Understanding Financial Statements of Power Grid

Dr Manoj Anand, MDI

Risk & Return Tradeoff

Investment Decisions

Capital Structure Decisions

Dividend Decisions

Management of Working Capital

Financial Statements Objectives

Useful to present and potential investors & creditors

• in making rational investment & credit decisions

Financial Statements Objectives

Comprehensible to those

• who have a reasonable understanding of business & economic activities &

• are willing to study the information with reasonable diligence

Financial Statements Objectives

About the

• economic resources of an enterprise,

• the claim to those resources, &

• effects of transactions & events that change resources & claim to those resources

Financial Statements Objectives

About an enterprise’s financial performance during a period

Balance Sheet Concepts

Money Measurement Concept

The Entity Concept

The Going Concern Concept

Balance Sheet Concepts

The Cost Concept

• Tangible Fixed Assets

• Intangible Assets

Balance Sheet Concepts

Rationale for Cost Concept

• Relevance

• Objectivity

• Feasibility

Dual Concept

Application of Funds

Fixed Assets

Investments

Current Assets, Loans & Advances

• Less: Current Liabilities & Provisions

Miscellaneous Expenditure

• (To the extent not written off)

Sources of Funds

Shareholders Funds

Loan Funds

Margins

Returns

Growth

Budget TargetsDividends

Earnings

Cash Flows

?

Compensation

Capital

Budgeting

Setting Goals

Strategic Planning

Measuring Performance

Corporate Tower of Babel

VALUE DRIVER ANALYSIS

AN EXAMPLE

VALUE DRIVERS

THREE LEVELSTHREE LEVELS

GENERIC

BUSINESS UNIT SPECIFIC

OPERATING

GENERIC VALUE DRIVERS

ROCEPOST TAX

1 -TAX RATE

ROCEPRE TAX

CAPITALTURNOVER

OPERATINGMARGIN

FIXEDASSETS

SALES

DEPRECIATION

SELLING & ADMNEXPENSES

COST OFGOODS SOLD

WORKINGCAPITAL

ROCE TREE

ROCEPOST TAX

9.23% (7.87%)

1 -TAX RATE91.41% (88.28%)

ROCEPRE TAX

10.10% (8.92%)

CAPITALTURNOVER0.20 (0.18)

OPERATINGMARGIN

49.56% (48.31%)

FIXEDASSETS

0.26 (0.23)

SALES100%

GENERAL EXPENSES3.47% (3.89%)

PERSONNELEXPENSES

11.28% (9.28%)

ELECTRIC POWER6.68% (8.98%)

WORKINGCAPITAL

2.18 (2.24 )

Power Grid

2001

Power Grid's ROE

9.99%

10.89%

9.50%

10.00%

10.50%

11.00%

1 2

Year

RO

E (%

)

OPERATING VALUE DRIVERS

ASSYSHOP

EXPENSES200

SHOPEXPENSES

183

ALLOCATEDOVERHEAD

17

LABOUR120

OVERHEAD63

CANTEEN12

TRANSPORT5

NO. OF WORKMEN 66

COST PER WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLOOR SPACE CHARGES 5

INTEREST 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

Rs.lakhs

VALUE DRIVER TREE

NO. OF WORKMEN 66

COST/ WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLR SP. CHARGES 5

INT 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

VOLUME2.4 L Nos

PROD-MIX

LAB.UTL 0.58

STD.TIME0.3 HRS

HOUR RATE

BENEFITS

OT RATE

SUP. 24

OTH 19

P.I. 0.70

C.F 0.96

ABSENT 0.86

NO.OF SUP 7

COST / SUP3.43

SETTINGTIME

IDLETIME

REWORK /REJECTION

NON-STDOPERATIONS

JOB W / OSTANDARDS

OTHERS

SPAN OFCONTROL 11

Rs. Lakhs

NO. OF WORKMEN 58 ( 66 )

COST/ WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLR SP. CHARGES 5

INT 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

VOLUME2.4 L Nos.

PROD-MIX

LAB.UTL 0.66 ( 0.58 )

STD.TIME0.3 HRS

HOUR RATE

BENEFITS

OT RATE

SUP. 24

OTH 19

P.I. 0.80 ( 0.70 )

C.F 0.96

ABSENT 0.86

NO.OF SUP 7

COST / SUP3.43

SETTINGTIME

IDLETIME

REWORK /REJECTION

NON-STDOPERATIONS

JOB W / OSTANDARDS

OTHERS

SPAN OFCONTROL 11

Rs.lakhs

IF PI ISRAISEDTO 0.80

ASSYSHOP

EXPENSES183 (200 )

SHOPEXPENSES168 ( 183 )

ALLOCATEDOVERHEAD

15 (17)

LABOUR105 ( 120 )

OVERHEAD63

CANTEEN11 (12)

TRANSPORT4 (5)

NO. OF WORKMEN58 ( 66 )

COST PER WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLOOR SPACE CHARGES 5

INTEREST 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

Rs.lakhs

NO. OF WORKMEN 66

COST/ WORKMAN 1.82

INDIRECT LABOUR 40 (43)

DEPRECIATION 1

FLR SP. CHARGES 5

INT 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

VOLUME2.4 L Nos.

PROD-MIX

LAB.UTL 0.58

STD.TIME0.3 HRS

HOUR RATE

BENEFITS

OT RATE

SUP. 21 (24)

OTH 19

P.I. 0.70

C.F 0.96

ABSENT 0.86

NO.OF SUP 6 (7)

COST / SUP3.43

SETTINGTIME

IDLETIME

REWORK /REJECTION

NON-STDOPERATIONS

JOB W / OSTANDARDS

OTHERS

SPAN OFCONTROL(SOC)

12 (11)

Rs.lakhs

IF SOC ISRAISEDTO 12

ASSYSHOP

EXPENSES197 (200)

SHOPEXPENSES180 (183)

ALLOCATEDOVERHEAD

17

LABOUR120

OVERHEAD60 (63)

CANTEEN12

TRANSPORT5

NO. OF WORKMEN 66

COST PER WORKMAN 1.82

INDIRECT LABOUR 40 (43)

DEPRECIATION 1

FLOOR SPACE CHARGES 5

INTEREST 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

Rs.lakhs

NO. OF WORKMEN 58 (66)

COST/ WORKMAN 1.82

INDIRECT LABOUR 40 (43)

DEPRECIATION 1

FLR SP. CHARGES 5

INT 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

VOLUME2.4 L Nos.

PROD-MIX

LAB.UTL 0.66 (0.58)

STD.TIME0.3 HRS

HOUR RATE

BENEFITS

OT RATE

SUP. 21 (24)

OTH 19

P.I. 0.80 (0.70)

C.F 0.96

ABSENT 0.86

NO.OF SUP 6 (7)

COST / SUP3.43

SETTINGTIME

IDLETIME

REWORK /REJECTION

NON-STDOPERATIONS

JOB W / OSTANDARDS

OTHERS

SPAN OF CONTROL (SOC)

12 (11)

Rs.lakhs

COMBINEDEFFECT OF

PI & SOC

ASSYSHOP

EXPENSES180 (200)

SHOPEXPENSES165 (183)

ALLOCATEDOVERHEAD

15 (17)

LABOUR105 (120)

OVERHEAD60 (63)

CANTEEN11 (12)

TRANSPORT4 (5)

NO. OF WORKMEN 58 (66)

COST PER WORKMAN 1.82

INDIRECT LABOUR 40 (43)

DEPRECIATION 1

FLOOR SPACE CHARGES 5

INTEREST 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

Rs.lakhs

10 % Reductionin Expenses

NO. OF WORKMEN 59 ( 66 )

COST/ WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLR SP. CHARGES 5

INT 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

VOLUME2.4 L Nos.

PROD-MIX

LAB.UTL 0.58

STD.TIME0.27 (0.3) HRS

HOUR RATE

BENEFITS

OT RATE

SUP. 24

OTH 19

P.I. 0.70

C.F 0.96

ABSENT 0.86

NO.OF SUP 7

COST / SUP3.43

SETTINGTIME

IDLETIME

REWORK /REJECTION

NON-STDOPERATIONS

JOB W / OSTANDARDS

OTHERS

SPAN OFCONTROL 11

Rs.lakhs

IF STD TIME IS REDUCEDTO 0.27 HRS

ASSYSHOP

EXPENSES185 (200 )

SHOPEXPENSES170 ( 183 )

ALLOCATEDOVERHEAD

15 (17)

LABOUR107 ( 120 )

OVERHEAD63

CANTEEN11 (12)

TRANSPORT4 (5)

NO. OF WORKMEN59 ( 66 )

COST PER WORKMAN 1.82

INDIRECT LABOUR 43

DEPRECIATION 1

FLOOR SPACE CHARGES 5

INTEREST 1(FA) + 4(WC)

REPAIRS & MAINT. 3

POWER 3

T&C 3

Rs.lakhs

FOUR KEY STRATEGIES TO INCREASE VALUE

EVA = {NOPAT/CAPITAL -COST OF CAPITAL} x CAPITAL

Operate: Improve the return earned on existing capital

Build: Invest as long as returns exceed the cost of capital

Harvest: Divest capital when returns fails to achieve cost of capital

Optimize: Reduce cost of capital by optimizing capital structure

Strategic

Financial

Corporate Governance

VALUE

VALUE BASED MANAGEMENT FRAMEWORK

DETERMINANTS OF VALUE

Return

Growth

Capital

Risk

Cash Flow

Cost of Capital

Company Value

ShareholderValue Culture

Better Decisions

Better Morale Better Results

Better Pay

Virtuous Circle for Competitive Advantage

VBM

Compensation

Capital

Allocation

Setting Goals

Strategic Planning

Measuring Performance

Uniform Standards, Goals & Terminology