The Power Sector

Introduction

        The Power sector is combination of power generation, transmission and distribution. India is world’s 4th largest consumer and 5th largest producer. Power industry is back bone of technology-led development, industrialisation and agriculture sector. India needs a growth of 250% of current production to meet demand of 2022. Liberalisation in 1991, opened power sector to private players, fast track clearance for investment has helped the power sector to grow. Central Electricity Act, 2003, a land mark act which included initiatives as de-licensing power sector, inclusion of renewable energy and initiatives for attracting investments. In this report, we analyse the market dynamics, competitive power, and macroeconomic and policy problems.

Challenges: Coal shortage, Gas supply constraints, Less innovation in renewable sector

Growth Drivers: Increasing demand of power due to increasing urbanisation and industrialisation, attractive FDI policy, tax incentives for power companies                                                                                      [pic 1] [pic 2]

[pic 3] [pic 4]

Source: IBEF Report June, 2015

Profitability: Thermal power generation is profitable in India, giving 15-17%. India faces problems in transmission and the losses are as high as 30%. The Nuclear power and most of the Hydro power project is state owned.

Porter’s Five Forces

                                                                                                 [pic 5]                                         

Policy Impact

Generation based incentives: Govt.  has introduced generation based tax incentives for renewable energy sector.

Delay in Land Acquisitions: Many nuclear and hydro power plants are stuck in pipeline due to delay in Land Acquisition. The govt’s new land acquisition bill is expected to remedy this.

Environmental Clearance: power projects of around 50,000 MW capacity are put on hold due to delay in getting environmental clearance.                                                Liberalised FDI Policy: The government has allowed upto 100% FDI inflow for Power sector other than atomic energy.

Policy paralysis has limited growth in the sector. India has a huge demand for power and key changes in policy will aid the growth of the power sector.

        SWOT Analysis

Recent trends

• Teesta Hydro Project worth USD 1.4 Billion backed by Goldman Sachs and Morgan Stanley cleared for construction.0
• Japan’s Softbank group has pledged an investment of USD 20 Billion in the Indian Solar power generation.
• The Coal India fuel supply agreement with companies will ensure continuous availability of Coal for the companies over the long term.
• Coal India production has increased by 31.82 million tonnes in the 2014-15 FY and now stands at 494.24 million tonnes

Part C: Interpretation of findings from analysis

Based on the above computations, answer the following questions:

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

·         No, company is not profitable. As we can see from the data, last year profit was Rs.595.26 Crores. But for the year 2015 reported net profit is Rs. -68.63 Crores. Therefore the company has incurred losses in current period.

·         Adani is less profitable as compared to its competitor NTPC Limited. The reported net profit of NTPC Limited is Rs. 10,290.86 Crores for the current year.

·         Reasons for the changes include:

§  The sales have been decrease by Rs. 89.82 Crores.

§  The cost of raw material has increased by 10 times compared to last year.

§  Overall expenses in the current year have increased in compared to that of last year’s.

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.

§  The company is not liquid in short term. The reasons being:

1.      A current ratio of at least 1 is to ensure that the value of their current assets cover at least the amount of their short term obligations. However, a current ratio of greater than 1 provides additional cushion against unforeseeable contingencies that may arise in the short term.

2.      From the data we can see that the current ratio is not even close to 1 which indicates the company does not have sufficient assets to meet its current obligations.