CCL Project

HAPTER -- 1 C HAPTER

1

C OAL   A R EVIEW  OAL  I NDUSTRY  NDUSTRY I N  N I NDIA-  NDIA-  A R  EVIEW  Coal Mining first sta st arted in India India in the yea year 1815. The priva private R ailwa lway y Com p  paanies sta started mining ac activities tivities in the yea ye ar 1850. The R ailwa lway y Boa oard rd  Naati  N tio onal alized ized the coal mining in 1925. The R ailwa lway y coll collieries ieries were tr ansferred to to the Coal Boa oard rd in the yea year 1944. Coal mining thr ough ough nati tio onal se secctor first sta st arted fr om om 01.10.1956 with the establ est ablish ishm ment of Nati tio onal Coal Deve Develo lo p  pm ment. After Na Nati tio onal aliz izaati tio on o f NonCok ing ing Coal se secctor in 1973 NC NCDC  b  beecom comee the Centr al al Divisi Divisio o n o f  f Coal Coal Mines Auth tho ority Ltd. Aga Again in the yea year 1975 with the re-o re-org rgaaniz nizaati tio on o f  f C CMAL as Coal Indiaa Ltd. Centr al Indi al Divisi Divisio o n of  f C CMAL wa wass k now own n as Centr al al Coal Coalfie fiellds Lim Limited (CC CCL). L). CCL wa CCL wass again re-o re-org rgaanized in the yea year 1986 and two t wo sep sepaar ate com p  paanies k now own n as Northern Coal Coalfie fiellds Lim Limited and Mahanadi Coal Coalfie fiellds Lim Limited cam camee into into existencce. existen

2

C OAL   A R EVIEW  OAL  I NDUSTRY  NDUSTRY I N  N I NDIA-  NDIA-  A R  EVIEW  Coal Mining first sta st arted in India India in the yea year 1815. The priva private R ailwa lway y Com p  paanies sta started mining ac activities tivities in the yea ye ar 1850. The R ailwa lway y Boa oard rd  Naati  N tio onal alized ized the coal mining in 1925. The R ailwa lway y coll collieries ieries were tr ansferred to to the Coal Boa oard rd in the yea year 1944. Coal mining thr ough ough nati tio onal se secctor first sta st arted fr om om 01.10.1956 with the establ est ablish ishm ment of Nati tio onal Coal Deve Develo lo p  pm ment. After Na Nati tio onal aliz izaati tio on o f NonCok ing ing Coal se secctor in 1973 NC NCDC  b  beecom comee the Centr al al Divisi Divisio o n o f  f Coal Coal Mines Auth tho ority Ltd. Aga Again in the yea year 1975 with the re-o re-org rgaaniz nizaati tio on o f  f C CMAL as Coal Indiaa Ltd. Centr al Indi al Divisi Divisio o n of  f C CMAL wa wass k now own n as Centr al al Coal Coalfie fiellds Lim Limited (CC CCL). L). CCL wa CCL wass again re-o re-org rgaanized in the yea year 1986 and two t wo sep sepaar ate com p  paanies k now own n as Northern Coal Coalfie fiellds Lim Limited and Mahanadi Coal Coalfie fiellds Lim Limited cam camee into into existencce. existen

2

Coal India Limited Li mited ±A PROFILE

ublic sec sector u r  undertak  ndertak ing ing of the India Indian Go Governm vernment. It is Coal India Limited (CIL) is a publi the wor  wor ld's largest largest coal miner. It is owned owned entirel entirely  by  by the Unio Unio n Go G overnm vernment, under the administr ative contr  contr ol ol o f the Ministry of  Coal. Coal. It is invol involved ved in coal mining and  pr oducti uctio on indu industry.

Coal India India Lim Limited (C (CIL) is a Schedul hedulee 'A' 'Na 'Navr atna tna' Publi ublic Sec Sector Undertak  Undertak ing ing under  Ministry o f Coal f Coal,, Go Governm vernment of India India, with Hea Headqua dquarters rters in K olkat olkata, West Bengal Bengal.. CIL is the singl single largest largest coal pr oducing ucing com pa  pany in the wor  wor ld and the largest largest corp corpo or ate em plo  ployer yer in the country country with manp manpow ower  er  of 409,332 (a (as on 1 July uly 2009). With pr oven coal reserves of 105.82 Bill Billiio n To T onnes out out of to total reserves o f 267 Bill Billiio n To T onnes (a (as on 1 April April 2009) Coal India India plays lays a pivo pivotal r ole ole in India Indian energy sc scena enario rio.

CIL contri contri butes  butes ar ound ound 85% of coal production in India ; it is the largest largest com pa  pany in the Wo Wor ld in ter ms o f  coal pr oducti uctio on. Em plo  ploys ys nea near ly 4.25 Lak  Lak h perso persons and is the largest largest corp corpo or ate em plo  ployer yer in the country. country. It is one o f the largest largest Com pa  panies in the country, country, tu turno rnover  b ver  being eing ar ound ound Rs. 386.31  bi  billi llion in 2007-08. It is one o f the largest largest ta tax  pa  payers (Co (Corp rpo or ate Tax Rs.35.75  bi  billi llio n) in 2007-08 and has paid Dividend of Rs17.054 Bill Billiio n to to the Go Govt. of India India in 2007-08.

VISION: To emerge fr om om the po positio sition of domesti omesticc leader to to leading global global player layer in the energy sec sector  by  by ado pting b  pting  best est pr acti acticces fr om om mine to to mar  mar k  ket e  t with du due care care to to envir onmental ental and soci oc ial sustena stenance.

MISSION: Pr oduce uce the pla planned nned qua quantity ntity o f  coal effic efficientl iently and econ conomi omically cally with du due rega regard to safety, conserv conservaatio tion & qual quality. ity.

3

st

was f or med on 21 October, 1975 as a holding olding com pa  pany with five Coal India Limited was subsidi ubsidiaaries: y

Bha Bhar at Cok ing ing Coal Lim Limited (BCC (BCCL),L),- Dha Dhan bad  bad

y

Centr al al Coalfie Coalfiellds Lim Limited (CC (CCL), L), -R anchi

y

Western Coalfie Coalfiellds Lim Limited (WC (WCL),- Na Nagpu gpur regio region

y

Eastern Coalfie Coalfiellds Lim Limited (EC (ECL),- Asa Asansol nsol

y

Centr al al Mine Pla Planning nning and Design Institu Institute Lim Limited (C (CMPDIL), -R anchi

Several years later, FOUR more subsidiaries were added: y

Mahanadi Coalfie Coalfiellds Lim Limited (MC (MCL), -R aulk  aulk ela

y

South outh Ea Eastern Coalfie Coalfiellds Lim Limited (SEC (SECL), -Bila -Bilasp spu ur 

y

 No  North Ea Eastern Coalfie Coalfiellds Lim Limited (NEC (NECL), -direc -directly under  contr  contr ol ol o f  coal India India limited

y

 No  Northern Coalfie Coalfiellds Lim Limited, Singr auli auli (NC (NCL), -Singr auli auli

The perf or man mance evalua evaluati tio on is ba is  based sed on its annual nnual perf or man mance.

PERFORMANCE RATING: The perf or man mance r ating is do done in the f ollowing ollowing way: way:     

5% more more tha than the ta target Equal Equal to the ta target 5% less tha than the ta target 10% less tha than the ta target 15% less tha than the ta target

-- Exc Excellent llent -- Very Good oo d -- Good ood -- Fair  -- Poor  oor 

CIL Board has the following fo llowing members:      

Chair man man CIL Functio tional Direc Director  Additio Additio nal Sec Secreta retary, MCC MCC Joint Sec Secreta retary & Fina Financial Adviso Advisor, MOC MOC Representa Representative fr om om R ailway lway Boa Board rd Two CMDs of sub subsidi sidiaary com pa  pany 4

C ENTRAL C OALFIELDS L IMITED (CCL), R  ANCHI, J HARKHAND  Introduction Of CCL: Central Coalfields Limited (CCL) is a subsidiary of  Coal India Limited (CIL) a Government of India undertak ing. CCL managing the nationalized coal mines of Centr al division of  Coal Mines Authority. CCL Notified as a Mini Ratna status in 2007. Its Registered and Corpor ate office is "Dar  bhanga House", R anchi, Jhar k hand.

Presently CCL has:

 Number of Mines Washeries

Wor ks  ho p

Oper ating Coalfields

63 Mines (26 Undergr ound & 37 Opencast mines) 7 Washeries 4 Medium Cok ing Coal Washeries 3 Non-Cok ing Coal Washeries 1 Centr al Wor ks  ho p,5 Regional Wor ks  ho p (The Centr al W/S & 3 Regional W/S are ISO 9001) 6 (East Bokar o, West Bokar o, North K ar anpur a , South K ar anpur a, R amgarh & Giridih)

Coal Reserves (up to 600 meter)

Medium Cok ing Coal  Non-Cok ing Coal Total Reserve Pr oved

14.023 B.T. 19.539 B.T. 33.562 B.T. 16.006 B.T. (48% of total reserve)

5

CCL is having 940 cr. Issued ca pital. Its main f unctions are PRODUCTION and SALE of  coal.Appr ox 90% of the total coal is sold on credit basis mainly to the public sector units, such as PSEB, HSEB, DVC, NTPC, JSEB, UPRVUNL, TVNL, SAIL etc. and remaining 10% on cash basis mainly to private sector units. CCL has played a major r ole in socio-economic gr owth of Jhar k hand region. In 47 years of its existence it has virtually br ought out develo pment in many backward areas thr ough its mining activities, em ployment o pportunities and reaching basic infr astr ucture to sever al remote and inaccessi ble areas. CCL also strive to hel p in establishing Coal based industries in this region and also to reach coal as domestic f uel to homes with an objective of im pr oving f orest cover.

MAJOR CONSUMERS OF CCL

A. Power Houses : 

Jhar k hand State Electricity Board



Bihar State Electricity Board



Damodar Valley Corpor ation



 N.T.P.C.



P.S.E.B.



G.S.E.B.



Delhi Vidyut Board

B. Steel Plants: 

SAIL



VIZAG Steel



TISCO

C. R ailways D. Government Parties: 

Defence



H.E.C.



Fertilizers



B.H.E.L.

6

E. Private Parties: 

Lemo Cement Com pany



Indian Aluminium Com pany Ltd.



Tata Sponge Ir on Ltd.



 National Fertilizer Limited, etc.

Coal Types : Chemically µCoal¶ is made of car  bon, hydr ogen, oxygen, nitr ogen and some other  im purities. The main constitutes of coal are: Car  boneous

Non- Car  boneous

Vitarin

Ash

Clarin

Moisture Volatile matter  Fixed Car  bon

Basically Coals are Four types: 1)

Anthr acite

2)

Bituminous

3)

Lignite

4)

Peat

CCL is mainly concerned with bituminous coal. These are mainly of two types:1)

Cok ing coal

2)

 Non- cok ing coal

Coking coal is that variety of coal which contains less per centage of ash and has high heat value. It can be converted into hard cok e which is suitable f or ir on and steel industry. Non ±coking coal is that variety of coal which contains high per centage of ash and has low heat value.

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METHOD OF EXTRACTION OF COAL

Coal is obtained fr om the earth¶s surf ace called mines. Mines are of two types:

1)

OPENCAST MINES: In this type of mine, attem pt is made to reach the level of coal seam with the hel p of  technology, by removing the over   burden (i.e. after removing everything lying above the coal seam). For this heavy machines lik e HEMM (Heavy Earth Moving Machine) are used and the manpower is reduced.

2)

UNDERGROUND MINES: In this type of mine technology attem pts to reach the coal seam not  by removing the over   burden but thr ough a pit. These mines are in those areas where the coal seam is deep. The over  burden remains intact and the wor ke  rs dig the gr ound.

The wor ke  rs are sent to the level of coal seam either thr ough shaft (an inclination) or  thr ough lift i.e. DOLI. There is o ptimum utilization of manpower in these mines.

In this type of mines, there is high risk of accidents due to the f all of r oofs and sides. In order to avoid these accidents thr ust is given to pr ovide su pport of green r oof with steel su pports lik e steel cogs, pit pr o ps, r oof  bolts, W-str a ps, etc.

8

V ISION & M ISSION O F CCL 

VISION:

"Committed to create eco-friendly mining"  y

y

The Mission of CCL is to pr oduce and mar ke  t the planned quantity of coal and coal pr oducts efficiently and economically with due regard to safety, conservation and quality. The main thr ust of CCL in the present context is to orient its o per ations towards mar ke  t requirements maintaining at the same time financial viability to meet the resour ce needs.

MISSION:

"To become a World class, Innovative, Competitive & Profitable Coal Mining Operation to achieve Customer Satisfaction as top priority." 

9

MAIN OBJECTIVE OF CCL:

1. Coal mining thr ough efficiently o per ated mines. 2. Besides f ulfilling coal needs of the customer in ter ms of quantity, f ocus on quality, value addition and beneficiation to the satisf action of the customers. 3. Mar ke  ting of coal as main pr oduct. 4. To o ptimize gener ation of internal resour ces by im pr oving pr oductivity, preventing wastage and to mobilize adequate external resour ces f or meeting investment needs. 5. To maintain high standards of safety f or accident free coal mining thr ough safe mining pr actices and continuous safety audit and risk assessment. 6. To conserve envir onment thr ough of committed plan f or reclamation and  plantation. 7. To intr oduce mass pr oduction technology lik e continuous miners etc. f or enhancing undergr ound pr oduction of quality coal. 8. To o per ate mega o pencast pr ojects using ca pacity equipment with higher  availability and utilization. 9. Explor ation and pr ospecting. 10. Policy f or mulation and advisory f unction. 11. Secured thr ough long ter m Maintenance And Repair Contr act (MAR C). 12. To beneficiate coal on a substantially larger scale by adding new ca pacities and su pplying quality coal as per customer ¶s choice. 13. To pr ovide adequate number of sk illed manpower to r un the o per ations and im part technical and managerial tr aining f or u pgr adation of sk ill. 14. To create an enabling envir onment f or f ull realization of em ployee¶s potential thr ough mindset change, customized HRD pr ogr ammes and synergic tr ams.

10

ROLE OF CCL

1.

To get im plemented the policy and pr ogr am laid down by the Govt. of India. CIL ensures wor k ing in accordance with the guidelines and directions issued by them fr om time to time.

2.

To k eep them inf or med of the pr ogr am to im plementation of their policies and  pr ogress in accordance with the guideline and direction issued  by them.

3.

To plan and carryout all o per ations in such a manner that there is no risk  of loss, in jury or damage to the health of wor kman.

4.

To tak e care of housing, water su pply, recreational, educational, medical and other f acilities f or the social security of em ployees to the extent it is reasonable and pr acticable.

5.

To dr aw annual plans f or pr oduction, prepar ations and dispatch of coal connect activities k eeping in priority wise demand.

6.

To maintain store of equipment spares and others materials to that necessary items are available in time without unduly block ing ca pital f or purpose.

7.

To install, maintain and o per ate plant and machinery pr o per ly so that they are available f or  wor k ing to the maximum extent and to utilize them in the  best  possi ble manner.

8.

To arr ange necessary f und and utilize that in the most f avor able manner.

9.

To maintain har monious industrial relation.

10. To constr uct new pr ojects to meet the f uture requirements and to ensure timely

communication and com pletion of  jobs. 11. To ado  pt techniques and methods of  wor ki  ng such that loss  by ways similar to

others reasons and blockages of reserved in barriers etc. 12.

To k eep down cost in all possi ble ways so as to get maximum pr ofit. 11

ORAGANISATIONAL STRUCTURE :

Shri R. K. SAHA (CMD)

Shri A. Chatterjee Director(Finan ce)

Cash

Accounts

T.K. Chand Director(Personnel)

G.M (Finance)

Chief (IAD)

G.M (Systems)

Cost and Budgeting

Tax

IAD

T.K.Nag Director (T)(Operation)

Director (P&P)

ADMINISTRATIVE SETUP Ministry of  coal (New delhi)

CIL (KOLKATA)

11 COAL PRODUCTION AREA

NCL,MCL,BCCL,ECL,

CCL,RANCHI

WCL,SECL,

CORPORATE H.Q.

CMPDIL

UNIT

MINES RESCUE STATION

CCWD AREAS(WASH ERIES)

12

HOSPITAL

NEC

CENTRAL STORES

CENTRAL WORKSHOP

FINANCIAL HIGHLIGHTS OF CCL

ST

PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31

MAR CH, 2010

FOR THE YEAR ENDED 31.3.2010 (Rs. In L ak h)

Schedule

FOR THE YEAR  ENDED 31.3.2009 (Rs. In Lak h)

INCOME :

1

548822.42

521088.78

Coal issued f or other purposes

2(A)

109313.21

103844.53

Accretion/Decretion in stock 

3

16243.95

-6993.82

Other Income

4

50585.90

46457.60

724965.48

664397.09

105315.47

102017.24

Sales

TOTAL INCOME EXPENDITURE :

Colliery consum ption

2(B)

Consum ption of Stores & Spares

5

50297.13

47980.00

Em ployees Remuner ation & Benefits

6

232875.99

258928.00

Social Overhead

7

20292.92

19300.53

Power & Fuel

8

26689.97

25628.66

Repairs

9

19574.04

17378.46

Contr actual Expenses

10

29276.90

31899.17

Miscellaneous Expenses

11

33608.73

37535.06

18502.34

7198.27

536433.49

547865.39

Over  burden Removal Ad justment TOTAL EXPENDITURE GROSS OPERATING PROFIT

188531.99

116531.70

Interest

12(A)

1738.80

4351.05

Financial Charges

12(B)

185.84

330.60

20202.27

19005.30

12707.82

18511.96

Depreciation Pr ovisions

13(A)

Write-Off

13(B)

PROFIT FOR THE YEAR

Prior Period Ad justment(Credit)

14

PROFIT BEFORE TAX

PROVISION FOR IN COME TAX PROVISION FOR DEFERRED TAX FRINGE BENEFIT TAX Pr ovision f or IT f or ear lier year PROFIT AFTER TAX

498.67

81.52

153198.59

74251.27

106.42

2129.12

153305.01

76380.39

50659.06

48341.00

5771.56

-22142.64

0.00

1189.12

295.52

0.00

96578.87

48992.91

15331.00

7974.00

2161.80

0.00

38632.00

19597.00

6565.51

3330.51

80128.60

62037.20

114017.16

80128.60

APPROPRIATION Gener al Reserve CSR Reserve Pr o posed Dividend Tax on Dividend PROFIT UPTO THE PREVIOUS YEAR BALANCE CARRIED TO BALANCE SHEET

13

BALANCE SHEET AS AT 31

Schedule I.

SOURCES OF FUNDS :

1

Share Holders' Funds :

(a)

Share Ca pital

A

( b)

Reserve & Surplus

C

ST

MAR CH, 2010

As at 31.3.2010 (Rs. In Lak h)

94000.00

As at 31.3.2009 (Rs. In Lak h)

94000.00

172063.96

120682.82 266063.96

2

214682.82

Loan Funds :

(a)

Secured

( b)

Unsecured

E

0.00

0.00

11205.41

29397.58 11205.41

TOTAL

II.

APPLICATIONS OF FUNDS :

1

Fixed Assets :

(a)

Gr oss Block 

277269.37

F

Less : Depreciation Ca pital Wor k in Pr ogress (Net)

448490.81

314281.44

303800.93

G H

2

Investments

3

Deferred Tax Assets

4

Current Assets, Loans & Advances :

244080.40

465900.25

 Net Block  ( b)

29397.58

151618.81

144689.88

34304.70

31135.31

185923.51

175825.19

5653.82

6596.12

50727.97

56499.53

(a)

Inventories

I

117717.53

96806.32

( b)

De btors

J

51244.83

74526.48

( c)

Cash &Bank Balances

K

260700.75

181588.39

(d)

Loans & Advances

L

120898.32

262270.48

(e)

Other Current Assets

M

16082.32

11821.78

Total Current Assets, Loans & Advances

Less : Current Liabilities & Pr ovisions

N

Net Current Assets

TOTAL

566643.75

627013.45

531679.68

621854.11

34964.07

5159.34

277269.37

SIGNIFICANT ACCOUNTING POLICY

P

 NOTES ON ACCOUNTS BALANCE SHEET ABSTRACT AND COMPANY'S GENERAL

Q

BUSINESS PROFILE

R 

CASH FLOW STATEMENT

S

14

244080.18

SWOT ANALYSIS OF CCL

STRENGTHS: 

CCL en joy mono poly in coal pr oduction.



CCL has a sk illed and experienced manpower to assist in coal pr oduction.



CCL has got constant Government su pport and assistance as it is a com pany with Govt. undertak ing.



Availability of good infr astr ucture.



Experience of Coal pr oduction f or 34 years.



Use of heavy machineries (HEMM) and advance technology in coal mining.

WEAKNESS:



CCL has to suffer due to interference  by Government.



It has heavy bureaucr acy and red-ta pism.



Attitude of manpower is negative and less motivated.



Lack of leadership quality in em ployees.

15

OPPORTUNITY: 

CCL has long-ter m  business o pportunity in coal pr oduction.



Availability of experienced manpower f or the com pany.





CCL is planning to expand its o per ations globally by investing in f oreign  pr ojects. CCL can look f or ward to pr ovide better services to its clients.

THREATS:



CCL may f ace intense com petition in f uture due to emergence of private com panies in coal pr oductions.



CCL might have reduced pr ofit and sales as a result of lack of pr oduct innovation.



The com pany may have to encounter tough challenges due to privatization of  coal sector.

16

OBJECTIVES, SCOPE & LIMITATIONS OF THE STUDY

O bjectives of the study:

y

To study and understand the current trend, pr ocedures & im plementations of  ca pital budgeting techniques at CCL.

y

To analyze the tools and techniques used in preparing ca pital budget.

y

To understand the nature of ca pital expenditures.

y

To estimate the total ca pital expenditure requirements f or pr ojects.

y

To a ppr oximate & establish the sour ces of ca pital to f und these pr ojects.

SCOPE OF THE STUDY:-

y

y

y

y

y

This resear ch pr oject aims at studying and analyzing the current pr actices of  ca pital budgeting at centr al coal field ltd (CCL). The resear ch pr oject would hel p CCL to im plement new and better techniques of  ca pital budgeting while evaluating new pr ojects i.e. acquiring new coal mines. This study would hel p CCL to find out various ways to f ulfill the ca pital requirements of the com pany. IT would hel p the com pany to im pr ove the pr ofitability of their pr ojects. This study is carried out using actual data and inf or mation pr ovided by various sour ces at CCL. CIL has com plete mono poly in the pr oduction, tr ade and mar ke  ting of coal. Hence, this study has a wide sco pe in the entire coal pr oducing com panies and other subsidiaries of Coal India Ltd. (CIL).

17

LIMITATIONS OF THE STUDY:--

1. Coal India ltd. accounts f or 90% of the coal pr oduction in India. It has com plete mono poly in the coal sector. Theref ore, the data used f or this study are confined to CIL and not a pplicable to any other com pany. 2. Assum ptions have been tak en regarding analysis and interpretations of   pr oject due to lack of pr o per data. 3. Certain data and inf or mation given in the resear ch are hypothesized due to highly confidential of such inf or mation. .

18

C HAPTER -- 2 

19

Introduction O f C apit al Budgeting  Capital Budgeting

An efficient allocation of  ca pital is the most im portant finance f unction in the modern times. The investment decision of  a fir m are gener ally k nown as the capital budgeting, or capital expenditure decisions. A capital expenditure is an outlay of cash f or a pr oject that is expected to pr oduce a cash inf low over a period of time exceeding one year. Ca pital  budgeting consists in planning the deployment of  available ca pital f or the purpose of  maximizing the long-ter m  pr ofitability (return on investment) of a fir m.

It is a pr ocess of evaluating and selecting long-ter m investment that is consist with the goal of share holders wealth maximization. The fir m¶s investment decisions would gener ally include expansion, acquisition, modernization and replacement of the long ter m assets. Ca pital  budgeting may  be defined as the decision mak ing pr ocess  by which a fir m evaluates the pur chase of  major fixed assets, including  buildings, machinery and equipment.

Features of investment Decisions 1. The exchange of current f unds f or f uture benefits. 2. The f unds are invested in long-ter m assets. 3. The f uture benefits will occur to the fir m over a series of year.

20

Importance of Investment Decisions Investment decisions require because of the f ollowing reasons: y y y y y

They inf luence the fir m¶s gr owth in the long r un. They affect the risk of the fir m. They involve commitment of large amount of f unds. They are irreversi ble, or reversi ble at substantial loss. They are among the most difficult decision to mak e.

Types of Investment decisions One classification is as f ollows: y

Expansion of existing  business

y

Expansion of new business

y

Replacement and modernization.

Yet another usef ul way to classify investment is as f ollows: 

Mutually exclusive investments



Independent investments



Contingent investments.

Investment Evaluation criteria Three steps are involved in the evaluation of an investment: 

Estimation of cash f lows



Estimation of the required r ate of return



Application of a decision r ule f or mak ing the choice.

Three types of ca pital budgeting:(1) (2) (3)

Accept and re ject decision. Ca pital r ationing decision. Mutually exclusive choice decision.

21

1. Accept and re ject decision:Pr o posal in which r ate of return is more than the invested r ate. I.e. ± output is more than input In this all independent pr oject are accepted. Independent pr oject are those which is not com pete with others.

2. Ca pital r ationing decision:Ca pital r ationing means distri bution of ca pital in f avors of more acceptable  pr o posals. A fir m deter mines a certain point f or selecting accepted pr o posals. 3. Mutually exclusive choice decisions:Mutually exclusive investment serve the same purpose and com pete with each other. If one investment is undertak en, other will have to be excluded.

Techniques of selecting capital budgeting proposals

Techniques gr ou ped in the f ollowing two categories: 1) Time ad justed (Discounted Cash Flow Criteria ±DCF) a) Net Present Value Method  b) Internal R ate of Return method c) Discounted pay back period d) Pr ofitability Index (PI)

2) Tr aditional (Non-Discounted Cash Flow Criteria) a) Aver age R ate of Return (ARR)  b) Pay back period (PB)

22

DISCOUNTED CASH FLOW CRITERIA

Net Present Value (NPV) Method: The present value is the pr ocedure recognizing the time value of  money.Cash f low streams at different time periods differ in value and can  be com pared only when they are expressed in ter ms of a common denominator, i.e., present values. The f or mula f or the net present value can be written as f ollows:

   

NPV =

C1

C2

1+k)

2

C3 3

(1+k)

 

Cn

 C

(1+k)n

0

Where, C1, C2, ««« represent net cash inf lows in year 1, 2«.., K is the o pportunity cost of ca pital, C0 is the initial cost of the investment and n is the expected life of the investment

The NPV Acceptance rules are: 1. Accept if NPV>0 2. Reject if NPV k  Re ject the pr oject when, r < k  May accept the pr oject when, r = k 

Where, r = internal r ate of return & k = required r ate of return or cut off r ate.

25

MERITS: y y

y

Time value of money. Pr ofitability measure: it considers all cash f lows over the entire life of the pr oject to calculate its r ate of return. Share holdes value: It is consistent with the shareholders wealth maximization objective.

DEMERITS: y

Multiple r ates: A pr oject may have multiple r ates, or it may not have a unique r ate of return.

Mutually E xclusive pr ojects: It may also f ails to indicate a correct choice  between a mutually exclusive pr ojects.

26

Profitability Index: It is the r atio of the present value of cash inf lows, at the required r ate of return to the initial cash outf low of the investment. A pr ofitability index number greater than 1 indicates an acceptable pr oject, and is consistent with a net present value greater than 0. The pr ofitability index a ppr oach measures the present value of returns per r u pee invested. The r atio is calculated as f ollows:

R ules f or selection or re jection of a pr oject: (1) (2) (3)

If PI > 1 then accept the pr oject If PI < 1 then re ject the pr oject May accept if PI=1

The r atio is calculated as f ollows :

27

For exam ple, If the initial outlay of  a pr oject is Rs.1000 and it can gener ate cash inf low of Rs.400, Rs.300, Rs.500, and Rs.200 in year 1-4. We assume r ate of discount as 10%. The PV of  cash inf lows at 10% discount r ate is:

Year

Inf lows

10% df

PV

1

400

.909

364

2

300

.826

248

3

500

.75 1

376

4

200

.683

137

Total PV = PI =

 

1125

= 1.125

28

Traditional/ Non-Discounted Cash Flow techniques:

Average Rate of Return: The aver age r ate of return (ARR) method is to measure the pr ofitability of an investment. It is based u pon accounting inf or mation r ather than cash f lows. The most common usage of aver age r ate of return (ARR) expresses it as f ollows:

ARR =





   



 



Where, The Aver age Pr ofit After Taxes are deter mined by adding u p the after tax pr ofits expected f or each year of the pr ojects life and dividing the results by the no. of years. The aver age investment is deter mined  by dividing the net investment by 2.

Accept reject rule: this method will accept all those pr ojects whose ARR is higher than the

minimum r ate established  by the management and re ject those pr ojects which have ARR  less than the minimum r ate.

For exam ple: If an investment pr o posal considering a cost of Rs. 50,000 having life expectancy of 5 years and no sulvage value. Assumingthe tax r ate is 35% and the fir m uses str aight line depreciation. The estimated cash f low bef ore depreciation & tax fr om the investment  pr o posal are as f ollows:

29

Year 

CFBT

Depreciation

PBT

TAX (0.35%)

EAT

1

10,000

10,000

Nil

Nil

Nil

2

10,692

10,000

692

242

450

3

12,769

10,000

2769

969

1800

4

13,462

10,000

3462

1212

2250

5

20,385

10,000

10,385

3635

6750

Total EAT (Earning After Tax) =11250

    

ARR =



 



  Advantages: y

It selects alternative uses of f und.

y

It considers saving over the entire life of the pr oject.

y

In addition to measuring the desir ability of new investments on the basis of  their relative cash f low, a com parison is made of expected pr ofitability. This is done with the aver age r ate of return, which is a r atio of the year ly aver age net earnings after depreciation and taxes to the aver age investment.

Disadvantages y

The differential timing of receipts is not considered

y

It ignores the time value of f unds

30

Payback Period Method:

nd

The pay period method is the 2 tr aditional method of ca pital budgeting. It is the sim ple and perha ps, the most widely em ployed quantitative method f or a ppr aising ca pital expenditure decisions. It is defined as the number of years required . This method answers the question ³How many years will it tak e f or the cash benefits, to pay the original cost of an investment´. This method is also k nown as the pay-out method.

Payback period

=



 



 

   

For Exam ple: If a pr oject requires an outlay of Rs. 50,000 and yields annual cash inf low of Rs. 12,500 f or 7 years. The pay back period f or the pr oject is:

PB =

 

= 4 years

 

Advantages (1) (2) (3) (4) (5)

(6) (7) (8)

It is an im portant guide to investment policy. It lays a great em phasis on liquidity. It is easy to understand, calculate and communicate to the other. The method enables a fir m to choose an investment which yields a quick return on cash f unds. It enables a fir m to deter mine the period required to recover the original investment with some per centage return and thus arrive at the degree of risk  associated with the investment. It em phasizes the liquidity and solvency of a fir m, which is undoubtedly an im portant consider ation. It weighs ear ly returns heavily and ignores distant returns. When the pay back index is used f or r ank ing com petitive pr ojects, it has the advantage of eliminating any bias due to pr oject size in ter ms of cost. 31

(9) The method is quite the sim plest of all the techniques used by the industry. It hel ps in selection of those pr ojects whose pr ofits are high enough to repay the amount invested within a particular number of years.

Disadvantages

(1) The time value of money is ignored. (2) The r a pidity of incoming cash f low is the only measure of desir ability. (3) There is no recognition of cash f low variation. One pr oject may have cash inf low of Rs.6,000 f or the first year, Rs.8,000 f or the second year and Rs.10,000 f or the third year. The second pr oject may have cash f low of Rs.10,000 Rs.8,000 and Rs.6,000 f or three years respectively. If  both the pr ojects involved net cash outlays of Rs.24,000, the pay back period would be three years of each. It should  be remembered, however, that the second pr oject would yield more cash ear lier  and may, theref ore, be considered more valuable. This situation is not pr o per ly handled under the pay back method. (4) It does not indicate how to maximise value and ignores the relative pr ofitability of  the pr oject. (5) It over em phasises liquidity and ignores ca pital wastage and the economic life of  an asset. (6) It is only a r ule-of-thumb method. It is often difficult to  judge objectively whether  one pr o posed pr oject is su perior to another and, if so, by how much. (7) No allowance is made f or taxation nor is any ca pital allowance made. (8) It may choose highly risk y pr oject.

32

C HAPTER -- 3 

33

C  AP ITAL BUDGE TING P R A    C TICES  IN CC L: The long ter m investment decisions are done in two categories :

y

y

With respect to ca pital expenditure With respect to pr oject selection.

CAPITAL EXPENDITURE:

A Ca pital budget or expenditure is the estimated amount required by the various departments, pr ojects, wor ks  ho ps, centr al stores and headquarters itself, f or the purpose of utilizing the amount against the expenditure which are estimated in advance and are of  ca pital expenditure in nature. Ca pital budget or expenditure is contr olled by the ministry of coal, where the pr o posed ca pital budget is sent f or a ppr oval by the ministry. Based on the budgeted figure, ca pital expenditure is made. In CCL µCAPITAL BUDGET¶ is prepared which is a manual com prising of area wise  pr ojected Ca pital Expenditure, prepared firstly at area (local) level by the GM and AGM of concerned area and then is sent to the head quarters at pr oject and planning department where these expected Ca pital budgets are com piled by the concerned officials in the same departments. Once the Ca pital Budget is com piled & finalized, it is then issued as a year  book showing area wise estimated ca pital expenditure f or each month. On the basis of these pr ojected  budgets, the monthly´ µStatement of Ca pital Outlay and expenditure¶ is prepared f or each area showing the pr ogressive expenditure of that respective month along with com paring it with the budgeted expenditure .

34

Regarding the payments of this Ca pital Expenditure, this is mainly done in two levels or   basis :

1. At area level : Area wise payment is done by the remittance received by the Centre or Headquarter. The  payments are made on the basis of release of f unds fr om the headquarters as per the estimations and sanctions made thereof . 2. At Central or Headquarters level:

The payment is directly made fr om centre or headquarters f or the HEMM and centr al stores at Bar kak hana. The Ca pital Budget depends either on pr oject report or a ppr oved scheme . The total pr oject evaluation is done  by the CMPDI subsidiary com pany of the CIL, holding com pany of CCL. CMPDI prepares the detailed pr oject report and sends it to the CCL f or  a ppr oval after giving sever al presentations on some im portant feasi bility aspects. CCL¶s  board of directors can directly a ppr ove the pr oject u p to 500 cr ore and f or pr ojects costing more than 500 cr ore, the respected pr oject has to be a ppr oved  by the ministry of coal . As stated ear lier, the ca pital expenditure statements are prepared at regional level and also at centr al level where  based on the ca pital  budget the estimated and actual are com pared and per centage achievement are shown in the statement itself.

35

PROCEDURE FOR STARTING A NEW PROJECT Starting a new pr oject (mine) involves com plex and elabor ate pr ocedure. These can be listed as below: Step: 1

The Area is ear mar ke  d and called as a µBlock¶. For e.g. ³Magadh´. Then the area is drilled and coal reserve is pr oved. Geological Survey is done and r aw data is made available: Moisture, quality, etc.

Step: 2

Next step is to prepare a ³Draft project report´ which is done  by Central Mine Planning and Design Institute (CMPDI) LTD . The dr aft report is then submitted to CCL Headquarters, pr oject & planning Department (P&P). Presentations are then given by CMPDI to the Head Of Departments (HOD) of  all departments ±Excavation, Mining, Finance, etc. As per suggestion, changes and amendments are made to the dr aft PR.

Step: 3

Empower Sub Committee (ESC) is prepared. It mostly consists of Functional Directors (FD¶s) and Independent Directors. Presentations are made to them and suggestions (if any) are incorpor ated.

Step: 4

The Dr aft PR is then sent to Board Of Directors f or a ppr oval (u p to 500crs). Upto 500 Cr ores

: Appr oval by BOD,CCL

500 Crs. ± 1000 Crs.

: Appr oval  by CIL

A bove 1000 Crs.

: Appr oval by Ministry Of Coal (MoC)

Step: 5

The DPR is then sent to ESC in Ministry of Coal f or a ppr oval.

Step: 6

DPR is now sent to Public Investment Board (PIB) and the Draft PIB Note is prepared. The Secretary Expenditure again analyses the pr oject and thereafter recommends the pr oject f or a ppr oval (if any).

Step: 7

Cabinet Committee on Economic Affairs (CCEA) then evaluates the pr oject. A Dr aft CCEA note is prepared.

Step: 8

The final stage is Approval of Project with / without conditions (subject to Forestry Clearence) . µZer o Date¶ of the pr oject if fixed. 36

PARALLEL ACTIVITY: ADVANCED ACTION

Advance action consist of activities which are carried side by side while the pr oject is  being studied and evaluated f or a ppr oval. These activities include: i. ii. iii. iv. v.

Land Acquisition Forestry Clear ance PR Prepar ation Initial Infr astr ucture EMP Clear ance

LAND ACQUISITAION:

Acquiring land f or the mines in the primary activity which is carried out in advance  by ccl. Land is acquired under various act  by CCL, which are given below: (1)

The coal bearing area (acquisistion and development)Act 1957 . Government of india acquires the land then given it to ccl/ail. This pr ocess is

k nown as µvesting¶

GOVT OF INDIA

CCL / CIL (2)

land

Acquires

Vesting

Land Acquition Act Only non f orest land can acquired under this act. All com pensation , interest etc is

 paid by the state government90% of land is acquired  by land acquisition act.

(3)

Direct Purchase Under this land is acquired directly by cil. These are only small portion of the

 pur chase as per extr a and emergency requirement of land.

37

FOREST CLEARANCE

Per mission has to be obtained fr om

f orest department regarding acquiring of 

f orest land f or non- f orest purpose I e. the purpose of creating mines.

Sections²II of the Forest Conservation Act, 1980 is a pplied to acquire f orest

land .It involves two stages: Principally agree with/without conditions.

STAGE 1:

 Net present value of the land is calculated and the payment is made. STAGE 2:

Final release of the land.

EMP CLEARENCE

Environmental Management Plan(EMP) is a pplied one month bef ore the final

release of land by f orest department. It analyses the effect of the pr oject on the f ollowing aspects envir onment and its degr adation: y

Air 

y

Water 

y

 Noises

y

Land

Stage1:

At this stage EOR(form-1) and the Ter m of Reference (TOR) is prepared and submitted to the Ministry Of Environment . The ministry analysis the a pplication and then the pr oject is finalized f or Appr oval.

Stage2:

Public Hearing

Minutes are given by The Po pulation contr ol Board. They give there suggestion on whether there should  be any chance or no chance in the pr oject.

Change MINUTES  No Change 38

Then presentations are given by expert committee mining I.e. EC( M) illustr ating the pr oject¶s: y

y

Internal rate of return (IRR) - It should be at minimum

12%.

Internal and extra budgetary resources (IEBR) - Gives the details of  sour ces of  ca pital Investment i.e. whether the com pany has surplus money to f und this pr oject or how the investment could  be f unded externally thr ough Loans, Financial Institutions etc

y

Variance Analysis

y

CCEA Note (Must)

One all the above activities are com pleted, the pr oject could be started.

39

Projects commissioned during the tenth Plan Period (2002-2007)

Sl.No.

1

Name of  Project

Magadh OCP

Capacity (MTY)

12.00

Proposed Capital Outlay (Rs. Cr.)

469.78

Approval from CCL board

Fe b¶2003

2

Ashok  Expn. OCP

6.50

471.66

June¶03

3

K onar OCP

3.50

74.53

April¶04

4

K ar o OCP

3.50

96.53

July¶05

5

To pa RO

1.20

65.25

-

6 7

8

Amr a pali OCP  North Urimari OCP Churi Benti UGP

12.00

3.00

0.81

517.62

179.87

163.51

Fe b¶03

May¶04

April¶07

Govt¶s approval/Present status

Appr oved by govt. Vide letter dated 19.07.06 fr om MOC. Pr oject is under im plementation. Appr oved by Govt. vide letter dated 13.04.06 fr om MOC. Pr oject is under im plementation. Appr oved by CCL Board on 12.08.06. (As per revised Delegation of power of CCL Board) Appr oved by CCL Board on 12.08.06. (As per revised Delegation of power of CCL Board) Appr oved by CIL Board on 06.03.02. Pr oject is under im plementation. CCEA note submitted to MoC on 06.11.06 Appr oved by CCL board on 07.12.07 (as per Revised Delegation of Power  of CCL board) Appr oved by CIL Board on 27.08.07. Pr oject is under im plementation

The above 8 mining pr ojects have  been commissioned during X Plan period. The total ca pacity of these pr ojects is 42.51 MTY. Out of this To pa RO OCP was sanctioned in 2002. Magadh, Ashok EPR (6.5 MTY), K ar o OCP and K onar OCP have been sanctioned in 2007-08. Pipar war Expn.(10 MTY) and Ashok  Expn (10 MTY) have  been a ppr oved under Emergency Coal Pr oduction Pr ogr amme. Amr a pali OCP is at CCEA f or its a ppr oval. 40

Major Projects of CCL

Pipar war OCP

(6.50 MTY)

KDH Hesalong OCP

(4.50 MTY)

R ajr a ppa OCP

(3.00 MTY)

Pare j (E) OCP

(1.75 MTY)

Urimari OCP

(1.30 MTY)

Sel. Dhori OCP

(2.25 MTY)

  and OCP Jhar kh

(1.00 MTY)

Future Projects

To pa OCP

(1.20 MTY)

Ashok Expansion OCP

(6.50 MTY)

K or a Expansion OCP

(3.50 MTY)

K onar OCP

(3.50 MTY)

 N. Urimari OCP

(3.00 MTY)

Purnadih OCP

(2.00 MTY)

th

Mega Project of 10 plan

Magadh OCP

(12.0´ ) Link ed to NKTPS

Amr a pali OCP

(12.0´ ) Link ed to Barha TPS

Strategy for financing or future project y

y

y

Internal Gener ation External f unding thr ough Financial Institutions Bill of Tr ansfer 

41

C HAPTER -- 4 

42

R esea rch M ethodology 

Methodology used in the study: For carrying out this study, a lot of eff orts have  been made. Thr ough this type of vast organisation these eff orts are nor mal  but not irrelevant. It might have little use  but it is not so that it has no use. So we tried our level  best f or carrying out this study and used f ollowing methods to achieve these objectives of the study.

Primary Data

1. Personal meeting with senior finance executives.

Secondary Data

1. Analysis of past financial statement. 2. Data collected fr om various magazines and internet.

Personal meeting with senior executives:

After analysis of past records f or understanding various things it was very im portant to meet finance executives and managers. To understand the reason behind the increase or decrease in pr ofit it was indispensable to talk  with the person who are directly involved in this pr ocess. Theref ore, I decided to talk with the to p officers, senior executives of the finance and administr ation department. Thanx toall those managers and executives whom I wished to talk ed and talk ed. They coo per ated with necessary data and talk ed very freely with me. We talk ed about past data, present scenario and even predicted about the f uture. 43

Analysis of Past Records:

Records of last years of tr ading and pr ofit and loss accounts, balance sheet and cash f low statements of CCl are collected.

Limitation: Primary and secondary data has been collected fr om various resour ces but it was not easy to collect all the data due to safety reason and security concerns. That is why some pr oblem had come in collecting data. I have tried my best f or collecting data.

44

C HAPTER -- 5 

45

DETAIL EV  ALUATION OF A P R OJEC T

Economic Evaluation

Economic evaluation f or the pr oject has been pr ovided in 2 parts: A) Mine Economics B) Integr ated Economics f or mining and coal washery

A) Mine Economics

Initial Capital investment :

In the two o ptions Department and Outsour cing o ptions, Department o ption has  been considered f or  o per ating this pr oject. In department o ption it has  been pr o posed to o per ate the mine with departmental resour ces except f or hiring of vehicles have  been  pr o posed. th

Total initial ca pital investment (till target in 5 year) f or the pr oject has been estimated as Rs.1071.73 cr ores. The ca pital investment of the pr oject is estimated on the basis of 1.5: 1- Loan: Equity R atio.

Methods of Estimation of Capital Cost:

The estimates f or the ca pital cost of HEMM and other P&M are  based mainly on cost of  mining equipment in Dec. 2008 ( as per  CMPDI¶s Standard Price List f or  Mining & Equipment). For civil estimates Building Cost Index f or the area has  been tak en as 1776 with respect to 100 base at Delhi as on 1.10.76.

46

First two years are considered as constr uction period (year 1 to year 2). During year  3, there is a cash surplus. Hence, the revenue expenses f or the first two years (year 1 & Year 2) have been ca pitalized.

Estimates of Operating Cost

The details of estimated o per ating cost are given f or 100% ca pacity utilization. The aver age cost of pr oduction, f or 25 years of  life of  mine, at 100% of  ca pacity utilization is given below:

Particulars

Departmental Option

At 100%

935.27

Salary and Wages

The peak requirements of manpower f or an annual output of 4.00 Mty of coal f or  Departmental Option is as 1044.

th

Year wise salary & wages cost u pto 25 year of o per ations are given . The salary & wages cost f or Departmental Option has been estimated as Rs. 97.55/t at 100% ca pacity utilization.

Stores Cost:

Year wise stores cost consists of repairs & maintenance, diesel, lubricant, explosives, th

and other details u p to 25 year of o per ations. The stores cost f or Departmental Option has  been estimated as Rs.307.55/t at 100% ca pacity utilization. 47

Power cost:

In Departmental Option power su pply arr angements to various locations will  be the responsi bility of com pany. Year wise power  bill is calculated f or the pr oject. The power cost f or departmental o ption and has  been estimated as Rs.16.97/t at 100% ca pacity utilization.

Miscellaneous expenses:

This covers the expenses on TA/DA, printing and stationary, postage, telephones, repairs, and maintenance of  civil items, wor ks  ho  p de bit f or  annual servicing and overhandling of HEMM, insur ance and taxes f or vehicles, envir onment management cost including mine closure, social welf are, security outsour cing cost, vehicle hiring cost etc. The miscellaneous expenses have  been estimated as Rs. 58.94/t at 100% ca pacity utilization.

Administrative charges:

This includes area overhead and a pex overhead etc. In the departmental o ption com pany authorities will be su pervising all the mining related activities. So the administr ative expenses f or departmental o ption has been estimated as Rs. 58.63/t at 100% ca pacity utilization.

Interest on working capital:

The r ate of interest on wor k ing ca pital is tak en as 12.5% per annum and the quantum of wor ki  ng ca pital has been assumed as equivalent to f our(4) months of cash o per ating cost.

48