GROUP ASSIGNMENT

Industry Analysis of the Indian Power Sector

India is the fifth largest power generating nation in the world. Globally, India ranks 3rd
in production of electricity. In May 2018, India was ranked 4th in the Asia Pacific region out
of 25 nations on an index that measures their overall power. Electricity production in India
reached 108.90 Billion Units (BU) in April 2019. Renewable energy is slowly becoming a major
source of power in India. The Government of India has committed to the target of achieving
175 GW installed capacity of renewable energy by fiscal year 2022. Wind energy is the largest
source of renewable energy in India and accounts for about 47.44% (35.14 GW) of the total
installed renewable capacity (74.08 GW) (as of December 2018). The Government plans to
invite bids for the largest solar tender in the world, to install 20 GW of solar power capacity,
which will give a boost to manufacture solar power equipment in India.

 Market Size:
The complete installed capacity of power stations in India stood at 360.788 Gigawatt (GW)
as of 31st August 2019. Renewable power plants, which also include large hydroelectric
plants, solar panels, wind mills etc. constitute 34.86% of India's total installed capacity.
Thermal power comprises 63.2% of the total power generated. The average electricity
usage in India is about 1.181 kWh per capita. As of 9th January 2019, there is 99.7%
electricity coverage in the country.

 Growth Rate:
Growth rate of installed power generation capacity of India was 5.25% as on 31 st March
2018 and about 3.52% as on 31st March 2019.

 Market Share of Major Players:

The private sector has 46.5% share in power generation, while the central sector and the
state sector have 25% and 28.5% shares respectively.
Name of the Company Sector Market Cap (in ₹ cr.) Net Profit (in ₹ cr.)
NTPC Central Govt. PSU 1,22,741.98 11,749.89
Power Grid Corporation Central Govt. PSU 1,06,018.16 9,938.55
Adani Power Private 24,915.83 -225.23
NHPC Central Govt. PSU 24,258.76 2,630.55
Tata Power Private 17,391.69 1,708.58
JSW Energy Private 10,976.24 251.45
CESC Private 10,933.30 937.05

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 Porter’s Five Forces Analysis of Competitive Power:
Highly capital-intensive industry and hence Industrial consumers have huge demand for power. Their
demands huge investment. Power producers Threat of New bargaining power is low in India as the number of power
– Behemoth like NTPC, SEBs contributing companies to buy from is limited in number. Hence power
around 85 % of total power produced. Entrants companies are in better position. For retail customers,
Obtaining regulatory approvals, fuel government regulates the power sector to ensure supply of
linkages, land etc. still remain the major Very Low power at reasonable prices but this regulation is limited.
bottlenecks.

Industry
Supplier Power Buyer Power
Rivalry
Very High Low-Medium
Medium

Power producing companies – No competitive rivalry as

Coal is majorly used as a feed for generating Threat of demand for power is way above its supply and all the power
power. The supply of coal in India is limited
and hence coal players are in dominant
Substitutes generated is used up. However, with government
encouragement, private participation is expected to increase
position. Power companies are required to in the coming years to take advantage of huge demand for
import coal if the domestic supply is not
Medium-High
power. Power equipment market - Market leader like BHEL is
sufficient, which proves to be an expensive facing tough competition from L&T, Alstom, Doosan and
affair. most importantly Chinese suppliers.

Power does not have substitute but it can be generated

from different sources of energy. Currently thermal
power is dominant in India, coal being the major raw
material. Coal availability is limited and therefore power
from nuclear, hydro and other renewable sources could
be used as substitute for thermal power in future.
Although demand for power outstrips its supply, going
forward, thermal power plant companies have threat
from non-thermal power generators.

SWOT Analysis:
Strengths

Weaknesses

Threats
Opportunities

More investment in •Growing More tax Compliance

renewable energy demand for incentives for and regulatory
Established energy energy-efficient risks
•Rising costs of automobiles Uncertainty in
Increased adoption electric grids Seasonal increase climate policy
of better and in the number of and carbon
•Employee
energy-efficient days of sunlight pricing
attrition
technology No ban on off- Commodity
shore drilling price volatility

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 Macroeconomic Factors and Policy Announcements
Impacting the Industry Performance:
Between April 2000 and March 2019, there has been US$ 14.32 billion worth Foreign Direct
Investment (FDI), accounting for 3.41 per cent of total FDI inflows in India. Few of the major
developments and investments in the Indian power sector are given as follows:

 In November 2018, Renascent Power Ventures Pte Ltd acquired 75.01 per cent stake
in Prayagraj Power Generation Company Limited (PPGCL) for US$ 854.94 million
 In August 2018, Kohlberg Kravis Roberts & Co (KKR) acquired Ramky Enviro Engineers
Limited for worth US$ 530 million
 In April 2018 ReNew Power made the largest M&A deal by acquiring Ostro Energy for
US$ 1,668.21 million
The power sector is identified by Government of India as a major sector of focus so as to
encourage sustained industrial growth. Few of the initiatives by the Government of India to
improve the Indian power sector are as follows:

 As of September 2018, a draft amendment to Electricity Act, 2003 has been introduced
to discuss separation of content & carriage, direct benefit transfers of subsidy, 24x7
Power supply is an obligation, penalization on violation of PPA, setting up Smart Meter
and Prepaid Meters along with regulations related to the same.

 Ujwal Discoms Assurance Yojana (UDAY) was launched by the Government of India to
encourage operational and financial turnaround of State-owned Power Distribution
Companies (DISCOMS), with an aim to reduce Aggregate Technical & Commercial
(AT&C) losses to 15 per cent by the fiscal year 2019.

 As of August 2018, the Ministry of New and Renewable Energy set solar power tariff
caps at ₹2.50 (US$ 0.04) and ₹2.68 (US$ 0.04) unit for developers using domestic and
imported solar cells and modules, respectively.

 The Government of India approved National Policy on Biofuels (2018) - the expected
benefits of this policy are health benefits, cleaner environment, employment
generation, reduced import dependency, boost to infrastructural investment in rural
areas and additional income to farmers.

References:
1. Porter’s Five Forces Analysis - Power Sector (https://www.mbaskool.com/business-
articles/marketing/2595-porters-five-forces-analysis-power-sector-.html)
2. Net Profit and Market Capitalization information of top companies in power sector
from MoneyControl

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 (https://www.moneycontrol.com/stocks/marketinfo/netprofit/bse/power-
generationdistribution.html)
3. IBEF Report on the Power Sector of India (https://www.ibef.org/industry/power-
sector-india.aspx)
4. SWOT Analysis (https://www.spendedge.com/blogs/swot-analysis-power-sector)

SECTION B
JSW Energy
Horizontal Analysis, Vertical Analysis, Trend Analysis
1. Balance Sheet

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2. PnL Statement

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 Adani Power
Horizontal Analysis, Vertical Analysis, Trend Analysis

1. Balance Sheet

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2. PnL Statement

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 Du-Pont Analysis
1. JSW Energy

2. Adani Power

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 Profitability, liquidity, solvency and market standing analysis
1. JSW Energy

2. Adani Power

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 SECTION C
a) Is the business profitable? Is it more or less profitable as compared to previous years,
competitor? Analyse the reasons for changes

Yes, the business is profitable. It has been more profitable over the previous years and
it has shown tremendous growth in profit from last year of about 800% and the reason
for increase has been the increase in revenue from operation by around 14% and also
a decrease in expense of cost of fuel.
b) Is the business liquid in the short-term? Comment on changes over the years. Is the
business more liquid at the cost of profitability? Substantiate.
JSW Energy seems not so liquid in short term as their current and quick ratio seem to
be very low although they have improved over the period but they still have way to go
As current ratio for 2109-0.72
2018-0.63
They are not able to cover the current liabilities as they have only INR 0.72 for every 1 of
liabilities. Which may give a signal to the investor that they might default upon the payment
and therefore in order to get credit in future, they will have to improve on their short term
position.

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c) Is the business financially stable in the long term? Substantiate.

Yes, the company is financially stable in the long term as its asset turnover is about
0.36 which is at par with other companies in the sector. Moreover, it has a decent
return on equity which is around 6.1% and it has a decent inventory turnover of 19.19.
It has a fair NPM (net profit margin) of 7.31%.

d) Is profitability high enough to justify owners’ continued investment in the company?

Yes, there is an increased profitability and also the net profit margin of 7.31% is
decent. Its EPS of about INR 4.5 per share compared to previous financial year’s value
of INR 0.47 per share is good indicator of company’s profitability.

e) How well has the company managed its overall business as compared to its
competitor?

The overall of Ratios indicate a good performance of the company as compared to its
competitor. It shows good profitability and also has a decent DSCR which shows that
it still has lot of scope of leverage that can be explored.

f) Comment on the operating performance of the company. (Reformulate the financial

statements if required.)

The company is doing fairly well in terms of operation with a decent profit margin of
7.3% as compared to competitor going in loss. It has got good turnover ratios which is
an important indicator to show good resource utilization on company’s part and their
ability to generate revenues.

g) What are the key sources of competitive advantage for the company as compared
to its competitor/s? What are the key drivers of profitability and growth?

JSW Energy has clear competitive advantage over its competitor Adani power as it has
better DSCR (Debt to Service coverage Ratio) and better Liability to equity ratio as
compared to competitor. It also has better turnover ratios which shows its better
resource utilization.

h) How is the market viewing the performance of the company as compared to its
competitor? Is it in line with your analysis of performance?

Over FY19, the equity share price of JSW Power has decreased only by 0.02%, while
the same for Adani Power increased by 110%. This is in line with the analysis of the
performance done. As JSW power is more stable and have been in a stable state on

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 the other hand Adani power have been volatile within the year have due to which they
are able have a fluctuate share price

i) What inferences can you draw from the company’s cash flow statement about its
ability to generate future cash flows, repay its borrowings and pay dividends?

The cash flow from operating activities has decline over the previous year by 39% and
also there have been negative cash from financing activities which is due to the
repayment of borrowing which means that there is a need to improve upon the cash
flow of the company and also to increase cash from operating activities. Also quick
ratio is also less than 1 which indicate that they have less liquid cash for there current
liabilities.

j) Comment on earnings quality.

The ratio of operating cash flow to net profit has decreased significantly over the year.
In FY19, the quality of earnings has decreased from 6.30 to 0.61. This was majorly
because the company had borne significantly higher fuel expenses in the year.

k) Critically evaluate the management outlook of the company’s future (as presented
in Management Discussion & Analysis) in the light of your own analysis of the
company’s performance

For thermal coal, the management’s outlook is mildly optimistic driven by the increase
in availability of the coal supply, and slow recovery. The power procurement structure
appeared to be pivoting to short- and medium-term PPAs, driven by low-cost
Renewable Energy and lower merchant market tariffs.
The domestic demand for power is on a slow increase, mainly due to urbanisation and
unlocking of strong rural demand. While on the supply side, capacity additions have
started shedding momentum over the last two years, along with retirement of old,
inefficient thermal plants. The management is hoping that the demand-supply
balances in the medium term.
While the company has decreased performance (measured by PLF) in nearly all its
plants, the company had achieved, its objective and had set up ~10 MW solar power
plants.
While the operating efficiency of the company has decreased over the year, the
financial performance has been quite good, as represented in the ratio analysis.

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