CREDIT APPRAISAL

PROJECT REPORT ON

CREDIT APPRAISAL

IN

FIRST CALL INDIA EQUITY ADVISORS PVT.LTD

UNDER THE GUIDANCE OF

SUNIL PARKAR

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT OF

MASTER OF MANAGEMENT STUDIES

BY

LESLIE SEQUEIRA

STUDENT ID NO – 2014160234

MMS-II

YEAR 2014-2016

Don Bosco Institute of Management and Research Kurla(west), MUMBAI – 400070

CREDIT APPRAISAL

PROJECT REPORT ON

CREDIT APPRAISAL

IN

FIRST CALL INDIA EQUITY ADVISORS PVT.LTD

UNDER THE GUIDANCE OF

SUNIL PARKAR

SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENT OF

MASTER OF MANAGEMENT STUDIES

BY

LESLIE SEQUEIRA

STUDENT ID NO – 2014160234

MMS-II

YEAR 2014-2016

Don Bosco Institute of Management and Research Kurla west, MUMBAI – 400070

CREDIT APPRAISAL

CREDIT APPRAISAL

Certificate

This is to certify that the project work titled “CREDIT APPRAISAL” is a

summer internship work carried out by Mr. Leslie Sequeira

The project was completed for “FIRST CALL INDIA EQUITY ADVISORS

PVT.LTD”, under the guidance of Dr V.V.L.N Sastry.

I further certify that the said work has not been submitted in the part or in full,

to any other University.

Date: 31st July 2015

_____________ ____________________

Dr. /Prof.(Project Guide name) Dr. S. Ramachandran

Project Guide Dean,

(Don Bosco Institute of Management and Research)

CREDIT APPRAISAL

DECLARATION

I, Mr Leslie Sequeira, student of Don Bosco Institute of Management and

Research of MMS II hereby declare that I have completed the summer

internship project on CREDIT APPRAISAL with FIRST CALL INDIA

EQUITY ADVISORS PVT.LTD in the Academic year 2014-2016. The

information submitted is true & original to the best of my knowledge.

Name of the student

CREDIT APPRAISAL

ACKNOWLEDGEMENT

At the outset of this project, I would like to express my profound gratitude to a

few people without whose help, completion of this project would not have been

possible.

First and foremost, I would like to express sincere thanks to FIRST CALL

INDIA EQUITY ADVISORS PVT.LTD for giving me this opportunity to work

with them.

The list is endless but to name a few special people, I would like to thank Dr

V.V.L.N Sastry, Director for being extremely supportive and guiding me

throughout my internship and giving me constant motivation and expert advice.

I am very grateful to Dr. S. Ramachandran, Dean, Prof. Conrad Saldanha,

Principal Advisor, Fr. Mario Vaz, Executive Director of Don Bosco Institute

of Management and Research, for giving me the opportunity to do this project

in FIRST CALL INDIA EQUITY ADVISORS PVT.LTD.

I would also like to thank Prof. Sunil Parkar for being an excellent mentor and

helping me whenever I approached him/her.

CREDIT APPRAISAL

EXECUTIVE SUMMARY

One of the major concerns is the quality of bank lending. Maintaining rigorous credit

standards is a significant challenge particularly in an environment for new competition and

clients. There is a need for evaluating the borrower behavior rather than the cash flow

analysis. The banking sector is facing a big burden with the increase in NPA’s. Therefore it is

imperative that the banks conduct a strict credit appraisal. The term credit appraisal basically

refers to the judging the credit worthiness of a borrower.

The main purpose of the report is to understand the different techniques applied while

conducting a credit appraisal. For the purpose of credit appraisal Jai Prakash Power Venture

Ltd a power generation and distribution company will be appraised based on various

parameters like company background, background of the promoters, business of the

company, financial statement analysis of the company the company valuation and other such

factors.

CREDIT APPRAISAL

INDEX

SR. NO. CONTENT PAGE NO.

1 RESEARCH METHODOLOGY 1

2. INTRODUCTION 4

3. CREDIT APPRAISAL 8

4. FACTORS AFFECTING CREDIT APPRAISAL

10

6 APPRAISAL PROCESS IN BANKS 13

7 CREDIT APPRAISAL ON JAIPRAKASH POWER VENTURES LTD

22

8 FINDINGS 49

9 CONCLUSION 51

10 RECOMMENDATION 53

11 BIBLIOGRAPHY 54

CREDIT APPRAISALRESEARCH METHODOLOGY

DATA COLLECTION

The data collected was secondary in nature.

METHOD OF DATA COLLECTION

Data was collected primarily through the various journals, RBI websites and other

related websites.

LITERATURE REVIEW

1. “INVESTMENT APPRAISAL PROCESS IN THE BANKING & FINANCE

INDUSTRY” by MEHARI MEKONNEN AKALU AND RODNEY TURNER.

This journal basically highlights the fact that the time value of money based methods

generally is confined to the financial data part and ignores other aspects of the project

appraisal decisions. A valuation model should instead be in line with the company

objectives. NPV is one of the best methods. The appraisal method is more for R&D

projects that non R&D. SVA method better for appraisal and EVA can be used for

company shareholder value.

2. “Overview of Banking Industry in India” BT Vadhar (2011). This article gives

us a brief introduction on the banking sector in India. It focuses on the evolution of

the co-op banks in India to the formation of RBI to regulate the banking operations in

India. It also focused on the on the privatization of banks, advancement of technology.

Also it mentions about the excess NPA’s in the public sector and the challenges in the

banking industry.

3. AN OVERVIEW OF THE BANKING SECTOR by RA Jadhav - 2011

This journal introduces the commercial banking, history of Indian banking and

various government policies, banking laws and regulations. Also it touches upon RBI

functions and roles. Also briefly emphasizes the banking services.

4. “Banking Risk Management in India and RBI Supervision” August 2009 This article talks about the various aspects of the risk that the banks have to

undertake. The various types of risk that the bank undertakes are categorized into 2

1

CREDIT APPRAISALtype’s business risks and the control risk. The article tries to highlight the various

weak links in the PSB’s like the lending practices, credit assessments and so on,

whereas the private sector is in much better place. The incidence of NPA’s is high in

Indian banks because of poor risk management techniques, improper evaluation of the

borrower’s credit worthiness, faulty loan appraisal systems and poor loan recovery

mechanisms. The challenge for the banks is to supervise the financial stability by

advocating a proper sophisticated and a robust profiling of the banks.

6. Understanding Credit Appraisal in Banks by Kamal Chattopadhyay

Appraisal basically refers to overall assessment of not only the present but it includes

the entire life span of the business. Project analysis covers partially the issue of

appraisal which generally covers the entire lifespan PSB’s play an important role in

the funding for startups. WC management is about short terms and project finance

deals in long term. But working capital assists a project in the long term. Capital

Employed could be derived from various sources. Basically the promoters get in their

own stake from the proprietorship to ownership and also by way of Pub ltd co. Mostly

banks raise long term loans for a specified time period for purchase of FA. Business

also requires short term funds from OD/credit from suppliers who provide raw

materials to keep production process alive. Credit appraisal requires both long term

and short term aspects in various aspects sometimes both are mutually exclusive or

inter linked.

7. Credit Is Inevitable In Banking: A Case Study of Premier Bank On Credit

Appraisal & Assessment by Dr. Ram Jass Yadav

The journal focuses on the credit risk which is present in the Indian banks and also it

explains how credit and risk are the two sides of the same coin. The article focuses on

the application of credit appraisal in SME and the parameters which the “Premier

Bank” has considered before undertaking a credit appraisal.

2

CREDIT APPRAISALOBJECTIVES

For commercial banks credit risk is of utmost importance. While providing loan to

any borrower the banks need to make sure that their money is safe. The main

objective of the research would be

1. To study the credit analysis of the banking sector in India

2. To explore the various factors affecting the credit appraisal

3. To study and analyze various techniques used for appraising of Jai Prakash

Power Venture Ltd like SWOT analysis, Porter’s five force analysis, Ratio

Analysis, Valuation techniques and Altman Z-score

LIMITATIONS1. Limited study done due to time constraint on the project.

2. Credit appraisal data not available from the banks due to the confidentiality of the

data.

3. For valuation techniques like DCF certain components were made on assumptions

hence it’s the final value differs based on which factors were taken into

assumptions. Latest company annual report not available hence certain projections

were made in certain areas.

3

CREDIT APPRAISALOVERVIEW

“It takes money to make money”.

One of the most important factors that are required for conducting a business is

finance. The success of any business lies in how financial instruments such as loans

and investment are utilized. Businesses require finance for their daily operations and

to meet essential expenses and payments. A key source in raising finance is loans

from banks and financial institutions. Lending remains one of the main functions of a

bank. But in what manner does the bank appraise a creditworthiness of a borrower.

What are the criterions for availing a loan? What are the tools used by banks for loan

appraisal.

Basically there are a variety of ways for availing a loan from a bank. It is broadly

classified into fund based and non-fund based.

A. Fund based – Involves transaction of funds (liability for the bank)

1. Cash Credit and Working capital cycle – For any business funds are required in the

working capital for purchase of raw materials, packing materials, payment to labor,

Taxes, administration, selling and marketing overheads.

2. Overdraft - Borrower can withdraw funds at any time against assets like FD, gold,

bonds, motor car, and immovable property.

3. Bill Purchase and Bill Discount - For ease of business banks give financing

resources in BD form. Banks purchase the BOE against a product sale at a discount

thus doing away with the delay in realizing receivables. The discounting will be to the

extent of interest calculated till payment of sale is realized and will be determined by

market interest rate and credit rating.

B. Non Fund based – This type of funds basically refer to those facilities where the

funds are transferred in case of a contingency

1. Letter of Credit – A borrower wants to purchase/import goods from seller, He will

approach the banks. The banks will issue a letter of credit to the supplier. On receipt

of goods the supplier will give goods to the borrower. The borrower will give the

letter of credit to the bank who will make the payment to the supplier.

4

CREDIT APPRAISAL2. Bank Guarantee – A guarantee where the bank guarantees any loss as per terms and

contract in case of any occurrence/non – occurrence of a particular event.

5

CREDIT APPRAISALINTRODUCTION TO CREDIT

Credit basically means providing money or resources to another party where the

money will be paid immediately but at a future date. In the past decade the credit

scenario has undergone a significant transformation due to reform of financial sector

in the domestic and the international sector. The total gross bank credit stands at Rs

61423 crore in March 2015 a rise of about 8.6% from the previous year which was

about Rs56572 crore March 2014.

With no significant improvement in activity in the corporate sector, bank borrowings

from these continue to remain low. According to Reserve Bank of India (RBI) data,

credit to business increased only by 6.4 per cent in April this year compared with the

increase of 12.3 per cent in same period last year. The regulator said deceleration in

credit growth to industry was observed in all major sub-sectors. The credit in the

services sector increased by 7.5% in April 2015 compared with the increase of 17% in

the corresponding period last year.

There is a wave of nervousness when it comes to the NPA’s in the banks. NPA’s

follow a close relation with the business cycle conditions prevailing around it. Banks

probably need to realize that restructuring the debts form an important activity if

practiced with due diligence. The question however needs to be raised whether

deteriorating quality of assets are due to the policies of the bank boards. Issues related

to the quality of the assets have been been due to the cyclical slowdown.

When it comes to judging the projects related to the infrastructure which may have

been stuck for certain environment clearances, the banks may not have expertise in

assessing these projects. The quality of equity which the promoters bring in is very

disturbing for the banks. Since the promoters cannot finance the whole amount of

equity they need to raise the money elsewhere by way of the debt method. The

promoters may not be too concerned whether the project undergoes its way or not.

How the promoters manage to bring in the required amount of debt and equity plays a

crucial role for the banks in the credit appraisal methods. At times the banks may have

been at fault with their failure to distinguish between the equity and the debt of the

promoter and over the time the proportion of the equity of the promoters have

declined and the leverage has increased.

6

CREDIT APPRAISALWhile implementing any defense mechanisms related to the risk banks need to be

vigilant when it comes to their own capital requirement and the performance of the

balance sheet. All the factors like the economic state, scope for credit expansion and

any provision for loan losses must be factored in.

Keeping these factors into consideration the RBI has brought out a mechanism which

is the Strategic Debt Conversion (SDR). In case if the borrower fails to meet the

certain terms stipulated under the restructuring norm, SDR gives the right to convert

outstanding loans into a majorly equity stake.

7

CREDIT APPRAISALCREDIT APPRAISAL

The term credit appraisal basically refers to the judging the credit worthiness of a

borrower. Credit worthiness basically refers to assessment of the likelihood that the

borrower will default on their debt obligation. Nowadays credit analysis uses concepts

in making subject evaluation, along with financial ratios and risk evaluation. Banks

lend money only if he is satisfied with the risk mitigation. This term is also related

closely to the term “default” which means when a borrower is unable to honor the

debt obligation.

For e.g. ABC Ltd is a rubber company and in order to expand and diversify their

business they approach a bank for further capital. Now the onus lies on the bank to

decide whether they are deemed worthy enough to avail of the loan. For this decision

the bank will do a stringent check on the company as a whole. The bank will check

the reason for loan, financial statements of the past, management, market conditions,

business that they are in and whether they can fulfil the loan obligations.

Even the firm which undertakes an appraisal is at an advantage. An effective appraisal

offers significant benefits and helps a company to get loans in an easy manner. Credit

appraisal of a proposal helps a firm to

To be consistent and objective in choosing projects

Makes sure that the benefits of the projects are communicated to all the

sections of the society including the people from the ethnic group.

To explain the objectives of the project to the local people and provide

documentation to meet financial and other requirements

Creditworthiness of a customer lies in assessing if that customer is liable to repay the

loan amount in the stipulated time, or not. Banks have a major role in deciding how a

credit appraisal takes place. They need to assess the viability of a long term

investment with regards to the shareholder funds. Banks also need to check what’s in

store for them. They have to check what the benefit that they can achieve with the

projected proposal. The banks will be satisfied if the appraisal is deemed to the

standard. It will justify all the money that is spent on the project. Credit appraisal of

project planning as it is better known should not be viewed as only a one time

decision making factor. Rather credit appraisal should be viewed as a process of

8

CREDIT APPRAISALdecision making over a period of time and it should go through various stages of

feasibility studies (for example management, technology, environmental, financial

etc) and finally the investment phase. This is very similar to exactly how a project

cycle runs.

All banks employ their own unique objective, subjective, financial and non-financial

techniques to evaluate the creditworthiness of their customers. It is determined in

terms of the norms and standards set by the banks. Being a very crucial step in the

sanctioning of a loan, the borrower needs to be very careful in planning his financing

modes. However, the borrower alone doesn’t have to do all the hard work. The banks

need to be cautious, lest they end up increasing their risk exposure.

9

CREDIT APPRAISAL

FACTORS AFFECTING CREDIT APPRAISAL

Basically there are 5 factors which affects credit appraisal in banks. The five factors

are capital, collateral, conditions, capital and character. The five factors together are

also known as 5C’s. Previously only 3C’s were considered namely capital, character,

and capability. Alternatively the factors affecting can also be termed as PARTS

(purpose, amount, repayment, terms, and security) or CAMPARI (character, ability,

means, purpose, amount, repayment and insurance).

The factors are as follows

1. Repayment capacity of the borrower

Out of the 5 factors probably one of the most important factors is the repayment

capacity of the borrower. Capacity to repay is the most critical of the five factors; it is

the primary source of repayment– cash inflows and cash generated by the company.

Banks will want to know the medium through which the borrower intends to repay the

loan. They also analyze the cash flow from the business, the probability of successful

repayment of the loan and the timing of the repayment. For this the banks consider the

payment history on existing credit relationships - personal or commercial is

considered an indicator of future payment performance. Banks would also want to

know about other possible sources of repayment and the details.

Banks while giving loans also consider whether the loan is required for short term

purpose like working capital of for long term purpose like purchase of assets like land

and building.

2. Capital

The term “capital” generally refers to the money personally invested in the business

by the shareholder. It is an indicator of how much the shareholder has at risk should

the business fail. It is imperative that the firms realize that banks/FI’s alone cannot

contribute to the working capital. They will expect that the company shareholders also

pitch in with some of the funds from the borrower’s assets. This also tests the risk

taking ability of the shareholders and whether they are willing to take a risk in the

project; the banks will probably decide whether or not to invest in the project or not.

10

CREDIT APPRAISALThis capital investment also acts as a proof of the shareholder’s dedication and

commitment in the business.

3. Character

In generic terms character is the general impression of the customer. The term

character refers to the responsibility of the borrower to repay the loan. Credit

appraisal concentrates not only on the quantitative part but also on the qualitative part.

Hence it is important that the banks know the borrowers at the back of the palm. In

the absence of any quantifiable measure to judge character, the responsibility lies on

the lender to decide subjectively whether an individual is sufficiently trustworthy to

repay the loan. The lender will verify the past credentials of the borrower with

reference to the financial reports, educational background, prior experience in

business and other parameters.

4. Collateral

On the careful analysis of the cash flow statement, if it is realized that the company

cash flows are not quite sufficient, the banks need to know as to what is the

alternative source of repayment. As on Dec 2014, the total NPA’s stood at Rs 300611

crore as on Dec 2014 of which Rs 262402 crore (87.3%) were from nationalized and

the rest are from private banks. One of the reasons for the high NPA’s could be the

nonchalant nature of the banks when it comes to credit appraisal mechanism. The

scrutiny of the documents, the collateral that is provided is not assessed in the right

manner.

Collateral also known as third party guarantee is an additional form of security

provided to the lender. Fixed assets like land, building, plant and machinery,

equipment, accounts receivable and inventory are some of the collateral that the

company prefers to keep as collateral. In case of any default of payment, the banks

will sell off the assets to recover the loan amount. The loan agreement should

carefully identify all the details that are related to the collateral. In case if assets can’t

be taken as collateral, banks may ask for a third party guarantee where someone else

will sign a guarantee document promising to repay the loan. Also banks need to check

whether the term of the loan matches with the life of the asset. For e.g. If the asset has

a 10 year expected life then the term loan will be of 10 years or less.

11

CREDIT APPRAISAL5. Conditions

Conditions are in reference to the intended purpose of the loan and the conditions

under which the loan is granted. In addition it also refers to not only the conditions of

the industry of which the company is part of; it also refers to the macro-economic and

the conditions of the nation as a whole. How the performance of the company affects

the nation’s economy? In times of recession will there be a direct effect on the sales of

the company or will it remain relatively unaffected?. How does the change in the RBI

interest lending rates affect the shares of the company and the lending capacity?

Banks generally tend to prefer companies that are least affected by these conditions.

12

CREDIT APPRAISAL

APPRAISAL PROCESS IN BANKS

In India the banks tend to follow a standard procedure for credit appraisal. Different

banks follow different procedures for checking the project viability. The following

chart will help to understand the credit appraisal.

CREDIT APPRAISAL PROCESS

Generating Business Leads

Receipt of application from applicant

Receipt of documents

(Balance sheet, KYC papers, Different govt. registration no., MOA, AOA, and

Properties documents)

Pre-sanction visit by bank officers

Check for RBI defaulters list, willful defaulters list, CIBIL data, ECGC caution list,

etc.

Title clearance reports of the properties to be obtained from empanelled advocates

Valuation reports of the properties to be obtained from empanelled valuer/engineers

Preparation of financial data

13

CREDIT APPRAISALProposal preparation

Assessment of proposal

Sanction/approval of proposal by appropriate sanctioning authority

Documentations, agreements, mortgages

Disbursement of loan

Post sanction activities such as receiving stock statements, review of accounts, renew

of accounts, etc

(On regular basis)

14

CREDIT APPRAISAL

CREDIT APPRAISAL AT PNB BANK

FLOWCHART

Credit Appraisal Process

CREDIT APPRAISAL IN ALLAHABAD BANK

15

Not feasible

No Queries

Queries

Feasible

Submission of Project Report along with the Request Letter

Carrying out Due Diligence on the Client

Submission of Proposal to designated Authority (Circle office)

Re-verification and analysis of the Proposal

Submission of Proposal to designated Authority

Preparing Credit Report / Feasibility Report and Risk Rating

Determining of Interest Rate and Preparation of Proposal

Meeting with the client to clarify the queries

Vetting of Credit Risk Rating Report

Approval of request made by the client like Reduction of Interest

Rates etc

Sanction of Proposal on various Terms & Conditions

Acknowledgement of Sanction Terms & Condition by the client

Application to comply with Sanction T&C. Execution of Loan Documents

Disbursement of Sanctioned Amount from the branch office

Procedures at Branch Office Procedures at Circle Office Level

CREDIT APPRAISALAllahabad bank is one of the largest PSB’s in India with a market cap of Rs 5213.83

crore. The bank follows a very exhaustive and effective in the appraisal system. The

credit appraisal at Allahabad Bank is categorized under 3 heads

Pre-sanction process

Project Appraisal

Post-sanction process

I. Pre – sanction process

(i) Receipt of proposal

This step basically deals with how the borrower avails of the loan. In this bank it is

classified into 3 categories

(a) By way of Grant of Bank Guarantee, Bill Discounting and Letter of Credit

(b) Cash Credit/OD

(c) Application of Term loan (short term, medium term & long term)

(ii) Statements to be provided by the borrower

After the proposal is received the borrower is required to submit certain documents to

the lender. The documents are as follows

a) Ownership pattern

b) Highlights and performance of the company

c) Details of the project

d) Profile of the company

e) Cost of the project and Means of the finance

f) Memorandum of Association/ Articles of Association

g) Industry Scenario

h) Board of directors detail

i) Present bank details

16

CREDIT APPRAISALj) Marketability and techno economic feasibility for new projects

k) Present Financial Performance of the company

l) Manufacturing process

m) P&M

n) Cash flow statement/Risk Analysis/Projected profitability/BEP,DSCR,FACR

iii) Pre Credit Appraisal format - The prospective borrower also needs to comply

by submitting the following documents

a) Name of the firm/company/unit

b) Date of incorporation/Commencement of business

c) Existing bank details

d) Proprietors/Partners/Directors (Name, Address, PAN card)

e) Whether the proprietor director are in the defaulter list of RBI or are the

directors disqualified under ICA 1956

f) Line of activity in detail

g) Capacity utilization/Licensed capacity/Installed capacity

h) Details of the cost of the project and the means of finance

i) E.S.C and its shareholding pattern

j) Share price

k) Multiple banking arrangement

l) Loan amount sought for (term loan/cash credit/bank guarantee/LOC)

m) Securities offered (Primary /Collateral/Name of guarantors

iv) Financial Analysis - This evaluates the performance of the company in an overall

manner. Financial analysis includes using discounted cash flow techniques like Net

17

CREDIT APPRAISALPresent Value and Internal Rate of Return. Ratios like current ratio, debt service

coverage ratio forms an important part of the financial analysis.

v) Working Capital Assessment In case of requirement of funds the bank arranges

the finances from other sources. Working Capital is generally computed by the

following manner

For village industries, tiny industries and other SME Up to 5 crore-------20% of the

projected annual sales turnover.

For others up to Rs 2 cr------------Turnover Method

Above 2cr and below 10cr-----------Maximum Permissible Banking Finance Method

Above 10 cr--------------Cash Budget Method

II. PROJECT APPRAISAL - After the pre sanction process the next step is the

project appraisal and it involves the following steps

Planning

Implementation

Commercial Operation Stage

Planning-------Planning involves how to plan the various aspects of the project in

terms of the marketing, technical, financial and economic aspects of the project.

Implementation------This basically involves the implementation of the project. It

involves site inspection, preparation of blueprints and plant design, engineering. For

the implementation the usage of CPM/PERT gives a clear idea with regards to which

step follows what and also avoid any delays if possible.

Commercial Operation Stage – This is the stage where the company produces the

required goods/services and generates the sales. In the short run the firm would be

more focused on ensuring an uninterrupted operation of the fixed assets and ensuring

its foothold in the market. In the long run though the firm would take steps to increase

sales and earn decent profits.

18

CREDIT APPRAISALPayment of Interest/installment amount – Allahabad Bank disburses the funds

during the project implementation stage. For the interest payment it is necessary for

the borrower to maintain a certain expected debt equity ratio. During this period all

the interest charges related to the project is undertaken by the bank itself. The initial

installment will be very low and will be based on how much sales the firm is expected

to generate.

III. POST SANCTION PROCESS

Monitoring of loan accounts

1. Submission of Monitoring formats – Once the loan is disbursed the managers of

the branch needs to keep a firm and constant check on the operation of accounts. The

project should be so carefully monitored that if it runs into trouble it should be

prevented before time. For this the bank develops a Credit Monitoring Report

(constant watch of the accounts to check irregularities).

b. Monitoring of potential NPA------ NPA’s are basically a virus in the body of the

bank. If not removed within time it will corrupt the whole body. Banks profitability

significantly reduces because they are unable to control the NPA’s. Therefore they

need to constantly monitor projects which does not appear feasible or which may not

seem to generate profits. NPA is identified in the following cases

i) When interest is overdue and irregularity is persisting for 45<days<90

ii) No Credit turnover in the account for the last 1 month

iii) Credit turnover is inadequate to cover interest debited

c. Visit by bank officials

Depending at what level the project is progressing the banks need to supervise by

visiting the project location and check whether there are no glitches in the project

d. Stock Audit – Audit is conducted by the banks with a credit limit of Rs 5 crore and

above and conducted once a year.

e. Security Register – This step consists of recording of security documents,

mortgage documents and insurance documents.

19

CREDIT APPRAISALf. Renewal of Limits – The limits of the project is to be assessed within 1 year from

the date of sanction. If the accounts are not reviewed inside the 3 months it will be

treated as irregular.

TYPES OF LENDING ARRANGEMENTS

In a business firm various types of arrangements are available

Single Borrower---One Bank

Single Borrower– Multiple banks (with consortium arrangement)

Single Borrower– Several Banks (without consortium arrangements) – Multiple

Banking

Credit Syndication

a) Single Borrower---One Bank

This type of arrangement is one of the most familiar type of arrangement. Loans

which are generally smaller in size fall under this category. All the financial dealings

need to be done with the one bank only. But this type of arrangement may not favour

the bank since he could be at the risk of dealing with bad loans.

b) Single Borrower– Multiple banks (with consortium arrangement)

When the requirement for the loans is huge in size borrowers opt for this method. This

type of arrangement may reduce the exposure of the risk to a borrower. The banks can

pool in together their expertise, resources, common documentation and also a

common supervision. Even the borrower will not have to face the hassle of availing

multiple credit facilities from various banks. Until any of one of the banks back out

this arrangement stays on.

c) Single Borrower– Several Banks (without consortium arrangements)

Similar to the previous one except that the borrower may avail of the loan from

various banks under different conditions. This facility is much more flexible than the

consortium arrangement as the consortium banking can procrastinate the credit

decisions and ultimately the project.

20

CREDIT APPRAISALd) Credit Syndication – This arrangement is basically among the 2 lending

institutions for providing loan to the prospective borrower. For this a lead manager is

arranged by the borrower who takes the charge for arranging the loan. These two

together make a detailed memorandum and circulate it among the lender banks who

take a view on the proposal. After this the banks convene a meeting with details

related to the strategy of the syndication. Finally all the banks sign the loan

agreement. This arrangement also is properly regulated. Failure to meet the repayment

schedule on time may invite serious action against the borrowers.

21

CREDIT APPRAISAL

CREDIT APPRAISAL ON JAIPRAKASH POWER VENTURES LTD

Background

The Jaypee Group is a conglomerate which is into various business interests like

Engineering & Construction, Power, Cement, Real Estate, Hospitality, Expressways,

IT, Sports & Education not-for-profit). Jaiprakash Power Ventures Limited, a part of

the Jaypee Group was incorporated in 1994. The company was incorporated The

Company was incorporated on December 21, 1994 with the object to set up hydro-

electric or Thermal power projects and for the supply of general electric power. The

company is the largest private sector hydropower company with 1700 MW in

operation. The company is in the business of planning, developing and implementing

power projects in India. Presently the company owns and operates the 300 MW

22

Type : Public

Traded as: BSE: 532627 NSE: JPPOWER

Industry: Conglomerate

Incorporated year: 1994

Headquarters: Solan District, Himachal Pradesh, India

Key People: Manoj Gaur (Chairman)

Industry/Sector: Power Generation/Distribution

Business Activity: Engaged in setting up hydro electric, thermal power projects and general electric power.

Revenue: Rs.2740.50 Crores

Web site: www.jppowerventures.com

CREDIT APPRAISALBaspa-II Hydroelectric Project at District Kinnaur, Himachal Pradesh , 400 MW

Vishnuprayag Hydroelectric project, at District Chamoli, Uttarakhand and 1000 MW

Karcham-Wangtoo at District Kinnaur, Himachal Pradesh. As on 31st March 2014 the

Company had a total workforce of 1973 employees which include Engineers,

Chartered Accountants, managers and other employees.

BUSINESS TRENDS

JPVL has also acquired Bina Power Supply Company Limited (BPSCL) from the

Aditya Birla Group and is setting up a 1250 MW coal fired Thermal Power Plant at

Bina in the State of Madhya Pradesh. JSW Energy was in talks to buy JPJP Power's

Nigrie and Bina thermal power units. JSW Energy thereafter had agreed to buy two

hydropower projects from Jaiprakash Power Ventures Ltd for 97 billion Indian rupees

($1.57 billion) including debt. In February 2015, JSW Energy got approval from CCI

to acquire the 2 hydropower projects. JPV had announced in 2010 of raising $200

million through convertible bonds. The conversion price of the paper, due next month,

was fixed at 85.81 rupees a share. However in Feb 13 JPV announced that it was

likely to default on the payments for convertible bonds worth $200 million. The

reason was the company’s inability to generate sufficient revenues from its operation.

23

CREDIT APPRAISAL

SHAREHOLDING PATTERN (As on 31st March 2014)

PARTICULARS No. of Shares

Promoters 1,868,648,237Others 344,107,873General Public 252,004,086Foreign Institutions 183,414,038Other Companies 118,536,661NBFC and Mutual Funds 110,148,515

Financial Institutions 27,925,944

Foreign - Others 25,067,286Foreign - NRI 8,150,444

TOTAL 2,938,003,084

24

CREDIT APPRAISALBOARD OF DIRECTORS AND ITS MANAGEMENT PERSONNEL (31 st

March 2015)

NAME DESIGNATION PROFILE

Mr. Manoj Gaur Chairman

● A Degree in Civil Engineering from BITS Pilani.

● Rich Experience of around 22 years in Corporate and

Finance related matters he has utilized this experience to

head the helm at the conglomerate.

● Instrumental in setting up the marketing network and

has been associated with various activities of the Jaypee

Group, such as engineering construction, hydro power,

cement, real estate, information technology, and other

initiatives.

● Won the Global Standard Award at NDTV Profit

Business Leadership Awards 2011.

Shri.Sunil Kumar Sharma VC and CEO

● A B.Sc graduate from University of Meerut

● Hands on experience of 30 years in the field of

procurement and management.

● Vast knowledge on various disciplines has been

instrumental in the completion of several engineering

construction projects, including raising the height of the

Lakhya Dam in Karnataka and in the construction of

various hotels.

Mr. Suren Jain MD and CFO

● A Bachelor’s degree in Prod Engineering and has a

experience of around 20 years in fields related to

corporate finance and planning.

● Involved in various capacities of the Jaypee Group and

works in a team which is part of various business

strategies related to the business

● Solely responsible for the construction activities and

the hydro-power wing of the Jaypee group.

25

CREDIT APPRAISAL

Shri B.B. Tandon

Non-Executive Independent Director

● A Bachelor’s Degree in Law and Master’s Degree in

Economics from the University of Delhi

● Held various positions in the Government of India and

Government of Himachal Pradesh including as Principal

Secretary, Power and Chairman, Himachal Pradesh State

Electricity Board.

Shri. Raj Narain Bhardwaj

Non-Executive Independent Director

● Post graduate degree in economics from the Delhi

School of Economics and a Diploma in Industrial

Relations and Personnel Management from Punjabi

University, Patiala.

●Over 37 years of experience with LIC and has served in

various key positions including as its Managing Director

& Chairman. Also held position of director in various

companies

Shri. A. K. Goswami

Non-Executive Independent Director

● A Bachelors’ Degree in Mechanical Engineering

● Over 42 years of work experience in various capacities

with the Central Government and the Government of

Himachal Pradesh, including several senior level positions

such as Secretary, Ministry of Water Resources, and Chief

Secretary amongst other positions.

Shri. S. S. Gupta

Non-Executive Independent Director

● Served in key positions such as the Chairman and CEO

of Himachal Pradesh Electricity Regulatory Commission.

● Also worked with East African Power and Lighting

Company, Kenya.

● Member of the Steering Committee of South Asian

Forum of Infrastructure Regulators.

Shri. Dharam Paul Goyal

Non-Executive Independent Director

● Renowned Hydro-Power Development (Construction

and Contract Management) Expert and carries with him

vast experience of around 48 years in the field of Hydro-

Power Projects.

● Previously working as the Director (Technical) with

Tala Hydro-Electric Project Authority, Bhutan. Shri Goyal

was sent on deputation from HPSEB on Foreign Service

26

CREDIT APPRAISALterms of the Ministry of External Affairs, Government of

India to Tala Hydro- Electric Project Authority

Shri D.P. Lieutenant General (Retired) Ravindra Mohan Chadha

Non-Executive Independent Director

● Over 44 years of experience in conceptualization,

planning, direction and implementation of various projects

especially in personnel management, equipment/

materials, logistics and financial aspects.

● Served in the Indian Army for 40 years before retiring

as a Lieutenant General.

● Joined as President in erstwhile Jaiprakash Power

Ventures Ltd, in 2007 and thereafter appointed as Whole-

time Director in the said Company and was looking after

the operations of 400 MW Vishnuprayag Project at Site.

Shri. Praveen Kumar Singh

Whole-time Director

● Associated with the Jaypee Group for the past 16 years

and has been involved in the construction and

implementation of Karcham-Wangtoo HEP.

● Also involved in the construction of the Indira Sagar

hydro electric project and was the unit in-charge of

Omkareshwar hydroelectric project.

Ms. Sunita JoshiNon-Executive Director

● A Masters’ Degree in International Business

Management and possess about 24 years experience in

related fields especially information technology, IT

education and software development, sales and marketing

and corporate communications.

● A Whole-time Director of JIL Information Technology

Limited.

Shri G.P. Gaur

Non-Executive Independent Director

●More than 38 years of experience in material

management and construction.

● Oversees the purchase & procurement for the projects

related to the JP group.

Shri Arun Bala Krishnan

Independent Director

● B.E (Chemical) from the College of Engineering,

Trichur, Kerala and has Post Graduate Diploma in

Management from the Indian Institute of Management,

Bangalore.

27

CREDIT APPRAISAL● Currently on board of HPCL Mittal Energy Ltd.,

Western Coalfields Ltd., NCDEX (National Commodities

& Derivatives Exchange) Spot Ltd., and KSS Global

BLV.

●Acts as an advisor to Mittal Energy India Services Ltd.

and other companies

Shri S.L. MohanIndependent Director

● Ex - Chairman Cum Managing Director, The Oriental

Insurance Company Ltd.

Shri Atanu SenIndependent Director  

Dr. Jagan Nath Gupta

Non-Executive Independent Director  

Shri S.D.Nailwal

Non-Executive Independent Director  

Shri K.N. BhandariIndependent Director  

BREAK-UP OF EXPENDITURE (31ST Mar 2014)

28

CREDIT APPRAISAL

SWOT ANALYSIS of JP POWER VENTURE LTD

29

CREDIT APPRAISALHelpful

to achieving the objective

Harmful

to achieving the objective

Inte

rnal

ori

gin

STRENGTHS

1. Production process of the plants is high on

efficiency.

2. The company is a subsidiary of the Jaypee

group which is a strong conglomerate

thereby making its presence strong.

3. Use of green technology and upgradations

thereby making the process environmentally

friendly.

WEAKNESSES

1.Huge competition which implies that

only few players dominate the market

and therefore limited market share.

2. Large amount of debts accumulated by

the firm over a consistent period of time.

Ext

erna

l ori

gin

(attr

ibut

es o

f the

env

ironm

ent)

OPPORTUNITIES

1.Company aimed to find new avenues of

power generation due to increase in

competition. By 2020 the demand for the

power is expected to go up to 400000 MW.

2.. The power generation companies are

eligible for a 100% tax deduction as per

Income Tax Act 1961 on the profits for 10

consecutive years. This benefit can be

procured till 2017.

3. Investment in the power sector is expected

to be around Rs 750000 crore from which

the private sector includes nearly half of the

investments

THREATS

1.Failure to meet the targets of power

generation. Increase in the cost of raw

materials like coal which increases the

overall cost of production.

2. Obtaining private investment in power

projects considering the high financial

risk.

3. Getting the required permission for the

land availability and other clearances for

the project

4. Lesser number of employees in this

sector as the candidates prefer more

lucrative opportunities.

30

CREDIT APPRAISALBALANCE SHEET OF JAIPRAKASH POWER VENTURES LTD

BALANCE SHEET AMOUNT IN LACS(` in Lacs)        PARTICULARS 2014 2013 2012 2011I. EQUITY AND LIABILITIES        (1) Shareholders’ Funds        (a) Share Capital 293,800 293,800 262,476 262,476(b) Reserves and Surplus 339,171 350,636 284,024 254,590(3) Deferred Revenue 56,266 48,716 39,207 31,302(4) Non-Current Liabilities        (a) Long-term borrowings 1,737,028 1,580,138 1,310,803 1,173,993(b) Deferred tax liabilities (net) 13,704 14,333 12,344 – (c) Other Long-term liabilities 2,798 3,395 1,253 9,669(d) Long-term provisions 25,310 44,636 35,533 34,672(5) Current Liabilities        (a) Short-term borrowings 19,031 23,707 51 5,082(b) Trade payables 101,280 101,625 81,127 32,952(c) Other current liabilities 317,571 216,814 174,363 31,406(d) Short-term provisions 27,410 16,696 36,561 1,947TOTAL CURRENT LIABILITIES 465,292 358,842 292,102 71,387TOTAL 2,933,369 2,694,496 2,237,742 1,838,089

ASSETS        Non-current assets        (a) Fixed assets         Tangible assets 1,244,873 1,121,680 965,700 307,414 Capital work-in-progress 991,310 911,994 638,377 896,216(b) Non-current investments 500,499 443,417 386,308 360,630(c) Long-term loans and advances 31,104 37,196 68,394 21,596(d) Other non-current assets 13,341 4,176 9,661 10,578(2) Current assets        (b) Inventories 15,834 13,572 4,866 1,753(c) Trade receivables 25,287 45,157 43,036 15,566(d) Cash and bank balances 55,700 58,367 71,581 202,424(e) Short-term loans and advances 51,301 54,993 46,615 16,539(f) Other current assets 4,120 3,944 3,204 5,373TOTAL CURRENT ASSETS 152,242 176,033 169,302 241,655TOTAL 2,933,369 2,694,496 2,237,742 1,838,089

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CREDIT APPRAISAL

The share capital has been increasing from Rs 262476 lacs in 2011 to Rs 293800 in

2014. lacs. As far as the reserves and surplus component is concerned it has increased

at a CAGR of 7% but comparing it to the previous year it has decreased from 350,636

lacs to 339171 lacs. It means that the company may need to keep on hold their

expansion and other strategic plans. The long term debt though has increased majorly

from Rs 1183662 lacs in 2011 to Rs 1739826 lacs in 2014. This states that the

company is more dependent on its external borrowings. The profits have decreased

from the previous years as a result of which the earnings for the shareholders have

reduced. The current assets have reduced by a CAGR of 10.91%.whereas the current

liabilities for the same period have increased by a CAGR of 59% which states that the

company has accumulated debts and they will have to reduce their debts significantly.

32

CREDIT APPRAISAL

INCOME STATEMENT OF JPVL

AMOUNT IN LACSPARTICULARS 2014 2013 2012 2011I. Revenue from operations 267,750 225,262 161,556 73,689II. Other Income 6,300 3,818 7,074 10,385III. Total Revenue 274,050 229,080 168,630 84,074IV. Expenses :        Cost of operation and maintenance 69,981 38,963 4,936 2688Employee benefits expense 7,422 5,739 4,329 2,434Finance costs 144,768 112,409 85,945 44,844Depreciation and amortization expense 44,659 32,389 23,005 9,491Other expenses 5,868 4,669 4,116 2,969Total expenses 272,698 194,169 122,331 62,426V. Profit before exceptional and extraordinary items and tax (III-IV) 1,352 34,911 46,299 21,648VI. Exceptional items Prior Period Expenses 8 – – – VII. Profit before extraordinary items and tax (V-VI) 1,344 34,911 46,299 21,648VIII. Extraordinary items – – – – – 1,002IX. Profit before tax (VII-VIII) 1,344 34,911 46,299 20,646X. Tax Expense :        Net Current Tax – – – – – 4,116(ii) Previous Year - Written Off – 7 -124 -4(iii) Deferred tax charge/(reversal) -629 1,989 6128 4,135XI. Profit/(loss) from operations (IX-X) 1,973 32,915 40,295 16,511XII. Profit/(loss) from continuing operations -21,044 -6,200   – XIII. Tax expense of continuing operations -2,192 -3,196   – XIV. Profit/(loss) from continuing operations (after tax) (XII-XIII) -18,852 -3,004 – – XV. Profit/(loss) from discontinuing operations 22,388 41,111 – – XVI. Tax expense of discontinuing operations 1,563 5,192 – – XVII. Profit/(loss) from discontinuing operations (after tax) (XV-XVI) 20,825 35,919 40,295 – XVIII. Profit/(loss) for the period (XIV + XVII) 1,973 32,915 40,295 16,511XIX. Earnings per equity share :        Before Extraordinary items        (i) Basic 0.07 1.24 1.54 0.84(ii) Diluted 0.06 1.19 1.47 0.67After Extraordinary items        (i) Basic 0.07 1.24 1.54 0.79(ii) Diluted 0.06 1.19 1.47 0.64

33

CREDIT APPRAISALThe sales have increased at a CAGR of 34% from 2011 to 2014. It has increased from

Rs 84074 lacs to Rs 274050 lacs. This shows that in order to reduce its mounting

debts the company is selling off its power plants. The depreciation has also increased

from Rs 9491 lacs in 2011to Rs 44659 lacs in 2014 since the company has increased

the purchase of its assets. The profits of the company have shown a steady decline

from Rs 16511 in 2011 to Rs 1973 lacs in 2014. The declining profits also have had

an impact on the EPS. For the investors EPS forms one of the major criteria for

investing in any company. But investors also look into the operating cash flows of the

company to decide whether or not to invest. The operating cash flow for the company

has been at 0.7 in the year 2014 which is higher than the EPS. This states that the

quality of the earnings is of the highest quality since the company is generating more

revenue from the operations.

RATIOS OF JPV LTD

34

CREDIT APPRAISAL

 RATIOS 2011 2012 2013 2014

35

CREDIT APPRAISAL1

CURRENT RATIO 3.39 0.58 0.49 0.332

QUICK RATIO 3.36 0.56 0.45 0.293 WORKING CAPITAL

TURNOVER RATIO 2.03 -0.73 -0.8 -1.144

DEBT EQUITY RATIO 2.3 2.4 2.49 2.785

DEBT TO ASSETS RATIO 0.7 0.74 0.74 0.776

EQUITY TO ASSETS RATIO 0.28 0.24 0.24 0.227

ASSETS TURNOVER RATIO 20.64 25.38 21.58 22.638 INVENTORY TURNOVER

RATIO 42.04 33.2 16.6 16.919

GROSS PROFIT MARGIN (%) 84.45 92.88 81.32 72.1710

NET PROFIT MARGIN (%) 22.41 24.94 14.61 0.7411 RETURN ON CAPITAL

EMPLOYED (%) 1.17 2.38 1.49 0.0512

RETURN ON EQUITY (%) 3.19 7.37 5.11 0.3113 NET FIXED ASSETS TO NET

WORTH RATIO 0.59 1.77 1.74 1.9714 INTEREST COVERAGE

RATIO 1.62 1.62 1.37 1.0415 EXPENSES TO TOTAL SALES

RATIO 74.25 72.54 84.76 99.516

EARNINGS PER SHARE 0.84 1.54 1.24 0.0717

PRICE EARNING RATIO 41.90 24.42 15.24 172.2918

BOOK VALUE PER SHARE 22.15 20.82 21.93 21.5419

PRICE TO BOOK VALUE 1.59 1.81 0.86 0.5620

PRICE TO SALES RATIO 8.77 5.85 2.42 1.29

1. CURRENT RATIO

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CREDIT APPRAISAL

The current ratio of a company basically shows how good a company is in meeting its

short term debt obligations. Current ratio for the company for the financial year was

3.39:1 in 2011 and due to the increasing debts that the company has incurred this has

drastically declined to 0.58 in 2012, 0.49 in 2013 and 0.33 in 2014. This suggests that

the company needs to sort out its working capital management.

2. ACID TEST RATIO

The acid test ratio is an indicator of a company’s ability to show how quickly it can

convert assets into cash. Inventory been slow moving, it is not included in the acid

test ratio. The ratio has been declining from 3.36 in 2011 to 0.29 in 2014.

3. WORKING CAPITAL TURNOVER RATIO

37

CREDIT APPRAISALLike the other liquidity ratios this ratio also determines how much liquid assets are

present with respect to its liquidity. The higher the net working capital to sales ratio

the better is the ability of the company to meet its debt obligations.

For the year 2010-11 the ratio was 2.03 which is a very satisfactory ratio. But due to

the mounting debt obligations the ratio has been in the red since Mar 2012. The ratio

has plummeted to -1.14 in Mar 2014.

4. DEBT EQUITY RATIO

The debt equity ratio indicates how aggressively a company finances its overall

growth by way of debt. Debt indicates loan and equity means how much capital

the company can bring in. The graph basically shows the debt equity ratio of the

company. The debt equity ratio basically has increased from 2.3 in March 2011 to

2.78 in March 2014. This basically shows the company’s dependence on its debt

portion for financing the growth has increased.

5. DEBT TO ASSETS RATIO

38

CREDIT APPRAISAL

This ratio basically shows the company’s capability to pay off its debt with the help of

the assets. In an ideal scenario a company with higher debts will have a higher debt

ratio which is not ideal for any company. For this ratio the debt ratio is rising very

marginally albeit the ratio is on the higher side. It was 70% in 2011 but in 2014 the

ratio has increased till 77%. The company will require reducing its dependency on its

external borrowings.

6. EQUITY TO ASSETS RATIO

Equity ratio shows how much assets are owned by the investors of the company.

Additionally it also shows how much burden the company has with respect to its debt

portion. As of the present situation the scenario does not look all that favourable for

the company. It has decreased from 28% in 2011 to 22% in 2014.

39

CREDIT APPRAISAL7. ASSETS TURNOVER RATIO

The asset turnover ratio basically determines a company’s ability to generate sales

from its assets. It shows how efficiently a company can generate sales from its assets.

In 2013 it stood at 21.58% but it has risen to 22.63%. For every 1 rupee of asset the

company is generating 22 paise in return. As seen in the graph the assets and the sales

have more or less kept pace with each other.

8. INVENTORY TURNOVER RATIO

This ratio determines a company’s ability to generate sales from its inventory. It also

shows how much stock can be sold in a given period of time. The chart illustrates that

the inventory turnover ratio has decreased from 42 in 2011 to 33 in 2012 and has

declined further to 16.91 in 2014. Given the nature of the industry the company is part

of, it is quite satisfactory that the company is doing a satisfactory job when it comes

to maintaining the inventory ratio.

9. GROSS PROFIT MARGIN

40

CREDIT APPRAISAL

Gross profit ratio connotes the operational efficiency of a firm. The gross profit at this

company shows that it has increased from 84 % in Mar 2011 to 92% in March 2012

thereafter it has steadily declined to around 72% in 2014. This indicates that the

pricing strategy of the company is faulty. It also shows that the company is not been

able to properly maintain the expenses

10. NET PROFIT MARGIN (%)

Net profit ratio is the ratio of profit after tax to sales. To arrive at the net profit all the

costs of administration, financing and production are deducted from it. The net profit

for the firm has had a slight decline in the year 2012 from 22.41% in 2011 to 24.94%

in 2012. Thereafter it has shown a steady decline and in 2014 it has drastically

declined to 0.74% which is very low.

11. RETURN ON CAPITAL EMPLOYED (%)

41

CREDIT APPRAISAL

Return on capital employed portrays a company’s ability to generate return using its

equity and debt. The ROCE has seen a steady decline since 2012. It was around 1.17

%in 2011 and has declined to 0.05%. This indicates that the firm is not been able to

deploy its capital in an effective manner and hence it has not been able to increase its

shareholder’s value.

12. RETURN ON EQUITY (%)

Return on equity also known as return on net worth shows the amount of profit a

company generates on its equity. It shows a company’s ability to depend on its own

capital rather than the outsider’s capital. Much of the company’s financing occurs

through borrowings. The ROE ratio has increased from 3 % in Mar 2011 to 7% in

Mar 2012 and thereafter it has steadily declined to 5%. For 2013-14 the ROE stands at

0.31 which is a very drastic fall down.

13. NET FIXED ASSETS TO NET WORTH RATIO

42

CREDIT APPRAISAL

Net fixed assets to net worth ratio shows how much of the company’s assets are tied

up in fixed assets and how much funds available for the operations of the company.

Ideal ratio for any company is 0.75. The ratio has shown an increasing trend except in

Mar 2013 where it improved marginally.

14. INTEREST COVERAGE RATIO

This ratio basically deals with a company’s ability to pay interest on its debt. It can be

calculated by dividing a company’s EBIT upon its interest. The interest coverage ratio

was 1.69 in Mar 2011 and thereafter it has declined to 1.04 Even though the company

sales figure is growing at an average of 50% yet there seems to be no effect of

decrease in its interest costs. The company is struggling to pay off its debt.

15. EXPENSES TO SALES RATIO (%)

43

CREDIT APPRAISAL

As the name of the ratio it indicates how much expense form as part of the sales. The

expenses have been increasing at a higher rate than usual. In 2014 the expenses have

touched close to 100% which shows that the company is not been able to struggle

with the costs in an effective manner and therefore there is a subsequent decline in the

profits. This ratio can also be used to determine and estimate the future expenses.

16. EARNINGS PER SHARE

EPS shows the net profit earned per share of the company. It shows capability to earn

profits for the investors. EPS can be compared with companies in the same industry.

The EPS has been declining since 2013 from 1.24 to 0.07 in 2014.

17. PRICE EARNING RATIO

44

CREDIT APPRAISAL

PE ratio basically determines the price that the market is willing to pay based on its

earning. It is assumed that higher P/E is better, which shows that the company has

good potential to grow in the near future. A higher ratio indicates that the investors

expect the growth in the future. The PE ratio has been declining since 2011 but in

2014 due to low earnings per share the ratio has risen from 15.24 in 2013 to 172.29 in

2014. It means that the investors are ready to put Rs 172.29 to earn one rupee in the

year 2014.

18. BOOK VALUE RATIO

Book value ratio calculates what a shareholder would receive should the company

liquidates. The growth has been more or less constant. It was Rs 22.15 in 2011 and

has decreased slightly to Rs 21.54 in 2014.

19. PRICE TO BOOK VALUE

45

CREDIT APPRAISAL

Price to Book ratio measures the market price with respect to its book value. Price to

book of JPV has been from 1.81 in 2012 to 0.56 in 2014. This ratio changes due to

change in the market price. There has been a reduction in market price which has

reduced from 35.2 in 2011 to 12.06 in 2014.

20. PRICE TO SALES RATIO

Price to Sales ratio is valuation tool. It may change due to change in the market

capitalization of the firm. It shows how much exchange value every rupee of company

sales. The market value of the share has been decreasing due to a decrease in market

price of the share. For every rupee of sale the exchange is valuing the share at Rs 8.77

in 2011 to Rs 1.29 in 2014.

ALTMAN’S Z SCORE

46

CREDIT APPRAISAL

PARTICULARS 2011 2012 2013 2014Working Capital/Total Assets (X1) 0.09 -0.05 -0.07 -0.11Retained Earnings/Total Assets (X2) 0.01 0.02 0.01 0.0007EBIT/Total Assets (X3) 0.04 0.06 0.05 0.05

Market Capitalization/Total liabilities (X4) 0.54 0.51 0.24 0.13Sales/Total Assets (X5) 0.05 0.08 0.09 0.09ALTMAN'S Z SCORE 0.61 0.53 0.34 0.21

The Altman Z score devise by Edward I. Altman in 1968 is a score which shows the

likelihood of a firm going into bankruptcy. A score below 1.8 suggests that

bankruptcy is likely whereas a score higher than 3.0 suggests that bankruptcy is

unlikely for the next 2 years. Scores in between 1.8 and 3.0 mean that the company is

in grey area. In 2011 the Z score was 0.61 but it slipped to 0.53 in the next year and

further slipped to 0.26 in 2014. Comparing the company’s performance to its

competitors, Reliance Infrastructure has got an average Altman Z score of 1.03, for

Adani Power it stands at 0.44, Tata Power has got an average of 1.01 whereas Jai

Prakash Power Venture stands at 0.44. By analysing the Z score the X3 component

has been more or less stable. The retained earnings component X2 has gone down

majorly since 2012 and has reached the value of 5 in 2014. As far as the market equity

X4 is concerned it has reduced from 0.54 in 2011 to 0.13 in 2014. The liquidity

component X1 has been showing a downward trend from 0.09 to -0.11. The sales

component however has shown a healthy trend. It is showing an increasing trend from

0.05 to 0.09 on account of the sales increasing at 65% rate. On the whole the Z score

has been at a decreasing rate to 0.21 at -29%. In all of the years above, the company is

in distress zone.

47

CREDIT APPRAISAL

WEIGHTED AVERAGE OF VALUATION

PRESENT VALUE OF THE FIRM(Rs in lacs)48

CREDIT APPRAISAL

VALUATION TYPE Present Value of the firm Weights Weighted average value

DCF 2228650 33.34% 743032Price Book Valuation 354323 33.33% 118096Price Earning Valuation 210067 33.33% 70015TOTAL   100.00% 931143Number of Outstanding shares     29380Value of Equity share     31.69

For valuing the company 3 methods have been utilized and have been given an equal

weight age. The total value of the firm comes to around Rs 931143 lacs. The value of

the share comes to around Rs31.69. For the year 2014 the market price stands at Rs

12.06. It can be stated that the share is undervalued and it is recommended that the

share may be purchased. The reasons for the stock being undervalued are

The company has not been paying dividends for the past 4 years since it

intends to utilize the earnings Company’s expansion plans/investment in

subsidiaries executing power projects.

The stock of the company is not a household name. The shares do have

potential but there is lack of visibility on the same.

The rising debts of the company have has caused the public to panic and

ultimately based on the market sentiments it is the investor which speculate

and dictate the market price.

The company’s declining profits been lower than expectation have led to the

investors sell their share and causing the stock price to fall down.

Expected mergers and acquisition had been called off like the TAQA India

Power Ventures Limited who in principal had agreed to buy two hydroelectric

power but later backed out of the expected deal. This called the share prices to

decline considerably.

FINDINGS

49

CREDIT APPRAISAL The decisions that the management undertake in various areas of business

eventually has a long lasting effect on the fate of the company and its

stakeholders. A management with a good reputation is able to handle the

toughest of the situations. An investor basically will invest in a company that

has a sound management. The management of the company has a vast amount

of experience in various disciplines and have the ability to take the right

decisions at the right time.

The total expenses of the company stood at Rs 2726.98 crores of which

majority of the expenses of the company go into paying the finance costs

which stood at around Rs 1447.68 crores, nearly 53% of the total expenses.

Even the cost of operation and maintenance goes to around Rs 699.81 crores

which constitutes to around 25% of the expenses.

For the SWOT analysis to reduce the mounting debts the companies should try

and obtain private investments to reduce the mounting debts.

As per the balance sheet, the company may need to keep on hold their

expansion and other strategic plans. The reserves and surplus has decreased

from 350,636 lacs to 339171 lacs. The long term debt though has increased

majorly from Rs 11836.62 crores in 2011 to Rs 17398.26 crores in 2014. This

states that the company is more dependent on its external borrowings. The

profits have decreased from the previous years as a result of which the

earnings for the shareholders have reduced. The current assets have reduced

by a CAGR of 10.91%.whereas the current liabilities for the same period have

increased by a CAGR of 59% which states that the company has accumulated

debts and they will have to reduce their debts significantly.

The sales have increased at a CAGR of 34% from 2011 to 2014. It has

increased from Rs 840.74 crores to Rs 274050 crores. This shows that in order

to reduce its mounting debts the company is selling off its power plants. The

profits of the company have shown a steady decline from Rs 165.11 crores in

2011 to Rs 19.73 crores in 2014. The declining profits also have had an impact

on the EPS. The operating cash flow for the company has been at 0.7 in the

year 2014 which is higher than the EPS. This states that the quality of the

50

CREDIT APPRAISALearnings is of the highest quality since the company is generating more

revenue from the operations.

Current ratio for the company for the financial year was 3.39:1 in 2011 and

due to the increasing debts that the company has incurred this has drastically

declined to 0.58 in 2012, 0.49 in 2013 and 0.33 in 2014. This suggests that the

company needs to sort out its working capital management. The debt equity

ratio basically has increased from 2.3 in March 2011 to 2.78 in March 2014.

This basically shows the company’s dependence on its debt portion for

financing the growth has increased.

In 2013 the asset turnover ratio stood at 21.58% but it has risen to 22.63%. For

every 1 rupee of asset the company is generating 22 paise in return. The gross

profit at this company shows that it has increased from 84 % in Mar 2011 to

92% in March 2012 thereafter it has steadily declined to around 72% in 2014.

The interest coverage ratio was 1.69 in Mar 2011 and thereafter it has declined

to 1.04 in 2011. The company is struggling to pay off its debt.

The PE ratio has been declining since 2011 but in 2014 due to low earnings

per share the ratio has risen from 15.24 in 2013 to 172.29 in 2014. It means

that the investors are ready to put Rs 172.29 to earn one rupee in the year

2014.

The Altman Z score devise by Edward I. Altman in 1968 is a score which

shows the likelihood of a firm going into bankruptcy. In 2011 the Z score was

0.61 but it slipped to 0.53 in the next year and further slipped to 0.26 in 2014.

For valuing the company 3 methods have been utilized and have been given an

equal weight age. The total value of the firm comes to around Rs 9311.43

crores. The value of the share comes to around Rs 31.69. The stock is grossly

undervalued for many reasons like declining profits, no visibility of the stock,

high debts, market sentiments and failed mergers and acquisitions.

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CREDIT APPRAISAL

CONCLUSIONS

By conducting a credit appraisal on the company the company’s performance

is not satisfactory on all the grounds especially the financials. As far as the

whether JPV will be eligible for availing loan it can be noted that the company

may need to concentrate on reducing its massive amount of debt before

availing further credit.

In terms of appraising the company the qualitative tools needs to be given due

importance. As far as the qualitative criteria is concerned the promoter’s

contribution, evolution of the company, management quality, M &A,

environment evaluation, strategies of the business and the past record are one

of the most valuable tools for evaluating the company. SWOT analysis can be

one of the tools that can be utilized as it help[s the firm to find out whether the

company is performing well, understand the external and the internal factors

affecting its performance and also evaluate the business for any future course

of action. Also the Porter’s five forces can act as an effective tool in

determining the overall industrial purview.

Banks need to maintain a full proof credit appraisal system failing which they

can run the risk of running into high NPA’s. Banks need to be accustomed to

apply modern technology to mitigate risk.

Though different banks follow different procedures for the credit appraisal yet

most of the banks follow a rigorous credit appraisal procedure.

Ratio analysis remains one of the quantitative tools used by banks for credit

appraisal even if though the result is historical in nature and cannot give any

estimate about the future earnings. Altman Z-score gives a comprehensive

view based on the financials of the company although it may not be totally

suitable for evaluating the power industry.

Valuation techniques can pitch in the lacunae where ratio analysis fails to do

so. Even though valuations are based purely on assumptions yet it acts as a

fortune teller; it gives a projected results based on the financial results.

For a comprehensive credit appraisal, banks may need to apply a perfect mix

of both quantitative as well as qualitative tools. Banks should understand the

nature of the business thoroughly and the market conditions and accordingly

makes the right judgment.

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CREDIT APPRAISAL

RECOMMENDATIONS

53

CREDIT APPRAISAL In terms of the overall appraisal of the company, Jaiprakash Power Ventures is

performing at below its expectations. Although the financials and other

parameters have not been favourable yet the management with its experience

can turnaround the situation and significantly reduce its debt proportion.

The company would benefit if it enters into debt restructuring which will

reduce the debt and extend the payment term. Alternatively the company can

go for the debt-for- equity swap in which the creditors will reduce some of its

debt in turn for the equity in the company.

BIBLIOGRAPHY

54

CREDIT APPRAISAL

Books

1. “Credit and banking” By K. C. Nanda, March 2002.

2. “Project Financing” by H.P.S.Pahwa and Mahesh Puliani 3rd Edition (1993)

Newspaper and journal

1. “Credit Risk Analysis in Indian Commercial Banks – An empirical

investigation” by Swarnajeet Arora, March 2013.

2. “Banking Risk Management in India and RBI Supervision” by Ravi Agarwal,

August 2009.

3. “Investment Appraisal Process in the Banking & Finance Industry.” by Akalu

and Turner, February 2002.

4. “Overview of Banking Industry in India” by BT Vadhar (2011).

5. “Understanding Credit Appraisal in Banks” by Kamal Chattopadhyay by

December 2011, 5th edition.

6. “Credit Is Inevitable In Banking: A Case Study Of Premier Bank On Credit

Appraisal & Assessment” by Dr. Ram Jass Yadav 2003.

Website

1. www.businesstoday.intoday.in

2. www.cea.nic.in

3. www.bloomberg.com

4. www.economictimes.indiatimes.com

5. www.thehindubusinessline.com

6. www.business-standard.com

7. www.moneycontrol.com

8. www. rbi .org .

Company reports

1. www.jppowerventures.com

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