Capital Expenditure Policies and Practices of NTPC An Analytical Study Dr. Ch. Satyanarayana Assistant Professor of Commerce Nagarjuna Government College (Autonomous), Nalgonda Email: drsatyanarayanachindam@gmail.com Abstract Capital expenditures are the amounts spent for tangible assets that will be used for more than one year in the operations of a business. Capital expenditures can be thought of as the amounts spent to acquire or improve a company's fixed assets. The survival of business enterprises is difficult without investment of funds in fixed assets. Fixed assets are the assets of a relatively permanent nature and provide productive facilities to attain the set goals of the firm. Inconsistent capital expenditure decisions in public sector can lead to heavy capital erosion. This implication is the motive for an analytical study of the capital expenditure decision in NTPC. This paper examines the capital expenditure decisions in public sector undertakings which are responsible for their success or failure. This paper further examines the capital expenditure policies and practices in NTPC in particular. Keywords: Capital Expenditure, NTPC, PSUs, India 11
Introduction Capital expenditure is defined as being the expenditure on items which are expected to produce future economic benefits for the Company, with a useful life in excess of twelve months. Items of capital expenditure include computer equipment and software, aircraft, plant and machinery, office furniture and equipment, vehicles, trucks, ground service equipment, and buildings and improvements, including leasehold improvements. Capital expenditure involves non-flexible long-term commitment of funds. Thus, money spent in the acquisition, installation or development of fixed assets and research and development projects fall under the category of capital expenditure. Capital expenditure decisions are made by management within the scope and framework of capital expenditure policy. A capital expenditure policy refers the determination of the nature, purpose, size and planning horizon of the expenditure involved with reference to each department of the organization. Capital expenditure decisions are also called as capital budgeting or fixed assets management. Capital expenditure decision is an important financial decision in as much as it affects the financial health of the enterprise for a long period of time. Capital expenditure decision involving the acquisition of major assets is not a routine process and whatever decision is taken can be reserved only at considerable cost to the company. Decision concerning commitment of funds to acquire production facilities whose benefits are reaped over a larger time span than the current accounting year is a capital expenditure decision. This necessitates a careful job of planning and evaluation. Capital expenditure decisions necessitate investment in current assets in relation to the sale of products/product lines taken up. Another factor contributing to the significance of the capital expenditure decision is the risk exposure of burgeoning funds committed the effect of which will be felt by the company over extended period of time. Objectives of the Study The following are the objectives of the study: To understand the capital expenditure policies and practices 12
To analyze the capital expenditure policies and practices in NTPC with a view to examine the extent to which the capital expenditure decisions in public sector undertakings were responsible for their success or failure To present conclusions for effective capital expenditure management of the select unit. Need for the Study Capital expenditure decision making assumes the greatest importance for any firm, whether small or big. This is mainly because of the associated problems like non availability of decisions on one hand, and the length of time involved for which decisions are implemented, on the other Particularly in a capital scarce and planned economy like India, the need for precise investment decision in the macro units can hardly be exaggerated. Since the benefits from investment proposals extend into the future, accrual is not always certain. In other words, in most of the cases, these decisions are made in an environment of risk and uncertainty which are associated with the factors affecting the net outcome. Erratic capital expenditure decisions in public sector can contribute heavily for capital erosion. These implications as a back drop was opined the need for an analytical study of the capital expenditure decision in public sector undertakings and assess the extent to which these decisions have contributed for their success/failure. Methodology The study is based on purposive random sampling of a Public Sector Undertaking which is located in Telangana State. The selected public enterprise produces goods involving heavy capital expenditure namely National Thermal Power Corporation Limited (NTPC) is a public enterprise earning good profits. Available information/data about capital expenditure decisions are collected from the annual reports of the company for the financial year from 2006-07 to 2015-16.The sources of data for the study are both primary and secondary. Capital Expenditure Decisions in NTPC - An Analysis Growth Rate in Total Fixed Assets With a view to examine the growth rate in fixed assets the data relating to this aspect in case of NTPC is presented in Table 1. It reveals the following: 13
During the year 2006-07 the investment in fixed assets registered at Rs.38,504.8 crores and increased to Rs. 1,65,571.86 crores in the year 2015-2016, which indicates a net difference of Rs. 127067.06 crores (76%). We find an increasing trend in the case of fixed assets investment in all the years of the study period. The increased investment in fixed assets is on account of undertaking Mega Power projects such as Vindyachal (M.P.), Kayamkulam (Kerala), Unchahar (U.P), Faridabd (Haryana), Simhadri (A.P.), Kaws (Gujarat), Anta (Rajasthan) and Mangalore (Karnataka) by NTPC during the period under study. The lowest growth rate in fixed assets investment is found at 115.65% in the year 2007-08 where as the growth rate in fixed assets investment is the highest in the year 2015-16 at 430%. TABLE 1 Growth Rate in Total Fixed Assets of NTPC (Rs. in Crores) Year Total Fixed Assets Percentage 2006-07 38,504.80 100.00 2007-08 44,532.60 115.65 2008-09 59,342.63 154.11 2009-10 66,865.60 173.65 2010-11 77,506.59 201.29 2011-12 89,613.74 232.73 2012-13 1,06,724.19 277.17 2013-14 1,16,752.60 303.21 2014-15 1,35,050.02 350.73 2015-16 1,65,571.86 430.00 Average: 62,727.66 233.99 Structure of Fixed Assets The componential analysis of fixed assets of NTPC is shown in Table 2. It reveals that the fixed assets of the company include mainly net-block, capital work-in-progress and construction stores and advances. By and large we observe an increasing trend in the case of net-block during the study period. The net-block consists of assets relating to power station, research & development, office complex, township and assets owned by the Government. The net-block varied in between Rs. 25,648.10 crores (2006-07) to Rs. 91,355.8 crores (2015-16). On an average the NTPC is investing in net-block Rs. 50,281.72 crores during the review period under study. The percentage of net-block to total fixed assets varied in between 58.12 to 87.08 and the other components occupied the remaining share of 41.88 to 12.92. Capital work-in-progress includes assets 14
pertaining to generation projects, research and development, office complex, township and incidental expenditure during construction. The capital work-in-progress is lying in between 9.78% to 36.70% over the period of study. The average investment in capital work-in-progress is Rs. 38,424.53 crores. This component of fixed asset is placed in second position in the total fixed assets structure of the organization. NTPC invested on an average Rs. 90046.46 crores during the review period. Table 2: Structure of Fixed Assets of NTPC (Rs. in Crores) Year Net block Capital work in Total Fixed Assets progress 2006-07 25,648.10 (60.42%) 12,856.70 (30.29%) 38,504.80(100%) 2007-08 26,093.70 (63.20%) 18,438.90 (29.34%) 44,532.60 (100%) 2008-09 32,937.73 (60.58%) 26,404.90 (32.23%) 59,342.63 (100%) 2009-10 34,761.29 (58.12%) 32.104.31 (36.70%) 66,865.60 (100%) 2010-11 39,235.96 (61.24) 38,270.63 (36.23%) 77,506.59 (100%) 2011-12 45,044.47 (77.20%) 44,569.27 (20.33%) 89,613.74 (100%) 2012-13 62,687.42 (87.08%) 44,036.77 (9.78%) 1, 06,724.19 (100%) 2013-14 71,865.86 (85.02%) 44,886.74 (10.95%) 1, 16,752.60 (100%) 2014-15 78,586.91 (77.45%) 56,463.11 (19.28%) 1, 35,050.02 (100%) 2015-16 91,355.82 (77.11%) 66,216.04 (18.81%) 1,65,571.86 (100%) Average 50,821.72 38,424.53 90046.46 The Fixed assets as a Percentage of Total Assets The fixed assets as a percentage to total assets of NTPC are presented in Table 3. It reveals the following: Table 3: Fixed Assets as Percentage of Total Assets of NTPC (Rs. in crores) Year Fixed Assets Total Assets Investment Investment 2006-07 38,504.80 73,738.00 52.21 2007-08 44,532.60 81,458.10 54.66 2008-09 59,342.63 1,04,251.10 56.92 2009-10 66,865.60 1,25,488.49 59.44 2010-11 77,506.59 1,25,279.93 61.86 2011-12 89,613.74 1,40,837.80 63.62 2012-13 1,06,724.19 1,61,116.46 66.24 2013-14 1,16,752.60 1,79,554.18 65.02 2014-15 1,35,050.02 1,97,134.92 68.50 15
2015-16 1,65,571.86 2,14619.26 77.14 Average 62,727.66 123,271.79 62.56 Industry Average 54.00 We observe a continuous increasing trend in the case of investment in total assets and also in the investment in fixed assets are showing an increasing trend throughout the study period. The fixed assets as a percentage of total assets ratios of NTPC recorded at 77.14% (2015-16) and 52.21% (2006-07) which are considered to be the highest and the lowest respectively. It is found that NTPC is investing on an average 62.56 percent in fixed assets, which is more than the industry average recorded at 54% and the remaining is invested in other assets such as investments, intangible assets, current assets and fictitious assets during the entire decade period. Sales of Fixed Assets The information with regard to sale of fixed assets as a percentage of total fixed assets is presented in Table 4, it reveals that the sale of fixed assets as a percentage of total fixed assets ratio has been showing a fluctuating trend during period of study (i.e., from 2006-07 to 2015-16). The ratio is varying in between 0.01% to 6.27% during the study period. TABLE 4: Sale of Fixed Assets as a Percentage of Total Fixed Assets of NTPC (Rs. in crores) Year Sale of Fixed Fixed Assets Assets Investment 2006-07 276.6 38,504.80 0.72 2007-08 691.30 44,532.60 1.55 2008-09 521.20 59,342.63 0.88 2009-10 8.13 66,865.60 0.01 2010-11 674.37 77,506.59 0.87 2011-12 469.66 89,613.74 0.52 2012-13 1044.00 1,06,724.19 0.98 2013-14 7324.42 1,16,752.60 6.27 2014-15 6306.15 1,35,050.02 4.67 2015-16 2725.14 1,65,571.86 1.65 Average 2004.10 1927422 1.812 It can be interpreted that in majority years of the study period the sale of fixed assets were low at less than 1%, which is considered to be negligible when compared with the total investment made on fixed assets by NTPC. 16
Net-worth to Fixed Assets Net-worth to fixed assets ratio is being presented in Table 5. Table 5: Net-worth to Fixed Assets Ratio of NTPC (Rs. in Crores) Year Net-Worth Fixed Assets Investment 2006-07 48,596.80 38,504.80 1.26 2007-08 52,638.60 44,532.60 1.18 2008-09 57,370.07 59,342.63 0.96 2009-10 62,437.42 66,865.60 0.93 2010-11 67,892.35 77,506.59 0.87 2011-12 73,291.17 89,613.74 0.81 2012-13 80,387.51 1,06,724.19 0.75 2013-14 85,815.32 1,16,752.60 0.73 2014-15 81,657.35 1,35,050.02 0.60 2015-16 88,782.00 1,65,571.86 0.53 Average 69,886.86 62,727.66 0.862 Industry Average 1.67 An analysis of the data reveals the following facts: The net-worth of NTPC has been consistently decreasing from the beginning of the study period to the end of the study period. The net-worth is recorded at Rs.48, 596.80 crores (2006-07) and increased to Rs. 88,782.00 crores (2015-2016) indicating two fold increase in net-worth. The increase in net-worth might be on account of mobilization of additional funds by issue of new shares and also due to increased reserves and surprises. The net-worth to fixed assets ratio is less than one in all the years of the stud except in the year 2006-07 and 2007-08. It means that the fixed assets were not only financed by net-worth but also using loan funds (debt-capital). A close examination of the ratio reveals that during the year 2006-2007, net-worth is more than the investment in fixed assets which can be presumed that the fixed assets were financed by net-worth only but net-worth is less than fixed assets during the year 2015-16. The average ratio of net-worth to fixed assets is registered at 0.862, which is more than that of industry average of 1.67. The Fixed Assets to Long-term Liabilities The fixed assets to long-term liabilities ratio is presented in Table 6. 17
Table 6: Fixed Assets to Long-term Funds Ratio of NTPC (Rs. in crores) Year Fixed Assets Long term Investment Liabilities 2006-07 38,504.80 1552665 0.52 2007-08 44,532.60 2025096 0.55 2008-09 59,342.63 2242274 0.64 2009-10 66,865.60 2402305 0.66 2010-11 77,506.59 2490097 0.69 2011-12 89,613.74 2527803 0.73 2012-13 1,06,724.19 2581718 0.77 2013-14 1,16,752.60 2680821 0.76 2014-15 1,35,050.02 2978835 0.80 2015-16 1,65,571.86 3298778 0.92 Average 62,727.66 2478039.2 0.704 Industry Average 0.82 Fixed assets to long-term liabilities ration was observed at 0.92 during the year 2015-16, which is the highest and at 0.52 in the year 2006-07, which is considered to be the lowest. On an average the ratio is found to be 0.704, which is less than the industry average at 0.82. A close examination of the ratio reveals that the ratio is less than one in all the years of the study period which indicates that the fixed assets have been financed by long-term sources of funds. This is considered to be a sound practice from the point of view of efficient financial management. Fixed Assets Turnover The data pertaining to fixed assets turnover ratio of NTPC is exhibited in table 7. It discloses that the fixed assets turnover ratio showed an increasing trend and it is less than one in all the years of the study. The minimum fixed assets turnover is found at 0.42 times in the year 2015-16 and maximum at 0.84 times in the year 2006-2007. On an average the sales generated per rupee of investment in fixed assets is 0.67 which is more than the power industry average turnover ratio. Table 7: Fixed Assets Turnover Ratio of NTPC Year Sales Fixed Assets Investment (Rs. in Crores) 18
2006-07 32,595.20 38,504.80 0.84 2007-08 37,050.10 44,532.60 0.83 2008-09 45,229.06 59,342.63 0.76 2009-10 49,233.88 66,865.60 0.73 2010-11 57,399.49 77,506.59 0.74 2011-12 62,052.33 89,613.74 0.69 2012-13 65,673.93 1,06,724.19 0.61 2013-14 72,018.93 1,16,752.60 0.62 2014-15 72,236.94 1,35,050.02 0.53 2015-16 70,056.80 1,65,571.86 0.42 Average 56,354.67 62,727.66 0.67 Industry Average 0.82 It can be said that the organization is not able to make use of its fixed assets to the maximum extent. Return on Fixed Assets The return on fixed assets of NTPC from 2006-07 to 2015-2016 is presented in Table 8. Table 8: Return on Fixed Assets of NTPC (Rs. in Crores) Year Profit/Loss Fixed Assets (Before Tax) Investment 2006-07 8,907.40 38,504.80 23.13 2007-08 10,254.90 44,532.60 23.02 2008-09 9,359.47 59,342.63 23.78 2009-10 10,885.46 66,865.60 16.28 2010-11 12,049.60 77,506.59 15.54 2011-12 12,326.16 89,613.74 13.75 2012-13 14,894.52 1,06,724.19 13.95 2013-14 13,904.65 1,16,752.60 11.90 2014-15 10,650.36 1,35,050.02 7.88 2015-16 10,058.67 1,65,571.86 6.07 Average 90,046.46 15.53 Industry Average 20.30 An examination of the table reveals that the net profit before tax is fluctuating year after year during the study period. The return on fixed assets ratio is appeared to be very high at 23.13% in the year 2006-07 and is decreased to 6.07% during the year 2015-16. The ratio showed a fluctuating trend during the review period because of low profit earned by NTPC during this year 1015-16. The average return on fixed assets ratio is accounted for 15.53% during the study period, which is more than the industry average ratio at 20.30%. 19
Conclusions The following are the conclusions drawn from the study: The investment in fixed assets has been increasing from time to time due to the introduction of new capital projects by the organization during the study period. The net-block occupies a major share followed by capital work-in-progress. As far as the trends in net-block and capital work-in-progress are concerned, the net-block showed an increasing trend except in the year 2009-10 where as the other component depicted fluctuating trend over a decade period of study. The investment in fixed assets is more when compared to the investment in other assets. In majority years of the study period the sale of fixed assets were low at less than 1%, which is considered to be negligible when compared with the total investment made on fixed assets by NTPC. NTPC is using both net-worth as well as loan funds to finance its fixed assets except in the year 2015-2016, where in the fixed assets were financed by only net-worth. NTPC is following a consistency policy for financing its fixed assets out of long-term funds, leading to healthy practice of managing the fixed assets. The organization is not able to make use of its fixed assets to the maximum extent. NTPC is earning a reasonable rate of return on fixed assets during the first three years of the study period (2006-09). 20
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