Вы находитесь на странице: 1из 26


Financial Statement Analysis of




Group 7 | Section F | PGP 2017-2019

Submitted On: 31st August 2017



1711384 AMRITA YADAV amrita.yadav17@iimb.ac.in
1711400 KINGSHUK MITRA kingshuk.mitra17@iimb.ac.in
1711416 RAVI RAJ ravi.raj17@iimb.ac.in
1711428 SHUBHI AGARWAL shubhi.agarwal17@iimb.ac.in
1711437 UDAY KUMAR uday.kumar17@iimb.ac.in

The report represents our original work and does not contain any material taken from any
source, except as acknowledged.

As undersigned by Group 7–






1. Executive Summary……………………………………………………….………….i
2. Introduction………………………………………………………….………………..i
3. Analysis of Financial Statements
Chapter 1: Sales and Profitability Analysis……………………….………………….1
Chapter 2: Liquidity Analysis ………………………………………………………..4
Chapter 3: Solvency Analysis……………………………………...………………....5
Chapter 4: Cash Flow Analysis…………….……….………………………………...6
Chapter 5: Prospects of the Firms’ Stocks…………………………………..………..8
Chapter 6: Earnings Quality Analysis………………….…………………………......9
Chapter 7: Annual Report Analysis……………………………………….………...10
4. Recommendations, Summary and Conclusion…………………………….………..12
5. References…………………………….…………………………………………….14
6. Report Checklist……………………………………………………….……………16

The objective of this report is to analyze the financial performance of two companies in the
Power industry, namely, NTPC Limited, a public-sector undertaking, and Tata Power
Company Limited, a private organization. We have read the financial statements of both
companies for a period of 5 years and gone through their reports, discussions and analysis. We
have endeavored to note down the changes in the financials along with the rationale for major
deviations by performing analysis of their sales trends, cost structures, profitability, liquidity,
debt level, cashflow, earnings quality and capital market ratios. A comparison between the two
companies helped comprehend how differently they operate, manage their finances, and what
aspects give rise to the way they are performing in the market scenario.

Our calculations of the abovementioned quantities are based on formulae defined and generally
accepted in the financial community. The data used for the purposes of this report are taken
from the yearly annual reports of Tata Power Company Limited and NTPC Limited. Any other
extra source of information has been duly marked and mentioned in the references. We expect
to provide the reader with a financial perspective of the two companies, and understand how
to analyze financial statements and ratios to form an objective view of the companies’
performance and anomalies in reporting.


Firm Selection
We have selected the following firms for our analysis:
1. Tata Power Company Limited
2. NTPC Limited
Rationale for selection
The first objective of our report is to compare two companies in the Power industry with
differing nature of ownership and operations - a public firm, NTPC Ltd., versus a privately
owned organization, The Tata Power Company Ltd. NTPC Ltd. is the largest power generating
company in India both in terms of installed capacity and generated output, with a market
capitalization of INR 139,696 cr. and gross generation of 250,314 million units in 2016-17.[3]

Tata Power, on the other hand, has a market capitalization of INR 21,408 and gross generation
of 10,463 million units in 2016-17, which is only 5% of NTPC’s generated units[4].
Our second objective is to understand, through financial analysis, how the financial
performance of companies within the same industry but having different operating scales vary.
Salient Features of the Firms
The financials of Tata Power Company Limited are significantly different from NTPC Limited.
The factors that drive up costs or revenue vary not only between the companies but over the
years. Tata Power is highly leveraged with debt whereas NTPC has comparatively much higher
proportion of shareholder’s equity, however, operations of both the companies are similar in
nature. The financials suggest that NTPC is performing very well compared to Tata Power even
as the power industry experiences a sluggish growth.
Industry Overview
The power sector in India is governed by the Ministry of Power. The sector consists of
generation, transmission and distribution utilities. Generation is divided into three sectors -
Central (PSUs), State, and Private, which constitute about 31.5%, 24.7% and 43.8% of total
installed capacity of 330 GW (as on 31.07.2017)[5]. The fuel-wise breakup shows that
percentage of power produced by Thermal plants is 66.8%, by Hydroelectric plants is 13.5%,
by Renewable Energy Sources is 17.7%, and by Nuclear plants is 2.1% [5]. Major end users of
power can be broadly classified into industrial, agricultural, domestic and commercial
consumers. These consumers represented approximately 42%, 17%, 24% and 9%, respectively,
of power consumption.[2] The gross annual generation increased Y-o-Y by 4.72% in 2016-17.
It was a landmark year for Renewable energy with 14410 MW capacity increment. [2] The top
5 companies according to market share are NTPC (32%), Power Grid Corp (27%), NHPC (7%),
Tata Power (5%), and NLC India (3%), adding up to 74% of the total market.
Study period
We have studied and analyzed the financial statements of the companies for 5 Financial Years,
starting from FY 2013 to FY 2017.
Data sources
For the purpose of our study, we have used the Annual Reports of the two companies as the
base documents. In addition to the annual reports, we have referred to analyst reports, internet
reports and stock exchange websites for the purpose of the financial analysis.



The sales of Tata Power increased by a total of 13.5% between 2013 and 2016, experiencing a
mild dip in 2015. The sales initially increased as all the units of Coastal Gujarat Power Limited
(CGPL) became operational. However, revenue slowed down in 2015 due to lower revenues
in coal companies. The pickup of sales in 2016 was a result of higher power trading and
increase in revenue on account of solar equipment business. In 2017, sales dropped by over
26% upon transition from Indian GAAP to IND AS. Overall, the sales growth has been rather
slow for Tata Power, over the last 5 years.
The revenue of NTPC has been on an increasing trend, except for a 2.4% dip in 2016, which
was a result of a fall in capacity utilization (PLF) due to backing down and shut down of units.
The revenue, however, picked up by 4.3% in 2017 as PLF recovered from 59.88% in 2016 to
78% in 2017. The company has recorded an overall sales growth of 18% over the past 5 years,
which is much higher than the growth registered by Tata Power during the same period. The
sales growth of NTPC also seems more sustainable as NTPC is continuously adding to its
installed capacity every year.

DuPont Analysis
To understand the profitability of the two companies, we have analyzed the Return on Equity
of Tata Power and NTPC, based on its component ratios. The key ratios are as under:

Ratio 2013 2014 2015 2016 2017

Return on Equity 15.99% 13.29% 11.58% 11.66% 11.20%

Return on Assets 7.88% 6.02% 4.76% 4.43% 4.38%

Leverage 2.03 2.21 2.43 2.63 2.55

Asset Turnover 0.43 0.42 0.38 0.34 0.33

Profit Margin 18.15% 14.45% 12.39% 12.94% 13.06%

Tata Power

Ratio 2013 2014 2015 2016 2017

Return on Equity -0.63% -1.87% 1.13% 5.40% 4.67%

Return on Assets -0.18% -0.37% 0.23% 1.14% 0.93%

Leverage 3.39 5.00 4.94 4.74 5.00

Asset Turnover 0.71 0.51 0.47 0.49 0.35

Profit Margin -0.26% -0.73% 0.49% 2.33% 2.67%

Return on Equity is a measure of efficiency in the use of shareholders’ funds. Return on

Equity for Tata Powers has increased from -0.63% to 4.67% over the last 5 years, whereas for
NTPC it has shown a continuous decline from 15.99% in 2013 to 11.20% in 2017. However,
despite the decline, the ROE of NTPC has been significantly higher than that of Tata Powers
across all the five years. This indicates that NTPC is able to generate higher profits from the
given level of capital as compared to Tata Power.
The two drivers of ROE are Return on assets (ROA) and Leverage. For NTPC, although the
leverage increased by 26% between 2013 and 2016, the fall in ROA by 56% was far more
dominant, resulting in a downfall in ROE by 30%. In case of Tata Power on the other hand,
both ROA and Leverage have increased, resulting in a significant increase in the ROE.
Leveraging is the use of debt to acquire assets in order to earn a higher ROE. However,
borrowings increase the financial risk of the firm. The leverage of NTPC has increased over
the years on account of heavy capital expenditure accompanied by corresponding increase in
borrowings. However, even at the increased level, the leverage of the company is fairly
conservative at 2.55 times. The leverage of Tata Power has increased by almost 48% and has
reached the level of 5 times, which signifies a very aggressive capital structure with a high
level of risk. The higher leverage of Tata Power is also accompanied by heavy capital
The Return on Assets is a measure of profitability from the assets. The steady decline in ROA
of NTPC is a result of the two-fold decline in both the Assets Turnover Ratio and the Profit
Margin of the firm by 23% and 28% respectively. The falling ROA indicates a deterioration of
profitability suggesting that the capital investments that were made to increase the assets by

the company were not very profitable. In case of Tata Power, however, the ROA has increased
from the level of -0.18% to 0.93% due to a higher than proportionate increase in Profit Margin
in comparison to the fall in the Asset Turnover Ratio. The increase in ROA is a positive sign
for the future profitability of the firm.
The Assets Turnover Ratio (ATO) of NTPC has shown a decline due to the fact that the
average assets of the firm increased at a faster rate of 53% over the 5 years, whereas operating
revenues only increased by 18%. Similar is the case with Tata Power where the ATO has
declined by 51% with a corresponding decrease of 15.5% in revenues. This decreasing trend
in assets turnover of both the companies suggests that the firms have failed to successfully
utilize their assets efficiently to generate revenue. However, it may also be the result of the fact
that the firms are expanding fast in anticipation of future growth in revenues.
The decline in the Profit Margin of NTPC has been driven primarily by the rising finance
costs due to increase in leverage and the decline in other income by 70% over 5 years. The net
profit margin of Tata Power improved with a turnaround in its losses incurred till 2014, in the
later years, through higher operational performance evidenced by a higher NOPAT margin,
and lower coal prices.

Sources of Profitability
We find that the asset turnover ratios of both companies are low and decreasing over the 5-year
period owing to expansion in installed capacity. Additionally, the profit margins are low but
increasing for Tata Power, and moderately high but decreasing for NTPC. This suggests that
the two companies follow a low margin and high-volume business model with some inherent
The increase in costs for Tata Power is majorly driven by raw materials consumed (~160%)
and cost of components consumed (~132%), whereas for NTPC the increase in costs is driven
by depreciation and amortization expense (~57%) and finance costs (~47%).

Cost Structure
In order to understand the cost structure of the company, we have broadly classified its
expenses into 2 categories - fixed costs and variable/semi-variable costs where fixed costs are
the costs which we expect to remain unaffected by the scale of operations and variable costs
are the cost which will change roughly in the same proportion as the production activity. We
have observed that the cost structure of Tata Power involves a higher degree of operating
leverage of 2.09 by use of a high proportion of fixed costs in its cost structure, as compared to

NTPC which has a lower operating leverage of about 1.59 in 2017, based on our estimation.
This indicates a higher operating risk in Tata Power in comparison to NTPC, as it must achieve
a sufficiently higher sales volume to be able to cover its fixed costs. Though this indicates a
high operating risk, with a high operating leverage, we expect Tata Power to be able to achieve
a more than proportionate increase in profits as its the sales increase.


Current & Quick Ratio

The Current Ratio of Tata Power has been below 1.00 over the past 5 years and has seen a
significant decline to 0.37 in 2017. Current ratio of NTPC is relatively healthier than Tata
Power. However, it has also been on a decline, falling from 1.68 in 2013 to 0.78 in 2017. The
low current ratios indicate a high liquidity risk, where the company may face difficulties in
financing its short-term obligations.
Further, normally, a Quick Ratio of 1:1 is considered adequate. The quick ratios of the two
companies are also fairly low and have been on a declining trend, indicating a liquidity crunch.
This decrease in quick ratio is in line with the falling Current Ratios of the two companies. We
consider these low current and quick ratios as a red flag in terms of liquidity risk.
Inventory Turnover and Inventory Holding Period:
The inventory turnover of Tata Power is higher than that of NTPC across all the 5 years, and it
stood at 16.38 in 2017 as against 11.29 of NTPC. Tata Power has consistently maintained a
high inventory turnover in the last 5 years, indicating an efficient inventory management. The
ratio for NTPC, on the other hand, has been on a declining trend, falling from 16.76 in 2013 to
11.29 in 2017. Due to this, NTPC runs the risk of inventory obsolescence, along with high
inventory carrying costs. The increasing trend in inventory holding period represents slowdown
inventory movement, as also indicated by the decline in inventory turnover over the years for
both the companies.
Receivables Turnover and Average Collection Period:
Tata Power has a receivables turnover ratio of 6.17 in 2017 and an average collection period
of 58.30 days. The receivables turnover ratio of NTPC is higher, at 8.58 with an average
collection period of 41.97 days. Though both the companies have experienced a decline in
receivables turnover over the last 5 years, the ratio of NTPC is higher than that of Tata Power.
The higher receivables turnover of NTPC indicates that it is more effective in its collections
from debtors and the receivables are of good quality. Further, in case of NTPC, we have

observed that the increase in average collection period has been coupled with a corresponding
increase in sales. Thus, a possible reason for the increase can be that the company has relaxed
its credit terms to increase its credit sales. A similar trend is observable in the case of Tata
Power as well.
Operating Cycle
Operating cycle is an indicator of the efficiency in working capital management of a company.
The length of the operating cycle of Tata Power has almost doubled over the last 5 years, from
39 days in 2013 to 80 days in 2017. The operating cycle of NTPC has also increased by about
41% over the last 5 years from 52 days in 2013 to 74 days in 2017. The increase in the operating
cycle is a result of a significant increase in both - the inventory holding period and the average
collection period of both the companies. The increase in operating cycle indicates that the time
taken by the company to realize cash from selling its inventories and making recoveries from
its receivables is on an increase, resulting in higher working capital cost. The operating cycle
of Tata Power is higher than that of NTPC and is increasing at a faster rate. This is a negative
indication on the operational efficiency of the company.


Debt Equity Ratio

Debt Equity Ratio is a measure of leverage of a company and indicates the use of debt in the
capital structure of the company. The debt-equity ratio of Tata Power, calculated both using
the Borrowings as well as Total Liabilities is alarmingly high at 2.51 and 3.93 respectively, in
2017, in the light of the rule of thumb value of 2:1. The ratios have remained fairly stable over
the last 5 years. However, we believe that this could be a result of the lack of availability of
additional debt due to the already high leverage employed by the company. The high leverage
indicates a high financial risk in the capital structure of the company and is a definite red flag
from an analysis point of view.
The Debt equity ratios of NTPC on the other hand are fairly conservative and have remained
below 2 over the period under analysis. However, an increasing trend in these ratios is clearly
visible, with the Borrowings based Debt-Equity ratio increasing by 35% to 1.18 and the
Liabilities based ratio increasing 27% to 1.62 over the past 5 years. The steady increase in
tangible assets and capital work in progress indicates that the firm is increasing its borrowings
to fund its capital investments. We do not see the current leverage levels as a cause of concern.
Assets to Equity Ratio
Another measure of leverage of a company is the Assets to equity ratio. A high asset to equity
ratio indicates a high level of debt in the capital structure of the business. Predictably, the ratio
is significantly large for Tata Power at 4.71 in 2017 while it is only 2.64 for NTPC. This
indicates that NTPC is a stronger firm which can operate at low levels of debt. Tata Power, on
the other hand, has reached an unsustainably high level of leverage, where majority of its assets
are financed by debt.
Interest Cover
Interest cover of Tata Power has been on a constant decline and is currently at an alarmingly
low level of 0.90 in 2017. This poses a serious financial risk as the ratio below 1 implies that
the company does not have sufficient operating profits to finance its interest costs. This is a
result of the high leverage employed by the company in its capital structure. The current Interest
Cover is not sustainable and if the company is unable to generate sufficient profits in the future,
then there is a high risk of default in repayment of its interest and debt obligations in the future.
The interest cover of NTPC also saw a decline between 2013 and 2016 from 7.70 to 3.43 but
revived to 4.60 in 2017. However, the interest cover of NTPC is still at a comfortable margin
to finance the interest costs. Thus, the financial risk of NTPC is much lower than that of Tata


The cash flow statement of a company gives an overview of the sources and applications of
funds of a company. It is reflective of the efficiency of the cash management activities of the
The main source of cash inflows for Tata Power is the Cash Flows from Operating Activities
(CFO). The CFO has constantly been positive and on a general increasing trend over the years,
with a spike in 2016 resulting from a high revenue. The Cash Flows from Investing Activities
(CFI) is consistently negative and has increased over the years on account of continued
investments in capital assets. The high investments in fixed assets are indicative of expansion
and expectation of higher revenues in the future. We see this as a positive sign for the future
growth prospects of the company. The Cash outflows from financing activities (CFF) showed
a significant increase between 2013 and 2016. This was despite incremental borrowings by the
company. The increase was primarily on account of high outflows in the form of finance costs
given the high borrowings. The CFF turned positive in 2017 on account of high net borrowings
by the company. The net cash flows have been negative between 2013 and 2016, and have

turned positive only in 2017. The firm has been financing its expansion primarily from its CFO,
given that the CFF has been negative for all years, except 2017.
The main source of cash inflows for NTPC is also the CFO, which remained fairly stable
between 2013-16 and showed a significant spike in 2017, primarily driven by high revenues.
The CFI outflows have been on a rise on account of capital expenditures, indicating that the
firm is expanding. The CFF outflows grew substantially between 2013-16 on account of high
dividend and interest costs, before turning positive in 2017 as net borrowings exceeded the
finance costs. The high positive CFO indicates that the company is able to manage its
operations well and its expansion is supported by the CFO.

Key Cash Flow Ratios

Cash Dividend and Interest Covers
While the cash dividend cover of Tata Power is sufficiently high at 16.75 in 2017, the cash
interest cover is comparatively lower at 2.13. The ratios indicate that the firm has sufficient
CFO to fund its finance costs. The cash dividend cover of NTPC is relatively lower at 5.65
while the interest cover is at 2.95. Though the dividend cover of NTPC is lower than that of
Tata Power, it is still sufficient for the firm to be able to comfortably finance its dividend costs.
Overall, the dividend and interest covers of both the firms look fairly healthy.
Current Liability Cover
The current liability cover of Tata Power is 0.20 in 2017. This is a cause of concern as it implies
that the CFO is much lower than the current liabilities of the firm, due to which the firm faces
the risk of not being able to fund its current liabilities from its CFO. As a result, the firm will
have to fund its current obligations through additional borrowings, which is also a trend visible
across the 5 years. Although the current liability cover of NTPC is higher than Tata Power at
0.53, the ratio is still alarmingly low and is a major red flag.
Capital Expenditure Cover
The capital expenditure cover of Tata Power is 2.10 which indicates that the CFO of the firm
is sufficient to finance the capital expenditure being incurred by the firm and the firm need not
depend upon external borrowings for its growth. The CFO of NTPC on the other hand is 0.87
which is quite low meaning that the operating cash flows are not sufficient to fund the capital
expenditures of the firm and firm will have to finance its expansions through borrowings in the


Price to Earnings Ratio (P/E)

The P/E ratio of a firm measures the Market price per share of the firm in relation to its Earnings
per share. It is a valuation measure used to identify whether the stock of the firm is overvalued
or undervalued. The P/E ratio of Tata Power is 38.68. This is lower than the industry benchmark
P/E ratio of 50.89. A lower P/E ratio compared to the industry implies that the stock of Tata
Power is relatively underpriced in comparison to its peers. The P/E ratio of NTPC at 12.77 [8]
is significantly lower than the industry average. It indicates that stock is heavily undervalued
and is a good buy. The NTPC shares are undervalued in comparison to the Tata Power shares
based on the P/E ratios, making NTPC a more attractive investment opportunity in the long
term than Tata Power.
Price to Book Ratio (P/B)
The P/B ratio measures the Market Price of a firm’s stock in relation to its book value. A low
P/B ratio would indicate that a stock is undervalued. The P/B ratio of Tata Power is 1.41 while
that of NTPC is 1.49. There is only a minor difference between the P/B ratio of the two firms.
Since the P/B ratio of Tata Power is lower than that of NTPC, it is relatively undervalued and
is a better investment option based on P/B analysis.
Dividend Ratios
The dividend yield ratio measures the cash return to the shareholders investments by way of
dividends. The dividend yield of Tata Power shares has come down from 2.01% in 2016 to
1.44% in 2017. However, the dividend payout per share has remained constant at INR 1.30
over the last 3 years. This predictability is generally viewed positively by the shareholders. The
dividend yield of ratio of NTPC is 2.63% which is 83% higher than that of Tata Power. Further,
the ratio in 2017 is almost the same as in 2016, although the dividend payout per share has
increased from INR 3.35 to INR 4.36 during the same period. NTPC shares might be preferred
over Tata Power shares by the shareholders who depend upon the dividend on the shares as a
source of income.
Stock Return
Stock return measures the total addition to the shareholder’s wealth by way of dividend
payments and the capital appreciation in stock price of the share. The stock return of Tata
Power has increased dramatically from -17.25% in 2016 to 30% in 2017. Similarly, the return
on NTPC has increased from -11.8% to 25.01% between 2016 and 2017. While Tata Power

seems more lucrative at the moment, its return is also more volatile in comparison to NTPC,
implying that it is a relatively riskier stock.


Earnings quality is a measure of the sustainability of the current profitability trends of the
company in the future. Earnings derived from core business operations of a company are
considered to be of high quality and more indicative of the future well-being of the company.
NOPAT to Net Profit Ratio
This ratio indicates the proportion of net profits which are represented by the operating profits
of the company. A high ratio implies a higher earnings quality as the profits are mainly derived
from the core business of the company. The NOPAT to Net profit ratio of Tata Power is 3.3
currently. This is mainly due to a high element of non-operating losses of the company, driven
mainly by high finance costs. This means that while the operations of the firm are fairly healthy,
the profitability is pulled down by non-operating expenses. In case of NTPC, the NOPAT to
Net Profit ratio showed an increasing trend from 0.88 to 1.18 between 2013 and 2016, before
dropping to 1.08 in 2017. The reason for the increasing trend in the ratio for NTPC is the
decrease of 70% in the proportion of Other income in the Net profit of the company between
2013 and 2017. The drop of NOPAT to Net profit ratio in 2017 resulted from a movement in
the regulatory deferral account by Rs. 334 Crore in the current year. The NOPAT to Net profit
ratio of the company being greater than 1 reflects positively on its earnings quality.
Cash Flow to Earnings
The Cash flow from Operations (CFO) of Tata Power is significantly higher than the net profit
across all the 5 years, although it has displayed a declining trend. The high ratio of 9.33 in 2017
reflects positively on the operations management and earnings quality of the firm as the
earnings of the firm are sufficiently backed by operating cash flows, negating any suspicion of
earnings management to report higher earnings. The difference between the CFO and Net profit
is mainly on account of the heavy finance costs on the firm’s borrowing. On the other hand,
the CFO of NTPC is closer to the net profit with a CFO to Earnings ratio of 1.89 in 2017.
However, since the operating cash flows comfortably cover the net profits, it is a positive
indication on the earnings quality of the firm.

Non-Recurring items
In the year 2017, Tata Power has written off an amount of Ross. 651.45 Crores, being
impairment of an advance related to consideration payable to DoCoMo, subsequent to a Delhi
High Court ruling. The company has treated the write off as an exceptional item in 2017. This
is a non-recurring item and represents an understatement in the true profitability of the
company. As such, we have excluded it from the calculation of NOPAT to determine the true
earnings of the company.
Audit Observations
In the Annual Report of 2017, the auditors of Tata Power have given a qualified opinion with
regard to an investment of Rs. 384.88 Crores in Tata Teleservices Limited and an advance
of Rs. 138.55 Crores to the same company. The auditors have communicated an inability to
comment upon the fair value of these assets. To the extent of this audit qualification, the
investment and current assets have an unreliable valuation. In addition to the above
qualification, the auditors have also drawn attention to two ongoing litigations of the company.
The first lawsuit estimates charges of Rs. 519 Crores which have not been adjusted by the
company. The decision by the legal authority may result in a loss of this amount for the
company in the future. An amount of Rs. 1,967 Crores in a tax matter is estimated in a tax
matter decided against the company by the High Court and is pending in the Supreme Court.
Although the company is of the opinion that the case will be decided in its favor, given that the
number is quite large, there may be a reluctance on part of the company to postpone the
recognition of the possible loss.
The Auditors of NTPC have given a clean opinion on the Financials of the company for 2017.
Thus, we don’t see a cause of concern in this case.


The directors’ report suggests that they are very optimistic about the macroeconomic
environment of the country and expect a steady GDP growth of ~7%. Government policies
such as ‘National Electrical Mission Mobility Plan 2020’ and ‘Cross border power trading’ will
boost the demand for electricity in the country. Envisaging the same, the company has
increased its assets over the years. Similar trend is observable from our analysis. The major
increase in assets was on the account of declaration of commercial operations of 1420 MW and
investment in subsidiaries and joint ventures. Report mentions the reduction of inventories of

FY 2017 against FY 2016 and our analysis of inventory turnover also suggests an increase in
inventory turnover.
Operating revenue and Total revenue of the firm have both increased by 10% as per the report.
Management attributes this increase to various reasons such as increase in energy sales,
revenue from consultancy and other services. Net profit has also increased in this period.
However, while analyzing the financial ratios, we found that the ROA and ROE both have
decreased consistently over the last 5 years. Operating expenses have increased in the FY 2017
against FY 2016. The main reason for this increase is the increase in employee benefit
expenses. On the other hand, other expenses have decreased for the year because there was no
expense towards contribution to water conservation fund as against previous year and reduction
of CSR.

Commenting upon the financial performance of the firm in 2017, the management has pointed
out that the conventional power generation capacity of the firm has declined due to a lack of
sufficient growth in demand coupled with a rapid increase in global coal prices over the last
year. The directors have pointed out that there is a political push to establish renewable power
generation capacity to meet the 175 GW target by 2022. This has led to the replacement of old
and inefficient equipment and increased investments by buying PPE for setting up new
operations. This is clearly visible in our analysis of Capital Expenditures as well. Report
mentions lower interest rates as the prime reason behind lower finance costs in FY 2017 against
FY 2016 which is similar to our analysis. Overall in the consolidated financial statements, PAT
decrease was mainly due to a sharp increase in coal prices and increase in borrowings and
refinancing. The exceptional item loss towards contractual obligation which has appeared in
FY 2017 due to the purchase of shares by Docomo in TTSL is an observation made by us in
our analysis as well. It is mentioned that by using e-Reverse auction portal started by the GOI,
the cost of procurement of power has reduced from FY 2016 to FY 2017 which is observable
in our reformulated Statement of Profit & Loss. The annual report explains that the ever-
increasing leverage for Tata Power group in the recent past is primarily due to the borrowings
taken for the acquisition and due to the deterioration in its net worth. As per our analysis, the
leverage ratio has increased over the past five years. However, the report mentions significant
steps taken by the company to reduce leverage ratio, which is inconsistent with our analysis
and seems misleading.


Tata Power - Sell
We give a SELL recommendation on the Tata Power stock. The company is heavily leveraged
as indicated by the unusually high debt-equity ratio and low interest coverage ratio, which
makes it a risky investment. The current ratio is very low which further adds to the risk of
investing in the company. The growth of the company had been very slow in the last few years
and the profitability is unimpressive. Based on these factors, we have concluded that Tata
Power is not a good investment option for now.

NTPC - Buy
We give a strong BUY recommendation on NTPC. The company is significantly undervalued
as evidenced by its low P/E Ratio discussed above. The installed capacity has grown by a
CAGR of 5% between 2013-16[6] and company has a planned capacity expansion of over 10000
MW over the next two years. This indicates strong growth prospects of the company in the
future. The company is currently operating at a relatively low leverage which makes it
financially less risky. Further, the profitability of the company has been consistent and
impressive. Considering these factors, we believe that NTPC is a good buying opportunity.

Summary & Conclusions

As part of the financial analysis of Tata Power and NTPC for the last 5 financial years, we have
computed and analyzed different ratios spanning the areas of profitability, solvency, turnover,
Liquidity and capital market indicators. Based on our analysis, we have observed that NTPC
is in much better financial health than Tata Power. Both the companies seem to be optimistic
about the future growth prospects of the power industry, as is evidenced by the continuous
capacity expansion undertaken by the firms over the last few years. The primary challenge
faced by Tata Power is the heavy leverage employed in its capital structure which has rendered
the firm risky and low on profitability, despite healthy operating income and cash flows. The
outlook for NTPC on the other hand appears to be much more positive given the strong
operational excellence demonstrated by the firm in the past and the plans of significantly
upscaling its generation capacity in the new future.

Below are a few limitations of our financial analysis of the two companies:

Items not classified as both Liabilities and Equity
The Balance sheets of both Tata Power and NTPC contain certain items on the Liabilities and
Equity side, which fall neither into equities, nor into liabilities. These include certain statutory
reserves as well as perpetual securities. For the purpose of our analysis, we have considered
these items to be a part of Equity.
IND AS impact on P&L of 2017
The Annual Report of 2017 has published Financial Statements in accordance with the IND
AS, while the financial statements of the previous years have been prepared in accordance with
the Indian GAAP. In order to make the financials comparable, we have reclassified the 2017
financial statements to bring the reported numbers to the same reporting format as the previous
four financial statements. However, the gaps due to the accounting and valuation differences
between the two GAAPs still remain in our source data and analysis.

1. Annual Reports – Tata Power Company Limited
FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2017

2. Annual Reports – NTPC Limited

FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | FY 2017

3. Internet Database for Industry Background:


4. Internet Database for Industry Background:

5. Internet Database for Industry Background:

6. Analyst Report

7. Market Prices

8. Industry P/E Ratio



Financial Ratios and Relevant Extracts


Particulars 2013 2014 2015 2016 2017

Stock Price Information

Year-end Stock Price BSE, Closing 93.03 84.80 77.10 64.65 90.50

Profitability Ratios
NOPAT margin = NOPAT/Operating
revenues 6.53% 5.86% 7.44% 10.66% 8.82%
NOPAT to PAT = NOPAT/Net Profit 25.23 8.03 15.23 4.58 3.30
Overall profit margin = Net
profit/Operating revenues -0.26% -0.73% 0.49% 2.33% 2.67%
Asset Turnover = Operating
revenues/Average assets 0.71 0.51 0.47 0.49 0.35
Return on assets = Net profit/Average
Assets -0.18% -0.37% 0.23% 1.14% 0.93%
Return on equity = Net profit /AE -0.63% -1.87% 1.13% 5.40% 4.67%
Basic Earnings per Share (EPS) (0.36) (1.10) 0.62 3.23 2.76

Cost Structure (Rs. In Crores)

Total Variable and Semi Variable
Costs 26,580.73 28,731.37 27,426.37 28,687.59 22,051.02
Total Fixed Costs 4,687.22 6,169.52 5,873.48 5,852.92 5,102.56
Contribution (Operating Revenue -
Variable Costs) 6,444.70 6,917.33 6,940.48 8,792.61 5,846.70
Operating Leverage
(Contribution/PBIT) 1.65 1.57 1.34 1.62 2.09

Particulars 2013 2014 2015 2016 2017
Liquidity Ratios
Current Ratio = Current
Assets/Current Liabilities 0.73 0.61 0.71 0.77 0.37
Quick Ratio = Quick Assets/Current
Liabilities 0.61 0.52 0.62 0.68 0.32
Inventory Turnover = Sales/Average
Inventories 22.93 17.39 17.55 20.54 16.38
Receivable Turnover =
Sales/Average Receivables 15.33 9.09 6.80 6.96 6.17
Average Collection Period = Average
Receivables/ADS 23.48 39.62 52.93 51.71 58.30
Average Holding Period (Sales)=
360/Inventory Turnover 15.70 20.70 20.52 17.53 21.97
Operating Cycle = Average
Collection Period + Average Holding
Period 39.18 60.33 73.45 69.25 80.28

Solvency Ratios
Assets to Equity ratio 1.87 4.86 5.14 4.77 4.71
Debt to Equity Ratio =
Borrowings/Equity 2.61 2.54 2.68 2.35 2.51
Debt to Equity Ratio =
Liabilities/Equity 3.82 3.99 4.11 3.71 3.93
Interest Cover = PBIT/Interest
Expense 1.48 1.28 1.40 1.56 0.90

Cash Flow Ratios

Operating Cash Margin =
CFO/Operating Revenue 0.10 0.18 0.17 0.26 0.25

Particulars 2013 2014 2015 2016 2017
Current Liability Cover =
CFO/Current Liabilities 0.20 0.30 0.28 0.47 0.20
Capital Expenditure Cover =
CFO/Capital Expenditure 0.78 1.50 1.75 2.49 2.10
Long Term Debt Cover = CFO/Non
Current Financial Liabilities 0.10 0.21 0.18 0.28 0.28
Cash Interest Cover = CFO/Interest
Paid (1.10) (1.91) (1.77) (2.91) (2.13)
Cash Flow to Earnings = CFO/Net
Profit (38.39) (24.94) 35.64 11.17 9.33
Cash Dividend Coverage =
CFO/Dividend (9.52) (19.00) (12.96) (19.44) (16.75)

Capital Market Ratios

Price-Earnings Ratio = Market
Price/EPS (75.63) (52.67) 453.53 23.68 38.68
Book value per share (Rs.) 67.00 68.16 67.70 70.54 63.99
Price-to-book Ratio 1.39 1.24 1.14 0.92 1.41
Dividend per share (Rs.) 1.15 1.25 1.30 1.30 1.30
Dividend-yield 1.24% 1.47% 1.69% 2.01% 1.44%
Earnings Yield -1.32% -1.90% 0.22% 4.22% 2.59%
Change in stock price (Rs.) (8.23) (7.70) (12.45) 25.85
Total return (Rs.) (6.98) (6.40) (11.15) 27.15
Total return (rate) on beginning price -8.23% -8.30% -17.25% 30.00%


Particulars 2013 2014 2015 2016 2017

Stock Price Information

Year-end Stock Price BSE,
Closing 142.00 119.95 147.35 128.80 165.95

Profitability Ratios
NOPAT margin =
NOPAT/Operating revenues 16.00% 14.81% 13.60% 15.33% 14.16%
Profit 0.88 1.02 1.10 1.18 1.08
Overall profit margin = Net
profit/Operating revenues 18.15% 14.45% 12.39% 12.94% 13.06%
Asset Turnover = Operating
revenues/Average assets 0.43 0.42 0.38 0.34 0.34
Return on assets = Net
profit/Average Assets 7.88% 6.02% 4.76% 4.43% 4.38%
Return on equity = Net profit /AE 15.99% 13.29% 11.58% 11.66% 11.20%
Basic Earnings per Share (EPS) 15.27 13.83 12.11 12.35 13.00

Cost Structure (Rs. In Crores)

Total Variable and Semi Variable
Costs 46,672.94 54,365.50 57,750.89 53,263.13 55,399.52
Total Fixed Costs 10,825.19 12,847.84 14,493.85 16,583.88 14,846.50
Contribution (Operating Revenue
- Variable Costs) 22,703.88 24,556.16 22,871.15 25,442.37 26,681.30
Operating Leverage
(Contribution/PBIT) 1.19 1.39 1.63 1.78 1.59

Particulars 2013 2014 2015 2016 2017
Liquidity Ratios
Current Ratio = Current
Assets/Current Liabilities 1.68 1.50 1.16 0.86 0.78
Quick Ratio = Quick
Assets/Current Liabilities 1.51 1.29 0.94 0.66 0.61
Inventory Turnover =
Sales/Average Inventories 16.76 14.94 11.55 9.88 11.29
Receivable Turnover =
Sales/Average Receivables 11.63 12.31 10.09 8.10 8.58
Average Collection Period =
Average Receivables/ADS 30.95 29.24 35.67 44.42 41.97
Average Holding Period (Sales)=
360/Inventory Turnover 21.48 24.09 31.17 36.44 31.90
Operating Cycle = Average
Collection Period + Average
Holding Period 52.43 53.34 66.84 80.86 73.87

Solvency Ratios
Assets to Equity ratio 1.88 2.16 2.25 2.63 2.64
Debt to Equity Ratio =
Borrowings/Equity 0.87 0.92 1.06 1.25 1.18
Debt to Equity Ratio =
Liabilities/Equity 1.28 1.33 1.52 1.78 1.62
Interest Cover = PBIT/Interest
Expense 7.70 5.52 3.93 3.43 4.60

Particulars 2013 2014 2015 2016 2017
Cash Flow Ratios
Operating Cash Margin =
CFO/Operating Revenue 0.22 0.20 0.18 0.18 0.25
Current Liability Cover =
CFO/Current Liabilities 0.58 0.53 0.40 0.36 0.53
Capital Expenditure Cover =
CFO/Capital Expenditure 0.95 0.94 0.83 0.71 0.87
Long Term Debt Cover =
CFO/Non Current Financial
Liabilities 0.24 0.21 0.15 0.14 0.20
Cash Interest Cover =
CFO/Interest Paid (4.04) (3.32) (2.55) (2.21) (2.95)
Cash Flow to Earnings =
CFO/Net Profit 1.23 1.38 1.43 1.42 1.89
Cash Dividend Coverage =
CFO/Dividend (4.42) (3.18) (1.15) (5.25) (5.65)

Capital Market Ratios

Price-Earnings Ratio = Market
Price/EPS 9.30 8.67 12.17 10.43 12.77
Book value per share (Rs.) 90.62 101.10 108.69 102.33 111.62
Price-to-book Ratio 1.57 1.19 1.36 1.26 1.49
Dividend per share (Rs.) 5.75 5.75 2.50 3.35 4.36
Dividend-yield 4.05% 4.79% 1.70% 2.60% 2.63%
Earnings Yield 10.75% 11.53% 8.22% 9.59% 7.83%
Change in stock price (Rs.) (22.05) 27.40 (18.55) 37.15
Total return (Rs.) (16.30) 29.90 (15.20) 41.51
Total return (rate) on beginning
price -13.59% 20.29% -11.80% 25.01%


The whole team of Group 5 guarantees that the report meets the requirements stated by the
professor. We confirm that –

1. We have used the annual reports of the companies and not any databases or summaries of
financial information.
2. The report does not exceed 20 pages.
3. The report is in Word .doc or .docx.
4. The report is in 1.5-line space. The font used is Times New Roman and the font size is 12.
We have not used any other line space, font or font size.
5. The report reads as one continuous story and not as disjointed parts.
6. The report does not reproduce information from the annual report but provides relevant
analysis of the information.
7. The pages are numbered consecutively.

Undersigned by the group as below: