MBA 2010-12

FSA Of Orissa Power Generation Corporation

Power for Progress

Keshaw Bhardwaj | KiiT School Of Management

Financial statement analysis &

reporting of OPGC
Power for Progress

A project report under the guidance of

Prof. BCM Patnaik

Mr. N. Mohapatra

KiiT School Of Management

KiiT University, Bhubaneswar

Sr. General Manager (Finance)

OPGC

By:
Keshaw bhardwaj

(MBA Batch 2010-12)

Roll No. 10202051, email: 10202051@ksom.ac.in
For the partial fulfillment of MBA program of KiiT School of Management, Bhubaneswar

KIIT School of Management | KIIT University

KIIT University,
KIIT Campus-7, KRISHNA Campus ,
Bhubaneswar:-751024,Orissa,
INDIA

Declaration
I do hereby declare that the project entitled Financial statement analysis & reporting of
OPGC is submitted as a partial fulfillment of the requirements for the degree of Masters of
Business Administration, KiiT school of Management in the course curriculum of third
semester, is an original piece of work done by me under the guidance of Mr. N. Mohapatra,
SGM (F), OPGC and Prof. BCM Patnaik, Faculty, KSOM. It has not been submitted for the
award of any other degree or diploma elsewhere in full or part.

Place:
Date:
Signature
Keshaw bhardwaj

Certifications
To whom this may concern

This is to certify that Sri Keshaw Bhardwaj, a student of Master of Business administration
2010-12, KiiT School of management, KiiT University has completed the project on the topic
Financial statement analysis & reporting of OPGC. He is very sincere, regular and hard
working student.
I wish him success in his academic as well as professional career.

Mr. N. Mohapatra
Sr. GM (Finance), OPGC

Certifications
Prof. BCM Patnaik
Faculty, Finance department,
KiiT School of Management,
KiiT University,
Bhubaneswar - 751024
This is to certify that the project entitled Financial statement analysis & reporting of OPGC
is a bona fide work done by keshaw bhardwaj under my supervision and it embodies the
result of his original contribution. No part of this project has been submitted for any other
degree or diploma.

Place:
Date:
Signature
Prof. BCM Patnaik

Acknowledgement
I express my heartfelt indebtedness and deep sense of gratitude to Mr. N Mohapatra, Sr.
GM (F), OHPC for his consultant inspiration and prompt guidance to carry out and complete
this project work.
Im also thankful to Prof. BCM Patnaik, Faculty, KiiT School Of Management for his
continuous guidance and kind suggestions.
Finally, I express my sincere gratefulness to all of those who helped me directly or indirectly
in bringing out this academic endeavor.

Place:
Date:
Signature
Keshaw bhardwaj

Table of Contents
Executive Summary.................................................................................................... 7
Energy sector ............................................................................................................ 8
Energy sector in Orissa ............................................................................................. 10
Power sector reform in Orissa ................................................................................. 13
Organizations in power sector in Orissa .................................................................... 14
Thermal power generation industry in India ................................................................. 15
OPGC: A company profile .......................................................................................... 16
FSA: A theoretical discussion ..................................................................................... 19
FSA of Orissa power Generation Corporation Limited .................................................... 22
1.

Multistep Income statements ............................................................................ 22

2.

Horizontal Analysis .......................................................................................... 22

3.

Common sized analysis (Vertical Analysis) ......................................................... 22

4.

Trend Analysis ................................................................................................ 23

5.

Analytical balance sheet................................................................................... 23

6.

Ratio Analysis ................................................................................................. 23

7.

Cash flow statement Analysis ........................................................................... 27

Conclusion............................................................................................................... 28
Bibliography ............................................................................................................ 29
Annexure I .............................................................................................................. 30

Executive Summary
The objective of the financial statement is to provide information about the financial
position, performance and cash flow of the enterprise to help various users carry out an
evaluation of the ability of the enterprise to generate cash and cash equivalents and of
timing and certainty of generation for necessary decision making.
When properly analyzed and interpreted, financial statement can provide valuable insights
into a firms performance. It is helpful in assessing corporate excellence, judging bond
rating, predicting credit worthiness, forecasting bankruptcy and assessing market risk.

Energy sector
The existence and development of adequate infrastructure is essential for sustained growth
of the Indian economy. Infrastructure investment in India is on the rise, but growth may be
constrained without further improvements.
The government is committed to accelerating the development of infrastructure sector as
indicated by its plans to raise infrastructure spending during the Eleventh 5 Year Plan period
(FY07-12). Investment in infrastructure sector is likely to increase to around 8 per cent of
GDP in the Eleventh Plan period compared to 4.6 per cent of GDP in the Tenth Plan period.
The government spending is planned across segments with power sector likely to see the
maximum spending of the total outlay. The government has identified the power sector as a
key sector of focus to promote sustained industrial growth.
The power sector requires huge capital outlay, and it is not possible for the government to
fund the growth of the sector on its own. It is essential that private sector participation be
promoted if the demand supply gap in power sector has to be mitigated. Consequently, the
government has undertaken multiple reforms to make the power sector more attractive to
the private sector.
The government has embarked on an aggressive mission Power for All by 2012 and
the private sector has a key role in achieving the objectives stated in the mission.
Involvement of the private sector not only reduces funding constraints of the sector, but
also has other advantages like improvement in competitiveness of projects, more efficient
execution, lower cost of generation, optimization of capacity utilization, optimisation of fuel
mix and technology up-gradation. There have been a slew of regulatory changes after the
enactment of the Electricity Act in 2003 which have opened up the power generation sector
and driven the sector on a high growth trajectory.

India had been traditionally dependent on thermal power as a source of power generation,
which constitutes about 64 per cent of current capacity. The balance is contributed by
hydroelectric power (23 per cent), nuclear (3 per cent), and renewable energy (9 per cent).
Demand and supply outlook
In order to sustain a GDP growth rate of over 8 per cent, it is essential that the power
sector also grows at a similar rate. The power sector has witnessed acute shortage of
electricity over the last few years. The energy deficit in FY09-10 was 10.1 per cent and the
peak power deficit was 13.3 per cent indicating a huge gap between demand and supply of
electricity. The gap between demand and supply has not decreased in the last few years,
leading to persistent power shortages. The following table highlights the deficit situation in
the last few years.

In recent years, Indias energy demand has been increasing very fast due to the population
growth and economic development. The increase in installed power generation capacity has
however not kept pace with the increase in demand for power thus leading to power
shortages.
Despite the overall increase in energy demand, per capita energy consumption in India, at
704 kwh, is still very low compared to other developing countries.
The global average per capita consumption of energy is currently at about 2,500 kWh. It is
said that the basic minimum need of energy for a decent quality of life is about 4,500 to
5,000 kWh per capita1. Further, global population is expected to rise from about 6.8 billion
currently to about 9 billion by 2050 and then stabilize2. Therefore, no matter which way one
looks at energy demand viz. either to just provide a basic quality of life to the existing
population or to take care of the needs of another 2.2 billion people, the world will need
more energy.
Transmission
The Electricity (Amendment) Act 1998 was passed with a view to make transmission as a
separate activity for inviting greater participation in investment from public and private
sectors. The participation by private sector in the area of transmission is proposed to be
limited to construction and maintenance of transmission lines for operation under the
supervision and control of Central Transmission Utility (CTU)/State Transmission Utility
(STU). On selection of the private company, the CTU/STU would recommend to the
CERC/SERC for issue of transmission license to the private company.
In this regard, the Government of Karnataka is the first to invite private sector participation
in transmission by setting up joint-venture company. Other States are also in the process of
introducing the reforms in the transmission sector.

Energy sector in Orissa

POWER SCENARIO IN ORISSA - AN OVERVIEW
Highlights of the Act | Regulatory Mechanism | Functions of the OERC

A NEW ERA IN UTILITY REGULATION

Orissa has been a pioneer among States in India
in embarking on a comprehensive reform of the
electricity industry of the State. The aim of the
reform is to address the fundamental issues
underlying poor performance of the Orissa State
Electricity Board and restructure the power
sector. The objective to make power supply
more efficient, meet the needs of a growing
economy and develop an economically viable
power industry which will enable Orissa to
attract private capital while safeguarding the
interests of the consumers.
The reform programme was announced by the Chief Minister of Orissa in November, 1993,
formally approved by the council of Ministers in April, 1994 and was endorsed by the new
state government which took office in March, 1995. On April 20, 1995, the government
issued a formal statement of its power policy.
A new legislation, namely, the Orissa Electricity Reform Act, 1995 (Orissa Act 2 of 1996)
was enacted for the purpose of restructuring the electricity industry, for taking measures
conducive to rationalization of generation, transmission and supply system, for opening
avenues for participation of private sector entrepreneurs and for establishment of a
Regulatory Commission independent of the state government and power utilities.
Advance clearance of the legislation by the central government was issued by the
Ministry of Home Affairs in early November 1995. The legislation was approved by the State
Assembly on November 28, 1995. The President gave his assent in January 1996 and the
Act became effective in April 1996. The restructuring of the industry became effective from
the same date and the Regulatory Commission became functional on 01.08.1996 after all
the three members including the Chairman had taken oath of office.
HIGHLIGHTS OF THE ACT
The reform legislation contains several fundamental building blocks.
Restructuring - The former OSEB has been corporatized and is designed to be managed on
commercial principles in its new form GRIDCO. While the newly formed GRIDCO has been
put in charge of transmission and distribution, the hydro power- generating stations owned
by the government has been taken over by the Orissa Hydro Power Corporation (OHPC).
Unbundling - The reform structure has incorporated principles of functional unbundling
with regard to generation, transmission and distribution to be managed by separate
10

corporations/companies.
Privatisation - The OER Act, 1995 aims at fostering private sector participation in
generation and gradual privatisation of transmission and distribution.
Regulatory Commission - An important component is establishment of the Orissa
Electricity Regulatory Commission for ensuring achievement of objectives given in the
Orissa Electricity Reform Act, 1995.
Licensing - Government ownership and direct control has given way to a licensing system
in respect of transmission and distribution activities.
Tariff - Determining tariff which would ensure commercial rate of return for investment in
the electricity industry while protecting rights of all categories of consumers with respect to
cost, efficiency and quality of service.
The new regulatory supervision is designed to be qualitatively and structurally different from
the command and control exercised by the government so far as the electricity industry is
concerned. The Orissa government's objective is to withdraw from the power sector as an
operator of utilities and give way to privately managed utilities operating in a competitive
and appropriately regulated power market. The Commission is designed to be an
autonomous authority responsible for regulation of the power sector while policy-making
power continues to be retained by the State Government. The Commission is a three
member body with the necessary supporting staff.
Structural Evolution
REGULATORY MECHANISM
The new regulatory regime is designed to insulate the electricity industry from short term
political decisions and rigid bureaucratic control. It aims at ensuring that industry operates
on commercial lines so that the scarce resources of the state are available for development.
It has been the experience that state owned industry is utilised for achieving social and
political ends such as creating avenues for employment, and giving subsidy to certain
categories of consumers. This becomes detrimental to the industry resulting in nonavailability of resources for maintenance and expansion, lack of accountability in
performance, poor quality of service, financial sickness of the industry and unwillingness of
private sector to invest in any significant manner.
The new regulatory regime, on the pattern prevalent in USA and UK, is designed to create
clear and transparent rules and procedures for open hearing by which the Regulatory
Commission can monitor and control the essential utility industries while the interests of all
those who participate in it and those who are served by it can be balanced and protected.
As an independent Regulatory OERC
Issues and enforces licenses
Determines tariff and charges

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Monitors financial viability of operators

Sets service standards and monitors compliance
Arbitrates in disputes between licensees
Arbitrates in disputes between licensees and consumers
Provides information and advice to the Government
Handles consumer grievances
Promotes competition in all sectors of electricity industry
An independent Regulatory Commission operating in a transparent manner creates comfort
and confidence of investors from private sector by allaying the apprehension that political
and personal considerations may create an uncertain climate and that the interests of Govt.
or selected persons shall not be unduly favoured.
Regulatory Structure
FUNCTIONS OF THE OERC
to aid and advise, in matters concerning generation, transmission, distribution and supply of
electricity in the State;
to regulate the working of licensees and to promote their working in an efficient, economical
and equitable manner;
to issue licenses in accordance with the provisions of the Reform Act and determine the
conditions to be included in the licenses;
to promote efficiency, economy and safety in the transmission, distribution and use of
electricity in the State including and in particular in regard to quality, continuity and
reliability of service so as to enable all reasonable demands for electricity to be met;
to regulate the purchase, distribution, supply and utilization of electricity, the quality of
service, the tariff and charges payable keeping in view both the interest of the consumer as
well as the consideration that the supply and distribution cannot be maintained unless the
charges for the electricity supplied are reasonably levied and duly collected;
to promote competitiveness and progressively involve the participation of the private sector,
while ensuring a fair deal for the customers;
to collect data and forecast on the demand for and use of electricity and to require the
licensees to collect such data and make such forecasts;
to require licensees to formulate perspective plans and schemes in coordination with others
for the promotion of generation, transmission, distribution and supply of electricity; and
to undertake all incidental or ancilliary things.

12

The Orissa Electricity Regulatory Commission has taken up its role earnestly in the aforesaid
historical and legal perspective. The Commission's task is all the more difficult because
there has been no precedent of an independent regulatory Commission in electricity
industry in any of the developing countries in Asia. The Commission has formulated its
rules, regulation and procedure in a tailor-made manner to suit the economic and industrial
development in general, and need of electricity sector in particular, in the state of Orissa
while safeguarding the interests of all categories of consumers.

Power sector reform in Orissa

The main objective of the Reform in State Power Sector was to unbundled Generation,
Transmission & Distribution activities of Orissa State Electricity Board (OSEB) and to
establish an independent and transparent Regulatory regime in order to promote efficiency
and accountability in the sector.
1995-96
1. Grid Corporation of Orissa Ltd. (GRIDCO) was registered under the Companies Act 1956
in April 1995 to own and operate the Transmission, Bulk Supply and Distribution
systems in the State. Similarly, the Orissa Hydro Power Corporation (OHPC) was also
registered under the Companies Act 1956 in April 1995 to own and operate all the Hydro
Generating Stations in the State. Both the entities are State Govt. owned companies.
2. The Orissa Electricity Reform Act, 1995 was passed by the State Legislative Assembly in
November 1995 and was assented to by the President of India in January 1996.
1996-97
3. The Orissa Electricity Reform Act 1995 came into force with effect from the 1 st of April
1996. The assets and personnel of OSEB were transferred to the newly created entities
such as GRIDCO and OHPC with effect from the 1 st of April 1996 on a provisional basis
pursuant to the Orissa Electricity Reform (Transfer of Undertakings, Assets, Liabilities,
Proceedings and Personnel) Scheme Rules, 1996. This transfer became absolute with
effect from 1st April 1997.
1998-99
4. One of the objectives of the power sector reform was also to associate Private Sector
Investors in the distribution activities of the State. Keeping this in view 4 Distribution
Companies namely Central Electricity Supply Company of Orissa Ltd. (CESCO), NorthEastern Electricity Supply Company of Orissa Ltd. (NESCO), Western Electricity Supply
Company of Orissa Ltd. (WESCO) and Southern Electricity Supply Company of Orissa
Ltd. (SOUTHCO) were incorporated in 1997. All the four companies functioned as wholly
owned subsidiaries of GRIDCO. With effect from 26.11.98 pursuant to the Orissa
Electricity Reform Rule (Transfer of assets, liabilities, proceedings and personnel of
GRIDCO to Distribution Companies) 1998, the distribution undertakings of GRIDCO were
transferred to the 4 (four) wholly owned subsidiaries which carried on the business of
distribution and retail supply of power in the State as an affiliate of GRIDCO up to
31.3.99 and thereafter it operated under license granted by OERC.
1999-00

13

5. Through a process of international competitive bidding, 51% of the equity share capital
of the four companies held by GRIDCO has been sold in favour of Private Sector
Investors. BSES, a Mumbai based utility of repute have acquired 51% of stake in three
companies namely, WESCO, NESCO & SOUTHCO on 1.4.99. AES Corporation, USA in
consortium with Jyoti Structure has acquired 51% of equity in CESCO on 1.9.99. With
this disinvestment, the privatisation of distribution activities of GRIDCO, which is first of
its kind in India, has been concluded.
6. The total proceeds of disinvestment of 51% of the equity share of the 4(four)
distribution companies are as under:
Name of the
Company.

Name of the 51% equity

Preferred
offered for
purchaser.
Sale.
(Rs. in lakhs)

WESCO

BSES

NESCO

BSES

SOUTHCO
CESCO

Amount
offered

(Rs. in lakhs.)

price

( in Rs.)

5458.53

22.00

3361.41

3361.41

10.00

BSES

1920.66

2880.99

15.00

AES-JYOTI

3708.72

4200.00

11.33

11471.94

15900.93

13.86

TOTAL

2481.15

Offered
per share

8. The entire proceeds of the disinvestment is on account of GRIDCO and the utilisation are
made towards discharge of Generators liabilities, partly towards expenditure on capital
works and payment to GoO towards guarantee commission and stamp duty.
2005-06
9. GRIDCO is presently engaged in the transmission and bulk supply of electricity. GRIDCO
procures power from the generators and sells in bulk to the four distribution companies.

Organizations in power sector in Orissa

Generation

Transmission

Distribution

OPGC
OHPC

OPTCL

CESU
NESCO
WESCO
SOUTHCO

Regulatory body
GRIDCO

OERC

14

Thermal power generation industry in India

A thermal power station is a power plant in which the prime mover is steam driven. Water is
heated, turns into steam and spins a steam turbine which either drives an electrical
generator or does some other work, like ship propulsion. After it passes through the turbine,
the steam is condensed in a condenser and recycled to where it was heated; this is known
as a Rankine cycle.
Almost all coal, nuclear, geothermal, solar thermal electric, and waste incineration plants, as
well as many natural gas power plants are thermal. Natural gas is frequently combusted in
gas turbines as well as boilers.
Commercial electric utility power stations are most usually constructed on a very large scale
and designed for continuous operation. Electric power plants typically use three-phase or
individual-phase electrical generators to produce alternating current (AC) electric power at a
frequency of 50 Hz or 60 Hz (hertz, which is an AC sine wave per second) depending on its
location in the world.

15

OPGC: A company profile

Orissa Power Generation Corporation Ltd. (OPGC) was incorporated on 14th November 1984
as a wholly owned subsidiary of Govt. of Orissa (GoO) to promote the growth of thermal
power generation capacity within the state.

In the pursuit of its objective, OPGC established IB Thermal Power Station having two units of
210 MW each in the Ib valley area of Jharsuguda District in the State of Orissa. These Units
have become operational since 1994 (1st Unit) and 1996 (2nd Unit) respectively. The entire
generation from IB Thermal Power Station is committed to GRIDCO, at present a State
owned utility; on the basis of a long term Power Purchase Agreement. There are seven mini
hydro Units out of which three are in operation and remaining units are being revived.

As a part of the reform in the energy sector of the state, 49% of the equity was divested in
favour of a Strategic investor i.e. AES Corporation, USA in early 1999.
OPGC with its present ownership structure is unique of its kind in the country and has
excellent track record of plant performance and earnings.
The project site is located at Banharpali in the District of Jharsuguda, Orissa, which is at an
approximate latitude of 210, 42 N and longitude of 83 52E. ITPS site is located on an
undulating terrain, but has been graded to flat terrain at elevation of 199.5m above the sea
level.

The location of the thermal power plants at the pit heads of coal mines and their proximity
to the main reservoir at Hirakud facilitates easy supply of coal and water respectively.
This gives the company the distinct advantage of low cost of inputs leading to low cost
generation.

Coal from mines is brought by dumpers up to Ubuda loading platform where coal is loaded
to bottom discharge wagons of OPGC. Further transportation from loading platform to power
station is by broad gauge railway line adopting a Semi Merry-Go-Round (MGR) system. The
MGR route is 10.7 Kms. for loaded run and 12.7Kms.for empty run.

A firm Coal supply agreement between OPGC and Mahanadi Coalfield Limited was signed on
17th of Nov-09. Prior to this there was only a fuel linkage. OPGC has a plan to import
1,00,000MT of imported coal to meet its resource quality requirements.

16

OPGC has been following world class system and practices like ISO Certifications, Behavioral
based Safety, Zero Tolerance Policy P2P, CAPEX, APEX, SAP, Operational Risk Assessment,
Engineering Standards, KPI & Deliverables, Business Continuity Processes, Technical Risk
Assessment & Ten year Budget plan.
People development has been the key focus area for OPGC .Moving towards lean manning,
retaining skilled human resources, people development and satisfaction, market based
compensation, Variable Pay Incentives are initiatives for better man management.
Up-gradation of C&I and Electrical Control systems, Control Room Up gradation, Coal
Washing and blending and installation of boiler tube leak detection system will help OPGC
keep pace with its competitors in near future.
OPGC has established itself as a cost effective generator through Improved resource
optimization, capital costs vs sustained performance, reduction in contract services and
sourcing economies.
Better availability of asset information and streamlining of maintenance processes led to
significant improvement in plant performance over last decade in terms in terms of
availability, PLF and specific fuel consumption.
Additionally, we benefitted with fast & accurate maintenance information retrieval,
predictive analysis and performance measures, effective materials management & spares
inventory control.
OPGC follows best operating practices like trips minimized through changeover of equipment
and checking up availability of standby equipment, review of parameter excursions and
implementation of RCA and trip committee recommendations.
Average ash generated per day is to the tune of 3500 tonnes. Disposal of ash is done to self
owned ash ponds (A & B), arrangement is also made for dry ash disposal for ash utilization
for low lying area OPGC has state of the art fire protection system for various applications
like hydrants, automatic high velocity spray, turbine bearing fire protection system,
automatic CO2 flooding system for control room (replacing HALON in phases).
Continuous improvement projects are taken up through APEX and Quality Circles activities.
The company has established internal control standards and procedures to ensure that
assets are protected and properly used and that financial records and reports are accurate
and reliable.
Today OPGC has firmly established its credentials as a successful power generating
company both technically & commercially by providing safe, clean & reliable power.
OPGC capacity addition plan

Power Plant

17

OPGC is now pursuing capacity addition of 1320 MW (2 X 660 MW, Supercritical Units), to
be located at the existing power plant site at Banharpali, Jharsuguda. Land for the main
plant and its accessories are already in possession. Water intake is available from Hirakud
Reservoir, which is situated adjacent to the project location. In addition, the project has
already secured environment clearance and aviation clearance. The project is in process of
seeking long term open access.

Out of 1320 MW, 50% of the power shall be supplied to GRIDCO at regulated tariff. Of the
remaining 50% capacity, balance power is proposed to be sold through long/short term
contracts. Power to be sold to GRIDCO from the proposed capacity addition, shall be
evacuated through transmission facility provided by OPTCL. Power to be sold outside the
state will be evacuated by securing open access from PGCIL.
The EPC bidding process for the main plant is scheduled to be started shortly. Financial
Closure is scheduled for Q2 2011, for which financing agreements with lenders are under
review. Construction is expected to commence from Q2 / Q3 2011 and COD of the plant is
estimated to be achieved in Q 2/3 2015.

Fuel Source

OPGC has been allocated captive coal blocks at Manoharpur under Sundergarh district of
Orissa. Of the blocks, Manoharpur is fully explored and Dip side is regionally explored. The
coal blocks have a combined estimated reserve of 531 MT. Mining plan for Manoharpur has
been approved by MoC. It is proposed to mine 8 MT per annum of coal, for the additional
capacity. Land acquisition, forest clearance, environment clearance and issue of mining
lease are in progress for the coal blocks.

The coal blocks are proposed to be mined by engaging a mine operator. OPGC has also
applied for a tapered linkage to bridge any gap between COD of Power Plant and full
capacity operation of captive coal mine.

Coal transportation

Coal shall be transported from the coal mine to plant site through a dedicated railway
corridor of around 47.5 kms. The proposed alignment runs across two districts, of which
around 35.5 km falls within Jharsuguda and 12 km falls within Sundergarh district.
18

Development of the railway corridor is being done with the assistance of RITES Ltd. Some of
the key permits like in principle clearance from SEC Railway for construction of Rail Flyover
on Bombay Howrah main line and laying Railway line in MCL owned land, have been
obtained. Land acquisition, forest clearance and other permits are in progress.

The plant will have higher reliability on account of certainty of fuel supply (captive mine),
both in terms of quantity and quality of coal. Further, the fact that it will be built on the
most advanced technology available as on date will ensure improved reliability and
efficiency of the plant. This will add up to a reliable power supply situation within the state.

FSA: A theoretical discussion

Components of financial statements:
1.
2.
3.
4.

Balance sheet
Profit and loss account
Cash flow statements
Notes to accounts

Objective of financial statements:

To provide information about the financial position, performance and cash flows of an
enterprise to help various users carry out an evaluation of the ability of the enterprise to
generate cash and cash equivalents and timing and certainty of the generation for
necessary decision making.
Techniques of financial statement analysis:
The analysis of financial statements can often be tailor made according to the need of the
information seeker. To extract information from the various financial statements we have to
employ various methods at hand.
1.
2.
3.
4.
5.
6.
7.
8.

Multistep income statement

Horizontal analysis
Common sized statement analysis
Trend analysis
Analytical balance sheet
Ratio analysis
Du point analysis
Cash flow analysis

19

Limitations of financial statement analysis:

1. Window dressing
Firms may resort to window dressing to project a favorable financial picture.
2. Price level changes
Financial accounting as it is currently practiced in India and most other countries,
does not take into account price level changes.
3. Variations in accounting policies
4. Interpretation of results
Through industry average and other yardsticks are commonly used in financial
ratios, it is somewhat difficult to judge whether a certain ratio is good or bad.

20

FINANCIAL STATEMENT ANALYSIS

OF
ORISSA POWER GENERATION CORPORATION LIMITED

21

FSA of Orissa power Generation Corporation Limited

1. Multistep Income statements
An alternative to the single-step income statement is the multiple-step income statement,
because it uses multiple subtractions in computing the net income shown on the bottom
line.
The multiple-step profit and loss statement segregates the operating revenues and
operating expenses from the non-operating revenues, non-operating expenses, gains, and
losses. The multiple-step income statement also shows the gross profit (net sales minus the
cost of goods sold).
Here are the important steps in an typical multistep income statement.

Gross profit - GP
Profit before depreciate interest and tax - PBDIT
Operating profit OP | PBIT
Profit before tax and extraordinary items - PBTEOI
Profit before tax- PBT
Net profit - PAT

2. Horizontal Analysis
This is a very simple tool. It facilitates a quick review of the current years performance and
financial position of the business over the previous year.
The methodology is to work out increase/ decrease in each item of the balance sheet and
profit and loss account of the current year over those of the last year.

Formula used =
And

(Current years figure Previous years figure ) * 100

Previous years figure

3. Common sized analysis (Vertical Analysis)

CSS (Common Size Statement)
This tool is very useful in comparing the performance and financial position of two
companies, either in the same industry or in different industries. Since no two balance
sheets will have the same figures they cannot be compared and analyzed based on absolute
figures.
They have therefore to be converted into what is known as common sized statements.
Here I have compared OPGC with NTPC.

22

Balance sheet
Profit and loss account

4. Trend Analysis
Trend analysis is an extension of horizontal analysis in that while the latter compares only
two years position. The former does the same for more than two years.

Sales and PBIT

Power generation
Net worth

5. Analytical balance sheet

Although the vertical balance sheet is more analytical than its horizontal counterpart, it can
be made further analytical from the angle of equity shareholders.
It shows the net asset possessed by the owners of the company. It starts with the
application of funds side as against the vertical balance sheet that starts with sources no
funds.

6. Ratio Analysis
The absolute accounting figures reported in the financial statements do not provide
meaningful understanding of the performance and financial position of a firm. An accounting
figure conveys meaning when it is related to some other relevant information.
The relationship between two accounting figures, expressed mathematically, is known as a
financial ratio. Ratios help to summarize large quantity of financial data and to make
quantitative judgment about the firms financial performance.

Types of
Comparison
Cross Sectional
Analysis

6.1.

Time-Series
Analysis

Combined
Analysis

Profitability Ratio

Profit is the difference between revenue and expenses over a period of time (usually one
year). Profit is the ultimate output of a company, and it will have no future if it fails to
make profits. Therefore, the financial manager should continuously evaluate the efficiency
of the company in terms of profits.

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The profitability ratios are calculated to measure the operating efficiency of the company.
Besides management of the company, creditors and owners are also interested in the
profitability of the firm.
Creditors want to get interest and repayment of principle regularly. Owners want to get a
required rate of return on their investment. This is possible only when the company earns
enough profit.
Generally, two major types of profitability ratios are calculated:

Profitability in relation to sales

Profitability in relation to investment

6.1.1.

Gross Profit Margin:

It is calculated by dividing the gross profit by sales. The gross profit margin reflects the
efficiency with which management produces each unit of product.
A high gross profit margin ratio is a sign of good management. A gross margin ratio may
increase due to the following factor:
1.
2.
3.
4.

Higher sales prices, cost of goods sold remain constant

Lower cost of goods sold, sales prices remaining constant
A combination of variations in sales prices and costs, the margin widening and
An increase in the proportionate volume of higher margin items.

The analysis of these factors will reveal to the management how a depressed gross margin
can be improved.
A low gross profit margin may reflects higher cost of goods sold due to the firms inability to
purchase raw materials at favorable terms, inefficient utilization of plant and machinery, or
over-investment in plant and machinery, resulting in higher cost of production.
The ratio will also be low due to a fall in prices in the market, or marked reduction in selling
price by the firm in an attempt obtain large sales volume, the cost of goods sold remaining
unchanged.
The financial manger must be able to detect the causes of a falling gross margin and initiate
action to improve the situation.
6.1.2.

Net Profit Margin

Net profit is obtained when operating expenses, interest and taxes are subtracted from the
gross profit. The net profit margin ratio is measured by dividing profit after tax by sales.
If the gross margin has increased over the years, but the net profit margin has either
remained constant or declined, or has not increased as fast as the gross margin, it implies

24

that the operating expenses relative to sales have been increasing. The increasing expenses
should be identified and controlled.
6.1.3.

Return on Investment

The conventional approach of calculating return on investment (ROI) is to divide PAT by

investment. Investment represents pool of funds supplied by shareholders and lenders,
while PAT represents residue income of shareholders; therefore, it is conceptually unsound
to use PAT in the calculation of ROI. Also, PAT is affected by capital structure.
So, NOPAT (Net Operating Profit After Tax) or EBIT (1-t) is sometimes used.
Now, since taxes are not controllable by management , and since firms opportunities for
availing tax incentives differ, it may more prudent to use before-tax measure of ROI. So,
EBIT is preferred.
Many companies use EBIDTA (instead of EBIT) to calculate ROI.
ROI can be categorized in two parts:

6.1.4.

ROTA | Return on Total Assets

RONA | Return on Net Assets

Return on Equity

ROE indicates how well the firm has used the resources of owners. In fact, this ratio is one
of the most important relationships in financial analysis. The earning of a satisfactory return
is the most desirable objective of a business. The ratio of net profit to owners equity
reflects the extent to which this objective has been accomplished. This ratio is, thus, of
great interest to present as well as prospective shareholders and also of great concern to
the management, which has the responsibility of maximizing the owners wealth.

6.2.

Liquidity Ratio

The ratio is mainly used to give an idea of the company's ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The
higher the current ratio, the more capable the company is of paying its obligations. A ratio
under 1 suggests that the company would be unable to pay off its obligations if they came
due at that point. While this shows the company is not in good financial health, it does not
necessarily mean that it will go bankrupt - as there are many ways to access financing - but
it is definitely not a good sign.
The current ratio can give a sense of the efficiency of a company's operating cycle or its
ability to turn its product into cash. Companies that have trouble getting paid on their
receivables or have long inventory turnover can run into liquidity problems because they are
25

unable to alleviate their obligations. Because business operations differ in each industry,
it is always more useful to compare companies within the same industry.
This ratio is similar to the acid-test ratio except that the acid-test ratio does not include
inventory and prepaids as assets that can be liquidated. The components of current ratio
(current assets and current liabilities) can be used to derive working capital (difference
between current assets and current liabilities). Working capital is frequently used to derive
the working capital ratio, which is working capital as a ratio of sales.

6.2.1.

Current ratio

In recent years OPGC has accumulated huge cash to finance its project Unit 3 & 4. The
environment clearance and other formalities have been accomplished to kick start the
project in the near future therefore OPGC don't want to distribute or invest its accumulated
cash in anywhere else. As a result we see an unsustainable cash reserve in its balance sheet
that distorting the current ratio.
If we remove the cash from the current asset we find that the current ratio now lies around
4-5. Now this situation is also can't be approved by the general thumb rule in accounting
practices.
So, why OPGC is continuously keeping its current asset four times its current obligations?
The answer to this question actually lies in the Raw material purchasing pattern and norms
prevailing in coal and power sector.
The major contributor of the raw material is coal at OPGC and coal is now a cash and carry
market, where you pay in cash, to purchase the raw material. So the current liabilities are
bound to be least.

6.3. Leverage Ratio

6.3.1.
Debt-Equity Ratio
This relationship describing the lenders contribution for each rupee of the owners
contribution is called debt-equity ratio.
Capital employed to net worth ratio is yet another alternative way to expressing the basic
relationship between debt and equity.
A low debt-equity ratio implies a greater claim of owners than creditors. From the point of
view of creditors, it represents a satisfactory situation since a high proportion of equity
provides a larger margin of safety for them. The most appropriate debt-equity combination
would involve a trade-off between return and risk.

26

OPGC is a highly unleveraged firm.

6.4.

Activity Ratio

Funds of creditors and owners are invested in various assets to generate sales and profits.
The better the management of assets, the larger the amount of sales. Activity ratios are
employed to evaluate the efficiency with which the firm manages and utilizes its assets.
These ratios are called turnover ratios because they indicate the speed with which assets
are being converted or turned over into sales. Activity ratio, thus involve a relationship
between sales and assets.
Several activity ratios can be calculated to judge the effectiveness of asset utilization.
1. Inventory Turnover Ratio
2. Asset Turnover Ratio
3. Working Capital Turnover Ratio

7. Cash flow statement Analysis

1.
2.
3.
4.
5.

Operation Activities
Inventory activities
Financial activities
Quality of cash position
Ability to generate positive cash flow from operations in future

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Conclusion
Orissa Power Generation limited is a financially sound firm operating in a high growth and
high margin core industry.

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Bibliography
1.
2.
3.
4.
5.
6.
7.
8.

Orissa Electricity Regulatory Commission [ www.orierc.org ]

The Institute Of Chartered Accountants Of India [www.icai.org ]
Central Electricity Authority (CEA) [www.cea.nic.in ]
OPGC, Annual Report
Prowess, CMIE Database
Ministry of Power, Government of India [www.powermin.nic.in ]
Kanungo Committee Report
Power Sector in India, White paper on Implementation Challenges and Opportunities
January 2010, KPMG IN INDIA
9. Blueprint for Power Sector Development, Ministry of Power, Government of India,
August 2001
10. Technology status of thermal power plants in India and opportunities in renovation
and modernization, TERI, New Delhi
11. Central Electricity Regulatory Commission (CERC)

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Annexure I
1. Balance sheets of OPGC, NTPC, OHPC
2. Income statements of OPGC, NTPC, OHPC
3. Map of Orissa

30