CAPITAL BUDGETING

L.ANANDA SAI KISHORE

2K16BFS016

ASIA PACIFIC INSTITUTE OF MANAGEMENT

APIM, 3&4, Institutional Area, Jasola, NEW DELHI 110025.

PH : 011-42094800, FAX : 011-26951541

INDIA
Title of the SIP project : Capital budgeting
Name of the student : L.ANANDA SAI KISHORE
ID NO. : 2K16BFS016
Name of the company : RINL
Department : Finance

Company mentor details:

Name : K.V. VENUGOPAL

Designation : AGM

Contact details:

Email Id : [email protected]
Company address : Vizag Steel Plant
Contact number : 9959094656
Website : vizagsteel.com
 Acknowledgement

I L.ANANDA SAI KISHORE convey my deep sense of gratitude to all those who have helped

me in completing my Summer Internship Project to the best of my ability. Being a part of this

project has certainly been a unique and a very productive experience on my part.

I am thankful to Mr. SAMIRAN JANA for making all kinds of arrangements to carry the

project successfully and for guiding and helping me to solve all kinds of quarries regarding the

project work. His systematic way of working and incomparable guidance has inspired the pace of

the project.

I would also like to thank my mentor and project coordinator, Mr. K.V.VENUGOPAL Assistant

General Manager, (Finance & Accounts) for assigning me a project of such a great learning

experience his valuable advice and suggestions supported me to complete my project with great

learning. Mr. K.V.VENUGOPAL provided me insights about the company, Industry and global

market trends to have a brief knowledge about Steel industry.

L.ANANDA SAI KISHORE

 CERTIFICATE

This is to certify that the Project Report titled capital budgeting being submitted to RINL
(Rashtriya Ispat Nigam ltd.) is a bonafide work done by L.ANANDA SAI KISHORE, bearing
Roll no.2K16BFS016, under my guidance.

Date:24-06-2017

Signature of the Guide

Name: Mr. K.V.VENUGOPAL

 DECLARATION

I hereby declare that this Project Report titled Capital budgeting submitted by me is a bonafide
work undertaken by me and it is not submitted to any other Institution or university for the award
of any degree/diploma certificate or published any time before.

Name of the Student

L.ANANDA SAI KISHORE

Signature of the Student

 TABLE OF CONTENTS

CHAPTER I

EXECUTIVE SUMMARY

CHAPTER II

PMCI ANALYSIS

CHAPTER III

CONCEPTUAL FRAME WORK

CHAPTER IV

DATA ANALYSIS & INTERPRETION

CHAPTER V
CONCLUSIONS
 EXECUTIVE SUMMARY
Rashtriya Ispat Nigam Limited (RINL), the first shore based Integrated Steel Plant in the
country was incorporated on 18 February 1982 with an installed capacity of 3 million tonne per
annum (MTPA) with the main objective of production and sale of iron and steel products. This
project is specially designed to understand the subject matter of Financial Statement Analysis
through various ratios in the company. This project gives us information and report about
companys Financial Position. Ratio Analysis is one of the techniques of financial analysis where
ratios are used for evaluating the financial condition and performance of a firm. Analysis and
interpretation of various accounting ratios gives a better understanding of financial condition and
performance of firm. It provides data for intra-firm comparison. They also revel financially
strong and weak such as overvalued and undervalued of firms. These ratios help to indicate a
companys efficiency in the past and likely performance in future. It should be noted that
computing the ratios does not add any information in figures of profits and sales. This report
provides an analysis and evaluation of the current and prospective Profitability, liquidity and
financial performance or stability of a firm. This report will provide an assessment and analysis
of the capital budgeting and financial position of the RINL. From the ratios we can say that in
the year 2015-2016 RINL has not been profitable because of excess of steel production and
selling at a low cost The Company does not have a healthy liquidity position which means that it
cannot rely on its current assets to finance the current liabilities and does not have to commit to
long term debts. However, it can be noticed that the future does not look bright, firstly because of
recurring losses and secondly because unhealthy financing structure giving that it relies a heavily
on debts. The analysis is done for 5 years and comparative study has been made possible. Given
the nature of the business, it would have been interesting to evaluate the business by comparing
with past year results and also with the industry benchmark.
 PMCI ANALYSIS

PRODUCTS OF RINL

SPECIAL STEELS: Special steel is generally considered a special chemical

composition (alloy), using a special production process, with special microstructure and
properties of steel to meet the special needs class.

In these special steel there are 3 sub products namely

Wire Rod Coils

MMSM Rounds & Billets

LMMM Rounds & Billets

PRODUCT MIX: It implies all the products offered by a firm for sale. It may consist of
one product or several allied products.

These are product mix of RINL

Wire Rounds

Rounds

Reinforcement Bars

PLAIN WIRE RODS IN COILS: Wire rods are manufactured in special steel grades
also for various applications like Cold heading. Tyre-bead, Cable armouring, Electrodes,
Pre-stressed Concrete wire etc. The size of Wire Rods is 5.5-20mm and end users are
Wire Drawing, Bright bars, Fasteners.

EXPORT PRODUCTS:

List of products offered for export from VSP

Wire Rods

Hot rolled Rebars

Equal Angles

Channels

Billets

Beams

Rounds

Pig-Iron

REBARS: In-built ability to resist loss of strength at higher temperature. Higher yield
strength, Ultimate tensile strength and higher percentage elongation when compared to
cold twisted bars of same grade. The size of Rebar is 8-36mm and end users are
Construction and Reinforcement.

STRUCTURALS: It providing more flexibility to designer, fabricator and erector.

Tension free rolling ensures uniform dimensional tolerances. The size of Structural is 55-
200mm and end users are Construction and Fabrication.

In structural there are 3 sub products

Angles

Channels

Beams

BY PRODUCTS:

They are many by-products for the company

Coke Fractions Ammonium Sulphate

Medium High Pitch Crude Coal Tar

Benzene Hot Pressed Naphthalene

Phenol Fractions Drained Pressed Naphthalene

Toluene Light Solvent Oil

Anthracene Oil Coal Tar Wash oil

B F Slag Coal Tar Fuel

FORGED ROUNDS: Forged metals tend to be harder, stronger and more durable than
cast forms or machined parts. The sizes of rounds are 16-80mm in Fasteners, Forging,
Railways, Construction and 20-45 mm in Straight and Coil for
 MARKET

COMPETITORS OF RINL

JSW

Tata Steel Ltd

Jindal Steel Ltd

ESSAR Steel

SAIL

Electro Steel Ltd

Bhusan Steel Ltd

GEOGRAPHICAL MARKETS

Rourkela Steel Plant

Bhilai Steel Plant

Bokaro Steel Plant

Durgapur Steel Plant

Indian Iron and Steel Company (IISCO)

Tata Iron and Steel Company (TISCO)

The various market segment and its details for RINL products:

RINL operates in both domestic and international markets. In the international markets not only
help in realizing opportunity for export of products but also in maintaining its quality standards
at international level. RINL is in the long products segment of steel markets and produces and
supplies products like TMT bars, wire rods, rounds, structural, squares and semis. The customer
groups of RINL are categorized into the following groups.

PROJECT

EXPORT CUSTOMERS
INDUSTRIAL
CUSTOMERS
USERS
RINL

RURAL CUSTOMERS NSIC/SSIC

DEALERS

RETAILERS

Customers of RINL Market segment wise.

Project Customers: Major Infrastructure developers of the country like Larsen Turbo Limited,
GMR, GVK, Gammon India, BG Shirke, Simplex Construction and others are our esteemed
customers.

Industrial Users: TATA Motors, Maruti Suzuki, General Motors, Caterpillar, Wheels India,
Cummins, Meritor Troy, etc
 COMPANY

Rashtriya Ispat Nigam Limited is the corporate entity of Vishakhapatnam Steel Plant is a
Navaratna PSE under the ministry of Steel. It is popularly known as Vizag steel plant is the first
shore based integrated steel plant in the country and its known for its Quality Products and
customer Delight. A market leader in long steel products, it caters to the requirements of the
Construction, Manufacturing Automobile, General Engineering, and Fabrication Sectors.

The Government of India has decided to set up an integrated Steel Plant at Visakhapatnam to
meet the growing domestic needs of steel. Visakhapatnam Steel Plant was the effect of the
persistent demands and mass movements. It is another step towards increasing the countrys steel
production.

The decision of the Government to set up an integrated steel plant was laid down by the then
Prime Minister Smt. India Gandhi. The Prime Minister laid the foundation stone on 20th January
1971.

Unlike other integrated Steel Plants in India, Visakhapatnam Steel Plant is one of the most
modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992 by
the then Prime Minister, Sri.P.V.NarasimhaRao.

Steel is such a versatile commodity that every object we seen in our day to day life have used
steels either directly or indirectly in its products. To mention a few, it is used for such a small
items as pins, needles etc. Steel comprises one of the most important inputs in all sectors of
economy. The economy of any nation depends on a strong base of iron and steel industry in that
nation. Today Steel occupies the foremost place amongst the materials. All the key discoveries
the human genius for instance, steam engine, railway, means of communication and
connection, automobile, airplane and computers are in one way or other, fastened together with
steel.
 STRENGTHS WEAKNESSES

Conferred with Navratna status in India, Rise in input cost affects cost of
making it a strong market player production & operating efficiency
More infrastructure to increase high High interest and finance charges is a
demand. concern
One-fourth of saleable steel neutralized Single location company- Only long
impact of rise in raw material prices products exposed to cyclical markets
2.4 Mn tonnes of steel by rail is the best for High manpower cost
any year since inception
Only focused on low diversified product
The first Indian steel company to adopt
Delay in less capabilities in execution of
energy management standard for systematic
cost.
improvement in energy efficiency
It is a shore based plant

OPPORTUNITIES THREATS

Acquisitions to gain market share Rising in inflation rate and increase in

interest rates by RBI etc. impacts the rate
Continued emphasis on infrastructure
of growth
building & several Greenfield projects
under execution will boost growth The debt crisis in Europe & the political
turbulence in the Middle east
Focus on strategic initiatives of Expansion,
securing raw materials Speculative market of raw materials is a
real concern
Improve availability of ports and logistics
Higher competition in secondary produce
Company having sufficient land for
expansion upto 20 million tons. Surplus steel capacity world wide
It is steel based industry Rapid development in growth economy.
Increase in market real plant
It has better transport than other companies
in raw material
 STEEL INDUSTRY

Introduction

The iron and steel industry is one of the most important industries in India. During 2014 through
2015, India was the third largest producer of raw steel and the largest producer of sponge iron in
the world. The industry produced 91.46 million tons of total finished steel and 9.7 million tons of
pig iron. Most iron and steel in India is produced from iron ore. The Indian Ministry of Steel is
concerned with: the coordination and planning of the growth and development of the iron and
steel industry in the country, both in the public and private sectors; formulation of policies with
respect to production, pricing, distribution, import and export of iron and steel, Ferro alloys and
refractories; and the development of input industries relating to iron ore, manganese ore, chrome
ore and refractories etc., required mainly by the steel industry. The growth in the Indian steel
sector has been driven by domestic availability of raw materials such as iron ore and cost-
effective labor. Consequently, the steel sector has been a major contributor to Indias
manufacturing output. The Indian steel industry is very modern with state-of-the-art steel mills. It
has always strived for continuous modernization and up-gradation of older plants and higher
energy efficiency levels.

Market Size

Indias crude steel production grew by 7.4 per cent year-on-year to 95.6 Million Tonnes (MT) in
2016. Total production of crude steel during February 2017 grew by 8.5 per cent year-on-year to
8.08 MT. Indias steel exports grew 150.0 per cent year-on-year to 0.75 MT in February 2017,
while steel imports declined 46 per cent year-on-year to 0.49 MT. Total consumption of finished
steel grew by 3.4 per cent year-on-year to 76.22 MT during April 2016-February 2017.
 As of FY16, SAIL was the leader in Indias steel sector with the company accounting for
13 per cent of countrys finished steel production and 15.8 per cent of countrys crude
steel production.

Tata Steel, another household name in the country, leads private sector activity in the
steel sector. During FY16, the firm accounted for 10.33 per cent of finished steel
production and 11.03 per cent of the countrys crude steel production.

Steel demand has outpaced supply over the last five years

Driven by rising infrastructure development and growing demand for automotive, steel
consumption is expected to reach 104 MT by 2017

It is expected that consumption per capita would increase supported by rapid growth in
the industrial sector, and rising infra expenditure projects in railways, roads & highways,
etc.

It is expected that consumption per capita would increase supported by rapid growth in
the industrial sector, and rising infra expenditure projects in railways, roads & highways,
etc.
Global Scenario

In 2016, the world crude steel production reached 1628 million tonnes (mt) and showed a
growth of 0.8% over 2015.

China remained worlds largest crude steel producer in 2016 (808 mt) followed by Japan
(105 mt), India (96 mt) and the USA (79 mt).

World Steel Association has projected Indian steel demand to grow by 5.4% in 2016 and
by 5.7% in 2017 while globally, steel demand has been projected to grow by 0.2% in
2016 and by 0.5% in 2017.

Chinese steel use is projected to decline in both these years - by 1% in 2016 and by 2% in
2017.

NEW STEEL POLICY

The Union Steel Minister Chaudhary Birender Singh said that the new policy will be announced
soon after the Cabinet clearance and the policy has many issues that have been pending for a
long period and to achieve the target of 300 million tonnes of production by 2030. He said that
the cabinet was preparing a note that to make the use of steel made in the country compulsory in
Government projects. He advised to the Visakhapatnam Steel plant that to take advantage of
demand for steel in several projects in the AMARAVATHI the new capital of ANDHRA
PRADESH. He praised the Rashtriya Ispat Nigam Ltd (Visakhapatnam steel plant) for
completing the expansion project and said the plant had a great advantage in having two ports in
its vicinity. The plant was moving towards achieving international standards of efficiency. He
said the steel industry in the country has been under the stress for the last three years due to
trends in the international markets and imports. "The import has been reduced by 26 per cent due
to the anti-dumping duty imposed by the Central government to save the Indian steel industry
and the demand for steel in the country is on the rise and the performance of the industry has
been improved in the last six months.
This table says that the target of 300tonnes throughout the country in the following years. In the
year 2016 they target is 122MT of capacity expansion. The target of 300MT to be achieved in the
year 2031 according to that every five years they have set an target to achieve 300MT. In the
financial year 2016 to 2021 they have a target of 25MT and at the end of that year the total
capacity should be 147MT and so on
PROJECT APPRISAL
Introduction:

A project is an activity sufficiently self- contained to permit financial and commercial analysis.
In most cases projects represent expenditure of capital funds by pre- existing entities which want
to expand or improve their operation.

In general a project is an activity in which, we will spend money in expectation of returns

and which logically seems to lead itself to planning. Financing and implementation as a unit, is a
specific activity with a specific point and a specific ending point intended to accomplish a
specific objective.

To take up a new project, involves a capital investment decision and it is the top
managements duty to make a situation and feasibility analysis of that particular project and
means of financing and implementing it. Financing is a rapidly expanding field, which focuses
not on the credit status of a company, but on cash flows that will be generated by a specific
project.

Capital budgeting has its origins in the natural resource and infrastructure sectors. The
current demand for infrastructure and capital investments is being fueled by deregulation in the
power, telecommunications, and transportation sectors, by the globalization of product markets
and the need for manufacturing scale, and by the privatization of government owned entities in
developed and developing countries.

The capital budgeting decision procedure basically involves the evaluation of the
desirability of an investment proposal. It is obvious that the firm must have a systematic
procedure for making capital budgeting decisions. The procedure must be consistent with the
objective of wealth maximization.

An efficient allocation of capital is the most important finance function in the modern
times. It involves decisions to commit the firms funds to the long - term assets. Capital
budgeting for investment decisions is of considerable importance to the firm since they tend to
determine its value by influencing its growth, evaluation of capital budgeting decisions.

Nature of Investment Decision:

The investment decisions of a firm are generally known as the capital budgeting, or capital
expenditure decisions. A capital budgeting decision may be defined as the firms decision to
invest its current funds most effectively in the long- term assets in anticipation of an expended
flow of benefits over a series of years. The long-term assets are those that affect the firms
operational beyond the one year period.

Investment decisions generally include expansion, acquisition modernization and

replacement of the long-term assets. Sale of a division or business (Divestment) is also an
investment decision. Decision like the change in the methods of sales distribution, or an
advertisement campaign or a research and development program have long-term implications for
the firms expenditures and benefit, and therefore, they should also be evaluated as investment
decisions.

The following are the features of investment decisions.

The exchange of current funds for future benefits.

The funds are invested in long-term assets.
The feature benefits will occur to the firm over a series of years.

Objectives of Investment Decisions:

Understand the nature and importance of investment decisions.

Explain the methods of calculating net present value (NPV) and internal rate of return
(IRR).
Show the implicated of net present value (NPV) and internal rate of return (IRR).
Describe the Non- DCF evaluation Criteria. Payback period and accounting rate of return
(ARR).
 Institute the competition of the discounted payback.
Compare and contract NPV and IRR and emphasize the superiority of NPV rule.

Importance of Investment Decisions:

The need of investment decisions can be emphasized taking into consideration the very nature of
the capital expenditure such as heavy investment in capital projects, long-term implications for
the firm, irreversible decisions and complicates of the decision making. Its importance can be
illustrated well on the following other grounds:

i. Indirect Forecast of Sales: The investment in fixed assets is related to future sales of the firm
during the life time of the assets purchased. It shows the possibility of expanding the production
facilities to cover additional sales shown in the sales budget. Any failure to make the sales
forecast accurately would result in over investment or under investment in fixed assets and any
erroneous forecast of asset needs may lead the firm to serious economics results

ii. Comparative Study of Alternative Projects: Capital budgeting makes a comparative study
of the alternative projects for the replacement of assets which are wearing out or are in danger of
becoming obsolete so as to make the best possible investment in the replacement of assets. For
this purpose, the profitability of each project is estimated.

iii. Timing of Assets-Acquisition: Proper capital budgeting leads to proper timing of assets-
acquisition and improvement in quality of assets purchased. It is due to the nature of demand and
supply of capital goods. The demand of capital goods does not arise until sales impinge on
productive capacity and such situation occurs only intermittently. On the other hand, supply of
capital goods with their availability is one of the functions of capital budgeting.
iv. Cash Forecast: Capital investment requires substantial funds which can only be arranged by
making determined efforts to ensure their availability at the right time. Thus it facilitates cash
forecasts.

v. Wealth-Maximization of Shareholders: The impact of long-term capital investment

decisions is far reaching. It protects the interests of the shareholders and of the enterprise because
it avoids over-investment and under-investment in fixed assets. By selecting the most profitable
projects, the management facilitates the wealth maximization of equity share-holders.

vi. Other Factors: The following other factors can also be considered for its significance:

(a) It assists in formulating a sound depreciation and assets replacement policy.

(b) It facilitates the management in making of the long-term plans and assists in the formulation
of general policy.

(c) It helps the management to avoid over investment and under investments.

(d) It is irreversible in nature and gives sufficient scope for the financial manager to evaluate
different proposals and only viable project must be taken up for investments.

Types of Investment Decisions:

There are many ways to classify investments one classification is as follows;

Expansion of existing business

Diversification to new business
Replacement and modernization
Expansion and Diversification:

A company may add capacity to its existing product lines to expand existing operations.
For example, the Visakhapatnam Steel Plant (VSP) may increase its plant capacity to
manufactures more liquid steel. It is an example of related diversification.

A firm must expand its activities in a new business expansion as a new business requires
investment in new products and new kind of production activating within the firm. If packing
manufacturing company invests in a new plant and machinery to produce ball bearings, which
the firm has not manufactured before, this represents expansion of new business or unrelated
diversification. Sometimes a company acquires existing firms to expand its business.

Replacement and Modernization:

The main objective of modernization and replacement is to improve operating

efficiency reduce costs. Cost savings will reflect in the increased profits, but the firms revenue
may remain unchanged. Assets become outdated and absolute with technological changes. The
firm must decide to replace those assets with new assets that operate more economically.
Replacement decisions help to introduce more efficient and economical assets and therefore, are
also called cost- reduction investments.

However replacement decisions that involve substantial modernization and technological

improvements expand revenues as well as reduce costs.

Yet another useful way to classify investments is as follows;

Mutually exclusive investments

Independent investments
Contingent investments
Mutually exclusive investments:

Mutually exclusive investments serve the same purpose and compete with each other. If
one investment understands others will have to be excluded. Accompany May, for example,
either use a more labour- intensive, semi- automatic machine, or employ a more capital intensive,
highly automatic machine for production.

Independent investments:

Independent investments serve different purposes and do not compete with each other.
For example, a heavy engineering company may have been considering expansion of its plant
capacity to manufacture additional excavators and addition of new production facilities to
manufacture a new product.

Contingent Investments

Contingent investments are dependent projects; the choice of one investment

necessitates understanding one or more other investments for example, if a company decides to
build a factory in a remote, backward area, it may have to invest in houses, roads, hospitals,
schools, etc., and the total expenditure will be treated as one single investment.

General Priority Ranking:

Legal and Safety

Replacement of worn out Machines
Completion of running projects
Projects retain Companys position
Expansion projects of High return
Expansion of average return projects
Long range advantage and intangible
 Capital Budgeting

DEFINITION: - It is the planning process used to determine whether an organizations

long term investments such as new machinery, replacement of machinery, new plants,
new products, and research development projects are worth the funding of cash through
the firms capitalization structure. It is the process of allocating resources for major
capital, or an investment is to increase the value of the firm to the shareholders.

Methods used for capital budgeting:-

Accounting rate of returns
Average accounting returns
Payback period
Net Present Value
Profitability index
Internal rate of returns
Modified internal rate of returns
Equivalent annual cost
Real options valuation
These methods use the incremental cash flows from each potential investment, or project.
Techniques based on accounting earning and accounting rules are sometimes used though
economists consider this to be improper such as the accounting rate of returns, and return
on investment. Simplified and hybrid methods are used as well, such as payback period and
discounted payback period.
Process of Investment Decision:

Capital Budgeting is a complex process which may be divided into the following phases:

Planning
Identification of investment opportunities
Preliminary Screening
Quantitative Evaluation
Qualitative Evaluation
Accept/Reject Decision
Implementation Action
Performance Review

Pre- Independence:

1830 - Josiah, Marshall Health constructed the first manufacturing plant at port Move in
Madras presidency.

1874 - James Erskin founded the Bengal iron works.

1899 - Jamshedji Tata initiated the scheme for an integrated steel plant.

1906 - Formation of TISCO.

1911 - Tata iron & steel company started production.

1916 - TISICO was founded.

1940-45 - Formation of Mysore iron & steel limited, and Bhadravati in Karnataka.
Post-Independence:

1951-56 - First Five Year Plan

No new steel plant came up .The Hindustan steel Ltd. was born on 19th January, 1954 with the
decision of setting up three steel plants each with one million tone input steel per year in at
Roukela, Bhilai and Durgapur; TISCO stated its expansion programme.

1956-61 - Second Five Year Plan

A bold decision was taken up to increase the ingot steel output India to 6 Million tons per year &
production at Rourkela, Bhilai and Durgapur steel plant started.

1961-66 - Third Five Year Plan

During the third five year plan the three steel plants under HSL, TISCO & HSCO were expanded
as show. In January 1964 Bokaro steel plant came into existence.

1966-69 - Recession Period

The entire expansion program was actively executed during this period.

1969-74 - Fourth Five Year Plan

Licenses were given for setting up of many mini steel plants and re-rolling mills.

Govt. Of. India accepted setting up two more steel plants in south. One each at
Visakhapatnam and Hospet(Karnataka).

SAIL was formed during this period on 24th January, 1973. The total installed capacity
from 6 integrated plants was 106 Mt.
1979 - Annual Plan

The erstwhile Soviet Union agreed to help in setting up the Visakhapatnam Steel Plant.

1980-85 - Sixth Five Year Plan

Work on Visakhapatnam steel plant was started with a big bang and top priority was
accorded to start the plant.
 Scheme for modernization of Bhilai steel plant, Rourkela, Durgapur, TISCO were
initiated.

1985-91 - Seventh Five Year Plan

Expansion work of Bhilai and Bokaro steel plants completed.

Progress on Visakhapatnam steel plant picked up and rationalized concept has been
introduced to commission the plant with 3.0Mt liquid steel capacity by 1990.

1991-96 - Eight Five Year plan

Visakhapatnam steel plant started its production modernization of other steel plants is also duly
envisaged.

1997-2002 - Ninth Five Year Plan

Visakhapatnam steel plant had foreseen a 7% growth during the entire plan period.

2002-2007 - Tenth Five Year Plan

Steel industry registers the growth of 9.9 % Visakhapatnam steel plant high regime targets
achieved the best of them.

2007-2012 - Eleventh Five Year Plan

For the 11th Five Year Plan (2007-12), the Planning Commission has approved total outlay of Rs
45607.08 Crores (i.e. Internal and Extra Budgetary Resources [I&EBR] of Rs 45390.08 Crore
and Gross Budgetary Support [GBS] of Rs 217 Crore).

2012-2017 Twelfth Five Year Plan

Infrastructure investment is aimed to increase from about 8.0% of GDP in the base year (2011-
12) of the Plan to about 10.0% of GDP in 2016-17. The total

Investment in infrastructure is aimed to be over 45 lakh Cr. or $ 1 trillion during the Twelfth Plan
period, double the investment of 11th Plan.
 These investments in infrastructure augur well for steel demand. The demand is
projected to grow at a healthy rate of 10.3% in the 12th Plan Period. RINL has projected a
th
CAPEX of Rs 11183 Cr during the 12 Plan..

National Steel Policy 2005:

The national policy seeks to facilitate the removal of procedural and policy bottlenecks
that affect the availability of production inputs, increased investment in research and
development, and the creation of road, railway and port infrastructure.

The policy focuses on the domestic sector, but also envisages a steel industry growing at
a faster pace than the domestic consumption, which will enable export opportunities to be
realized.

To boost steel consumption in the rural areas.

Developing of risk-hedging instruments like futures and derivatives to contain price

volatility in the steel market.

To strengthen the existing training and research facilities available to the domestic steel
industry.

Protection of industry from unfair trade practices resulting in integration of the Indian
and global industry especially in periods of downturn.
Rashtriya Ispat Nigam
TH
Limited 12 year
plan-projects
 TH
Rashtriya Ispat Nigam Limited 12 year plan-projects

Rashtriya Ispat Nigam Limited

Total XII th Plan Total XII'th Plan

Name of the Scheme/Project Original 2012-13 to 2016-17
Approved
Continuous/New Schemes

Expansion to 6.3 Mt LS 2,934.00 2412.84

Coke Oven Battery-IV(Phase I) - 4.52

Coke Oven Battery-IV(Phase II) 176.00 120.12

Coke Oven Battery-V(Including By-product plant) 235.00 380.35

Air Separartion Plant (ASU 4) 15.00 23.44

Pulvarised Coal Injection 38.00 22.73

330 TPH (6th) Boiler with Aux. 87.00 50.63

67.5 MW - TG5 power evacuation system 57.00 82.85

Strengthening of 220 KV system of APTransco 17.00 0.31

Augumentation of 220 KV power system 45.00 42.14

Facilities for Iron Ore Storage 310.00 220.44

Augmentation of Water Storage facility 215.00 11.07

3rd Converter and 4th Caster 970.00 472.53

Power Plant - II 677.00 577.03

TB 5 116.81

BF-1 & BF-2 category 1 repair 1,658.00 1338.32

Sinter plant productivity enhancements 333.00 166.99

SMS converter revamp 170.00 388.53

20.6 MW waste Heat Recovery Project 133.00 81.11

Axle Plant /Forged Wheel Plant 43.01

Acquisition of Iron Ore Mines & Coal Mines/ICVL 100.00 45.30

SLTM/Rebar Mill 1,708.00 1.12

Expansion to 11 Mts 610.00 0.00

Revamping of LMMM walking beam furnace 0.00
Central Storage Yard 2.22
Railway Signalling for Expansion 0.00
Revamping & Modernisation of CCD in SMS 1 0.00
Desaliniation Plant 0.00
Solar Power Plant 22.88
KBR Rectification Works 17.51
Twin LHF 0.39
Replacement of Turbo Blowers 0.00
HP Nitrogen Compressor 0.00
110 MVA, 220/33KV Transformer LBSS6(SMS2) 0.00
Charging Crane & Slag Yard Crane in SMS-2 0.00

AMR Schemes 625.00 515.23

R&D 70.00 159.76

Feasibility Report 0.00
Total - 12th Plan 11183.00 7320.18

Slurry Pipe Line and Pellitisation Plant

Transmission Tower Lines (TLT)
JV TOTAL
Total
SOLAR POWER PLANT

The Ministry of New and Renewable Energy (MNRE) is the nodal Ministry of the Government
of India for all matters relating to new and renewable energy. The broad aim of the Ministry is to
develop and deploy new and renewable energy for supplementing the energy requirements of
the country.

1. Commission for Additional Sources of Energy (CASE) in 1981.

2. Department of Non-Conventional Energy Sources (DNES) in 1982.
3. Ministry of Non-Conventional Energy Sources (MNES) in 1992.
4. Ministry of Non-Conventional Energy Sources (MNES) renamed as Ministry of New
and Renewable Energy (MNRE) in 2006.
The role of new and renewable energy has been assuming increasing significance in recent times
with the growing concern for the country's energy security. Energy self-sufficiency was
identified as the major driver for new and renewable energy in the country in the wake of the two
oil shocks of the 1970s. The sudden increase in the price of oil, uncertainties associated with its
supply and the adverse impact on the balance of payments position led to the establishment of
the Commission for Additional Sources of Energy in the Department of Science & Technology
in March 1981. The Commission was charged with the responsibility of formulating policies and
their implementation, programmes for development of new and renewable energy apart from
coordinating and intensifying R&D in the sector. In 1982, a new department, i.e., Department of
Non-Conventional Energy Sources (DNES), that incorporated CASE, was created in the then
Ministry of Energy. In 1992, DNES became the Ministry of Non-Conventional Energy Sources.
In October 2006, the Ministry was re-christened as the Ministry of New and Renewable Energy.

MISSION

The Mission of the Ministry is to ensure

1. Energy Security: Lesser dependence on oil imports through development and

deployment of alternate fuels (hydrogen, bio-fuels and synthetic fuels) and their
applications to contribute towards bridging the gap between domestic oil supply and
demand
2. Increase in the share of clean power: Renewable (bio, wind, hydro, solar, geothermal &
tidal) electricity to supplement fossil fuel based electricity generation;
3. Energy Availability and Access: Supplement energy needs of cooking, heating, motive
power and captive generation in rural, urban, industrial and commercial sectors;
4. Energy Affordability: Cost-competitive, convenient, safe, and reliable new and
renewable energy supply options; and
 5. Energy Equity: Per-capita energy consumption at par with the global average level by
2050, through a sustainable and diverse fuel- mix.

The National Solar Mission was launched on the 11th January, 2010 by the Prime
Minister. The Mission has set the ambitious target of deploying 20,000 MW of grid
connected solar power by 2022 is aimed at reducing the cost of solar power generation
in the country through (i) long term policy; (ii) large scale deployment goals; (iii)
aggressive R&D; and (iv) domestic production of critical raw materials, components and
products, as a result to achieve grid tariff parity by 2022. Mission will create an enabling
policy framework to achieve this objective and make India a global leader in solar
energy.
Further, Government has revised the target of Grid Connected Solar Power Projects from 20,000
MW by the year 2021-22 to 100,000 MW by the year 2021-22 under the National Solar Mission
and it was approved by Cabinet on 17th June 2015.

VISION

To develop new and renewable energy technologies, processes, materials, components, sub-
systems, products & services at par with international specifications, standards and performance
parameters to make the country a net foreign exchange earner in the sector and deploy such
indigenously developed and/or manufactured products and services in furtherance of the
national goal of energy security.

FUNCTIONS

Facilitate research, design, development, manufacture and deployment of new and renewable
energy systems/devices for transportation, portable and stationary applications in rural, urban,
industrial and commercial sectors through:

1. Technology Mapping and Benchmarking;

2. Identify Research, Design, Development and Manufacture thrust areas and facilitate the
same;
3. Lay down standards, specifications and performance parameters at par with international
levels and facilitate industry in attaining the same;
4. Align costs of new and renewable energy products and services with international levels
and facilitate industry in attaining the same;
5. Appropriate international level quality assurance accreditation and facilitate industry in
obtaining the same;
6. Provide sustained feed-back to manufacturers on performance parameters of new and
renewable energy products and services with the aim of effecting continuous upgradation
so as to attain international levels in the shortest possible time span;
7. Identify areas in which new and renewable energy products and services need to be
deployed in keeping with the goal of national energy security and energy independence;
 8. Deployment strategy for various indigenously developed and manufactured new and
renewable energy products and services; and
9. Provision of cost-competitive new and renewable energy supply options

CLIMATIC CONDITIONS

As our states Andhra Pradesh and Telangana has warm climatic conditions through out the
year they lie in the eastern hemisphere which is much viable for establishing the solar plants. To
establish solar power plants we have favourable climatic conditions throughout the year.

INCENTIVES GIVEN BY THE GOVT FOR ESTABLISHING SOLAR POWER PLANT

Transmission and Distribution charges for wheeling of power Transmission and
Distribution charges shall be exempted for wheeling of power generated from Solar
Power Projects for only captive use/third party sale within the State.

Distribution Losses Distribution losses shall be exempted only for Solar Power Projects
injecting at 33 kV or below irrespective of voltage-level of the delivery point within the
Discom.

Energy Banking Banking of 100% of energy shall be permitted for all Captive and Open
Access/ Scheduled Consumers during all 12 months of the year. Banking charges shall be
adjusted in kind @ 2% of the energy delivered at the point of drawal. The banking year
shall be from April to March. Drawals from banked energy shall not be permitted during
five month period from 1st April to 30th June and 1st February to 31st March of each
financial year.

Open Access Intra-state Open Access clearance for the whole tenure of the project or 25
years whichever is earlier will be granted as per the APERC Regulations amended from
time to time. In absence of any response or intimation from the Nodal Agency to the
generator within 21 days, then such application shall be considered to be deemed open
access.

Electricity Duty Electricity duty shall be exempted for captive consumption, sale to
Discom(s) and third party sale provided the source of power is from Solar Power Projects
setup within the State.

Contract Demand Scheduled Consumers shall avail reduction in Contract Demand for a
period of five (5) years from the date of commissioning of the project. Scheduled
consumers shall have the same meaning as defined in Balancing and Settlement Code
regulations issued by APERC and amended from time to time. The demand credit shall
be computed based on the average solar power consumption during hourly time block
periods.

Renewable Energy Certificate (REC) All projects developed with the above incentives
will be eligible for REC benefits subject to applicable regulations/orders of the
 appropriate commission. Deemed injection into the grid for in-house/co-located solar
generation will also be eligible for REC benefits subject to applicable guidelines.

Grid Connectivity and Evacuation facility The power generated from a Solar Power
Project shall be injected at an appropriate voltage at the sub-station and/or
interconnection point of the APTransco / Discom(s). Solar Power Projects will be
exempted from paying the Supervision charges to APTransco/Discom(s) towards the
internal evacuation infrastructure within the project site and upto interconnection point.

Deemed Industry Status Generation of electricity from Solar Power Projects shall be
treated as eligible industry under the schemes administered by the Industries
Department and incentives available to industrial units under such schemes shall be
available to the solar power producers.

Deemed Public Private Partnership (PPP) Status Deemed PPP status shall be provided for
projects coming up under category (A) as per para (3) of this policy.

Non Agriculture Status Deemed Non-Agricultural (NA) status for the land where Solar
Power Projects will be accorded, on payment of applicable statutory fees.

Land It is the responsibility of the project developer to acquire the land required for the
project. However, in case of land owned by Revenue Department, the land allotment shall
be done as per the prevailing government policy.

Pollution Clearance Solar PV power projects will be exempted from obtaining any
NOC/Consent for establishment under pollution control laws from AP Pollution Control
Board.

Viability Gap Funding (VGF) Means a grant one-time or deferred, provided to support
infrastructure projects that are economically justified but fall short of financial viability.
The lack of financial viability usually arises from long gestation periods and the inability
to increase user charges to commercial levels. Infrastructure projects also involve
externalities that are not adequately captured in direct financial returns to the project
sponsor. Through the provision of a catalytic grant assistance of the capital costs, several
projects may become bankable and help mobilise private investment in infrastructure.

Government of India has notified a scheme for Viability Gap Funding to
infrastructure projects that are to be undertaken through Public Private Partnerships. It
will be a Plan Scheme to be administered by the Ministry of Finance with suitable
budgetary provisions to be made in the Annual Plans on a year-to- year basis.

The quantum of VGF provided under this scheme is in the form of a capital grant at
the stage of project construction. The amount of VGF will be equivalent to the lowest
bid for capital subsidy, but subject to a maximum of 20% of the total project cost. In
case the sponsoring Ministry/State Government/ statutory entity propose to provide
any assistance over and above the said VGF, it will be restricted to a further 20% of
the total project cost.

Support under this scheme is available only for infrastructure projects where private
sector sponsors are selected through a process of competitive bidding. The project
 agreements must also adhere to best practices that would secure value for public
money and safeguard user interests. The lead financial institution for the project is
responsible for regular monitoring and periodic evaluation of project compliance
with agreed milestones and performance levels, particularly for the purpose of grant
disbursement. VGF is disbursed only after the private sector company has subscribed
and expended the equity contribution required for the project.

APREC GUIDELINES

According to APREC guidelines every company must meet 5% of their energy
requirements through renewable sources such as solar energy. With this rule many
companies are coming forward to establish solar plants to meet the guidelines of APREC
act.

If the companies fail to meet the guidelines of the APREC act they should buy REC(
renewable energy certificates ) from the power board.

COST COMPARISION REPORT OF MAY 2017

Product Power TPP Power TRT Solar power Power DNW
Variable cost 5536 2 42 5311
Total cost 6673 92 392 6504
Difference 1137 90 350 1193

As per the above table comparison of variable cost and total cost of the power plants are
shown Total cost variable cost = difference

Advantages
a) Accelerated Depreciation Upto 90% of asset value with 80% depreciation allowed in
the first year.
 b) 10 years Tax Holiday Tax holiday can be availed for 10 years during which time
Minimum Alternate Tax is still applicable (19.9305%) which can be offset against tax
payable later.
c) Other State specific exemptions which vary from state to state.
d) Capital Subsidy cannot be claimed for plants beyond 500 KW size. Also, capital subsidy
is made available only to Off-Grid and Decentralized Solar Power applications and not
Grid Connected Plants that are in the business of selling the generated power.
e) Capital Subsidy of 30% is applicable only for captive power plants up to 100 KW.
Subsidy will not be applicable in case of sale of power.

GRID CONNECTED POWER

Grid-interactive renewable power projects based on wind power, biomass, small hydro and solar
are mainly private investment driven, with favourable tariff policy regimes established by State
Electricity Regulatory Commissions (SERC), and almost all-renewable power capacity addition
during the year has come through this route.

Wind Power:
It aims at generation of competitively priced grid-interactive wind power. The programme also
covers research and development and survey and assessment of wind resources.

Bio-power:
Four sets of programmes are being implemented with the aim to generate competitively priced
bio power and/or heat from agricultural, agro-industrial residues and plantations and urban &
industrial wastes. These are:

- Biomass power / bagasse cogeneration

- Non-bagasse cogeneration

- Biomass gasifier

- Urban & Industrial wastes

Small Hydro Power

Aims to generate competitively priced Small hydro power (upto 25 MW station capacity).

Solar Power
Aims to generate competitively priced Solar Thermal and Solar Photovoltaic Power.
IRR CALCULATIONS OF SOLAR POWER PLANT
 Capitalization Value:
Rs.
Millions
Design and Engineering 3.51
Supply 274.04
Supply of commissioning Spares 0.35
Total 277.89
Less Service Tax Credit 0.43
(a) Net of CENVAT Credit 277.46
Storage, Erction and Handling Charges 34.06
Training Charges 0.35
Total 34.41
Less Service Tax Credit 7.02
Less AP Vat Credit 0.18
(b) Net of CENVAT Credit 27.20
( c) Viability Gap Funding @ Rs1Cr/mw 50
(d)=(a)+(b)-(
c) Capitalization Value 254.66
Depreciation: Straight line method (Book)
Capitalization Value Rs Millions 254.66
Estimated Life Yrs 25
Scrap Value (5% of Capitalization Vlaue) Rs. Million 12.73
Depreciation Value in 25 Yrs Rs. Million 241.93
Rs. Million
Depreciation /year 9.68
Maint Cost:
10% of (a)+(b) for 10 Year Rs. Million 35.06
for first 10 Yrs Rs. Million/Yr 3.51
 Input Data of 5 MW Solar Power Plant
Project Cost Unit Value Remarks
Project cost INR Million 254.7 As per Table A
Phasing of Expenditure
1st Year 100%
2nd Year 0%
3rd Year 0%
4th Year 0%

Project Specifications
Power generation MW 5
Operating Hours hours 8760.00 8000.07
Operating Capacity % 18.27%
Auxiliary Consumption % 0%
Project life Years 25
10% in first 10yrs 10 % in bal
Degradation of power generation after 25 years % 20
10 yrs
Project Financing
Project Equity % 100%
Project Debt % 0%
Operating Norms
Rate of Depreciation(WDV) % 80%

O&M
O&M Expenses
No Escalation forseen as
contract involves only O&M
Escalation Factor % 0%
Expenses at a fixed rate per
annum
Tax Rate % 34.61% As per Income Tax Act
MAT % 21.34% As per Income Tax Act
Electricity Tariff INR/Kvah 5.485 As mentioned in TABLE B
REC Price INR/REC 3500.00
Escalation Factor1 % 0 Normative Assumption
Book Depreciation of Plant & Machinery under % 3.80% Life time 25 Years
Companies Act
Salvage Value % 5.00% Based on depreciation of 95%

NOTE: 1) Insurance cost is not added.

Summary of Assumption:

Project Capitalization Value Rs. Millions 255

Power generation MW 5
Operating Hours hours 8760
Operating Capacity % 18.27
Auxiliary Consumption % 0
Project life Years 25
Degradation of power generation after 25 years % 20
10% in first 10 Yrs , another 10% in Bal 15 Yrs
Depreciation:
Book ( accounting) St line Method
Project life Years 25
Salvage Value (% of Capitalization Value) 5% Rs Millions 12.73
Dep for Income tax:
Rate of Dep (WDV) 80%
Project financing:
Project Equity % 100%
Project Debt % 0%
Income Tax Rate % 34.61
MAT Rate % 21.34
Electricity Tarif Rs./Kvah 5.473
Operation and Maint Expenses:
first 10 Years Rs Million 35.06
Operation and Maint per year Rs Million 3.51
for Bal 15 Yrs Rs. Million 35
Tax rate
Income Tax Rate % 34.61
MAT Rate 21.34
 As per project report IRR is 9.09% and as per Revised calculation IRR is 14.93%

The following are the major areas of difference

Parameter Unit Project Rev Remarks

In the revised calaculation
Awarded contract Value,
Cenvat benefits, VGF etc are
1 Asset Capitalization Value Rs.Millions 327.6 255 considered for Calculating the
Capitalization value and
Capitalization value is
considered as Cash Out flow

Depreciation per year varied

2 12.45 9.68
Depreciation Rs. Millions/Year due to above reasons

2016-17 Tariff is considered

3 4.96 5.385
Tariff Rs.Kwh in the revised Calculation

APEPDCL Revised Tarif

2016-17

Demand
charges Rs/kVA/month 386

Industrial Rs/kVah 5.25

Industrial
Colony Rs/kVah 6.08

TOD Rs/kVah 1.05

Customer
Charges Rs/Month 2250

Electricity
Duty Rs/kVah 0.06

APEPDCL
Rates 2015-16 Duration Hrs
Non Peak
Hours Rs/kVah 5.31 20 106.2
Peak Hours Rs/kVah 6.36 4 25.44
24 132
Weighted
Average
Tariff Rs/kVah 5.485
 CONCLUSION

Visakhapatnam Steel Plant was founded on 20th Jan 71 but became fully operational on 1st Aug
92. VSP is the first shore based integrated steel plant with new technology, large scale
computerization and automation. The organizational manpower has been rationalized to operate
it at international levels of efficiency and to attain international labor productivity.

Steel plant has an abundant availability of land so it became easy to establish solar
power plant without any land costs.

Normal water pumps were replaced with solar pumps which became easy for
operational purposes.

According to current tarrifs IRR(internal rate of return) has increased

Due to increase in consumption of water KBR(kaniti balancing reservoir) has
been expanded.(KBR 1 and KBR 2)

th
According to 12 plan solar power plant has been established successfully but it
was delayed by 3 months
 BIBILOGRAPHY

Websites

https://www.vizagsteel.com

http://www.tatasteel.com/

https://www.sail.co.in

http://www.jsw.in/steel

http://steel.gov.in/

https://ministry of renewable resources

http:// ministry of power http://

APREC.co.in

RASHTRIYA ISPAT NIGAM LTD.,

https://www.vizagsteel.com/insiderinl/financialperformance.asp

TATA STEEL official website

http://www.tatasteel.com/investors/performance/annual-report.asp

SAIL official site

https://www.sail.co.in/financial-list/103
JSW official site
http://www.jsw.in/sites/default/files/assets/industry/steel/IR/Financial
Performance/Annual Reports _ STEEL/JSW_Steel_Full_AR.pdf

INVESTOPEDIA INC., 1999.Financial Theory. [ONLINE]

https://www.investopedia.com/university/all/financial-theory/