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Tata Power Company Limited

The signing of the financing agreements for Mundra UMPP is an important milestone.

The good response demonstrates the faith of the lenders in our execution capabilities andexpertise to complete the project in time. The terms of debt financing provides us long tenure of

loans supporting our competitive bid price assumptions.

Mr. Prasad R. Menon, Managing Director, Tata Power

On April 24, 2008 The Tata Power Company Limited (TPCL), Indias largest private power

company, signed a financial agreements with a consortium of banks for 4000 MW Ultra Mega

Power Project (UMPP), coming up at Mundra, Gujarat under the Special Purpose Vehicle (SPV)

Coastal Gujarat Power Limited (CGPL). The cost of the project is estimated at INR 170,000

million (USD 4.2 billion) with the first of the five units to be commissioned in September 2011.

The entire plant is expected to be commissioned by end of 2012.

The company decided to finance the project with a debt-equity ratio of 70:30 comprising of

equity of Rs.42,500 million External Commercial Borrowings (ECB) of up to USD 1.8 billionand Rupee Loans of up to Rs.55,500 million. The banks that financed ECBs include The

Export-Import Bank of Korea, International Finance Corporation, Korea Export Insurance

Corporation, Asian Development Bank, and BNP Paribas. While the domestic banks that

financed rupee loan includes State Bank of India (SBI) (Lead bank for rupee lenders), India

Infrastructure Finance Co. Ltd., Housing and Urban Development Corporation Ltd., Oriental

Bank of Commerce, Vijaya Bank, State Bank of Bikaner and Jaipur, State Bank of Hyderabad,

State Bank of Travancore and State Bank of Indore. SBI Capital is the financial Advisor and

Mandated Lead Arranger for Rupee loans.

This is the first Ultra Mega Power Project in India built on super critical technology to improve

efficiency and to decrease green house gases. The Government of India in its ambitious project of

adding 73 GW of power during the 11th five year plan decided to set up nine UMPP in India

which will allocated to players in tariff led competitive bidding. Against this background, the

scenario of power industry follows:Power Industry

The power industry is considered as one of the important industries for the progress of any

country. It is considered as the backbone of any countrys development. The Indian government

has laid much emphasis on the development of power sector since independence; accordingly, the

installed capacity has increased from 1713MW in 1950 to 143061.01 MW as on 31st March 2008,

registering an 83-fold increase in power generation capacity.

The total installed capacity as on 30th April 2008 was at 143311.01 MW. The electricity

generation in India has increased from 5.4 billion units in 1950 to 624 billion units in 2006-07

registering a 115-fold increase in generation. Currently, India stands fifth in terms of installed

capacity. With the growing generation capacity the capacity of transmission and distribution is

also increasing. The present transmission and distribution capacity of India is at 5.2 million circuit

Km, which is third largest in the world. Despite heavy investments in generation and transmission

and distribution, the per capita consumption of electricity in India is far less than world average.

The per capita consumption of electricity in India during 2007-08 was at 704.2 kwh per year

against the world average of 2596 kwh.

Electricity falls with in the jurisdiction of Central government and the State governments. In many

states the electricity boards are vertically integrated entities, majority of which are now been

unbundled into Generation, Transmission and Distribution companies, which are state owned.

However to meet the targeted 1000 kwh per capita availability of power by 2012, the government

has been encouraging private players in power generation. States like Delhi, Orissa went one step a


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head by privatizing the distribution of power in these states. Inspite of these efforts by the

government of India, India is facing a severe shortage of power. For the first nine months of FY

07-08 the country has faced a power shortage of 9.9 percent and peak demand shortage of 16.6

percent as against a power shortage of 9.8 percent and a peak demand shortage of 13.5 percent in

2006-07. In order to accommodate the growth of economy of over 8-9 percent the country should

have to increase its generation capacity to 302000 MW in the next ten years. By 2031, the

expected generating capacity would be at 800000 MW.

Industry Value Chain

Generation, transmission and distribution form a line in the value chain to provide electricity toend customers like farmers, industries, domestic customers.

Figure 1: Value Chain

Source: Icfai Research Team.

Considering the importance of generation, transmission and distribution in the industry, anunderstanding of these segments is necessary to analyse the position of the industry.

i. Generation In this segment/stage electricity is generated by using four different types ofsources namely, water, fossil fuels, uranium and renewable resources. Based on the typeresource we use in generation of electricity there are four types of generation namely, Hydro,

Thermal, Nuclear and Renewable Energy Sources. In Hydro, we use water to produceelectricity. In Thermal we use fossil fuels like coal, natural gas and diesel. In nuclear, weuse uranium where as in Renewable energy sources we produce electricity by using wind andsunlight (solar). In India as on March 31 2007, nearly 65 percent of electricity was producedby using fossil fuels, while hydro generation contributes 26 percent to the total powerproduction. The remaining was by nuclear and renewable sources.

The utilization of capacity in power sector is calculated by using Plant Load Factor (PLF).

Historically India has a low PLF, however for the last few years it has been improving at a

steady rate. It has increased from 64.7 percent in 1996-97 to 78.61 in 2007-08. Among the


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three sectors private sector has highest PLF with 90.79 percent followed by central sector

with 86.74 percent while, state sector has least with 71.89 percent. Among these alternatives

power generation through hydro is the cheapest one followed by wind and thermal.

In India the following players generate electricity:

Central utilities such as NTPC, NHPC, Nuclear Power Corporation, Damodar Valley

Corporation and NEEPCO. State State Electricity Boards which are state-owned utilities. Few states have

corporatised their SEB. These are:

Orissa OPGC/OHPC

Haryana Haryana Vidyut Utpadan Nigam (HVUN)

Andhra Pradesh AP Genco

Uttar Pradesh UP Thermal Power Corporation & UP Hydel Power Corporation

Karnataka Karnataka Power Corporation Ltd.

Independent and Captive Power projects (ICP) like TPCL

Licensees such as Reliance energy and CESC.

ii. Transmission Transmission is the bulk transfer of electricity from the generation plant or

location to the place of local distributors or sub-stations near populated areas. It serves as aconnecting link between generation plants and sub-stations. In India, the transmission anddistribution system is a three-tier structure comprising regional grids, state grids anddistribution networks.

Most of the regional grids or inter-state transmission links are owned and operated by Power

Grid Corporation of India Limited (PGCIL) while the state grids and distribution network are

mostly owned and operated by SEBs or state governments through SEBs. The bulk

transmission network has increased from 3078 Ckm in 1950 to more than 250000 Ckm at

present. In order to facilitate the transfer of power between neighbouring states, state grids

are interconnected to form five regional grids. These regional grids facilitate transfer of

power from a power-surplus state to a power-deficit state and it is anticipated that these grids

will be gradually integrated to form a national grid. At present, the national grid has a

capacity of 9500 MW and PGCIL plans to achieve national grid capacity of 37000 MW by

fiscal 2012.

In the transmission sector, a few of the states have unbundled their transmission andcorporatized their entity

Orissa Grid co

Andhra Pradesh APTransco

Haryana Haryana Vidyut Prasaran Nigam (HVPN)

Uttar Pradesh UP Power Corporation.

In all other states, transmission is still under the control of SEBs except the 5 cities where

licensees control the transmission of power.

iii. Distribution Electricity distribution is the penultimate stage in the delivery (before retail)

of electricity to end users. The entities in this segment constitute the retail interface of the

industry and address supply, quality, billing and issues typical to the end consumer. The total

annual loss of the power distribution system is Rs.4,70,000 million, which is 33% of the

average investment required in this sector in the 11th plan period.

The distribution system is mainly controlled by state electricity boards except in Delhi and

Orissa where power distribution has been entrusted to the private sector. Orissa has divided

its distribution network into 4 zones Wesco, Nesco, Southco and Cesco. BSES (presently,

Reliance Energy) has a 51% stake in the first 3 and AES has a 51% stake in the last. Gridco

holds the remaining stake. In 2002, the Delhi government privatized the distribution through

competitive bidding to reduce transmission losses.


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While BSES got two zones namely, Central-East and South-West Delhi, TPCL got North,

North-West Delhi. In all other states, distribution is in the control of SEBs except the 5 cities

where licensees control the distribution of power.

Compared to states where government private players control distribution, the states with

private distribution have been able to reduce T&D losses. In Delhi it was reduced to around

26 percent compared to national average of 33 percent. In Orissa, the billing rate hasimproved by 50 percent in the last three years.

It can be seen that both private and public players operate under all the segements of power

industry, however public sector maintains its dominance all through the value chain.

Organized vs Unorganized

The Indian power industry is highly organized sector with 86 percent of generation controlled by

entities owned by state and central governments. NTPC the largest power company by far controls

19.1 percent of share. Even after liberalization of power sector in 1991, the private sector controls

only 14 percent of total capacity, in the private sector TPCL controls 11.49 percent of the installed

capacity. The low share of private sector was mainly due to regulatory hurdles in the form of

getting power purchase contracts with the electricity boards, access to raw materials like coal

which is controlled by governments, huge land requirement etc., while acquisition of land is

related to some local issues like displacement of people and providing rehabilitation for them, the

delay in power purchase contracts relates to inadequate provisions and lack of clarity in

government regulations forms a major hurdle for a private player to start generation of electricity,

this is clearly visible in the hydro electricity projects. Although the private sector is quite keen to

enter hydro projects in a big way, and several private companies have secured a number of

potential sites from State governments, actual investments have been slow mainly due to lack of a

framework enabling them to enter into Power Purchase Agreements with utilities and achieving

financial closure. The private sector contribution is mainly from independent power producers and

captive power producers. The contribution from captive power producers to state grid is more than

that of IPPs. The significant players in private sector are TPCL and Reliance energy.

The transmission of power in India is almost controlled by state and central entities. In fiscal 2006,

the Government of India implemented a scheme under the electricity act to invite private sector

investment in major transmission projects. The private participants are allowed to providetransmission services on a built own and operate basis. The Government of India has recognized

14 such projects to be implemented on built own and operate basis.

The distribution network and the state grids are mostly owned and operated by SEBs or state

governments through SEBs. In March 2003, the government has launched Accelerated Power

Development and Reforms Programme (APDRP) to accelerate distributional reforms.

Subsequently 22 states corporatized their SEBs while Delhi and Orissa are two states where

private companies oversee power distribution. Additionally, TPCL, CESC Limited, Reliance

Energy Limited, AEC Torrent Power Limited, SEC Torrent Power Limited and Noida Power

Company Limited own and operate distribution networks in their respective license areas.

Key Players: The major players currently operating in the Indian power sector are, Nuclear Power

Corporation of India Limited, North Eastern Electric Power Corporation Limited, Damodar Valley

Corporation, Power Grid Corporation of India, Reliance Energy Limited and TPCL. NTPCs shareon 31 March 2007 in the total installed capacity of the country was 19.1% and it contributed

28.50% of the total power generation of the country during 2006-07.

Regulations Norms

Despite public and private sector participation, experts were of the opinion that the role of

government is determinant in providing direction to the power industry; keeping this in view

government has introduced certain new regulations to meet its targets for power industry.


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Electricity Act, 2003

In recent years, the Government has taken significant action to restructure the power sector and

attract private and foreign investments. The most important reform has been the introduction of the

Electricity Act, which has modified the legal framework governing the electricity sector and has

been designed to alleviate many of the problems facing Indias power sector. The Electricity Act is

a central legislation and seeks to replace the multiple legislations that governed the Indianelectricity sector. The Electricity Act consolidates all the existing legislations. The salient features

of this policy are as stated hereunder:

Access to electricity: Available for all households in the next five years;

Availability of power: Demand to be fully met by 2012;

Supply of reliable and quality power;

Per capita availability of electricity to be increased to over 1000 units by 2012;

Minimum lifeline consumption of 1 unit/household/day as a merit good by year 2012;

Financial turnaround and commercial viability of the electricity sector.

Distribution Reforms

The reform in distribution is to bring about the efficiency and improve financial health of thepower sector. Government of India has approved a scheme called Accelerated PowerDevelopment and Reforms Program (APDRP) in March 2003 to accelerate distribution sectorreforms.

The main objectives of the APDRP program are to:

Reduce Aggregate Technical & Commercial (AT&C) losses;

Bring about commercial viability in the power sector;

Reduce outages and interruptions; and

Increase consumer satisfaction.

Considering the dynamics of power industry and its requirements, the government has initiatedseveral regulatory changes and policy incentives from time to time.

Regulatory Changes In order to facilitate FDI, automatic approval (RBI route) for 100% foreign equity without

any upper ceiling on the quantum of investment is permitted in all sectors of the powersector, i.e. generation, transmission and distribution of electricity.

Section 14 of the Electricity Act, 2003 allows any generator of electricity to distributeelectricity in a rural area without the requirement of any license, subject to compliance withmeasures as may be specified by the Central Electricity Authority under section 53.

Policy Incentives

100 percent foreign equity participation is allowed under the automatic approval route in allsegments of the industry (except atomic energy).

Generation and distribution power projects of any type and size are allowed.

The electricity act 2003 allows trading in power and provides for further deregulation.

A renewable license period of 30 years has been set.

Return on equity up to 16 percent is assured at 68.5 percent PLF for thermal power plants.Similar incentives are provided for hydroelectric power projects.

Import duty at the concessional rate of 20 percent has been set for import of equipment.

The government allows a 5-year tax holiday for power generating projects with an additionalfive years in which a deduction of 30 percent taxable profits is allowed.


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Performance

The power industry has gone through a long way since Indian independence; as mentioned earlierthe installation capacity has registered a 83-fold increase, from 1713 MW in 1950 to 143061.01MW as on 31st March 2008. During the fiscal 2008, the capacity addition was 10731 MW withgrowth rate of 8.1%. Historically power industry in India is characterized by electricity shortages.For the year 2007-08 the power shortage was at 73338 million units, amounting to 9.90 percent of

total power requirement. While the peak power shortage was at 18073 MW. For the last threeyears, the amount of power shortage has been increasing both in actual and percentage figures. Themain reason for this was while Indian economy is growing at over 9 percent annum the powergeneration is growing at just over 7 percent. Even though there is a slight south-ward movement inthe percent of losses they are very much above the accepted levels. Refer exhibit-8 for the T&Dloss figures in percentage. The Planning Commission has estimated that improvements in thedistribution sector are necessary for drastically reducing the AT&C losses. It has estimatedinvestments of up to Rupees ten lakh millions in distribution sector to reduce the losses. To reducethese losses, the government should also undertake reforms in transmission and distributionsectors.

For the fiscal 08, the overall PLF stood at 78.61% as against the targeted 77.14%, with privatesector operating at 90.79% PLF followed by central sector with a PLF of 86.74%. However, theperformance of state sector is disappointing with a PLF of 71.89%. During the tenth five-year planof the targeted capacity addition of 41000 MW only 23000MW was added. Experts are of the viewthat this is mainly due to capacity hurdles. This is in the form of lack of adequate domesticmanufacturing capacity for generation equipment; this has been a major bottleneck coming in theway of timely completion of generation projects. This problem can be overcome by creating moreplayers in this field and by bringing cost competitiveness and accountability to timelines.

Future Outlook

As mentioned earlier, the Indian economy is expected to grow at 8 to 9 percent for the next15 years, to support this growth Indias energy needs are also expected to increase at the same rate.To meet the ongoing demand in power the government of India has targeted a capacity addition of78577 MW during the 11th five-year plan, which covers fiscal 2008 through 2012. Out of thetargeted 78577MW during 11th five-year plan central is expected to add 39865 MW, while stateand private sectors are expected to add 27957 and 10760 MW each. Out of the targeted 78577MWduring 11th five-year plan, capacity addition by thermal plants will be around 75 percent of totaladditions, which is targeted at 58644MW, 16553 MW by hydro and the remaining 3380 from

nuclear power plants. Out of the targeted capacity addition of 78577MW, 48955 MW is underconstruction and the orders for the remaining are yet to be placed. During the current FY 07-08 outof the targeted capacity addition of 14613MW for the first ten months only 7263MW has beenachieved. So, the targeted capacity addition of 78577MW will not be reached until and unlessgovernment takes certain steps to implement power projects at a faster time. Given the gestationperiod of four years for power projects it is necessary for government to award the remainingpower projects before 31st March 2008 to achieve the targeted capacity addition. Keeping in viewof necessary changes in policy structure to encourage power production the government hasde-licensed generation under the Electricity Act, 2003. The requirement of techno economicclearance of Central Electric Authority (CEA) for thermal power plants has been removed. Theobjective is to give flexibility to promoters in setting up generation plant.

The Union Power Minister, Mr. Sushil Kumar Shinde has opined that to achieve the long-termgoal in power generation the country should harness the potential hydro electric capacity it ishaving. He said The country has a huge hydro potential of about 1,50,000 MW, of which only33,600 MW has been harnessed. There is an urgent need for public and private participation fordevelopment of untapped hydro potential.

It has established Power Trading Company (PTC) to purchase power from the private sector megaprojects and sell it to the beneficiary states. The policy has been further liberalized and with effectfrom March 2003, all inter-state projects with a capacity of 1000MW and above for thermal and500 MW and above for hydel projects are being treated as mega power projects subject tofulfillment of required conditions and would be extended the concession of Zero customs dutyon import of capital goods.


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In April 2005, the Government of India has launched a programme with an ambitious target toelectrify all the villages by 2012. As on 31st March 2008, only 82 percent of villages gotelectrified and out of that only 44 percent of people had access to electricity. When it comes toelectrification of potential pump sets, only 79 percent got electrified by the end of March 08.

To achieve these ambitious targets and to support the growing economy it is expected to have an

investment of US$200 billion during the 12th five-year plan. Of the $200 billion investment, as

high as $90 billion is needed for generation capacity addition of which $19 billion is expected

from the private sector. Besides, $90 billion would be needed for transmission and distribution of

which $15 billion is needed for the national power grid. Investment of $6 billion for the national

power grid is expected from the private sector, the balance from the central sector. Balance of the

investment in transmission and distribution is expected to be financed through a mix of the state

and the private sector. As per the Planning Commission report, in order to maintain a sustained

growth of 8% per annum to 2031, India would need to increase primary energy supply and

electricity supply by 3 to 4 times and by 5 to 7 times respectively. By fiscal 2032, power

generation capacity would have to increase to7780985 MW.

However, the government is facing a daunting task of replacing coal as major raw material, which

represents 51 percent of energy basket with other raw materials. It is estimated that coal resources

in India are exhaustible in 40 years and the industry is required to diversify the basket to mitigate

this effect. Experts are of the view that it is required to enhance domestic production of coal and

take equity positions in energy resources abroad to reduce the effects of fuel price shocks.

Tata Power

The largest private power producer in the country TPCL took its birth from the vision of Indias

first industrialist Jamsethji Nuseerwanji Tata, the man who pioneered industrial revolution in India

in the year 1906. It all started with an idea to harness the energy of water by converting into

electricity. Once Jamsethji Tata led his executives towards a creek near Bombay where rainwater

is gushing out from the river Roha. There he visualized his idea of producing hydroelectric power

by using gushing water. Initially, the project faced heavy resistance from British officials, however

after much delays and consultations finally the government has given license to Tata Hydro

Electric Supply Company in 1910, with a condition that it should restrict to bulk supply of

electricity to factories and railways, which require not less than 500,000 units per annum. In 1916,

it established Andhra Valley Power Supply Company. Between 1910 and 1927 it has built threehydroelectric plants in Western Ghats with a capacity of 291 MW.

To meet the growing demand in Bombay area it has built its first thermal power plant at trombay

near Bombay in 1956 with a capacity of 125 MW, which was upgraded to 180 MW in 1980.

Today the capacity of the tromaby thermal unit is at 1350 MW. It also has thermal power plants at

Jojobera in Jharkhand with a capacity of 428 MW, Belgaum, Karnataka 81 MW, Ahmednagar,

Maharashtra : 17 MW, Khandke, Maharashtra : 37.6 MW, and at Bramanvel, Maharashtra: 7.5

MW and at Wadi in Karnataka (50 MW). In Maharashtra. TPCL has three hydro-generating

stations (at Khopoli, Bhivpuri and Bhira), which are fed by five major reservoirs. The total

capacity of hydroelectric plants is at 447 MW as on March 31, 2007.

When the government of Delhi privatized the distribution network in 2002, TPCL acquired license

for the northern and the north western part of the Delhi. It has started a new subsidiary NDPL

(North Delhi Power Limited). It is a joint venture between TPCL Company and the Government ofNCT of Delhi with the majority stake being held by the Tata Group to distribute power in northern

and the north western part of the Delhi.

The company achieved another landmark in 2006, by completing the first inter state transmission

project with private-public partnership known as the Tala transmission Project. In 2007, it was

awarded the countrys first Ultra Mega Power Project at Mundra. To secure its raw material

requirements it has acquired stake in Indonesian coal mines. In the next few five years it is

planning to expand its size by five times.


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Products and Services

Analysts are of the view that in line with the changing industry dynamics the company has madeits presence felt in the entire value chain of the industry, for better growth prospects. TPCL, whichhas been in the business of power for the last nine decades, operates in two segments namelyPower and Strategic Electronic Division. The power business is the core business to the TPCLwhich contributes 98 percent of its revenues. The other business includes manufacturing of

Electronic equipment, Broadband services, Consultancy and oil exploration, and their contributionto overall revenue was around two percent in 2006-07.

Business Model

The business model of the company can be perceived from its varied operations which includegeneration, transmission and distribution. However, the important revenue streams for thecompany are:

Selling of electricity to large private clients, industries, railways and SEBs in bulk inMumbai license area and in other service areas like, Raigad District in Maharashtra,Belgaum in Karnataka & Jojobera in Jamshedpur.

Incorporating captive power plants in partnership with Tata steel for the requirements of Tatasteel.

Transmission of electricity over long areas from the place of generation to the market place.

Trading of electricity through its subsidiary Tata Power Trading Company Ltd.

Distributing electricity to the end customers.

Maintenance of captive power plants.

Manufacturing electronic equipment to defense sector.

Companys Strategies

Company sources pointed out that keeping in view the changing competitive environment and

available opportunities; it has evolved various strategies to continue its significant position in theindustry. These strategies include:

Expanding Capacities: The company is in the plans of expanding its capacity by five fold in

the next five years to capitalize the increasing demand in the country. To achieve the target it

is in the process of building Greenfield projects like ultra mega power projects in Mundraand one at coastal Maharastra. It is also in talks with various state governments like Orissa

and Jharkand for greenfield projects. It is also in the process of expanding its operations in

Trombay and Jhojobera. The company is also actively looking to build power projects in

overseas, where there is availability of raw materials.

Entering Partnerships: The company has entered into partnership with public sector

undertakings to explore opportunities in generation, transmission and distribution. It had

entered partnership with Power Grid Corporation in power links transmission for a

transmission project to evacuate power from Tala Hydro Project in Bhutan to the power

deficit states of northern India. In generation it has partnered with Damodar Valley

Corporation to set up 1050MW Maithon right bank thermal project in Jharkand. TPCL isviewing such partnerships in future to fuel the growth.

Captive Power Plants for Tata Steel: The company has entered into an agreement with

Tata steel to build and operates captive power plants for the energy requirements of Tata steel

through its subsidiary named Industrial Energy Limited, in which TPCL holds 74 percent and

Tata steel holds the remaining 26 percent. It is in talks with Tata steel to continue thispartnership for the future projects of Tata steel.

Securing Raw Material: TPCL, which is planning to increase its capacity five fold in next

five years, had acquired 30 percent stake in two major Indonesian thermal coal producers PT

Kaltim Prima Coal and PT Arutmin Indonesia, and a related trading company owned by PT

Bumi Resources Tbk to secure coal requirements for its future operations. The company has


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signed purchase agreement with KPC to purchase about 10 million tones of coal per annum.

The acquisition specifically addresses the fuel requirements for the upcoming 7,000 MW

power projects, which includes 4,000 MW Mundra Ultra Mega Power Project (UMPP),

Trombay and the coastal power project in Maharashtra. Mr. Prasad Menon, Managing

Director, TPCL said that The acquisition of mines specifically addresses fuel requirements

of the Mundra Ultra Mega Power Project, the Trombay project and the coastal power project

in Maharashtra. It is complementary and supports the assumptions made in the bid forMundra UMPP.

Entering New Businesses: With the liberalization of Indian power sector the company isplanning to capitalize opportunities in the sectors like transmission and distribution that wereopened to private players. The company, which had already entered into transmission anddistribution sectors in partnership with government entities, is looking to explore thesesectors once they are opened to private players.

Power Trading: With the liberalization of power sector, the company has entered into powertrading. Tata Power Trading Company Ltd. (TPTCL), the first trading entity to be granted atrading license by the Central Electricity Regulatory Commission (CERC) has now expandedoperations to cover the entire country including the North-Eastern States.

Nuclear Power: The company has earlier expressed its interest in nuclear power production.Once the treaty with US goes through, private players can get license to participate in nuclear

power production to achieve the governments target of increasing nuclear power generationcapacity to 10000MW by the end of 11th five year plan (from 2008-2012). The Governmentof India is also actively studying the private participation in nuclear power generation toreach its ambitious target of generating 20,000MW by 2020 and 50,000MW by 2050.

Performance

In the wake of new initiatives undertaken by the company, its revenues have grown at a CAGR of7.98 percent. Last year it has registered a growth rate of 3.8 percent in terms of number of unitsgenerated while the income from sale of power has grown at 6.01 percent, while income fromother business which includes Strategic Business Unit has decreased by 41 percent. During theyear 2006-07 due to unprecedented increase in demand for power in Mumbai License Area thecost of purchase of power has increased by 14 percent as the company has purchased extra units tocater the demand in the area. The increase coal and fuel prices have increased fuel costs by13 percent. They have increased from 52 of net sales in 2005-06 to 57 percent in 2006-07. Other

income for the year has increased by 5.64 percent; this is mainly due to increase in dividends fromits subsidiaries and investments.

Depreciation for the year was at Rs.2,919.2 million as against Rs.2,783.4 million in the previousyear. The increase was mainly on account of commissioning of Unit 4 at Jojobera in previous year.The increase in Interest and finance charges from Rs.1652.8 million in the previous year toRs.1895 million is mainly on account of the fresh loans raised during the year from IDFC ofRs.4500 million and CPs of Rs.5,000 million issued.

Profit before tax for the year has decreased by 22 percent mainly due to increased fuel costs andcost of power purchased, and also the rebate provided by the company to its customers as perMumbai Electric Regulatory Commission (MERC) order which was provided in the books ofaccounts. However, profit after tax has increased by 14 percent due to excess of tax provisionmade in earlier years. During the year 2006-07, the Company has received favorableassessments/orders pertaining to its Mumbai LA relating to previous years and therefore reversed

tax provisions aggregating Rs.1817.4 million. The provision for the current year is lower due tothe Company providing tax as per Minimum Alternative Tax (MAT), with the commissioning ofthe wind farms during the year.

Segmental Analysis

TPCL which generates 90 percent of its revenues from sale of power saw a modest increase of five

percent in sales. While its subsidiary for power trading Tata Power Trading Company Ltd.

(TPTCL) has recorded highest growth among all the divisions for the year 2006-07. During the year

2006-07 TPTCL traded 1,205 MUs during the year as compared to 675 MUs in the previous year,


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thereby resulting in an increase in its revenues by 191% to Rs.6,037.6 million from

Rs.2,077.6 million in the previous year. Profit after tax also increased to Rs.38.4 million as against

Rs.31.8 million in the previous year. The operations have been expanded to cover the entire

country including the Northeastern states.

Powerlinks the transmission company established in partnership with Power Grid Corporation of

India has commenced operations in the year 2006-07. Powerlinks in its first year of operations hasearned revenues of Rs.1,350.1 million and a profit after tax of Rs.205.7 million. Powerlinks has

declared a maiden dividend of 1.8% for FY 07.

Projects Under Implementation

The company has lined up various projects to increase its capacity over the next five years by four

fold, the projects that are under implementation are:

Mundra Ultra Mega Power Project

It is the first UMPP that was declared by government, which TPCL has won by tariff, based

competitive bidding. This project is based on super critical technology which improves the

efficiency and reduces CO2 emissions. Out of the 4000 MW of capacity it supplies power to

five states namely, Gujarat (1805 MW), Maharashtra (760 MW), Punjab (475 MW), Haryana

(380 MW), Rajasthan (380 MW). This project has a capital outlay of Rs.1,70,000 million with adebt: equity ratio of 75:25. The project is implemented under five phases of 800MW each, with

the first project is expected to complete by October 2011 and the final phase is expected to

complete by December 2012.

Maithon Power Project

It is a mega power project that TPCL is executing in joint venture with Damodar Valley

Corporation (DVC). In this project, TPCL holds 74 percent while the remaining 26 percent is held

by DVC. The project is a coal based one with a capacity of 1050 MW and will be executed in two

phases of 525 MW each. The total outlay of the project is Rs.44,500 million with a Debt: Equity

ratio of 70:30. The first phase is expected to complete in 2010, while the second one in 2011.

Captive Power Plants at Jamshedpur and Jojobera

The company is constructing two captive power plants of 120 MW each at Jamshedpur and

Jojobera in joint venture with Tata Steel at a ratio of 74:26 to cater to the needs of Tata Steel. The

plant at Jamshedpur will run on coke oven gases from Tata Steel. The capital outlay for the project

is Rs.4,900 million and will be executed with a debt: equity ratio of 70:30 and is expected to be

completed by August 2008.

The plant at Jojobera is will be run on coal supplied from Mahanandi coal fields. The capital

outlay for the project is at Rs.6,400 million with a debt: equity ratio of 70:30 and is expected to be

completed by September 2009.

Trombay Unit 8

TPCL is adding another 250 MW to its existing 1350 MW capacity at Trombay. The cost of the

project is pegged at Rs.10,660 million and is financed at a Debt: Equity ratio of 70:30. The plant

will operate on imported coal, it is expected to be completed by August 2008.

Haldia Power PlantTPCL is constructing a 120 MW of power plant to catter to the needs of Hoogly metcoke plant at a

cost of Rs.6,060 million with a Debt: Equity ratio of 70:30. The plant uses hot flue gases from

Hoogly Metcoke as raw material. The first unit of 45 MW was completed in March 2008, while

the remaining 75 MW = (30 + 45) will be completed in October 2008. After meeting the

requirements of Hoogly metcoke the excess power will be sold to Tata Power Trading and

WBSEDCL (West Bengal State Electricity Distribution Company Ltd.).


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Table 1

Projects in Pipeline

Project Fuel Source Capacity (in MW)

Coastal Maharashtra (Dehrand) Imported Coal 2400

Naraj Marthapur IPP Mandakini Coal Block 1000

Naraj Marthapur CPP Supply by Producers 1270

Tubed IPP Captive Coal 500

Jharkhand CPP (Tata Steel) Supply by Tata Steel 500

Source: Tata Power.

Future Outlook

TPCL has been looking at various alternatives to tap the opportunities available in power industrymainly due to increasing demand for electricity. Over the next 20 years, the country is going to addanother 500000 MW of capacity, which will provide huge opportunity to TPCL to expand itsbusiness. Out of the proposed nine UMPP only three have been awarded till now and the company

which has successfully won bid for Mundra project is planning to bid for other projects once thegovernment initiates the process. These UMPPs have huge impact on the expansion of thecompanys operations as these projects add 4000 MW of capacity with an added advantage ofgetting guarantees from government to get loans from financial institutions. With the liberalizationof Indian power sector, new areas of business in transmission and distribution have been opened toprivate players. The government of India has already selected few projects in transmission forprivate sector participation to improve the efficiency in operations and for TPCL, which is lookingto enter new areas in power business, this will be a trusted area where they want to concentrate.The company has already obtained all India license to trade power, which allows TPCL to sellexcess power generated at its captive power plants to the other parts of the world. However withgeneration having opened up, the distribution licensees are now allowed to procure power fromany source. The Companys vulnerability to competitive pressures in the medium term in MumbaiLA are low given the prevailing energy deficiency in the western region and transmission capacityconstraints. However, in long-term it has to face competition with other players like Reliance who

is expanding aggressively.The company is planning to capitalize the growing manufacturing industry by constructing andrunning captive power plants at different locations. To this extent it has already entered intoagreement with Tata Steel to construct captive plants at their greenfield projects.

The company, which is planning to expand its generation capacity through Greenfield projectsacross India to capitalize power deficit situation in India is relying heavily on coal as a rawmaterial for these projects might face few challenges in the form of increase in costs andenvironmental issues relating to fly-ash at the same time it facing the risk of increase in the pricesof coal due to infrastructure bottle neck across the world.

Against the back drop of these expansion plans, analysts are expecting the performance of thecompany for the next three years as follows:

In 2006-07, the company has generated 14267 million units and it is expected to grow at7.93, 14.99 and 15.83 percent for the next three years. The average per unit price charged by

TPCL will be at 3.49, 4.01 and 4.41 rupees for the next three years.

Due to short fall in generation the company has been purchasing electricity to supply to itsMumbai customers for the last few years; this is expected to continue for the next three yearsalso. The number of units the company is expected to purchase is at 477.78, 272.12 and334.63 million units. The per unit price expected to pay for the next three years would be at7.98, 8.38 and 8.79 rupees.

Income from other operations is expected to be at Rs.1,758, 1,933.8 and 2127.2 million.

Cost of fuel is expected to increase by 19.75, 38.58 and 29.88 percent.


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Staff cost for the next three years will be at Rs.2343.9, 3037.8 and 3860.4 million.

Repairs and maintenance for the next three years is assumed to 2.27, 2.01 and 1.83 percent ofnet sales.

The administration and other expenses for the next three years are expected to be at8.5 percent of net sales.

Depreciation rate 8.5 percent.

Financial charges for the next three years will be at 5.91, 6.41 and 6.83 percent of totalliabilities.

Capex for the next three years will be at Rs.13910, 15760 and 20700 million and work inprogress for the next three years is estimated at Rs.4930, 2760 and 14500 million.

For the next three years the company is expected to raise Rs.3630, 6800, 14490 million ofsecured debt and Rs.6110 and 4230 million of unsecured debt. For the next two year, duringthe year 2009-10 it is expected to raise only secured debt.

Effective Tax rate for the next three years will be 18.36 percent.

Other non-cash charges for the next three are expected at Rs 2214.5, 3010 and 4292.6million.

Current asset turnover ratio for the next three years will be at 1.28, 1.45 and 1.61 and thecurrent ratio for the next three years will be at 2.41, 2.41 and 2.35.

Total shareholders equity for the next three years will be at 78370, 92140 and 102280million.

Growth rate for the period FY 2011 to FY 2015 will be at 24.08 percent, while the terminalgrowth rate will be at 7.56 percent.

No. of shares outstanding is at 198 million.


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ANNEXURE I

Profit and Loss account of Tata Power from FY 04-FY 07

(Rs. in Million)

Particulars FY 04 FY 05 FY 06 FY 07

Income from Sale of Power 399177 36553.9 42932.7 45555Income from other Operations 2454.9 2716.5 2676.0 1598.2

Net Sales 42372.6 39270.4 45608.7 47153.2

% Growth 7.32% 16.14% 3.39%

Expenditures

Cost of Power Purchased 4094.9 4157.0 5832.0 6645.8

% of Net Sales 9.66% 10.59% 12.79% 14.09%

Cost of Fuel 18488.7 18639.8 23965.1 27089.1

% of Net Sales 43.63% 47.47% 52.55% 57.45%

Staff Costs 1916.1 1554.0 1736.8 1919.0

% of Net Sales 4.52% 3.96% 3.81% 4.07%

Repairs and Maintenance 889.2 1135.4 1159.8 1199.8

% of Net Sales 2.10% 2.89% 2.54% 2.54%Provisions for Contingencies 0.00 300.0 300.0 0.00

% of Net Sales 0.00% 0.76% 0.66% 0.00%

Generation, Distribution, Administration andOther Expenses

5082.4 4291.0 4579.6 3065.1

% of Net Sales 11.99% 10.93% 10.04% 6.50%

Total Expenditures 30471.3 30077.2 36973.3 39918.8

% of Net Sales 71.91% 76.59% 81.07% 84.66%

EBITDA 11901.3 9193.2 8635.4 7234.4

EBITDA Margin % 28.09% 23.41% 18.93% 15.34%

Growth % 22.75% 6.07% 16.22%

Depreciation & Amortisation 3339.5 3596.2 2783.4 2919.2

EBIT 8561.8 5597.0 5852.0 4315.2

Financial Charges 2837.2 1914.4 1652.8 1895.0

Other Income 1599.9 3871.3 3256.1 3439.9

PBT 7324.5 7553.9 7455.3 5860.1

Pre-tax Margin % 17.29% 19.24% 16.35% 12.43%

Tax 2251.9 2074.3 1369.1 1107.9

Effective Tax Rate % 30.74% 27.46% 18.36% 18.91%

Adjusted PAT 5072.6 5479.6 6086.2 6968.0

Net Profit Margin % 11.97% 13.95% 13.34% 14.78%

Growth % 8.02% 11.07% 14.49%

Shares in Issue 197.8 197.8 197.8 197.8

Adjusted EPS 25.65 27.70 30.77 35.23

Growth % 8.02% 11.07% 14.49%

Dividends Paid 138.69 148.6 168.41 188.72

DPS 7.01 7.51 8.51 9.54

Source: Tata Power Annual Statement.


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ANNEXURE II

Balance Sheet of Tata Power from FY 04-FY 07

(Rs. in Million)

Particulars FY 04 FY 05 FY 06 FY 07

Gross Assets 55350 54660 59250 62300

Accumulated Depreciation 23640 26570 29220 31990

Net Fixed Assets 34770 32460 32150 38110

Capital WIP 3060 4380 2120 7810

Investments 27290 35030 34120 35700

Current Assets

Cash 520 9800 9910 13680

Inventories 3130 2970 4420 3960

Trade Debtors 7180 6930 10580 14780

Loans and Advances 5970 5530 4640 7700

Other Current Aseets 280 360 340 350

Current Liabilities 11800 13000 13210 17570

Net Current Assets Excluding Cash 4770 2790 6770 9230

Deferred Tax (Net) 370 110 160 60

Capital Deployed 67720 79960 83110 96660

Total Assets 79510 92960 96320 114240

Non-Current Liabilities

Secured Debt 7220 10590 9460 13540

Unsecured Debt 10000 18010 18090 22790

Total Liabilities 17210 28600 27550 36330

Share Capital 1980 1980 1980 1980

Reserves 42770 43630 47820 52590

Special Appropriatins 5750 5750 5750 5760

Total Stockholders Equity 50500 51360 55560 60330

Capital Employed 67720 79960 83110 96660

Source: Tatapower Annual Statement.


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ANNEXURE III

Cash Flow Statement of Tata Power from FY 04-FY 07

(Rs.in Million)

Particulars FY 05 FY06 FY 07

Cash Flow from Operating Activities

PBT 7553.9 7455.3 5860.1

Non-Operating Income 3871.3 3256.1 3439.9

Depreciation 3596.2 2783.4 2919.2

Other Non-Cash Charges 301.3 1199.2 297.5

Operating Profit Before WC Changes 7580.1 8181.8 5636.9

Changes in Current Assets 782.3 4194.6 6822.9

Changes in Current Liabilities 1202.1 211.4 4362.9

Cash Generated from Operations 9564.5 4198.6 3176.9

Direct Taxes Paid 2074.3 1369.1 1107.9

Others 3040 161.5 57

Net Cash Generated from Operations 4450.2 2668 4341.8

Cash Flow from Investing Activities

CAPEX 492.2 2330 7813.6

Investments 5368.7 907.5 1579.8

Interest Received 2780.1 3256.1 3439.9

Others 0 0 0

Net Cash Used in Investing Activities 3080.8 1833.6 5953.5

Cash Flow from Financing Activities

Change in Debt 11385.9 1050.1 9135.5

Change in Equity 0 0 0

Dividends Paid 1378.6 1480.3 1676.5

Interest Paid 1914.4 1652.8 1841.1

Others 181.3 208.4 236.2

Share Premium

Net Cash used in Financing Activities 7911.6 4391.6 5381.7

Net Increase in Cash and CashEquivalents 9281 110 3770

Cash and Cash Equivalents at theBeginning 519 9800 9910

Net Increase in Cash and CashEquivalents 9281 110 3770

Cash and Cash Equivalents at the End 9800 9910 13680

Source: Tatapower Annual Statement.


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ANNEXURE IV

Demand and Supply of Electricity from 1998-99 to 2007-08

Source: CEA.


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ANNEXURE V

Per Capita Consumption of Electricity over the Last Few Years

Source: CEA.


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ANNEXURE VI

Per Capita Consumption of Electricity in Different

Countries during 2006

Source: CEA.


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ANNEXURE VII

Growth in Electricity Generation over the Last Few Years

Source: CEA.


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ANNEXURE VIII

Share of Different Sectors in Electricity Generation

Installed Capacity as on 31-03-08

Source: CEA.


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ANNEXURE IX

The Percentage of T&D Losses and AT&C Losses since 2002-03

Year T&D Losses in % AT&C Losses in %

2002-03 32.54 32.54

2003-04 32.53 34.78

2004-05 31.25 34.33

2005-06 30.42 34.54

2006-07 28.61 32.07

2007-08 26.91 N.A

Source: CEA.


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Documents

01 Tata Power