Jai Prakash Power Venture - Credit Appraisal

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
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 APPRAISAL
RESEARCH 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
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CREDIT APPRAISAL
type’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.
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CREDIT APPRAISAL
OBJECTIVES
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
LIMITATIONS
1. 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.
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CREDIT APPRAISAL
OVERVIEW
“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
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CREDIT APPRAISAL
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.
2. 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.
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CREDIT APPRAISAL
INTRODUCTION 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
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CREDIT APPRAISAL
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.
While 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.
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CREDIT APPRAISAL
CREDIT 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
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CREDIT APPRAISAL
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
decision 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.
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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
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CREDIT APPRAISAL
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. This 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
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CREDIT APPRAISAL
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.
5. 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.
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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
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CREDIT APPRAISAL
Valuation reports of the properties to be obtained from empanelled valuer/engineers
Preparation of financial data
Proposal 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)
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CREDIT APPRAISAL
CREDIT APPRAISAL AT PNB BANK
FLOWCHART
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
Disbursement of Sanctioned
Amount from the branch office

CREDIT APPRAISAL
Credit Appraisal Process
CREDIT APPRAISAL IN ALLAHABAD BANK
Allahabad 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
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Procedures at Branch Office Procedures at Circle Office Level

CREDIT APPRAISAL
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
j) 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)
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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
Present 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
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• 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.
Payment 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
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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.
f. 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
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CREDIT APPRAISAL
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.
d) 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.
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CREDIT APPRAISAL
CREDIT APPRAISAL ON JAIPRAKASH POWER VENTURES
LTD
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 APPRAISAL
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
Baspa-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
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CREDIT APPRAISAL
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.
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CREDIT APPRAISAL
SHAREHOLDING PATTERN (As on 31st
March 2014)
PARTICULARS
No. of Shares
Promoters 1,868,648,237
Others 344,107,873
General Public 252,004,086
Foreign Institutions 183,414,038
Other Companies 118,536,661
NBFC and Mutual Funds 110,148,515
Financial Institutions 27,925,944
Foreign - Others 25,067,286
Foreign - NRI 8,150,444
TOTAL 2,938,003,084
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CREDIT APPRAISAL
BOARD OF DIRECTORS AND ITS MANAGEMENT PERSONNEL (31st
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.
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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
terms of the Ministry of External Affairs, Government of
India to Tala Hydro- Electric Project Authority
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CREDIT APPRAISAL
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 Joshi
Non-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.
● Currently on board of HPCL Mittal Energy Ltd.,
Western Coalfields Ltd., NCDEX (National Commodities
& Derivatives Exchange) Spot Ltd., and KSS Global
BLV.
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CREDIT APPRAISAL
●Acts as an advisor to Mittal Energy India Services Ltd.
and other companies
Shri S.L. Mohan
Independent
Director
● Ex - Chairman Cum Managing Director, The Oriental
Insurance Company Ltd.
Shri Atanu Sen
Independent
Director
Dr. Jagan Nath
Gupta
Non-Executive
Independent
Director
Shri S.D.Nailwal
Non-Executive
Independent
Director
Shri K.N. Bhandari
Independent
Director
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CREDIT APPRAISAL
BREAK-UP OF EXPENDITURE (31ST
Mar 2014)
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CREDIT APPRAISAL
SWOT ANALYSIS of JP POWER VENTURE LTD
Helpful
to achieving the objective
Harmful
to achieving the objective
Internalorigin(attributesofthesystem)
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.
Externalorigin
(attributesoftheenvironment)
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.
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CREDIT APPRAISAL
BALANCE SHEET OF JAIPRAKASH POWER VENTURES LTD
BALANCE SHEET AMOUNT IN LACS
(` in Lacs)
PARTICULARS 2014 2013 2012 2011
I. 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 1,947
TOTAL CURRENT
LIABILITIES 465,292 358,842 292,102 71,387
TOTAL 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
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CREDIT APPRAISAL
(e) Short-term loans and
advances 51,301 54,993 46,615 16,539
(f) Other current assets 4,120 3,944 3,204 5,373
TOTAL CURRENT ASSETS 152,242 176,033 169,302 241,655
TOTAL 2,933,369 2,694,496 2,237,742 1,838,089
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.
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CREDIT APPRAISAL
INCOME STATEMENT OF JPVL
AMOUNT IN LACS
PARTICULARS 2014 2013 2012 2011
I. Revenue from operations 267,750 225,262
161,55
6 73,689
II. Other Income 6,300 3,818 7,074 10,385
III. Total Revenue 274,050 229,080
168,63
0 84,074
IV. Expenses :
Cost of operation and maintenance 69,981 38,963 4,936 2688
Employee benefits expense 7,422 5,739 4,329 2,434
Finance costs 144,768 112,409 85,945 44,844
Depreciation and amortization expense 44,659 32,389 23,005 9,491
Other expenses 5,868 4,669 4,116 2,969
Total expenses 272,698 194,169
122,33
1 62,426
V. Profit before exceptional and extraordinary
items and tax (III-IV) 1,352 34,911 46,299 21,648
VI. Exceptional items Prior Period Expenses 8 – – –
VII. Profit before extraordinary items and tax
(V-VI) 1,344 34,911 46,299 21,648
VIII. Extraordinary items – – – – – 1,002
IX. Profit before tax (VII-VIII) 1,344 34,911 46,299 20,646
X. Tax Expense :
Net Current Tax – – – – – 4,116
(ii) Previous Year - Written Off – 7 -124 -4
(iii) Deferred tax charge/(reversal) -629 1,989 6128 4,135
XI. Profit/(loss) from operations (IX-X) 1,973 32,915 40,295 16,511
XII. 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 – –
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CREDIT APPRAISAL
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 16,511
XIX. 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 0.67
After Extraordinary items
(i) Basic 0.07 1.24 1.54 0.79
(ii) Diluted 0.06 1.19 1.47 0.64
The 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.
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CREDIT APPRAISAL
RATIOS OF JPV LTD
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CREDIT APPRAISAL
1. CURRENT RATIO
37
RATIOS 2011 2012 2013 2014
1
CURRENT RATIO 3.39 0.58 0.49 0.33
2
QUICK RATIO 3.36 0.56 0.45 0.29
3 WORKING CAPITAL
TURNOVER RATIO 2.03 -0.73 -0.8 -1.14
4
DEBT EQUITY RATIO 2.3 2.4 2.49 2.78
5
DEBT TO ASSETS RATIO 0.7 0.74 0.74 0.77
6
EQUITY TO ASSETS RATIO 0.28 0.24 0.24 0.22
7
ASSETS TURNOVER RATIO 20.64 25.38 21.58 22.63
8 INVENTORY TURNOVER
RATIO 42.04 33.2 16.6 16.91
9
GROSS PROFIT MARGIN (%) 84.45 92.88 81.32 72.17
10
NET PROFIT MARGIN (%) 22.41 24.94 14.61 0.74
11 RETURN ON CAPITAL
EMPLOYED (%) 1.17 2.38 1.49 0.05
12
RETURN ON EQUITY (%) 3.19 7.37 5.11 0.31
13 NET FIXED ASSETS TO NET
WORTH RATIO 0.59 1.77 1.74 1.97
14 INTEREST COVERAGE
RATIO 1.62 1.62 1.37 1.04
15 EXPENSES TO TOTAL SALES
RATIO 74.25 72.54 84.76 99.5
16
EARNINGS PER SHARE 0.84 1.54 1.24 0.07
17
PRICE EARNING RATIO 41.90 24.42 15.24 172.29
18
BOOK VALUE PER SHARE 22.15 20.82 21.93 21.54
19
PRICE TO BOOK VALUE 1.59 1.81 0.86 0.56
20
PRICE TO SALES RATIO 8.77 5.85 2.42 1.29

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
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CREDIT APPRAISAL
Like 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
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CREDIT APPRAISAL
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
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
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CREDIT APPRAISAL
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.
7. 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
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CREDIT APPRAISAL
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
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
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CREDIT APPRAISAL
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 (%)
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 (%)
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CREDIT APPRAISAL
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
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.
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CREDIT APPRAISAL
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 (%)
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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.
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CREDIT APPRAISAL
17. PRICE EARNING RATIO
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.
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CREDIT APPRAISAL
19. PRICE TO BOOK VALUE
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
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CREDIT APPRAISAL
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
PARTICULARS 2011 2012 2013 2014
Working Capital/Total Assets (X1) 0.09 -0.05 -0.07 -0.11
Retained Earnings/Total Assets (X2) 0.01 0.02 0.01 0.0007
EBIT/Total Assets (X3) 0.04 0.06 0.05 0.05
Market Capitalization/Total liabilities (X4) 0.54 0.51 0.24 0.13
Sales/Total Assets (X5) 0.05 0.08 0.09 0.09
ALTMAN'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
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CREDIT APPRAISAL
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.
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CREDIT APPRAISAL
WEIGHTED AVERAGE OF VALUATION
PRESENT VALUE OF THE FIRM(Rs in lacs)
VALUATION TYPE Present Value of the firm Weights
Weighted average
value
DCF 2228650 33.34% 743032
Price Book Valuation 354323 33.33% 118096
Price Earning
Valuation 210067 33.33% 70015
TOTAL 100.00% 931143
Number of
Outstanding shares 29380
Value 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.
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CREDIT APPRAISAL
 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
 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
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CREDIT APPRAISAL
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 earnings 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.
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CREDIT APPRAISAL
 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.
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.
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CREDIT APPRAISAL
 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
 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.
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CREDIT APPRAISAL
BIBLIOGRAPHY
Books
57

CREDIT APPRAISAL
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
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CREDIT APPRAISAL
7. www.moneycontrol.com
8. www.rbi.org.
Company reports
1. www.jppowerventures.com
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Jai Prakash Power Venture - Credit Appraisal

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