone a change during the year due to increase/decrease in long term liabilities on account of exchange fluctuation, price adjustment, change in duties or similar factors, the unamortised balance of such asset is charged prospectively over the residual life determined on the basis of the rate of depreciation.
  6. Where the life and/or efficiency of an asset is increased due to renovation and modernization, the expenditure thereon along-with its unamortized depreciable amount is charged prospectively over the revised useful life determined by technical assessment.
  7. Machinery spares which can be used only in connection with an item of plant and machinery and their use is expected to be irregular, are capitalised and fully depreciated over the residual useful life of the related plant and machinery.
  8. Capital expenditure on assets not owned by the company is amortised over a period of 4 years from the year in which the first unit of project concerned comes into commercial operation and thereafter from the year in which the relevant asset becomes available for use. However, such expenditure for community development in case of stations under operation is charged off to revenue.
  9. Leasehold buildings are amortised over the lease period or 30 years, whichever is lower. Leasehold land and buildings, whose lease period is yet to be finalised, are amortised over a period of 30 years.
  10. Expenses on ex-gratia payments under voluntary retirement scheme, training & recruitment and research and development are charged to revenue in the year incurred.
  11. Preliminary expenses on account of new projects incurred prior to approval of feasibility report are charged to revenue.
  12. Actuarial gains/losses in respect of 'Employee Benefit Plans' are recognised in the statement of Profit & Loss Account.
  13. Net pre-commissioning income/expenditure is adjusted directly in the cost of related assets and systems.
  14. Prepaid expenses and prior period expenses/income of items of Rs.100,000/- and below are charged to natural heads of accounts.
  15. Carpet coal is charged off to coal consumption. However, during pre-commissioning period, carpet coal is retained in inventories and charged off to consumption in the first year of commercial operation. Windage and handling losses of coal as per norms are included in cost of coal.

FINANCE LEASES

  1. Assets taken on lease are capitalized at fair value or net present value of the minimum lease payments, whichever is lower.
  2. Depreciation on the assets taken on lease is charged at the rate applicable to similar type of fixed assets as per accounting policy no.
  3. If the leased assets are returnable to the lessor on the expiry of the lease period, depreciation is charged over its useful life or lease period, whichever is shorter.
  4. Lease payments are apportioned between the finance charges and outstanding liability in respect of assets taken on lease.

PROVISIONS AND CONTINGENT LIABILITIES

A provision is recognised when the company has a present obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and in respect of which a reliable estimate can be made. Provisions are determined based on management estimate required to settle the obligation at the balance sheet date and are not discounted to present value. Contingent liabilities are disclosed on the basis of judgment of the management/independent experts. These are reviewed at each balance sheet date and are adjusted to reflect the current management estimate.

FINDINGS OF THE STUDY

The most of the NTPC's financial problems is that financing from the institutional agencies has slowed down due to sectoral issues. This trend can be reversed only with improvements in the financial health of the State Electricity Boards (SEBs), though such assistance could take care of only a portion of the total requirements. The key issue lies in improving the internal resource generation of all the sector utilities including SEBs whose contribution to the resource mobilisation during the entire seventh plan had been negative. This would point out to the need for suitable adjustment in the tariff and adoption of sound commercial practices in utility management.

In NTPC, successful implementation of capacity additions programme is sensitive to timely mobilisation of financial resources. It would be very useful to adopt a comprehensive approach to investment planning, particularly from the point of view of identifying sources of funds. This would facilitate the taking up of advance action for processing the financing proposals so that the arrangements can be finalised especially from foreign sources in time for scheduled project execution. Further, such comprehensive long-term planning alone would reveal projected resource gaps providing increased response time for drawing up strategies to bridge such gaps through alternative sources. With every year, the problem related to financing of NTPC are becoming increasingly difficult. With net budgetary support from the Government trickling down to almost non-existent level and increasing dependence on the domestic borrowing which is also not forthcoming, NTPC is finding it extremely difficult to mobilise resources to fund its plans.

From an analysis of the various sources of NTPC's financing mix, it is evident that the emphasis is clearly shifting from Government support and soft loans to internal resources and commercial/market borrowing. Bond financing, as a source, is shrinking because of the changing economic scenario and the liberalisation measures announced by Government. There is a dampening impact, presumably, of the mounting outstanding dues from SEBs on NTPC's ability to generate internal resources to finance its own development programmes in the recent past.

Future capacity additions programme in NTPC is very much dependent upon the availability of project financing. The situation would call for increase in the internal resources generation of the power sector entities by way of (i) improved commercialisation of working, adequately remunerative tariffs and prompt payment by the consumers of power and (ii) efforts to minimise project cost and improved project implementation.

SHORTCOMINGS IN THE COMPANY

Some of the main factors responsible for NTPC's deteriorating financial condition and those which represent its chief financing constraints are :

  1. Increasing capital cost over the years
  2. Higher interest during construction
  3. Changing financing pattern
  4. Inadequate generation of internal resources
  5. Problems in the borrowings for power projects
  6. Devaluation of rupee/partial convertibility
  7. Uncertainty in the flow of external aid
  8. Problems of financing through power bonds

RECOMMENDATIONS

These are some of the sectoral issues which have resulted in serious fund constraints in NTPC. This would point out to the need for suitable all-round adjustments in utility management. NTPC's management practices and control systems in the area of finance will have to be subjected to more rigorous tests in an increasingly adverse environment characterized by resource constraints and weak financial position of the customers for NTPC power viz., SEBs.

Efforts to maintain growth with financial soundness by greater and more innovative efforts towards resource mobilisation is urgently called for by NTPC.

While the agreements with SEBs provide for prompt payment for sale of electricity by means of Letter Of Credit (LCs) for this purpose, many of the beneficiaries have not opened LCs for the required amounts and have defaulted in their payments. The position of arrears has severely affected the ways and means position of NTPC because it had to divert substantial investible funds which could have been ploughed back for capacity additions.

The Integrated Project Management and Control Systems (IPMCS) evolved and implemented by NTPC has enabled it to commission most of its projects on or ahead of their schedule. Apart from the system of project management, the system of financial control in a project is of utmost importance. In the NTPC's philosophy, there is an integrated approach to the task of overall project management where finance, engineering and other functions including personnel are integrated all along the line. NTPC has also felt that modern management techniques would be equally applicable in operation and maintenance of power stations. It has, therefore, evolved a comprehensive philosophy for the operation and maintenance which has enabled it to operate its existing power stations at a very high plant load factor.

However, the problem of funding in NTPC, the premier power utility in the country is so enormous, that it has recently shelved its expansion plans. It will take up no new project during the eighth plan.

BIBLIOGRAPHY

  • www.ntpc.co
  • www.google.co.in/search?hl=en&q=credit+policy+OF+ntpcC&meta=&aq=o&oq
  • www.google.co.in/search?hl=en&q=finance+policy+OF+ntpcaq=o&oq
  • www.google.co.in/search?hl=en&q=financial+statement+OF+ntpc=&aq=o&oq
  • www.google.co.in/search?hl=en&q=introduction+OF+ntpcC&meta=&aq=o&oq

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