Analysis of fixed and floating interest rates

Analysis of Fixed and
Floating Interest Rates
For Bonds of Power Grid Corporation of India Limited

Under the Guidance of

Mr. Nalin Jain Mr. K.C. Pant
Professor, Marketing CM- Finance (Bonds)
FORE School of Management Power Grid Corporation of India Limited

Mr. Vinay Dutta
Area Chair Person, Finance
FORE School of Management

Madhusudan Partani
91029
PGDM- 2009-11
FORE School of Management
New Delhi

Analysis of Fixed and Floating Interest Rates 2010

Table of Contents
Acknowledgement .................................................................................................................................. 5
Chapter I Introduction
Introduction .......................................................................................................................................... 11
Objectives ............................................................................................................................................. 12
Purpose of Study ................................................................................................................................... 13
Scope ..................................................................................................................................................... 14
Data ....................................................................................................................................................... 15
Review of Literature.............................................................................................................................. 16
Introduction .......................................................................................................................................... 19
Developments in Government Bond Market.................................................................................... 19
Corporate Bond Market .................................................................................................................... 20
Development of Equity Market vs. the Debt Market ....................................................................... 22
Chapter II Financial Statetement Analysis
Balance Sheet Analysis .......................................................................................................................... 26
Capital Composition .......................................................................................................................... 26
Sources and Application of Funds ..................................................................................................... 28
Share Capital ................................................................................................................................. 30
Share Holding Pattern ................................................................................................................... 30
Brief note on Initial Public Offering .............................................................................................. 32
Reserves ........................................................................................................................................ 33
Secured Loans ............................................................................................................................... 33
Unsecured Loans ........................................................................................................................... 35
Current Liability ............................................................................................................................. 36
Fixed Assets ................................................................................................................................... 37
Investments................................................................................................................................... 38
Current Assets ............................................................................................................................... 39
Profit and Loss Analysis......................................................................................................................... 40
Sales/ Operating Income............................................................................................................... 41
Profits ............................................................................................................................................ 42
Dividends....................................................................................................................................... 42
Cash Flow Analysis ................................................................................................................................ 44
Ratio Analysis ........................................................................................................................................ 47
Liquidity Ratio ................................................................................................................................... 47

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Current Ratio ................................................................................................................................. 47
Quick Ratio .................................................................................................................................... 48
Profitability Ratio .............................................................................................................................. 49
Operating Profit Margin (PBIDTM) ............................................................................................... 49
Net Profit Margin .......................................................................................................................... 50
Cash Profit Margin ........................................................................................................................ 50
Return on Capital Employed ......................................................................................................... 51
Return on Net Worth .................................................................................................................... 51
EPS................................................................................................................................................. 52
Solvency Ratios ................................................................................................................................. 53
Debt- Equity Ratio ......................................................................................................................... 53
Intrest Coverage Ratio .................................................................................................................. 54
Activity Ratios ................................................................................................................................... 54
Receivables Turnover Ratio .......................................................................................................... 55
Inventory Turnover Ratio .............................................................................................................. 55
Fixed Asset Turnover Ratio ........................................................................................................... 55
Capital Market Behaviour ................................................................................................................. 56
P/E Multiple .................................................................................................................................. 56
Beta ............................................................................................................................................... 57
Chapter III Procedures in Bond Raising
Steps in Issuing Bonds ........................................................................................................................... 60
Dematerialization Process .................................................................................................................... 68
Listing Process ....................................................................................................................................... 70
Debt Servicing ....................................................................................................................................... 72
Chapter IV Characterstics of Bonds
Yield or IRR ............................................................................................................................................ 78
Current Yield ................................................................................................................................. 78
Yield to Maturity ........................................................................................................................... 78
Annualised Yield ............................................................................................................................ 78
Yield to Call / Put ........................................................................................................................... 79
Price- Yield Relationship ................................................................................................................... 79
Duration ................................................................................................................................................ 80
Macaulay’s Duration ..................................................................................................................... 80
Modified Duration......................................................................................................................... 80

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Convexity............................................................................................................................................... 81
Yield of PSU and GSec Bonds ................................................................................................................ 82
Duration of PSU and GSec Bonds .......................................................................................................... 90
Convexity of PSU and GSec Bonds ........................................................................................................ 95
Chapter V Analysis of Fixed and Floating Interest Rates
Introduction ........................................................................................................................................ 100
Fixed Intrest Rate ............................................................................................................................ 100
Floating Intrest Rate........................................................................................................................ 102
Indian Issuers going for FRBs .......................................................................................................... 104
GOI Floating Rate Bonds ............................................................................................................. 104
Indian Railway Finance Corporation Limited (IRFCL) .................................................................. 105
Power Finance Corporation Limited, .......................................................................................... 105
ICICI Bank .................................................................................................................................... 106
Others ......................................................................................................................................... 106
The Debt Servicing for PGCIL’s Bonds ................................................................................................. 107
Floating Intrest for PGCIL’s Bonds....................................................................................................... 109
Assumptions.................................................................................................................................... 109
Selection of Bonds .......................................................................................................................... 109
Selection of Reference Rate ............................................................................................................ 110
Reset Period and Reference Period ................................................................................................ 113
Spread ............................................................................................................................................. 113
Floating Rate under Reference Rate of Average yield of 1 Year GSec ............................................ 114
Bond VIII ...................................................................................................................................... 114
Bond IX ........................................................................................................................................ 116
Bond X ......................................................................................................................................... 118
Bond XIII- Opt II ........................................................................................................................... 120
Bond XIV ...................................................................................................................................... 122
Floating Rate under Reference Rate of Average yield of 10 year GSec .......................................... 124
Bond VIII ...................................................................................................................................... 124
Bond IX ........................................................................................................................................ 125
Bond X ......................................................................................................................................... 127
Bond XIII- Opt-II........................................................................................................................... 129
Bond XIV ...................................................................................................................................... 130
Floating Rate under Reference Rate of Average yield of 10 year GSec .......................................... 132

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Floating Rate under Reference Rate of Average yield of 10 year GSec- Average Spread of last 12
months ............................................................................................................................................ 135
Summary of Each Base Rate ........................................................................................................... 135
Factors Effecting The Selection Of Each Method............................................................................ 137
Term ............................................................................................................................................ 137
Coupon Rate................................................................................................................................ 137
Market Condition ........................................................................................................................ 138
Quantum of Loan ........................................................................................................................ 139
Repayment Structure .................................................................................................................. 139
Time of Issue ............................................................................................................................... 140
Chapter VI Findings and Recommendations
Critical Analysis of Alternatives........................................................................................................... 142
Fixed Coupon Interest Rate ............................................................................................................ 142
Floating Rate ................................................................................................................................... 142
Fixed Coupon Rate with Option ...................................................................................................... 144
Recommendation................................................................................................................................ 145
References .......................................................................................................................................... 146

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Table of Figures and Charts

FIGURE 1 TREND OF AVERAGE TRADE SIZE - WDM ......................................................................................................... 23
FIGURE 2 CAPITAL COMPOSITION FROM 1996 TO 2009 ................................................................................................... 27
FIGURE 3 SOURCES OF FUNDS- 2008-09 ....................................................................................................................... 28
FIGURE 4 APPLICATIONS OF FUNDS- 2008-09 ................................................................................................................ 29
FIGURE 5 TREND IN SHARE CAPITAL .............................................................................................................................. 30
FIGURE 6 SHARE HOLDING PATTERN AS ON 31ST DEC 2009 ............................................................................................. 31
FIGURE 7 SHARE HOLDING PATTERN ............................................................................................................................. 31
FIGURE 8TREND IN RESERVES AND SURPLUS ................................................................................................................... 33
FIGURE 9 TREND IN NON CONVERTIBLE DEBENTURES ....................................................................................................... 33
FIGURE 10 TREND IN TERM LOANS INSTITUTIONS ............................................................................................................ 34
FIGURE 11 TREND IN TERM LOANS BANKS ..................................................................................................................... 34
FIGURE 12 TREND IN DEFERRED CREDIT ......................................................................................................................... 34
FIGURE 13 TREND IN UNSECURED LOANS....................................................................................................................... 35
FIGURE 14 DEBT COMPOSITION FROM 2003 TO 2009..................................................................................................... 36
FIGURE 15 TREND IN CURRENT LIABILITY........................................................................................................................ 36
FIGURE 16 TREND IN FIXED ASSETS ............................................................................................................................... 37
FIGURE 17 TREND IN INVESTMENTS .............................................................................................................................. 38
FIGURE 18 COMPARISON OF FIXED ASSETS AND INVESTMENTS ........................................................................................... 38
FIGURE 19 TREND IN COMPOSITION OF CURRENT ASSETS ................................................................................................. 39
FIGURE 20 MULTI STEP ANALYSIS OF INCOME................................................................................................................. 40
FIGURE 21 TREND IN INCOMES .................................................................................................................................... 41
FIGURE 22 TREND IN DIFFERENT PROFITS ....................................................................................................................... 42
FIGURE 23 DIVIDEND TREND ....................................................................................................................................... 42
FIGURE 24 PROFIT APPROPRIATIONS OVER THE YEARS ...................................................................................................... 43
FIGURE 25 LIQUIDITY RATIOS....................................................................................................................................... 48
FIGURE 26 OPERATING PROFIT MARGINS ...................................................................................................................... 50
FIGURE 27 NET PROFIT MARGINS................................................................................................................................. 51
FIGURE 28 EPS TREND ............................................................................................................................................... 52
FIGURE 29 DEBT EQUITY RATIO ................................................................................................................................... 53
FIGURE 30 INTEREST COVER RATIO ............................................................................................................................... 54
FIGURE 31 P/E RATIO ................................................................................................................................................ 57
FIGURE 32 RESIDUAL PLOT FOR BETA ............................................................................................................................ 58
FIGURE 33 YIELD CURVE OF PGXXX ............................................................................................................................. 88
FIGURE 34 YIELD CURVE OF GSEC 8.20% ...................................................................................................................... 88
FIGURE 35 YIELD CURVE OF PFC (S-57) ........................................................................................................................ 89
FIGURE 36 MODIFIED VS MACAULAY'S DURATION .......................................................................................................... 93
FIGURE 37 DURATION VS MATURITY ............................................................................................................................ 93
FIGURE 38 DURATION VS YIELD ................................................................................................................................... 94
FIGURE 39 DURATION VS CONVEXITY ............................................................................................................................ 97
FIGURE 40 COUPON RATE VS CONVEXITY (SAME MATURITY) ............................................................................................ 98
FIGURE 41 COUPON RATE VS CONVEXITY (SAME DURATION) ............................................................................................ 98
FIGURE 42 COUPON RATE OF PG VS GSEC RATE........................................................................................................... 108
FIGURE 43 COUPON RATE OF PG VS AVG GSEC YIELD ................................................................................................... 108
FIGURE 44 TREND OF 10 YR GSEC YIELD ..................................................................................................................... 111
FIGURE 45 TREND OF 1YR GSEC YIELD ........................................................................................................................ 111
FIGURE 46 TREND OF COUPON RATES OF PG BONDS ..................................................................................................... 112

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FIGURE 47 RATES OF PG BONDS VS 1 YR GSEC YIELD .................................................................................................... 112
FIGURE 48 INTREST PAYMENTS UNDER FIXED AND FLOATING RATE FOR PGVIII FOR 1 YEAR GSEC AS REFERENCE RATE .............. 116
FIGURE 49 INTEREST PAYMENT UNDER FIXED AND FLOATING RATES FOR PGIX FOR 1 YEAR GSEC AS REFERENCE RATE ............... 118
FIGURE 50 INTEREST PAYMENT UNDER FIXED AND FLOATING RATES FOR PGX FOR 1 YEAR GSEC AS REFERENCE RATE ................ 120
FIGURE 51 INTEREST PAYMENTS UNDER FIXED AND FLOATING RATES FOR PGXIII FOR 1 YEAR GSEC AS REFERENCE RATE............ 121
FIGURE 52 INTEREST PAYMENTS UNDER FIXED AND FLOATING RATE FOR PGXIV FOR 1 YEAR GSEC AS REFERENCE RATE ............. 123
FIGURE 53 INTEREST PAYMENTS UNDER FIXED AND FLOATING RATE FOR PGIX FOR 10 YEAR GSEC AS REFERENCE RATE ............. 127
FIGURE 54 INTREST PAYMENTS UNDER FIXED AND FLOATING RATES FOR ALL BONDS FOR 10 YEAR GSEC AS BASE RATE ............. 134
FIGURE 55 COMPARISON OF FIXED AND FLOATING IN CASE OF ADVERSE MARKET CONDITIONS............................................... 139

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Table of Tables

TABLE 1 CAPITAL COMPOSITION FROM 1996 TO 2009 .................................................................................................... 27
TABLE 2 SHARE HOLDING PATTERN FROM 2007 TO 2009 ................................................................................................ 31
TABLE 3 TOP 10 SHARE HOLDERS AS ON 29.01.2009 ..................................................................................................... 32
TABLE 4 CASH FLOW STATEMENT ................................................................................................................................. 45
TABLE 5 LIQUIDITY RATIOS .......................................................................................................................................... 48
TABLE 6 OPERATING PROFIT MARGINS .......................................................................................................................... 49
TABLE 7 NET PROFIT MARGINS .................................................................................................................................... 51
TABLE 8 RETURNS...................................................................................................................................................... 52
TABLE 9 TURNOVER RATIOS......................................................................................................................................... 56
TABLE 10 REGRESSION OUTPUT ................................................................................................................................... 57
TABLE 11 LIST OF BONDS SELECTED FOR STUDY ............................................................................................................... 83
TABLE 12 YIELD TO MATURITY OF PG XXXI.................................................................................................................... 85
TABLE 13 COMPUTATION OF YIELD OF GSEC BOND.......................................................................................................... 85
TABLE 14 YTM AND CURRENT YIELD OF ALL BONDS ........................................................................................................ 86
TABLE 15 MODIFIED AND MACAULAY'S DURATION OF PGXXXI ......................................................................................... 91
TABLE 16 MODIFIED AND MACAULAY'S DURATION OF GSEC ............................................................................................. 91
TABLE 17 MACAULAY'S AND MODIFIED DURATION OF ALL BONDS ..................................................................................... 92
TABLE 18 CONVEXITY OF PGXXXI ................................................................................................................................ 96
TABLE 19 CONVEXITY OF ALL BONDS............................................................................................................................. 97
TABLE 20 FRBS BY GOI ............................................................................................................................................ 105
TABLE 21 FRBS BY IRFC ........................................................................................................................................... 105
TABLE 22 FRBS BY PFC ............................................................................................................................................ 106
TABLE 23 FRBS BY ICICI BANK .................................................................................................................................. 106
TABLE 24 FRBS BY OTHERS ....................................................................................................................................... 106
TABLE 25 LIST OF BONDS SELECTED FOR ANALYSIS ......................................................................................................... 109
TABLE 26 DETERMINATION OF SPREAD FOR PGVIII FOR 1 YEAR GSEC AS REFERENCE RATE ................................................... 114
TABLE 27 FLOATING RATES FOR PGVIII FOR 1 YEAR GSEC AS REFERENCE RATE ................................................................... 115
TABLE 28 INTREST UNDER FIXED AND FLOATING RATES FOR PGVIII FOR 1 YEAR GSEC AS REFERENCE RATE .............................. 115
TABLE 29 CALCULATION OF SPREAD FOR PGIX FOR 1 YEAR GSEC AS REFERENCE RATE ......................................................... 116
TABLE 30 FLOATING RATES FOR PGIX FOR 1 YEAR GSEC AS REFERENCE RATE ..................................................................... 117
TABLE 31 INTEREST UNDER FIXED AND FLOATING RATES FOR PGIX FOR 1 YEAR GSEC AS REFERENCE RATE............................... 117
TABLE 32 CALCULATION OF SPREAD FOR PGX FOR 1 YEAR GSEC AS REFERENCE RATE .......................................................... 119
TABLE 33 FLOATING RATES FOR PGX FOR 1 YEAR GSEC AS REFERENCE RATE ...................................................................... 119
TABLE 34 INTEREST UNDER FIXED AND FLOATING RATE FOR PGX FOR 1 YEAR GSEC AS REFERENCE RATE .................................. 119
TABLE 35 CALCULATION OF SPREAD FOR PGXIII FOR 1 YEAR GSEC AS REFERENCE RATE ....................................................... 121
TABLE 36 FLOATING RATES FOR PGXIII FOR 1 YEAR GSEC AS REFERENCE RATE ................................................................... 121
TABLE 37 INTEREST UNDER FIXED AND FLOATING RATES FOR PGXIII FOR 1 YEAR GSEC AS REFERENCE RATE ............................ 121
TABLE 38 CALCULATION OF SPREAD FOR PGXIV FOR 1 YEAR GSEC AS REFERENCE RATE ....................................................... 122
TABLE 39 FLOATING RATES FOR PGXIV FOR 1 YEAR GSEC AS REFERENCE RATE................................................................... 122
TABLE 40 INTERESTS UNDER FIXED AND FLOATING RATES FOR PGXIV FOR 1 YEAR GSEC AS REFERENCE RATE ........................... 123
TABLE 41 FLOATING RATES FOR PGVIII FOR 10 YEAR GSEC ............................................................................................ 125
TABLE 42 INTERESTS UNDER FIXED AND FLOATING FOR PGVIII FOR 10 YEAR GSEC.............................................................. 125
TABLE 43 CALCULATION OF SPREAD FOR PGX FOR 10 YEAR GSEC AS REFERENCE RATE ........................................................ 126
TABLE 44 FLOATING RATES FOR PGIX FOR 10 YEAR GSEC AS REFERENCE RATE ................................................................... 126
TABLE 45 INTERESTS UNDER FIXED AND FLOATING FOR PGIX FOR 10 YEAR GSEC ................................................................ 127
TABLE 46 TOTAL INTREST UNDER FIXED AND FLOATING RATES FOR ALL BONDS UNDER 10 YEAR GSEC AS BASE RATE ................ 132

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TABLE 47 SUMMARY OF COSTS UNDER 1 YEAR GSEC AS BASE RATE.................................................................................. 135
TABLE 48 SUMMARY OF COSTS UNDER 10 YEAR GSEC AS BASE RATE ( COUPON PERIOD) ..................................................... 135
TABLE 49 SUMMARY OF COSTS UNDER 10 YEAR GSEC AS BASE RATE ( INTEREST PAYMENT PERIOD)....................................... 136

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Acknowledgement

The satisfaction and joy that accompanies the successful completion of a task is incomplete without
mentioning the names of those who extended their help and support in making it a success.

The Project Titled “Analysis of Fixed and Floating Rates of Bonds of Power Grid Corporation of India
Limited “has not been a success without the priceless support and assistance of Mr. K.C. Pant (Chief
Manager Finance-Bonds, Power Grid Corporation of India Limited), Mr. Sandesh Nagrare (Chief
Accountant- Bonds, Power Grid Corporation of India Limited) and Mr. S.V. Venkat (Chief Manager,
Finance-Bonds, Power Grid Corporation of India Limited).

I am greatly indebted to Prof. Vinay Dutta (Chairperson, Finance, FORE School of Management),
Prof. Kanhaiya Singh (Sr. Faculty, Finance, FORE School of Management) and Prof. Himanshu Joshi
(Faculty, Finance, FORE School of Management) for their invaluable guidance and direction provided
to me in the course of the study.

A special word of thanks to Prof. Nalin Jain (Faculty, Marketing, FORE School of Management), who
has been a constant support and guided me in the report.

I also wish to express my gratitude and gratefulness towards Mr. Ranjan Srivastav (AGM- Finance,
Power Grid Corporation of India Limited), Mr. V.C. Jagannathan (Executive Director-Finance, Power
Grid Corporation of India Limited) and also Mr. Venkat Krishna (Vice President, ICICI Securities
Primary Dealership Ltd)

Date: 12 May 2010

Place: New Delhi

Madhusudan Partani

9


Chapter I
INTRODUCTION

 Introduction
 Purpose of Study
 Objectives
 Scope
 Data
 Review of Literature
 Introduction to Bond Market

10


Introduction

The project done with the Power Grid Corporation of India Limited in their Finance department,
Bonds Section, is a study on Cost and Benefit analysis of Fixed and Floating rate bonds. Intrest
payment under both the methods is computed for bonds with different characteristics (Maturity,
Coupon rate and Amount). Recommendation has been made on suitability of each method under
different conditions.

Also the Valuation and Convexity measures like Duration, Yield, Convexity have also been computed
for all the Bonds issued by Power Grid Corporation of India Limited and also few GSec Bonds and
other corporation bonds.

Also The Securities Exchange Board of India (SEBI), the regulator of Capital Markets, has made wide
array of policies and guidelines with respect to issue of bonds. Thus it is per se necessary to study
the procedural aspects of issuing bonds, the legal aspects and also the provisions and guidelines. The
scope of the study is extended to Debt-Servicing Process, listing process and dematerialisation
process. And Analysis of Financial statements using different tools like Horizontal analysis of Income
and Position Statement, Cash Flow Analysis, Ratio Analysis has been done.

Apart from the above mentioned aspects, the behaviour of GSec Yields, Comparison of interest rates
on bonds issued by Power Grid Corporation of India Limited with the Government Yield has also
been done.

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Objectives
The Objectives of study are as follows:

 Comparison of Cost of each bond in case of present system of fixed coupon rate with
Floating Coupon rate. And to study the suitability of each method for different kinds of
bonds having different maturity, different coupon rate and different loan quantum.
 To study the Characteristics in terms of Macaulay’s Duration, Convexity, and YTM; of each
bond issued by PGCIL and also to compare the same with other GSec Bonds and other
corporate bonds.
 To study and understand the procedural aspects of issuing the bonds, their listing, debt
servicing and dematerialisation.
 Financial Performance Analysis of Power Grid Corporation of India Limited using different
techniques like Ratio Analysis, Cash Flow Analysis, Balance sheet and Profit and Loss
Analysis.

The secondary Objectives will be:

 To study the behaviour of yields on 10 Year and 1 Year GSec papers
 To Understand the Power sector and the value chain of the industry.

12


Purpose of Study

Bonds have become one of the important sources for long term funds in the present scenario. The
central government, the state government, PSUs, Banks, and also Corporate issue bonds regularly to
raise long term funds. Along with the Primary Issues, the trading in Exchanges has also improved
rapidly. The average trade size has increase from Rs.6.64 Crores in 1994-95 to Rs.23.42 Crs in the
year 2009-10. Thus it is per se necessary to study the Bond market and also understand the growing
importance of Bonds as the source of long term finance.

It is by itself very indispensable to study the financial condition of the company, its financial strength
in terms of profitability, solvency, liquidity etc... To understand the company. Thus Financial
Statement Analysis has been done and study of Balance Sheet, profit and loss, Sources and
applications of funds, Cash flow analysis and also ratio analysis has been done.

As mentioned before, the Bonds have become one of the favoured preferences for the long term
funds. And Power Grid Corporation of India Limited issues Bonds periodically, thus to study the
Bonds and understand the mechanism, it was a necessity to understand the procedural aspects and
legal aspects of issuing the bonds. Thus a detailed study of each and every aspect of issue of bond
ranging from Approval, Listing, Dematerialisation, to Debt Servicing has been studied.

The bond market is not only flooded from supply side, but also there is a rapid growth on demand
side by many fresh players entering the market. The investors in Bonds include Banks, Insurance
companies, Mutual Funds, Provident Funds, Pension Funds and other such funds o different
companies. Thus it is necessary to study the characteristics of the bond and compute their Yields,
Duration, and Sensitivity by means of Convexity. And since there are different kinds of bonds issued
by different bodies, the comparison amongst them is also necessary.

The Power Grid Corporation of India Limited’s Debt structure has changed substantially over the
years. From 35% Unsecured Loans and 13% Secured loans in the total Capital Mix in the year 1996-
97, the composition has changed to 7% Unsecured and 58% Secured loans in the year 2009-10. And
of these 58%, approx 38% is comprised of Secured Bonds. As on 31st march 2010, the company has
Bonds outstanding worth Rs.21420.4 Crs and on these a total Intrest of Rs 1500 Crs is paid annually.
And the interest rate paid is fixed. In simple words the interest rate determined at the time of issue
is kept fixed throughout the tenure of the bond irrespective of the market condition. Alternatively
the company could even go for floating rate Bonds whose interest rate is floating i.e... Varies with
the market conditions. Thus a study has been done to compute the savings in cost under floating
rate mechanism. But since the regulations do not allow the company to take risk of fluctuations in
interest rates, and also in this competitive scenario, cost saving has became one of the most
important tool. Thus instead of floating rate, if the company issues the bonds at an appropriate and
at favourable time period, which lead to low coupon rate and ultimately cost savings has been also
studied.

13


Scope

For the purpose of comparing the cost under fixed and floating Rate five bonds issued by Power Grid
Corporation of India Limited with different tenures, different repayment structure, different coupon
rates and different loan amounts were taken. And the Intrest on them under both the methods has
been computed from the date of issue to the latest Intrest payment has been computed taking
different spreads and different reference rates as per the Industry practices.

And for studying the duration, Yields and Sensitivity of the Bonds, all the Bonds issued by Power Grid
Corporation of India Limited and which are active are selected. Along with these Two GSec bonds
and bond series (S-57) issued by Power Finance Corporation has been selected.

For studying the procedural aspects, the steps of the issue, Dematerialisation, Rating, Listing etc
have been studied by referring to the process of issue of Power Grid Bonds XXX issued on 29 th
September 2009.

And for the financial performance analysis, specific study has been done based on the financial
figures of the financial year 2008-09. The scope was not extended to the latest FY 2009-10 because
the audited results were not yet published till the preparation of this report. And for studying the
trend and growth, the figures of last 8 years starting from 2003 has been selected.

14


Data

For the purpose of study the data has been collected from the Company’s Balance Sheets, The
details of Loans and Intrest payments schedules as provided from the internal records of the
company and also different correspondence letters, approval letters, legal documents as provided by
the company were used.

For historical yields on GSec Papers the data has been collected from Reuters Database1. And for
determining the spread for the purpose of deciding the floating rate, the data on spreads as
published by FIMMDA2 has been used. And also data published by RBI related to GSec and also the
Data from Indiastat has been used. For computing the Duration, Yields and Convexity, the present
value has been taken from the NSE websites WDM (Wholesale Debt Segment).

1
A premium Database which provides the data on Global Macro Economic Indicators
2
Fixed Income Money Market and Derivatives Association of India

15


Review of Literature

For the purpose of understanding the concepts and having the thorough knowledge of Bonds and
also to have background knowledge of topics like Floating rate, to understand the valuation concepts
of bonds, the procedural aspects, different articles, papers, reports and other literature has been
studied. Some of the literature is:

WHAT PRACTITIONERS NEED TO KNOW .....? ABOUT DURATION AND CONVEXITY

Mark Kritzman, Windham Capital Management
Financial Analysts Journal (Nov-Dec 1992)

The paper is on Duration and Convexity of Bonds. It has the concept of Macaulay’s Duration and the
author has explained why the time weighted PVs of future cash flows are to be considered instead of
just PVs. The author has also extended the scope of paper by discussing the property of Duration
that with constant YTM and Coupon Payments, the increase in Maturity will increase duration but
the rate of increase is lower.

Modified Duration, which measures sensitivity of price of bond to the changes in yield, does not
accurately predict the sensitivity for the larger changes in YTM. Thus he proposes to use Convexity as
measure of sensitivity. Convexity measures sensitivity of price of bond to the change in Duration.

Apart from the concept of Convexity and Duration, the author has also explained the application of
these measures in Portfolio management. How they can be used to leverage the price appreciation
in case of fall in rates by increasing the duration of the portfolio. Also how it can be used in hedging
the liabilities. The author has also shared how the portfolio can be immunized from interest rate
shifts by setting its duration equal to the investors’ holding g period.

In a nutshell, the paper introduces one to Duration and other valuation techniques and also it shows
the applicability of each. From this literature I am able to understand the concepts of Macaulay’s
Duration, Modified Duration, and Convexity and also their computation and inferences.

A “DURATION” FALLACY

Miles Livingston and John Caks
The Journal of Finance (Vol XXXII No.1 March 1977)

As the title of the paper itself portrays that content is related to a fallacy in general opinion on
Duration. The authors wish to prove that duration is a function of the yield curve but the yield curve
is not the function of duration. Thus one cannot ‘correct the yield curve for the duration’ because
bonds with identical duration do not necessarily have identical yields. They have proved this by
comparing and analysing the two bonds of similar duration.

Also they have concluded that that if bonds with identical durations always have identical yields to
maturity, then the entire term structure of interest rates is determined by the first two rates; given

16

r1 and r2, we can calculate r3 and then (recursively) all subsequent forward rates. This result
contradicts experience and the theoretical work done on term structure.

‘POWER SECTOR IN INDIA’

WHITE PAPER ON IMPLEMENTATION CHALLENGES AND OPPORTUNITIES
KPMG (Jan 2010)

It is an annual report on Power Sector published by KPMG. This paper throws light on Industry
overview, the value chain, and the different players in each business operation namely generation,
transmition and distribution. The paper also discusses the regulations in this sector which are paving
the way for private sector participation.

Also the challenges in this sector which needs to be tackled are also discussed. Some of the
prominent challenges are the Project Execution, The scarcity of fuel, Equipment shortage,
Manpower Shortage, problems in land acquisition and Environment clearance.

This paper helps in understanding the power sector in general, and its structure. And also the
challenges in that sector can be understood.

SEBI (DISCLOSURES AND INVESTORS PROTECTION) GUIDELINES, 2000

Securities Exchange Board of India, the sole regulator of Capital market in India, issues various
guidelines to regulate the capital market of the nation. The DIP Guidelines were issued for the
purpose of protecting investors from fraudulent practices by issuers and also to ensure maximum
disclosure.

It has guidelines with respect to Offer letter, its contents, the promoters share, lock-in period,
requirements for issuing IPOs, Guidelines on Advertising of issue, guidelines on Pricing of issue etc...

The copy of the above mentioned guidelines has many regulations which are not under purview of
my study. Thus only few aspects were studied. The review of them is as follows:

The objectives of these guidelines are:

i. Enhance level of protection of investors
ii. To increase transparency and efficiency of primary market
iii. To strengthen disclosure and eligibility norms of the issuer
iv. Rationalize and simplify operational procedures in primary market.

The guidelines on Book building process, Green Shoe Option, Disclosure requirement in the offer
document and guidelines pertaining to issue of Debentures were studied to have foreground
knowledge of various guidelines.

17

INFORMATION MEMORANDUMS

Then Information Memorandum or Disclosure Document is similar to an invitation letter to the
investors, inviting them to invest in the issue. As per SEBI, this offer document must have all the
details as mentioned by it and which are important and material for investor. Thus it has the
company profile, the challenges and strengths, the financial history, latest financial data, share
holding pattern, details of previous issues of similar security etc... It also has the details of the issue,
the structure of issue, details on Open and close of issue, the details Arrangers, bankers, Registrar,
Trustee etc

By studying this document one can understand the company profile and its financial position in a
gist. Also every minute detail of a particular issue like the interest payment, the terms and
conditions, redemption details, listing details can be understood from this document.

For the purpose of understanding the issue structure and coupon rate determination, IMs of various
bonds of Power Grid Corporation of India Limited have been studied.

Also to understand the Intrest rate determination under Floating rate mechanism and the terms
under that mechanism, the IMs of previous issues of FRBs by firms including Power Finance
Corporation, Railway Finance Corporation Limited, ICICI Bank, IDBI Bank, and Kotak Mahindra etc...
were studied.

WORKING MANUAL FOR DOMESTIC RESOURCE PLANNING AND MOBILISATION
IN P OWER GRID

The Power Grid Corporation of India Limited for its internal policies has a manual on Resources
rising. The document has the policies as defined by its Articles of Association and as vested by Board
with related to Borrowing power, the authority, accountability for activities related to resource rising
(including Term loans and Bonds).

The document also has the procedure of rising funds through Bonds and also through term loan
from banks, the Debt Servicing, the book building process, conversion of bonds from Physical to
Demat, statutory compliance etc.

It also has the formats of each letter to be sent to various parties like Registrar, Arranger, Investor,
Stock Exchange, Depository etc... The guidelines by SEBI and the copy of internal guidelines are also
included.

Thus overview of fund raising process along with legal and procedural aspects can be understood
from this document.

18


Introduction

The debt market is much more popular than the equity markets in most parts of the world. In India
the reverse has been true. Nevertheless, the Indian debt market has transformed itself into a much
more vibrant trading field for debt instruments from the rudimentary market about a decade ago.

The sections below encompass the transformation of government and corporate debt markets in
India along with a comparison of the developments in equity market.

Developments in Government Bond Market

Prior to 1992, money was collected and lent according to Plan. Lacunae in institutional infrastructure
and inefficient market practices characterized the government securities market. In fact the sole
objective pursued was to keep the cost of government borrowing as low as possible. If planning
went awry, the government sent word to its banker. The central bank made a few phone calls to the
heads of banks and bonds were issued and the money arranged. No questions asked, no
explanations given. The GOI bond market did not use trading on an exchange. It featured bilateral
negotiation between dealers. The market thus lacked price-time priority and the bilateral
transactions imposed counterparty credit risk on participants. This narrowed down the market into a
“club” with homogeneous credit risk. This was the state of the government debt market in India ten
years ago.

The major thrust of Financial Reforms commenced in 1992. This was when the contours of the debt
market began taking shape. The idea of the financial reform movement was to have more and more
different markets and not necessarily have whole financial intermediation left to the banks. The
reform process attempted at doing away with regulations in favour of controls based on market
forces i.e. an era where the interest rates are governed more by the market forces of demand and
supply and less by centralized supervision. Slowly, but steadily, the market grew, adding fresh
players and novel instruments. Several measures have added greater transparency and have brought
the issuances closer to the market levels.

The major reforms that took place in the 1990’s were:

• Introduction of the auction system for sale of dated government securities in June1992. This
signalled the end of the era of administered interest rates.

• The RBI moved to computerize the SGL and implement a form of a ‘delivery versus payment’ (DvP)
system. The DvP enabled mitigating of settlement risk in securities and ensured the smoothness of
settlement by synchronizing the payment and delivery of securities.

• Innovative products in form of Zero Coupon Bonds and Capital Indexed Bonds (Ex. Inflation Linked)
were issued to attract a wider gamut of investors. However, the pace of innovation suffered due to
non-sophistication of the markets and lack of persistence with some of the new bonds like Inflation
Indexed bonds after the initial lukewarm response.

19

• The system of Primary Dealers was established in March 1995. These primary dealers have since
then acquired a large chunk of share in the GOI bond market and have played the role of market
makers.

• The RBI setup “trade for trade” regime, a strong regulatory system which required that every trade
must be settled with funds and bonds. All forms of netting were prohibited.

• Wholesale Debt Market (WDM) segment was set up at NSE; a limited degree of transparency came
about through the WDM at NSE, where roughly half the trading volume of India’s GOI bond market
is reported.

• The Ways And Means agreement put an end to issuance of ad hoc treasury bills, the government’s
favourite instrument of funding its profligacy.

• Interest Income in G-Secs was exempted from the purview of TDS.

• FIIs with 100% Debt Schemes were allowed to invest in GOI Securities and T-Bills while other FIIs
were allowed 30% investment in these instruments.

• Dematerialised forms of securities in G-Secs were done through the SGL and Constituents SGL
accounts.

The above-mentioned measures have served in bringing about greater market orientation of the
sovereign issues. This is particularly important as the sovereign borrowing parameters have a direct
bearing on the cost of capital for other non-sovereign issuers. The Primary market for G-Secs
registered an almost ten-fold increase between 1990-91 and 1998-99. The broadening of the market
was also apparent from the fact that RBI’s participation, as reflected by absorption of primary issues,
came down from 45.90% in 1992-93 to 0.74% in 1994-95.

Though significant improvements have been made in the primary market, the secondary market
continued to be plagued by certain shortcomings like dominance of a few players (acted as a
deterrent to lending width in the market), strategy of holding to maturity by leading players
(prevented the improvement in the depth of the market), the pre-1992 “telephone market”
continued to exist (prevents information dissemination and hence price discovery is limited) and low
retail participation in G-Secs continues to exist even today. Experts believe that there is tremendous
potential for widening the investor base for Government securities among retail investors. This
requires a two-pronged approach, increasing their awareness about Government securities as
adoption for investment and improving liquidity in the secondary market that will provide them with
an exit route. Also infrastructure is seen as the vital element in the further development and
deepening of the market.

Corporate Bond Market

In the last decade, market related borrowings by the corporate sector have remained depressed as a
plethora of Financial Institutions were available for disbursal of credit. These Institutions managed to
mobilize a significant amount of domestic savings and route them for corporate consumption.

20

Also the reforms abolished the office of the Controller of Capital Issues (CCI), which meant that
companies were free to price their equity issues as per the market appetite. This led to a slew of
primary issue of equity and the relative attractiveness of issue of debt yielded way to equities. In
fact, even debt issues were made with attached sweeteners like convertible portion of the fixed
income instrument. In addition, several relaxations in regulations post 1992 have encouraged Indian
corporate to raise debt from overseas capital markets leading to further shunning of the domestic
debt market by creditworthy issuers. Therefore, the corporate debt market in India has continued to
be dominated by the PSU’s.

In the recent past, the corporate debt market has seen high growth of innovative asset-backed
securities. The servicing of debt and related obligations for such instruments is backed by some sort
of financial assets and/or credit support from a third party. Over the years greater innovation has
been witnessed in the corporate bond issuances, like floating rate instruments, zero coupon bonds,
convertible bonds, callable (put-able) bonds and step-redemption bonds. For example, step bonds
issued by ICICI in 1998, paid progressively higher rates of interest as the maturity approached while
the IDBI’s step bond was issued with a feature to pay out the redemption amount in instalments
after an initial holding period. The deep discount bond issued by IDBI in the same year had two put
and call options before maturity.

What these innovative issues have done is that they have provided a gamut of securities that caters
to wider segment of investors in terms of maintaining a desirable risk-return balance. Over the last
five years, corporate issuers have shown a distinct preference for private placements over public
issues. This has further cramped the liquidity in the market. While private placement has grown 6.23
times to Rs. 62461.80 crores in 2000-2001 since 1995-96, the corresponding increase in public issues
of debt has been merely 40.95 percent from the 1995-96 levels.

The dominance of private placement in total issuances is attributable to a number of factors. First,
the lengthy issuance procedure for public issues, in particular, the information disclosure
requirements, provide a strong incentive for eligible entities to opt for the private placement route.
Secondly, the costs of a public issue are considerably higher than those for a private placement.
Thirdly, the amounts that can be raised through private placements are typically larger than those
that can be garnered through a public issue. Also, a corporate can expect to raise debt from the
market at finer rates than the prime-lending rate of banks and financial institutions only with an AAA
rated paper. This limits the number of entities that would find it profitable to enter the market
directly.

Thus the public issues market has over the years been dominated by financial institutions, which is
exemplified by the fact that ICICI and IDBI accounted for the entire debt offerings in 1998–99 and all
but one issue in 1999–2000. Another interesting fact is that in spite of dominating the public issues
market even financial institutions have raised significantly larger amounts through the private
placement route.

Further the secondary market for non-sovereign debt, especially corporate paper remains plagued
by inefficiencies. The primary problem is the total lack of market making in these securities, which
consequently lead to extremely poor liquidity. The biggest investors in this segment of the market,

21

namely LIC, GIC and UTI prefer to hold the instruments to maturity, thereby truncating the supply of
paper in the market.

The secondary market for corporate did receive a boost with the waiver on stamp duty payment on
transfer of debt securities, as long as they are dematerialized debentures, in the Finance Bill 2000.

Development of Equity Market vs. the Debt Market

During this decade of financial reforms development in equity market has been striking as compared
to relatively minor changes in the debt market. In terms of sheer market size, the equity market saw
a drop from 42% of GDP in 1993–94 to 28.6% of GDP in 2000-01. Over the same period, the GOI
bond market saw an increase in market size, fuelled by large fiscal deficits, from 28% of GDP in
1993–94 to 36.7% of GDP in 2000–01. Other things being equal, this should have generated an
improvement in liquidity of the GOI bond market and a reduction in liquidity in the equity market.
Instead, changes in market design on the equity market over this period gave the opposite outcome,
where the improvement in liquidity on the equity market was superior to that observed on the GOI
bond market. The reasons for this have been manifold:

• Foreign capital inflows into the GOI bond market are relatively undesirable to policy-makers. This is
in contrast with capital inflows into the equity market, where policy-makers seek to have the largest
possible capital inflows. Hence, infirmities in the market design on the GOI bond market do not
generate an important opportunity cost as far as harnessing foreign capital inflows are concerned.

• In the presence of “development finance institutions” and banks, firms in India are seen as having
access to debt financing, access to debt finance was therefore not seen as a major bottleneck
hindering investment. Hence, the lack of a liquid bond market was not keenly seen as a constraint in
investment and growth.

• In the case of the GOI bond market, the benefits from a non-transparent market with entry
barriers accrue primarily to banks and PDs. The PDs are largely the creation of RBI and public sector
banks have extremely close ties with RBI. The RBI is the regulator for G-Secs market.

Thus the development of equity markets took precedence over development of debt market in India
but the future does seem promising for the debt market.

The Bond market has been growing popularity over the years. This can be seen from the following
chart depicting the average trade value in Wholesale Debt Segment

22


Average Trade Size- WDM Segment
35.00

30.00

25.00
Rs. Crores

20.00

15.00

10.00

5.00

0.00

Jun-04
Jun-94

Jun-96

Jun-98

Jun-00

Jun-02

Jun-06

Jun-08
Oct-95

Oct-97

Oct-99

Oct-01

Oct-03

Oct-05

Oct-07

Oct-09
Feb 99
Feb-95

Feb-97

Feb-01

Feb-03

Feb-05

Feb-07

Feb-09
Figure 1 Trend of Average Trade Size - WDM

From the above trend chart, the tremendous growth of trade in Debt segment can be clearly
demonstrated. The average trade size i.e. Value of each trade has increased from a meagre amount
of Rs. 30 Lacs in the June 1994 to Rs 7.24 Crores in June 2004 to 29.94 in March 2010. There has
been a multi fold

23


Chapter II
Financial Statement
Analysis

 Balance Sheet Analysis
 Profit and Loss Analysis
 Cash Flow Analysis
 Ratio Analysis

24


Financial Statements Analysis
To understand the performance of a concern and to forecast its financial position and financial
strength it is per se necessary to analyse its financial statements. Though a firm makes huge profits
but faces liquidity concerns and though a firm is poor profitability compared to others but yet is
rated as financially strong firm. Thus to comment on ones financial position and financial
performance, it is not possible to comment based on one parameter. Different parameters like
profits, activity, leverage, liquidity, Investments, turnovers, returns, ratios etc is to be analysed.

Different financial statements that can be analysed are Balance Sheet (Position Statement), Profit
and Loss Account (Performance Statement), Cash Flow Statement, Funds flow statement, Apart from
these there are some non-financial reports which are also part of Annual report of a company, and
they are Directors report, Industry Analysis, Auditors report, Third party disclosures, etc..

Some of the popular tools used for the effective analysis of the financial statements are

 Multi-Step Analysis ( Balance Sheet, Profit and Loss and Cash Flows)
 Common Size Analysis
 Comparative Analysis ( Over the years or with Peers)
 Index
 Trend Analysis
 Ratio Analysis

25


Balance Sheet Analysis

Balance Sheet is one of the most important sources for analysing the financial position of any
company. Some of the very important aspects that can be analysed using the Multi Step Analysis of
the Balance Sheet are Capital Composition, Sources and Application of Funds, Trends in Shareholding
Patterns, Trend of Self and Borrowed Funds. Composition of Loans, Trends in fixed assets, analysis of
Working capital etc....

Capital Composition
Capital is one of the import and prime source of funds. It is a long term source and comprises of
Shareholders Capital (L1), Reserves (L2), Secured loans (L3) and Unsecured loans (L4).

From the flowing stacked area chart and also from the table following things can be interpreted:

 The proportion of Share Capital in total capital is reducing every year. This implies the firm is
going on leveraging itself and trading on equity. It also implies the firm is not using its equity
route but either reinvesting the profits or borrowing loans. In the year 2007 though 10%
fresh equity was issued to the public by the route of IPO the proportion has reduced
because of continuous borrowings as Secured Debentures and Loans. The contribution has
reduced from 35 % in 1996 to just 9% in 2009.
 The Reserves and Surplus which includes the reinvestment of profits as retained earnings
has been increasing from 16% to 25%. This implies firm is in the path of expansion and
instead of distributing the earnings in form of dividends to the shareholders it is retaining
and ploughing back the profits in the business.
 There has been an exponential increase in the secured Loans which comprises of
Debentures, Loans from Banks and Loans from Institutions. The company to fulfil its Cap-Ex
requirements has a practice of issuing Secured Non Convertible Redeemable Debentures.
Also it takes term loans from banks and Loans from Multi-Lateral agencies like World Bank
and Asian Development Bank. The share of this source has increased from 13% to as high as
58%. But since the firm has security backed with these loans, it is most preferred by the
investors. But over the years in the same trend continues, there may be liquidity concerns
and also solvency issues. And a high financial risk is also attached with the loans as they
demand regular payment of interest and principal no matter if the financial performance is
good or bad. Default in payment impacts the rating and impairs borrowing ability.
 The Loans from Unsecured Borrowings is regarded as the most risky source as there is no
security backed for it and also the interest rates are very high due to high risk. The
Unsecured loans have been on fall over the years. There has been a rise in the years 2001
and 2006 due to unexpected borrowing needs. But over the years the company is trying to
repay its unsecured loans which are very costly.
 Overall the Capital Structure of the firm is changing over the years, from a less leveraged
firm of (D/E) less than 1; it has reached to leveraged ratio of 1.92. And also the proportion of
Secured loans has been on a rise to compensate the fall in equity and unsecured loans
contribution. But analysis of Absolute amounts of each source and also analysis of self and
borrowed funds need to be done for better understanding.

26


Capital Composition
100%
14.34% 11.69% 9.72%
17.82% 14.62%
90% 22.06%
27.69%
80% 24.56%
35.31% 26.50%
26.28% 25.53%
70% 23.78%
22.08%
18.54%
60%
16.03%
50% 58.38%
40% 13.33% 23.45% 27.17% 32.14% 36.55% 41.64% 48.73%
30%

20%
30.32% 28.68% 26.25%
10% 35.33% 22.55% 18.49%
13.08% 7.34%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Unsecured Loans Secured Loans Reserves Total Share Capital

Figure 2 Capital Composition from 1996 to 2009

Share Reserves Secured Unsecured
Capital Total Loans Loans

1996 35.31% 16.03% 13.33% 35.33%
1997 30.92% 17.45% 19.51% 32.12%
1998 27.69% 18.54% 23.45% 30.32%
1999 24.55% 19.83% 25.09% 30.52%
2000 22.06% 22.08% 27.17% 28.68%
2001 20.00% 24.53% 23.25% 32.23%
2002 17.82% 23.78% 32.14% 26.25%
2003 15.83% 24.48% 34.59% 25.10%
2004 14.62% 26.28% 36.55% 22.55%
2005 14.14% 26.04% 40.01% 19.81%
2006 14.34% 25.53% 41.64% 18.49%
2007 12.52% 23.60% 43.15% 20.73%
2008 11.69% 26.50% 48.73% 13.08%
2009 9.72% 24.56% 58.38% 7.34%
Table 1 Capital Composition from 1996 to 2009

27


Sources and Application of Funds

Every firm has different sources of funds like share capital, reserves, Loans, Debentures, Current
liability, public borrowings etc... And the funds are borrowed for some specific applications like fixed
assets, Investments, Current Assets etc... An analysis of the sources is to be done for the purpose of
assessing the costs and also the applications to analyse the profitability. It is necessary to invest the
funds in profitable resources to earn good Return on Investment and fulfil the expectations of the
stake holders. Following pie-charts show the sources of funds and applications of the same for the
year 2008-09.

Total Current
Sources of Funds- 2008-09
Liabilities Term Loans
19% (Institutions)
1%
Term Loans (Banks)
Unsecured Loans Non Convertible 1%
6% Debentures
Secured 28%
Loans Deferred Credit
47% 17%
Reserves and Surplus
20%

Share Capital Reserves and Surplus Unsecured Loans
Total Current Liabilities Non Convertible Debentures Term Loans (Institutions)

Share Capital
8%

Figure 3 Sources of Funds- 2008-09

From the above chart on Sources of Funds, following interpretations can be made:

 The company has just 28% of the sources as shareholders Funds (Non borrowed funds) this
implies the firm is highly leveraged. But seeing the nature of the business of the firm which is
into power transmission and with many projects regularly under implementation, it faces
high capital requirement. Thus it depends on the borrowed funds.
 As mentioned earlier, the firm is a high growth firm thus has just 19% from Short term
sources like suppliers credit and customers advance.
 Highest is being contributed by Secured Loans which has Non Convertible Debentures,
Deferred Credit and Term Loans.
 The firm prefers to raise loan by issuing the Non Convertible Debentures because it has less
interest rate than term loans and are the availability of Option of moratorium period which
matches with the gestation period of the projects.

28

 Unsecured loans which are very costly due to high rates of interest when compared to
secured loans are just 6%.
 The firm in the year 2009 has funds of Rs. 53787.32 Crores.

Applications of Funds- 2008-09
Total Current
Assets
Investments 15%
3% Net Block
Capital Work in Progress
Capital
Net Block
Work in Investments
57%
Progress Total Current Assets
25%

Figure 4 Applications of Funds- 2008-09

The application of funds implies the avenues where the investment is made to earn the revenue and
to carry on the activities as per the objectives of the business.

 Being a capital intensive firm, the 57% of the funds are invested in Net Block i.e... Fixed
assets like Transmission Grids, transmitters etc...
 As high as 25% of the resources are invested in Capital WIP (Work in progress), this signifies
that the company is in the path of expansion and is undertaking the projects. The Capital
WIP implies the funds given as advance to the contractors, the Under Construction buildings
and plants, etc...
 Just 3% of the funds are into Investment and 15% in current assets. We can infer that either
the firm has operational excellence in Working capital management or since it is Under
Expansion stage the investment in short term assets is low.

From the Sources and Applications it can be analysed that 15% of short term Assets (CA) is wholly
financed by the Current liabilities which is 19%. This implies the firm is matching its short term
requirements with short term sources. This may be termed as aggressive strategy because the
Permanent and temporary working capital is being financed by the short term funds.

29

Share Capital
After analysing the various sources and Applications of funds, it is now necessary to analyse the
trend in each component of the sources and application over the years. The share capital has been
increasing over the years; this is because of the companies borrowing from Government of India by
allotting the shares. Pre-Listing i.e... Before 2007, the company used to allotment shares for this
purpose. In the year 2008, there has been rise in shares allotted because of Initial Public Offer on
26th September 2007. Under the plan of Disinvestment of Public Undertakings, 10% of fresh shares
and 5% of government of India’s holding was issued to the public. In the year 2008 to 2009, the
number of shares and the share capital is constant implying no further issue of share capital is made.
However there is news of further disinvestment through FPO in the year 2010, so there may be
change in share capital in the year 2010-11.

Share Capital
4,500.00
4,000.00
3,500.00
3,000.00
2,500.00
2,000.00 Share Capital
1,500.00
1,000.00
500.00
0.00
2003 2004 2005 2006 2007 2008 2009

Figure 5 Trend in Share Capital

Share Holding Pattern

Not only the share capital but also the holding pattern of the same shall be studied. Since Power
Grid Corporation is one of the Public Undertaking, the maximum holding is with the Government of
India. Only after September 2007, i.e... After the Disinvestment, the holding pattern was diluted. The
holding reduced to 86.37%. Through the issue, the Government of India (promoter) sold its 5% stake
and also fresh equity of 10% of the total share capital was issued. As on 31 st of December 2009,
Institutional and Non Institutional investors have almost equal contribution of 7%.

30


Share Holding Pattern as on 31st Dec 2009
Non Promoter
(Institution) Non Promoter (Non-
7% Institution)
7%

Government(Central / State)
Non Promoter (Institution)
Government(Central Non Promoter (Non-Institution)
/ State)
86%

Figure 6 Share Holding Pattern as on 31st Dec 2009

Share Holders 31-12- 31-03- 31-03- 19-04-
2009 2009 2008 2007
Government(Central / State) 86.37% 86.37% 86.37% 100.00%
Individuals / Hindu Undivided Family 0.00% 0.00% 0.00% 0.00%
Financial Institutions / Banks 1.13% 0.66% 0.37% 0.00%
Foreign Institutional Investors 1.62% 2.58% 2.89% 0.00%
Insurance Companies 3.68% 2.37% 0.97% 0.00%
Mutual Funds / UTI 0.66% 0.79% 0.65% 0.00%
Bodies Corporate 1.65% 1.69% 1.93% 0.00%
Individuals (up to Rs. 1 lakh) 4.17% 5.10% 6.10% 0.00%
Others 0.73% 0.45% 0.72% 0.00%
Table 2 Share Holding Pattern from 2007 to 2009

Share Holding Pattern
Government(Central /
State)
Financial Institutions /
Banks
Foreign Institutional
31-12-2009 Investors
Insurance Companies
31-03-2009
31-03-2008
Individuals holding upto
19-04-2007
Rs. 1 lakh

Figure 7 Share Holding Pattern

31

Name of Share Holder No. Of Shares (%)
( of Rs. 10 each)
President Of India ( Ministry of Power) 3533637935 83.96%
President Of India ( Ministry Of Development Of North East 101269800 2.41%
Region)
Life Insurance 60342943 1.43%
Corporation Of India
LIC Of India - Market Plus 48942430 1.16%
LIC Of India Money Plus 38713829 0.92%
Janus Contrarian Fund 32210129 0.77%
LIC Of India Market Plus – 1 23728370 0.56%
ICICI Prudential Life 20647334 0.49%
Insurance Company Ltd.
Life Insurance 8105330 0.19%
Corporation Of India Profit Plus
HDFC Standard Life 5950579 0.14%
Insurance Company Limited
Total 3873548679 92.03%
3
Table 3 Top 10 Share Holders as on 29.01.2009

Some of the supposition that can be made analysing the holding pattern over the years and the Top
ten shareholders is:

 The holding of promoter (Government) has reduced to 86.37% post IPO. But after that the
holding is constant implying no further dilution or no further issue has been made.
 Over the years the holding of Individuals holding up to Rs. 1 lakh (i.e... Retail Investors) is
falling
 Holding of Insurance Companies is increasing over the years, which implies that the
company is attracting that kind of clients.
 Also the holdings by FIIs are on the fall and are compensated by holdings of Financial
Institutions which is increasing.
 From the list of Top 10 shareholders and the proportion of their holdings, it can be very
clearly observed that the holding is very much skewed.
 92% of total share capital is held by the top 10 shareholders. Thus the Ownership and
control is under few hands.

Brief note on Initial Public Offering
The corporation has come up with Initial Public Offer in the month September, 2007 with an issue
size up to573, 932,895 equity shares of Rs. 10 each for cash at a price of Rs. 52 per equity share
aggregating Rs. 2985crores. The issue comprised a fresh issue of up to 382,621,930 equity shares
and an offer for sale of up to191,310,965 equity shares by the President of India acting through the
Ministry of Power, Government of India. The issue comprised a net issue to the public of up to
559,954,895 equity shares and a reservation of up to 13,978,000 equity shares for subscription by
employees at the issue price. The issue comprised approximately 13.64% of the fully diluted post-
issue capital of POWERGRID.

3
Source: Final Disclosure Document for XXXI issue of Bonds of Power Grid (www.nseindia.com)

32

Reserves

Reserves and Surplus
12000
10000
8000
6000
4000 Reserves Total

2000
0

Figure 8Trend in Reserves and Surplus

The Reserves in the form of General reserve, Capital Reserve, Share Premium, Debenture
Redemption reserve and Profit and Loss Account’s Credit balance are maintained. There has been
continuous increase in the reserves over the years. In the year 2008, the steep increase is
attributable to the share premium account started after the IPO. The shares were issued at a
premium of Rs. 42 per share. Overall, the company is able to retain the earnings and ploughing back
them to fund the capital expansion plans.

Secured Loans

The secured loans in specific to Power Grid Corporation of India Limited comprises of Debentures,
Loans from banks like Indian Overseas Bank, Corporation Bank, Punjab National Bank; Loans from
Institutes like Asian Development Bank, and World Bank (IBRD) and Deferred Credit.

Non Convertible Debentures
20000
15000
10000
5000
0

Non Convertible Debentures

Figure 9 Trend in Non Convertible Debentures

33


Term Loans Institutions
1000
800
600
400
200
0
2004 2005 2006 2007 2008 2009

Term Loans Institutions

Figure 10 Trend in Term Loans Institutions

Term Loans Banks
1000

500

0
2004 2005 2006 2007 2008 2009

Term Loans Banks

Figure 11 Trend in Term Loans Banks

Deferred Credit / Hire Purchase
10000

8000

6000
Deferred Credit / Hire
4000
Purchase
2000

0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Figure 12 Trend in Deferred Credit

34

From the above facts and figures and the trend of growth over the years, following analysis can be
made:

 There has been a constant increase in the amount of Loan from Non Convertible
debentures. From a mere amount of Rs. 1139 Crores in the year 2000-01, the amount has
exponentially increased to Rs. 15112 Crores in the year 2009-10.
 Usually the firm issues Non Convertible, Secured, Taxable, and Redeemable Bonds with a
rating of AAA/ LAAA which implies the most secured investment being issued by the credit
rating agencies like CRISIL, CARE and ICRA. Due to the security, and Ratings, the firm is able
to attract funds at a lower rate than compared to the rate being paid in case of term loans.
 At present as on 31st March 2010, the firm has issued 32 series of bonds and 26 Bonds are
active and interest is being paid on them.
 The Term Loans from Institutions mainly has the loans from LIC at different rates. This
amount is depleting over the years as it is redeemed in equal instalments every year. And
also since they are raised at rate of 10% or high, the firm is proffering to repay the amount.
 The Term Loans from Banks include loans from banks like ICICI, PNB, and IOB etc... Over the
years the loan from this source is also on the fall. This is mainly because the firm prefers to
issue bonds as they have a moratorium period of 3-4 years and also the Intrest rates are
lower there. And in case of Term loans the rates are linked to PLR and thus there are wide
fluctuations.
 Loans in form of Deferred Credit or Hire Purchase are used to finance the Machines and
Plants purchase. Since the firm is expanding and has many projects under implementation
the machines and plants are being financed through this operation.

Unsecured Loans

Unsecured Loans
7000
6000
5000
4000
3000
Unsecured Loans
2000
1000
0

Figure 13 Trend in Unsecured Loans

35

The Unsecured loans have been in a constant range and they include Unsecured Bonds, Loans from
Institutions and Banks at a higher rate and without a security. In the year 2007, there has been a
steep increase in the secured loans because of Increase in borrowings from secured Bonds.

Debt-Composition
100%
90%
80%
70%
60%
50% Unsecured Loans
40%
30% Secured Loans
20%
10%
0%

Figure 14 Debt Composition from 2003 to 2009

From the above chart it can be very clearly commented that the composition of secured loan has
been increasing over the years. This is mainly because of issuing of secured bonds and redemption of
unsecured bonds.

Current Liability

Current Liability
12000

10000

8000

6000 Provisions

4000 Current Liabilities

2000

0
2003 2004 2005 2006 2007 2008 2009

Figure 15 Trend in Current Liability

36

One of the component of sources of Funds and which is short term in nature is Current Liability.
Some of the observations that can be made are:

 The Current Liabilities has increase from Rs. 1646 Crores in the year 2003-04 to as high as
Rs.10472 Crs in the year 2009-10.
 Also the Proportion of Provisions for deferred tax and Debtors is increasing over the year.
This is mainly because of guidelines issued by CERC (Central Electricity Regulations Code),
which has the guidelines of making provisions as per the Tariff system for its customers who
are SEBs since the financial position of SEBs is not sound.

Fixed Assets

Fixed Assets
35000
30000
25000
20000
Net Block
15000
Capital Work in Progress
10000
5000
0
2003 2004 2005 2006 2007 2008 2009

Figure 16 Trend in Fixed Assets

Some of the observations that can be made are:

 The point that the firm is under a rapid expansion stage is very clear from the trend in
growth of fixed assets.
 The Fixed assets have increased at an exponential rate. This is mainly because of the
National Grid project.
 Also the firm has many projects under implementation stage thus has a high amount in
Capital Work in progress, which include the advances to the supplier of machinery, Under
construction plants and buildings etc...

37

Investments

Investments
2500

2000

1500

1000 Investments

500

0
2003 2004 2005 2006 2007 2008 2009

Figure 17 Trend in Investments

The firm has investments of its residual surplus in the income earning instruments. But since the
CREC guidelines do not permit them to invest in different Money market instruments like
Commercial papers, Certificate of Deposits etc... It is permitted to invest only into the safest and also
secured securities like fixed deposits. And also though the amount in investments is not much
fluctuating, but this must be compared with that of fixed assets. From the following chart, it is very
clearly evident that the firm invests its surplus into fixed assets than in investments. Only the surplus
which cannot be invested into capital creation is invested in those avenues. Also though the fixed
assets proportion is exponentially increasing, the proportion of investments is constant.

Fixed Assets: Investments
45000
40000
35000
30000
25000
Fixed Assets
20000
15000 Investments
10000
5000
0
2003 2004 2005 2006 2007 2008 2009

Figure 18 Comparison of Fixed Assets and Investments

38

Current Assets

Current Assets
9000
8000
7000
6000
Loans and Advances
5000
Inventories
4000
3000 Sundry Debtors
2000 Cash and Bank
1000
0
2003 2004 2005 2006 2007 2008 2009

Figure 19 Trend in Composition of Current Assets

The short term applications of the funds are Current Assets. These are the assets which can be
converted to cash in less than a year. The current assets have been at an increase over the years.

Following analysis can be done:

 The Cash and Bank balance, which signifies the actual cash in hand of the firm, has increased
over the years. From a negligible amount of Rs. 118 Crores in the year 2003-04 the balance
has increased to Rs. 2428 Crores in the year 2009-10. This implies that the firm has good
liquidity management and holds cash in hands. But this also implies that the firms
opportunity cost of holding cash is high since the same can be invested in other avenues and
get returns.
 The Sundry debtors which were very high or the year 2003-04 have decreased over the years
and have increased in the year 2009-10. This could be due to the expansion in the
operations and also since the customers are mainly SEBs (State electricity Boards), whose
financial position is weak, thus the debtors have increased.
 Being a capital intensive firm it has very least amount of Inventories which are in form of
spares, consumables etc... The amount is very negligible compared o the other components.
 The Loans and advances have been increased. This can be because of short term loans to its
subsidiaries.
 Overall, if we compare the current assets and Current liabilities position, the firm is able to
match the current assets and current liabilities and is adopting Matching approach of
working capital management by financing the short term needs by short term sources.

39

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