A PROJECT REPORT ON

“CAPITAL BUDGETING”

SUBMITTED BY

A.RAMESH (09JK1E0005)

In Partial fulfillment for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION (FINANCE)

(Academic Year 2009-2011).

With Reference to

THE SINGARENI COLLIERIES COMPANY LIMITED, KOTHAGUDEM

(CORPORATE OFFICE)

GUNTUR ENGINEERING COLLEGE (JNTU KAKINADA)

NH-5, YANAMADALA, GUNTUR-522019, GUNTUR (DIST), A.P.

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 Acknowledgement
I am grateful to sri.K.J.AMARNATH, CHIEF GM (HRD), sri M.V.V.SUBBA
RAO CHIEF GM (F&A) and other officers and staff of Finance & Accounts
Department. The Singareni Collieries Company Limited, kothagudem for
providing the opportunity to do the project work.

I am also thankful to the principal of our college Dr.K.L.Narayana &

K.Madhusudan Rao (Head of the Department) and other faculty members
who extended their cooperation in completion of project effectively.

A.RAMESH (09JK1E0005)

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 INDEX

S.NO TOPIC PAGE NO

Chapter I: Design of the Study.
1 Introduction & objectives of the study. 5-21

Chapter II: Industry Profile.

2 Introduction to Coal Industry. 22-30

Chapter III: Company Profile.

3 The Singareni Collieries Company Limited. 32-53

Chapter IV: Capital Budgeting.

4 Concept of capital Budgeting. 55-62

chapter V: Capital Budgeting in SCCL

5 Capital Budgeting in SCCL. 64-70

Chapter VI: Kistaram Open cast Project.

6 Kistaram opencast project, Kothagudem Area. 72-87

Chapter VII: Financial Viability.

7 Financial Viability Analysis. 89-102
8 Financial Viability (Summary) 103-105
9 Conclusions. 106
10 Suggestions. 107
11 Bibliography. 108

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 CHAPTER-1

DESIGN OF THE STUDY

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 Design of the Study – Capital Budgeting

1. Introduction & objectives of the study:

Capital expenditure is an outlay of cash for a project that is expected to

produce a cash inflow over a period of time exceeding one year. Examples of
projects include investments in property, plant, and equipment, research and
development projects, large advertising campaigns, or any other project that
requires a capital expenditure and generates a future cash flow.

Because capital expenditures can be very large and have a significant impact
on the financial performance of the firm, great importance is placed on project
selection. This process is called capital budgeting.

1.1 Capital budgeting – Definition:

Capital budgeting (or investment appraisal) is the planning process used to

determine whether a firm's long term investments such as new machinery,
replacement machinery, new plants, new products, and research development
projects are worth pursuing. It is budget for major capital, or investment,
expenditures.

Many formal methods are used in capital budgeting, including the techniques
such as

 Accounting rate of return

 Net present value
 Profitability index
 Internal rate of return
 Modified internal rate of return

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  Equivalent annuity

These methods use the incremental cash flows from each potential investment,
or project Techniques based on accounting earnings and accounting rules are
sometimes used - though economists consider this to be improper - such as
the accounting rate of return, and "return on investment." Simplified and hybrid
methods are used as well, such as payback period and discounted payback
period.

1) Accounting rate of return:

Accounting rate of return, also known as the Average rate of return, or ARR is
a financial ratio used in capital budgeting. The ratio does not take into
account the concept of time value of money. ARR calculates the return,
generated from net income of the proposed capital investment. The ARR is a
percentage return. Say, if ARR = 7%, then it means that the project is
expected to earn seven cents out each dollar invested. If the ARR is equal to or
greater than the required rate of return, the project is acceptable. If it is less
than the desired rate, it should be rejected. When comparing investments, the
higher the ARR, the more attractive the investment.

Basic formulae

Where

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 2) NET PRESENT VALUE:

In finance, the net present value (NPV) or net present worth (NPW) of a time
series of cash flows, both incoming and outgoing, is defined as the sum of the
present values (PVs) of the individual cash flows. In the case when all future
cash flows are incoming (such as coupons and principal of a bond) and the
only outflow of cash is the purchase price, the NPV is simply the PV of future
cash flows minus the purchase price (which is its own PV). NPV is a central
tool in discounted cash flow (DCF) analysis, and is a standard method for
using the time value of money to appraise long-term projects. Used for capital
budgeting, and widely throughout economics, finance, and accounting, it
measures the excess or shortfall of cash flows, in present value terms, once
financing charges are met.

The NPV of a sequence of cash flows takes as input the cash flows and a
discount rate or discount curve and outputting a price; the converse process
in DCF analysis - taking a sequence of cash flows and a price as input and
inferring as output a discount rate (the discount rate which would yield the
given price as NPV) - is called the yield, and is more widely used in bond
trading.

Formula:

Each cash inflow/outflow is discounted back to its present value (PV). Then
they are summed. Therefore NPV is the sum of all terms,

where

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 t - The time of the cash flow
i - The discount rate (the rate of return that could be earned on an
investment in the financial markets with similar risk.)
Rt - the net cash flow (the amount of cash, inflow minus outflow) at time
t. For educational purposes, R0 is commonly placed to the left of the sum
to emphasize its role as (minus) the investment.

The result of this formula if multiplied with the Annual Net cash in-flows and
reduced by Initial Cash outlay will be the present value but in case where the
cash flows are not equal in amount then the previous formula will be used to
determine the present value of each cash flow separately. Any cash flow within
12 months will not be discounted for NPV purpose.

3) PROFITABILITY INDEX:

Profitability index (PI), also known as profit investment ratio (PIR) and value
investment ratio (VIR), is the ratio of investment to payoff of a proposed project.
It is a useful tool for ranking projects because it allows you to quantify the
amount of value created per unit of investment.

The ratio is calculated as follows:

Assuming that the cash flow calculated does not include the investment made
in the project, a profitability index of 1 indicates breakeven. Any value lower
than one would indicate that the project's PV is less than the initial
investment. As the value of the profitability index increases, so does the
financial attractiveness of the proposed project.

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Rules for selection or rejection of a project:

 If PI > 1 then accept the project.

 If PI < 1 then reject the project.

For example, given:

 Investment = 40,000
 life of the Machine = 5 Years

CFAT Year CFAT

1 18000
2 12000
3 10000
4 9000
5 6000

Calculate Net present value at 10% and PI:

Year CFAT PV@10% PV

1 18000 0.909 16362

2 12000 0.827 9924
3 10000 0.752 7520
4 9000 0.683 6147
5 6000 0.621 3726

Total present value 43679

(-) Investment 40000
NPV 3679

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 PI = 43679 / 40000
= 1.091
= >1
= Accept the project.

4) INTERNAL RATE OF RETURN:

The internal rate of return (IRR) is a rate of return used in capital budgeting
to measure and compare the profitability of investments. It is also called the
discounted cash flow rate of return (DCFROR) or simply the rate of return
(ROR). In the context of savings and loans the IRR is also called the effective
interest rate. The term internal refers to the fact that its calculation does not
incorporate environmental factors (e.g., the interest rate or inflation).

Definition:

Showing the position of the IRR on the graph of NPV(r) (r is labeled 'i' in the
graph)

The internal rate of return on an investment or project is the "annualized

effective compounded return rate" or discount rate that makes the net present
value of all cash flows (both positive and negative) from a particular
investment equal to zero.

In more specific terms, the IRR of an investment is the interest rate at which
the net present value of costs (negative cash flows) of the investment equals
the net present value of the benefits (positive cash flows) of the investment.

Internal rates of return are commonly used to evaluate the desirability of

investments or projects. The higher a project's internal rate of return, the
more desirable it is to undertake the project. Assuming all other factors are

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 equal among the various projects, the project with the highest IRR would
probably be considered the best and undertaken first.

A firm (or individual) should, in theory, undertake all projects or investments

available with IRRs that exceed the cost of capital. Investment may be limited
by availability of funds to the firm and/or by the firm's capacity or ability to
manage numerous projects.

Uses:

Important: Because the internal rate of return is a rate quantity, it is an

indicator of the efficiency, quality, or yield of an investment. This is in
contrast with the net present value, which is an indicator of the value or
magnitude of an investment.

An investment is considered acceptable if its internal rate of return is greater

than an established minimum acceptable rate of return or cost of capital. In a
scenario where an investment is considered by a firm that has equity holders,
this minimum rate is the cost of capital of the investment (which may be
determined by the risk-adjusted cost of capital of alternative investments). This
ensures that the investment is supported by equity holders since, in general,
an investment whose IRR exceeds its cost of capital adds value for the company
(i.e., it is economically profitable).

Formula:

Given a collection of pairs (time, cash flow) involved in a project, the

internal rate of return follows from the net present value as a function of the
rate of return. A rate of return for which this function is zero is an internal rate
of return.

Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total
number of periods N, and the net present value NPV, the internal rate of return
is given by r in:

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Note that the period is usually given in years, but the calculation may be made
simpler if r is calculated using the period in which the majority of the problem
is defined (e.g., using months if most of the cash flows occur at monthly
intervals) and converted to a yearly period thereafter.

Note that any fixed time can be used in place of the present (e.g.,the end of
one interval of an annuity); the value obtained is zero if and only if the NPV is
zero.

In the case that the cash flows are random variables, such as in the case of a
life annuity, the expected values are put into the above formula.

Often, the value of r cannot be found analytically. In this case, numerical

methods or graphical methods must be used.

5) MODIFIED INTERNAL RATE OF RETURN:

Modified internal rate of return (MIRR) is a financial measure of an

investment's attractiveness. It is used in capital budgeting to rank alternative
investments. As the name implies, MIRR is a modification of the internal rate
of return (IRR) and as such aims to resolve some problems with the IRR.

Problems with the IRR:

While there are several problems with the IRR, MIRR resolves two of them.

First, IRR assumes that interim positive cash flows are reinvested at the same
rate of return as that of the project that generated them. This is usually an
unrealistic scenario and a more likely situation is that the funds will be
reinvested at a rate closer to the firm's cost of capital. The IRR therefore often
gives an unduly optimistic picture of the projects under study. Generally for

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comparing projects more fairly, the weighted average cost of capital should be
used for reinvesting the interim cash flows.

Second, more than one IRR can be found for projects with alternating positive
and negative cash flows, which leads to confusion and ambiguity. MIRR finds
only one value.

Calculation

MIRR is calculated as follows:

Where n is the number of equal periods at the end of which the cash flows
occur (not the number of cash flows), PV is present value (at the beginning of
the first period), FV is future value (at the end of the last period).

The formula adds up the negative cash flows after discounting them to time
zero, adds up the positive cash flows after factoring in the proceeds of
reinvestment at the final period, then works out what rate of return would
equate the discounted negative cash flows at time zero to the future value of
the positive cash flows at the final time period.

Spreadsheet applications, such as Microsoft Excel, have inbuilt functions to

calculate the MIRR. In Microsoft Excel this function is "=MIRR".

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Example:

If an investment project is described by the sequence of cash flows:

YEAR CASH FLOW

0 -1000

1 -4000

2 5000

3 2000

Then the IRR r is given by

 .

In this case, the answer is 25.48% (the other solutions to this equation are -
593.16% and -132.32%, but they will not be considered meaningful IRRs).

To calculate the MIRR, we will assume a finance rate of 10% and a

reinvestment rate of 12%. First, we calculate the present value of the negative
cash flows (discounted at the finance rate):

Second, we calculate the future value of the positive cash flows (reinvested at
the reinvestment rate):

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 .

Third, we find the MIRR:

The calculated MIRR (17.91%) is significantly different from the IRR (25.48%).

6) EQUIVALENT ANNUAL COST:

In finance the equivalent annual cost (EAC) is the cost per year of owning
and operating an asset over its entire lifespan.

EAC is often used as a decision making tool in capital budgeting when

comparing investment projects of unequal lifespan. For example if project A
has an expected lifetime of 7 years, and project B has an expected lifetime of
11 years it would be improper to simply compare the net present values
(NPVs) of the two projects, unless neither project could be repeated.

EAC is calculated by dividing the NPV of a project by the present value of an

annuity factor. Equivalently, the NPV of the project may be multiplied by the
loan repayment factor.

EAC=

The use of the EAC method implies that the project will be replaced by an
identical project.

Why we should opt for a Capital Budget?

Here are nine good reasons why India should switch to a Capital Budget
instead of the usual one that focuses primarily on revenue-related issues:

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  First, every economic entity has a capital budget, be it unstated and
implicit (like a household or kirana shop) or stated and explicit like in
the case of a company or an R&D lab.

 As the size and complexity of operations increase, it becomes all the

more necessary for an economic entity to structure, implement and review
a capital budget. A nation-state is the most evolved form of an economic
entity, and therefore needs a capital budget. We in India certainly need one.

 Second, there seems to be an obsessive interest in a 'revenue' budget.

The annual tamasha surrounding the end-February presentation of the
Union Budget reinforces the feeling that our economic pundits,
commentators and critics are not able to step out of this frame of reference
and demand a 'capital budget'.

 While revenue deficit, fiscal deficit, FRBM et al are all very fine, surely as
citizens, we have a right to know how much capital is being deployed in
nation-building activities and how such capital is being raised.

 At a ridiculous level, but just to forcefully make the point, a perfectly

balanced revenue budget may have zero funds deployed for long-term
investment in the country's infrastructure. Something close to this may well
have happened as is pointed out below.

 Third, a capital budget provides a full perspective. A lack of appreciation

of the nation's capital needs may have derailed us. An obsession with the
revenue books has led India up the path of minimum investment in the
country's infrastructure with an abysmal figure of close to 3.5 per cent of
the GDP for about three decades. Debate and discussion on a publicly
declared capital budget may have averted this serious under-investment.

 Four, revenue and capital budgets are obviously inter-related just as a

profit and loss account and balance sheet are. Surpluses and allocations
from the revenue budget go towards capital investments. Similarly, the
servicing of long-term capital features in the revenue budget. In a
jugalbandhi, there is no music when one half is missing, forgotten or
ignored.

 Five, a capital budget should be made understandable to the people.

Just as the television-viewing public has over the years gained an
appreciation of the nuances of the revenue budget (prices, inflation,
deficits, taxes, allocations, subsidies and so on), the language of capital

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 budgets must also be made simple to the public at large who are today
tuned in far more to economic issues than ever before.

The following five questions need to be posed and then answered:

 How much capital formation does my country need?

 How much has been planned for?
 How much has actually been invested?
 How has it been financed?
 What choices have been made?

Simple Then let's get the answers in the form of a Union Capital Budget. Or
do we have to wait till these questions are posed under the Right to
Information Act?

 Six, the capital budget is intimately linked with infrastructure

investments. If US$ 350 billion is the planned infrastructure outlay in
the next five years (as endorsed by everyone from the prime minister
downwards), then let us have a capital budget that shows the way; or
candidly admit that we have yet to find the way.

 Recognizing reality through a capital budgeting process will indeed throw

up some challenging issues. An ICOR (incremental capital output ratio)
hovering around four would mean that for the 9 per cent growth
envisaged for the 11th plan period, capital formation will have to be
around 36 per cent.

 If the infrastructure sector is targeting around 8 per cent Gross Capital

Formation in Infrastructure, roughly one-fourth of the nation's capital
formation will be in infrastructure. It is this one-fourth that is closely
linked to the provision of public goods and services, economic
development and global competitiveness. It is also largely under the
direct influence of central and state governments.

 The balance non-infrastructural elements of capital formation are largely

in the private domain and not directly amendable to public

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 accountability or the assessment of the government's performance. So,
the link between a capital budget and nation-building is very strong.

 Seven, the frailty of investment-related statistics is worrisome. Nobody

from the Planning Commission to the finance ministry to the PMO will
deny that the existing statistical superstructure for accurately capturing
capital and investment related "stock" data is woefully inadequate vis-à-
vis systems in place for capturing "flow" data.

 While we are up to our eyeballs in statistics relating to industrial

production, agricultural production, service sector output, mining,
electricity production, export-import figures and so on, try asking for
data relating to the capital invested in the last one year across the
central government, state governments, PSUs, private sector, urban local
bodies and rural infrastructure, and humming and hawing is all you
would get.

 The ministry of statistics and programme implementation should get

cracking on this huge challenge. Surely, the newly constituted National
Statistical Commission that has taken charge under the Chairmanship of
Professor Suresh Tendulkar can list 'capital investments' as one of its
priority tasks.

 Eight, a capital budget will lead to a more informed debate. A good

capital budgeting process would lead to far greater participation and
consensus on key issues of nation-building. Should we be investing more
in railways or a new generation of expressways? Should irrigation take
precedence over rural roads? Should urban local bodies strive to invest
more by quadrupling their income from property taxes and other revenue
raising methods? How is funding happening? Are we availing enough of
overseas development assistance? Are short-term funds of public sector
banks going towards long-term debt of infra-projects? Is there gross
asset liability mismatch in the balance sheet of our nation...or is there
likely to be.

 Nine, finally, can we please do away with the irrelevant colonial hangover
of a Railway Budget Day in Parliament. It was in 1924 that, for the first
time, railway finances were separated from the general finances of the
government.

 Eighty-three years later, it seems more appropriate to have an

Infrastructure Budget Day. The overall requirement of Indian

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 infrastructure is five times the size of the railway's requirement. And an
Infra-Budget Day is nothing more than presenting the Capital Budget of
the nation.

 February is a good time for capital ideas for a Capital Budget!

1.2 Criteria for capital budgeting decisions

Potentially, there is a wide array of criteria for selecting projects. Some

share holders may want the firm to select the projects that will show
immediate surges in cash inflow, others may want to emphasize long-
term growth with little importance on short term performance viewed in
this way, it would be quite difficult to satisfy the differing interests of all
the share holders. Fortunately, there is a solution.

The goal of the firm is to maximize present shareholders value. This goal
implies that projects should be undertaken that result in a positive net
present value, i.e., the present value of the expected cash inflow less (-)
the present value of the required capital expenditures. Using net present
values (NPV) as a measure, capital budgeting involves selecting those
projects that increases the value of the firm because they have positive
NPV. The timing and growth rate of the incoming cash flow is important
only to the extent of its impact on NPV.

Using NPV as the criteria by which to select assumes efficient capital

markets so that the firm has access to whatever capital is needed to
pursue the positive NPV projects. In situations where this is not the case,
there may be capital rationing and the capital budgeting process
becomes more complex.

Note that it is not the responsibility of the firm to decide whether to

please particular group(s) of shareholders who prefer longer or shorter
term results. Once the firm has selected the projects to maximize its net
present value(NPV), it is up to the individual shareholder to use the

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 capital markets to borrow or lend in order to move the exact timing of
their own cash inflows forward or backward. This idea is crucial in the
principle – agent relationship that exists between shareholders and
corporate managers. Even though each may have their own individual
preferences, the common goal is that of maximizing the present value of
the corporation.

While net present value is the rule that always maximizes share holder
value, some firms use other criteria for their capital budgeting decisions,
such as internal rate of return (IRR), Discounting cash flow (DCF) and
payback period etc.

1.3 The importance of the capital budgeting in an industrial undertaking

needs no emphasis. The present status is confined to the Singareni
collieries company LTD (A Government company) to analyze how capital
budgeting is managed in the organization, what are the practices adopted
and its constraints.

1.4 Objective of the study:

 To study the capital budgeting management i.e., profitability analysis;

sensitivity analysis; risk factor analysis; statement showing financial
viability.

 To analyze the changes of the capital of the capital budgeting

management.

 To evaluate the effectiveness of the capital budgeting- expenditure

decisions in SCCL.

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 Suitable suggestions to improve the Capital Budget Management

1.5 Methodology:

a. sources of data:

Annual reports of the Singareni Collieries Company Limited

published & printed financial statements of SCCL.

b. Limitations of the study:

1. The information provided is restricted to its period of reference.

2. The period of study i.e., 2 months is not enough to conduct a detailed

study of the project.

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 CHAPTER-2

INDUSTRY PROFILE

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 Introduction to Coal Industry

2.1 Coal Mining in India:

India has a large history of commercial coal mining covering nearly

220 years starting from 1774 by M/s Sumner and Heatly of East India
Company in Raniganj Coalfield along the Western bank of river Damodar.
However, for about a century the growth of Indian coal mining remained
sluggish for want of demand but the introduction of steam locomotives in
1853 gave a fill up to it. Within a short span, production rose to an
annual average of 1 Million tonne (mt) and India could produce 6.12 mts.
per year by 1900 and 18 mts per year by 1920. The production got a
sudden boost from the First World War but went through a slump in the
early thirties. The production reached a level of 29 mts by 1942 and 30
mts by 1946.

With the advent of independence, the country embarked upon the

5-year development plans. At the beginning of the 1st plan, annual
production went up to 33 mts. during the 1st Plan period itself, the need
for increasing coal production efficiently by systematic and scientific
development of the coal industry was being felt. Setting up of the
National Coal Development Corporation (NCDC), a government of India
Under taking in 1956 with the collieries owned by the railways as its
nucleus was the first major step towards planned development of Indian
Coal Industry. Along with the Singareni collieries Company Limited
(SCCL) which was already in the operation since 1945 and which became
a government company under the control of Government of Andhra
Pradesh in 1956, India thus had two Government coal companies in the
fifties. SCCL is now a joint undertaking of Government of Andhra
Pradesh and Government of India sharing its equity in 51:49 ratios.
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2.2 Nationalization of Coal Mines:

Right from its genesis, the commercial coal mining in modern times in
India has been dictated by the needs of the domestic consumption. On
account of the growing needs of the steel industry, a thrust had to be
given on systematic exploitation of coking coal reserves in Jharia
Coalfield. Adequate capital investment to meet the burgeoning energy
owners. Unscientific mining practices adopted by some of them and poor
working conditions of labor in some of the private coal mines became
matters of concern for the Government. On account of these reasons, the
Central Government took a decision to nationalize the private coal mines.

The nationalization was done in two phases, the first with the coking coal
mines in 1971-1972 and then with the non-coking coal mines in 1973
which now is the piece of Central legislation determining the eligibility of
coal mining in India.

In October, 1971, the Coking Coal Mines (Emergency Provision) Act,

1971 provided for taking over in public interest of the management of
coking coal mines and coke oven plants pending nationalization.

This was followed by the Coking Coal Mines (Nationalization) Act, 1972
under which the coking coal mines and the coke oven plants other than
those with the Tata Iron & Steel Company Limited and Indian Iron &
Steel Company Limited, were nationalized on 1.5.972 and brought under
the Bharat coking Coal Limited (BCCL), a new Central Government
Undertaking. Another enactment, namely the Coal Mines (Taking over of
Management) Act, 1973, extended the right of the Government of India to
take over the management of the coking and non- coking coal mines in
seven States including the coking coal mines taken over in 1971. This
was followed by the Nationalization of all these mines on 1.5.1973 with
the enactment of the coal mines (Nationalization) Act, 1973 which mow is

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 the piece of Central Legislation determining the eligibility of coal mining
in India.

The Government has recognized the need for new coal policy initiatives
and for rationalization of the legal and regulatory frame work that would
govern the future development of this industry. One of the key reforms is
that the Government has allowed importing of coal to meet our
requirements. Private sector is now allowed to participate in the
extraction and marketing of coal.

The ultimate objective of some of the ongoing measures and others under
consideration is to see that a competitive environment is created for the
functioning of various entities in this industry. This would not only bring
about gains in efficiency but also effect cost reduction, which would
consequently ensure supply of coal on a lower prices. Competition would
also have the desirable effect of bringing in new technology, for which
there is an urgent and overdue need since the coal industry has suffered
a prolonged period of stagnation in technological innovation.

In a developing country like India coal mining occupies a pivotal place.

Coal is the basic input to many industries like iron and Railways. In
addition to them, Cement Fertilizers, Paper, Chemical and thousand of
medium and small- scale industries are among the main consumer of
coal.

Despite the development of the alternative resources of fuel like

Electricity, Petroleum and Solar energy, Coal continues to be the major
fuel in most of the industries.

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2.3 Coal in the Energy Scenario:

Coal dominates India‟s energy source. It contributes 55% to the total

production. Natural gas contributes 13% and natural oil contributes
17%. India‟s coal reserve may last for about 230 years at the present
Reserve to Production (R/P) ratio, whereas, world‟s coal reserve is
expected to last for 192 years.

In India coal reserves are found in Andhra Pradesh, Uttar Pradesh. West
Bengal, Madhya Pradesh, Orissa, Jharkhand etc

2.4 Coal resources and quality:

According to the 2010 BP Statistical Energy Survey, India had coal

reserves of 58600 million tones, 7.09% of the world total. The world‟s
largest coal reserve are held by the U.S.A, Russia, China, Australia, and
India. In 2009-2010 India produced 532.062 MT of coal (CIL 431.266
MT; SCCL:50.425 MT and balance others). Indian coals are high in ash
content (24-45%) but low in Sulphur (less than 1%) of the reserves, 15
are coking variety and the balance non-coking.

2.5 Coal Production:

Through a sustained programme of investment and greater thrust on

application of modern technologies, it has been possible to raise the
production of coal from al level of 70 Million Tonnes at the time of
Nationalization (1970) to a production of 532.062 MT during 2009-10.

Most of the coal production in India comes from open cast mines which
contribute over 88% of the total production (472.578 MT). underground
mining currently accounts for around 12% of national output(59.484
MT). most of the production is achieved by conventional Board and Pillar
mining methods.

Coal is the dominant energy resource in India, accounting for more than
half of the country‟s requirements. 70% of India‟s coal production is used
Capital budgeting Page 26
 for power generation, with the remainder being used by heavy industry
and public use. Domestic supplies satisfy most of India‟s coal demand.

According to the 2008 BP Statistical Energy Survey, India‟s coal

consumption is 208 million tons of oil equivalents. Unfortunately most of
India‟s coal is characterized by high ash content, but has high other
useful qualities such as low sulphur content (generally 0.5%), low iron
content in ash, low refractory nature of ash, low chlorine content and low
trace element concentration.

At present all private mines are allowed to operate only if they are
producing coal to supply a specific industry (eg. Power station,
industry)..

The only other major coal producer other than CIL, is the Singareni
Collieries Company, which is located in Andhra Pradesh. Singareni has
36 underground and 14 open cast mines, and produced 50.425 million
tons of coal in 2009-10.

2.6 Organizational structure of the Coal Industry:

Almost the entire sector is under state control, Coal India Limited., (CIL)
a Government under taking, has seven coal producing subsidiaries and
produce, 88% of the overall coal production. Singareni Collieries
Company Limited., is a joint venture of Government of Andhra Pradesh
and Government of India.

2.7 Coal Consumption:

The power industry is the single largest coal-consuming sector

accounting for about 70% of overall consumption followed by steel sector

Capital budgeting Page 27

 (13%). The balance is being consumed in other industries such as
cement, fertilizers, textile and chemical industries etc.

2.8 Collaboration in Coal Sector:

Technical and financial assistance of erstwhile USSR, UK, Australia,

Canada, Germany and France is given in developing the coal industry on
continuous basis through joint working groups of the respective
Governments and the Government of India. World Bank has also
financed some projects in the coal sector.

2.9 Reforms in Economy and Scope of Private Participation:

The scope of private sector participation in coal mining was begun with
amendment to the Coal Mines Nationalization Act in respect of existing
developed mines and a cost sharing basis has been envisaged by CIL
with foreign mining companies and mining equipment manufacturers in
developing new mines.

Thirteen mining blocks with a potential for yielding 35 million tons per
year have been offered for captive mining. Letters of intent have been
issued for setting up of four coal washeries with at o total installed
capacity of 21 million tons per year to private investors, including foreign
investors under a BOO scheme of CIL. Global tenders have also been
floated by Coal India to develop some existing mines in collaboration with
foreign firms.

Capital budgeting Page 28

2.10 Import of Coal:

Imports of coking and non- coking coal have been increasing every over
years. The bulk of imported coal is coking coal which is required by steel
plants. The domestic coking coal production has not been able to keep
place with the increase in demand from the steel sector. Import of lulling
coal required for metallurgical purposes cannot be stopped since these
are blended with indigenous coal to improve its quality.

2.11 Captive consumption:

Private sector companies engaged in production of Iron & Steel, Cement

and Power generation have been permitted to take up coal mining for
Captive consumption. The production of captive collieries viz., TISCO,
IISCO and DBC are still small when compared with the productive
Collieries.

2.12 Coking and Non- Coking Coal:

India has limited reserves of coking coal as well as superior grades of

non-coking coal. Superior grades are available at depth that can be
mined only through underground working. As the mines make get older
and deeper the geo-mining conditions in these mines make extraction of
coal harduous, causing decline in production and not financially viable.
Government envisages increasing productivity and quality in these mines
by introduction of machine mining.

2.13 Coal India Limited:

Coal India Limited, having head quarters at “Calcutta”, is the holding

company with eight substations viz,

 Eastern Coalfields India Limited (ECIL) Sancharia, West Bengal.

 Bharat Coking Coal Limited (BCCL) Dhanbad, Bihar.

Capital budgeting Page 29

  Central Coal Field Limited (CCL) Ranchi, Bihar

 Northern Coal Fields Limited (NCL) Singrouli, Madhya Pradesh

 Western Coal Fields Limited (WCL) Nagpur, Maharashtra

 Mahanandi Coal Fields Limited (MCL) Sampabalpur, Orissa

 Central Mining Planning & Design Institute of India (CMPDIL) Ranchi,

Bihar

 Eastern Coal Fields Limited (ECL) Sancoria, Asansol.

2.14 The Singareni Collieries Company Limited:

The Singareni Collieries Company Limited (SCCL) is a Government coal

mining company jointly owned by the Government of Andhra Pradesh
and Government of India on a 51:49 equality basis.

The Singareni coal reserves stretch across 350 km of the Pranahita-

Godavari Valley of Andhra Pradesh with a proven geological reserves
aggregating to whopping 8791 million tones.

SCCL is currently operating 14 opencasts and 36 underground mines in

4 districts of Andhra Pradesh with manpower around 69043 (31.3.2010).

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 CHAPTER – 3

COMPNAY PROFILE

(The Singareni Collieries Company Limited)

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 Company Profile: The Singareni Collieries Company Limited

3. The growth of the company since inception up to 2007 can be classified

in phases as under.

3.1 1871-1927:

In the year 1871, Dr. King of the Geological Survey of India discovered
coal near the village of Yellandu in Khammam district and accordingly
one of the important coal seams bore his name (King Seam). The
Hyderabad (Deccan) Company Limited incorporated in England acquired
mining rights in 1886 at exploit coal found in Yellandu area. One mine
was opened in 1889 at Yellandu and coal mining continued in this area
till 1927. In the inaugural year (1889), 59.671 tonnes of coal was
produced.

Large-scale expansion of coal mining SCCL was undertaken during the

initial Five-Year plans. In 1960 the Govt. of India Started its participation
in the equity of the company and also started extending loan assistance.

Thus, since March 1960 the company has been jointly owned by the
Government of Andhra Pradesh and Govt. of India. The Company‟s
accredited valley coalfield, which is the only depository of coal in South
India. Mining activities of SCCL are presently spread over four districts of
Telangana Region of Andhra Pradesh viz. Adilabad, Karimnagar,
Khammam and Warangal.

The studies of Geological Survey of India estimate as 22016 million of

coal reserves in the Godavari valley coalfield. The inventory covers up to
a depth of 1200 meters and it includes reserves proved, indicated as well
as inferred.

Capital budgeting Page 32

 The present Company was incorporated on 23rd December 1920 under
the Hyderabad Companies Act as a public limited company with the
name „The Singareni Collieries Company Limited‟ (SCCL). It acquired all
the assets and liabilities of the Hyderabad (Deccan) Co. Ltd. Best & Co.,
acted as Secretaries and Selling Agents.

3.2 Initial expansion (1928-1960):

During this period SCCL commenced coal-mining operations in

Bellampally and Kothagudem areas. Singareni Collieries grew from a
production level of 0.07 m.t. in 1928 to 2049 m.t in 1960. The State of
Hyderabad purchased majority shares of the Company in 1945. From
1945 to 1949, the Hyderabad Construction Co., Ltd., was acting as
Managing Agent.

In 1947, the Government of India transferred its share capital to the

newly constituted Mines Authority Limited (Coal India Limited). The
manner of participation in the company financial assistance for its
expansion by the state Government and the Central Government were
agreed upon in the 4-Party agreement of 1947.

In 1949 this function was entrusted to industrial Trust Fund by the then
Government of Hyderabad. The controlling interest of the Company
devolved on the Government of Andhra Pradesh in 1956 pursuant to the
reorganization of States. Thus, the SCCL became a Government
Company under the Companies Act in 1956.

3.3 Pre-Nationalization area (1961-73)

The period witnessed a steep growth in coal production as the

Government of India also participated in investment in SCCL from 1961.
Coal –mining activities were extended to other areas like Mandamari and
Ramagundam (1961) and Ramakrishnapuram (1963).

Capital budgeting Page 33

3.4 post – nationalizations ear (1973-92)

Large – scale expansion / modernization of mines was taken up during

this period. A large number of mines were opened between 1973-1992.
Open cast mining commenced in SCCL in 1975 with the opening of open-
cast mine at Godavarikhani area. The central government decided to
control its equity directly in SCCL. Accordingly agreements were
concluded on 13th March 1977. The SCCL, The State government, the
Central government and Coal India Limited were parties to the
agreements. In 1974 the Government of India transferred its share
capital to the Coal Mines Authority Limited.

3.5 Liberalization era (1992-2007)

Even though the country adopted economic reforms in the early 1990‟s.
it was not until 1996 that the coal industry has the first feel of
liberalization through Deregulation of pricing and distribution of higher
grades of coal. During this period the company witnessed a remarkable
turnaround due to structural reforms initiated in 1997 with significant
increase in production, productivity and profitability. SCCL has mined
275.70 Million Tons of coal from the Godavari valley field during the last
100 years.

3.6 Financial assistance plan periods;

The manner of extending financial assistance for expansion of SCCL by

the Govt. of India during V plan period was agreed upon in the four
party Agreement executed on 10th June 1974.

Capital budgeting Page 34

 For financial and other assistance during VI, VII, VIII, IX & X Plan
periods, separate agreements were executed on 31st March, 1985, 19th
October 2004 and 11th June 2010 between the Government of India, the
Government of Andhra Pradesh and SCCL.

3.7 Mission of SCCL:

 To retain strategic role of premier coal producing company in the

country and excel in a competitive business environment.

 To strive for self-reliance by optimum utilization of existing

resource and earn adequate returns of employed.

 To exploit the available mining blocks with maximum conservation

and utmost safety by adopting suitable technologies and practices
and constantly upgrading them against international benchmark.

 To supply reliable and qualitative coal in adequate in adequate

quantities and strive to satisfy customers needs by constantly
sharing their experience and customizing the product.

 To emerge as a model employer and maintain harmonious

industrial relations within the legal and social frame work of the
state.

 To emerge as a responsible company through good Corporate

Governance by laying emphasis on protection of environment &
ecology and with due regard for corporate social obligations.

3.8 Production profile:

SCCL occupies a vital position in the coal production of the country with
7.5% of India‟s coal reserves and production of 10% of country‟s annual
coal production. Coal production from open cast mines in SCCL
commenced and presently contributes to more than 60% of the total coal
output of the company.

Capital budgeting Page 35

3.9 Singareni at a Glance:

No of mines 36 Undergrounds+14 opencast

Manpower 69043
Production 2009-10 Target: 50.4MT Actual: Rs 50.43 MT
Production 2008-09 Target: 43.56MT: Actual: 44.54MT
Output per manshift (Total) 2009-10 2.73 Tones
Major consumers Power, Cement and others

3.10 Market Profile:

SCCL has been endeavoring to meet the coal demand of entire South
India. All the powerhouses located within the state of Andhra Pradesh get
their coal supplies from Singareni Collieries. In addition, the
requirements of coal of some of the Powerhouses located in Maharashtra
and Karnataka are being fulfilled by Singareni Collieries Company
Limited. About 2700 industrial units situated over the southern states
in the Small-scale sector get their coal requirement from SCCL.

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3.11 Performance of SCCL at glance:

2006-07 2007-08 2008-09 2009-10

Production MT 37.71 40.60 44.44 50.42

Dispatches MT 37.48 41.79 44.40 49.27

Productivity – Output per

man shift (Tonnes)

Mines 2.39 2.63 3.01 3.36

Total 1.91 2.10 2.42 2.73

OB removal ibcm 1373.53 1407.07 1849.92 2470.49

Manpower 82224 75573 70586 69043

Profit Rs lakhs 6380 17617 13283 26801

3.12 Land marks:

1. Discovery of Coal 1871

2. Commencement of Mining Operation 1889

3. Introduction of Machine Mining 1948

4. Introduction of Incentive Scheme 1951

5. Introduction of Electric Lamps 1953

6. Introduction of Frame proof Mining machine 1954

7. Commencement of Open Cast Mining Projects 1975

Capital budgeting Page 37

 8. Road Headers, side dump loaders, load haul dumpers 1981

9. Long wall Face 1983

10. Introduction of first 123/33 KVA Sub-station 1984

11. Introduction of Computers 1986

12. Introduction of walking dragline in opencast Mines 1986

13. Introduction of French Blasting Gallery Technology 1989

14. Introduction of Input crushing & conveying technology 1994

15. Introduction of Re-structuring capital base 1994

16. Re – structuring package 1998-99

17. Electronics for recognition of Trade Union 1998-99

18. All time record production of 29.556 million tones 1999-00

19. All time record production of 302 cores 1999-00

20. Introduction of Hi-tech information system 1999-00

21. Record profits of 400 cores 2002-03

3.13 Awards

Coal India productivity Award – 2003

Best CEO Award to Sri R.H.Khwaja.IAS. SCCL by IIIE 2004

Golden peacock environmental A ward for mining 2005

Coal India Productivity Organization Award 2005-06

TERI Award for Environmental Excellence 2007

Capital budgeting Page 38

 3.14 Financial results:

(a) Profit & Loss account for the year ended 31st March 2010
PARTICULARS SCHEDULE 2009-10 2008-09
REFERENC
E
INCOME
Turn over of gross coal (Gross) 1 782548.37 639608.57
Less: Statutory levels 95793.30 81620.76
Less: transfer to development 1371.52 7947.82
Turnover for coal (Net) 685383.55 550039.99
Internal consumption of coal 2 1273.10 1539.21
Other income 3 53755.04 47099.29
Increase/ decrease in stock 4 8243.40 114.41
Total 748655.0 598792.90
9
EXPENDITURE
Employee‟s Remuneration and 5 253738.23 239961.71
other benefits
Consumption of stores & Spares 6 152344.90 116347.39
Power & fuel 7 22642.55 22070.05
Transportation charges 8 15991.47 12066.79
Repairs & Maintenance 9 16230.17 16570.53
Social amenities 10 20355.92 15631.80
Interest 11 1211.39 2119.47
Provision and write off 12 1735.07 2540.46
Other Expenses 13 106648.55 8063.74
Contractual expenses 14 87867.90 53170.66
Depreciation E1 30093.37 24919.64
Voluntary retirement 3578.03 46129.90
compensation
Overburden adjustment (79.47) 17740.06
Provision for back filling 99700.00 ..
Less: cost allocated to internal job 15 7092.91 3371.23

Capital budgeting Page 39

works
Total 708983.1 573960.57
7

Profit for the year before prior

period adjustment & Taxation
Prior period adjustment(Net) 16 478.45 (160.83)
Provision for tax –current 45806.24 32047.00
- Deferred (33374.34) (20665.42)
Fringe benefit tax .. 328.19
Income tax of earlier years (39.27) ..
Profit after taxation 26801.14 13283.39
Add: profit brought forward from 14378.38 15150.50
previous year
profit available for appropriations 41179.52 28433.89

10000.00 10000.00
APPROPRIATIONS
Less: Transfer to general reserves
Less: Transfer to general reserve 6932.79 3466.40
Less: Corporate divided tax 1151.45 589.11
Balance carried to balance sheet 23095.28 14378.38
Basic and diluted earnings per 1.55 0.77
share (Rs)

Capital budgeting Page 40

 (b) Balance sheet as on 31st March 2010

PARTICULARS 2009-10 2008-09

SOURCES OF
FUNDS
1. share holders
funds
a. Share 173319.81 173319.81
capital 89135.53 70418.63
b. Reserves &
Surplus
2. Reserve for future 58864.04 41734.54
overburden removal
3. Secured loans 46433.66 61882.06
Total 367753.04 347355.04
APPLICATION OF
FUNDS
1. Fixed assets
a. gross block 625740.88 554197.07
Less: 297938.67 281753.07
Depreciation
net block
b. capital 327802.21 272443.96
works in
progress
2. Investments 37452.69 34682.61
3. Deferred Tax 1941.76 1942.01
Asset (Net)
4. Advance action for 49174.26 32303.48
removal of over
burden
5. Current Assets,
loans & Advances
a. Current
Assets
i. Inventories 34831.46 26139.35
ii. Sundry 29925.89 26874.22

Capital budgeting Page 41

debtors
iii. Cash & 156997.80 160651.66
Bank
Balances
iv. Other 5188.46 5815.31
current
Assets
b. Loan & 113579.70 299628.73
Advances
LESS
Current
Liabilities &
Provision
a. Current 160273.61 192232.27
liabilities
b. provisions 273218.77 112389.72
433491.77 304621.99
Net Current Assets
6. Miscellaneous (929668.46) (4993.26)
Expenditure
(to the extent not
written off or
adjusted)
367753.46 347355.04

Capital budgeting Page 42

 (c)Performance indicators at glance 2005-06 to 2009-10

Indicators unit 2009-10 2008-09 2007-08 2006-07 2005-06

Production
Lakh
a. Open Cast tons 384.56 324.59 279.58 258.31 234.27
Lakh
b. Under Ground tons 119.69 120.87 126.46 118.76 127.11
Lakh
c. Total tons 504.25 445.46 406.04 377.07 361.38
Lakh
Off take tons 493.68 445.21 419.5 376.29 354.47
Stock of Coal tons 12.25 1.63 1.48 12.18 14.13
Output per man shift Nos 2.73 2.42 2.1 1.91 1.74
Man power RS. Lakh 69043 70586 75573 82224 86025
Net sales RS. Lakh 685384 550040 449968 379055 362910
Net profit before tax RS. Lakh 39672 24832 29012 11720 33249
Accumulated Profit RS. Lakh 23095 14378 15151 11589 17642
General Reserve RS. Lakh 66040 56040 46040 40000 30000
Equity share capital RS. Lakh 173320 173320 173320 173320 173320
Long term debit RS. Lakh 46434 5067 66334 66334 66334
Net worth RS. Lakh 262455 243738 216258 211400 206392
Capital Employed RS. Lakh 272286 302133 302028 253942 217571
Contribution Exchequer
State Government RS. Lakh 88622 79147 70164 58486 55818
Central Government RS. Lakh 54051 39203 15139 20524 23226
Earning per share Rs 1.55 0.77 1.02 0.37 1.06
Debt equity share Ratio 0.27:1 0.31:1 0.38:1 0.38:2 0.38:3
Capital turnover ratio Times 2.52 1.82 1.49 1.49 1.67
Cost of sales to sales % 94.21 95.49 93.55 96.91 90.84
Debtors as no of maonth
sales months 0.46 0.51 0.37 0.53 0.38

Capital budgeting Page 43

 d) Cash flow statement for the year ended 31st march 2010.

S.No Particulars 2009-10 2008-09

A CASH FLOW FROM OPERATING ACTIVITIES
Profit Before Tax and Prior Period 39671.6 24832.33
Adjustment
Adjustment for
Depreciation 30093.4 24919.64
OBR Reserve 17129.5 25952.16
WVD of assets written off 440 1591.09
Provision written back 819.56 2450.8
interest income on investments 85.03 85
interest income on deposits and others 15662 17433.28
Interst expense 1211.38 2119.47
VRS expenditure 3578.03 46129.9
gain exchange variation 561.91 0.58
Loss exchange variation 741.56
prior period adjustment 503.12 277.45
Operating profit before working capital 36459.77 86108.31
charges 76131.69 110940.64
Adjustment towards changes in :
inventories 8692.11 2161.59
Sundry Debtors 3051.67 10340.29
Other current assets 626.85 3030.53
Loans and advances (Excl: Advance Tax & TDS 1618.85 8869.71
Current liabilities 32216.3 32865.16
Provisions for gratuity, leave encashment
& superannuation benefit 17414.2 14856.96
provisions for back filling 99700
Tax paid including TDS 41131.6 32896.85
FBT paid 328.19
Overburden advance action 16870.8 8272.82
17397.50 438.35
Cash flow before extra ordinary items 937529.19 11050.27
VRS payment 3578.03 27877.29
Net Cash flow from operating activities 89951.2 82624.98

Capital budgeting Page 44

B CASH FLOW FROM INVESTING ACTIVITIES

Increase in fixed assets( including

work in progress) 88637 63933.41
Sale of Investments 0.25
Interest income 85.03 85
cash flow from investing activities(B) 88551.7 63848.41

C CASH FLOW FROM FINANCING ACTIVITIES

Decrease in secured loans 15448.4 24388.68
Interest on Deposits and others 15662 17433.28
Interest expense including prior period
interest 1211.38 2119.47
Dividend Paid 3466.4 3466.4
Corporate dividend Tax 589.11 589.11
Cash flow from financing activities© 5053.28 13130.38
Net increase in cash and cash equivalents
D (A+B+C) 3653.86 5646.19
cash & cash equivalent at the beginning of the
E year 160652 155005.5
cash &cash equivalent at the end of the
F year (D+E) 156998 160651.7
e) Financial Report (Rs in crores):s

2009- 2008-
Particulars
10 09
Capital
Authorised(1800000000 Equity shares of Rs 10 each) 1800 1800
(f)
Issued,subscribed and paid up:
1733198119 Equity shares of Rs 10 each fully paid
1733.2 1733.2
(includes 632145 equity shares of Rs 10 each allotted
as bonus shares by capitalisation of general and
capital reserves)
General reserve 660.4 560.4
Profit after tax 268.01 132.83
Dividend 69.33 34.66

Capital budgeting Page 45

Sources and application of funds in SCCL:

 Equity capital From Government of India.

 Equity capital From Government of Andhra Pradesh

 Long – term borrowings from Government of India.

 Plighting back of funds by Internal Resources of Profit.

 Bilateral credit from Government of India

 Drawing funds temporarily from Commercial Banks such as State

Bank of Hyderabad etc. to meet working capital

(g) Cash Credit Account: (CCA)

Secured by first charge in factor of the following participation banks

ranking on present and future stocks of stores and spares and coal stock
in all the divisions.

a. State bank of Hyderabad Limit Rs. 490 Lakhs

b. Indian Bank of Hyderabad Limit Rs. 150 Lakhs

c. Canara Bank Hyderabad Limit Rs. 90 Lakhs

d. State Bank of Partial, Hyderabad Limit Rs. 100 Lakhs

Capital budgeting Page 46

 3.15 Consumer satisfaction:

To improve the customer satisfaction the company adopted selective

mining in underground and opencast mines to improve the quality of
dispatches.

Non-carbonaceous brands like clay were blasted separately and excluded

form coal brought to surface, in some mines, picking arrangement for
removing shale stone etc, were intensified at all sidpatch points.

Installation of electronic weighbridges in the place of mechanical

weighbridges, joint sampling methods etc were also taken

Measures for improving quality of coal like fortnight planning of seam-

wise production, spot analysis at dispatch points, selective mining,
washing lower/inferior grade coal etc., were taken.

Washeries established at Manuguru and Ramagundam on BOO basis

started functioning. Establishment of washeries on BOO basis at
Khairagura and Ramakrishnapur is in progress.

3.16 Target and off-take of coal :

During the year 2009-10 off-take if coal was 49.37 million tones against
the target of 44.50 million tones.

As per the New Coal Distribution Policy announced by the Ministry of

Coal, Gol in 2008, customers drawing more than 4,200 tones per annum
have to enter into FSA. 171 customers entered into FSAs with SCCL.
Apart from them, 2power units, 55 cement units, 55 sponge iron units
and 27 CPP customers have FSAs with SCCL. 92% of dispatches have
been covered under FSAs and joint sampling protocols. The number of
customers registered with SCCL has gone up from 6,469 in 208-09 to
6,850 in 2009-10.

Capital budgeting Page 47

 3.17 exploration activities:

74057 million tonnes of reserves were proved during the year under
review against 229 million tonnes proved in the previous year. Thus, the
total proved reserves in Godavari Valley Coalfield have gone up from
9,384 MT at the end of previous year to 9,459 MT as on 31.03.2010. The
coal extracted by the Company in the Godavari Valley Coalfield up to the
year 2009-10 was about 931 MT.

3.18 Welfare measures and Social Security Schemes:

Welfare and social security to the employees are given due attention and
various welfare activities viz., housing & sanitation, educational,
recreational, medical facilities with super specialty services and social
security schemes that were in vogue are being continued. The overall
housing satisfaction as on 31.3.10 was 75% as against 72% at the end of
previous year.

The Singareni Collieries Education Society sponsored by the Company

has been running 13 schools at various areas, women‟s degree & junior
college at kothagudem and one polytechnic college at srirampur.

Tale radiology services have been commenced at Main Hospital and

radiology department is renovated. The cell constituted for monitoring
diseases like hypertension, diabetes have conducted 22 counseling
sessions.

Out of 36 underground mines man-riding systems are in operation in 29

mines and under erection in 3 mines. In 4 mines man-riding systems are
not introduced since walking distance is less.

Employees are provided sports facilities & required infrastructure and

also encouraged to participate in sports & games. Several events were
conducted for sports & games which inter-alia include coal India inter

Capital budgeting Page 48

 Company weight lifting, power lifting, body building competitions and
caroms tournament.

3.19 Corporate Social Responsibility

As a responsible corporate citizen, the company is carrying out several

CSR activities under a programme known as‟ Surrounding Habitats
Assistance Programme‟(SHAPE) the objective of which is to improve the
quality of life, living standards by making the surrounding areas as
better living places. 88 mobile medical camps covering 294 villages
conducted by the Company have benefitted 7,927 persons living in
remote places by way of medical consultation and investigation and
medicines have been supplied free of cost. Financial support was
extended for establishment of Engineering College by JNTU at Manthani,
Karimnagar district which starts from the academic year 2010-11. An
amount of Rs.5 crores was donated to Andhra Pradesh Chief Minister‟s
Relief Fund for the exclusive purpose of construction of 2,500 houses
and providing basic infrastructure for fold victims of Rajole Village in
Mahaboobnagar district. An amount of Rs. 5 lakhs has been donated to
National Foundation for communal harmony.

3.20 Activities of Singareni Seva Samithi

„Singareni Seva Samithi‟, a non – profit organization established by the

Company in 1998 has helped to a great extent for socio-economic
development of coal belt region. During the year under review the
Samithi extended training to 662 candidates in various vocational
courses in association with Khadi Gramina Mahila Vidyalaya. Training
was also imparted for the Project Affected Persons in various vocational
courses in addition to the measures taken under R&R scheme. 266 PAPs
were trained in Agarbathi & Rexine bag making, Volvo vehicles & Motor
car driving.68 candidates have established self employment units during
the year under review. Out of 576 candidates trained for Army / Police
recruitment rallies, 48 candidates were selected. In the Yoga &
Capital budgeting Page 49
 Meditation camps conducted throughout areas 300 persons have
participated.

An expenditure of Rs. 183 crores was incurred on various social

overheads during the year 2009-10 as against Rs.155 crores incurred in
the previous year.

3.21 Information Technology & Net Working:

Enterprise Resource Planning (ERP) Package has been implemented and

stabilized. Disaster system is being established.

First balance sheet under ERP regime was generated for the financial
year 2008-09. Facility established in the Company to organize „web
casting‟ where web conference can be held from; multiple locations
subscribing to annual license. RG-I, II & III, SRP and Mandamarri areas
are inter-connected by wireless.

Video conference facilities are being extensively used for various review
meetings. 2 important modules of hospital management system (OP
registration & periodical medical examination) went on live during the
year under report.

3.22 Safety in mines:

For the best efforts put in by the Management the number of fatal
accidents and fatalities has been reduced.

Mines rescue services: During the year under report, 76 persons were
imparted initial training in rescue and recovery works. Two mines rescue
teams have participated in All India Mines Rescue

3.23 Human Resource Development:

The fundamental truth behind the success made by the company is its
committed and dedicated human resources. For further improving the
technical and managerial skills of employees and constantly upgrading

Capital budgeting Page 50

 their knowledge in relevant spheres, the management is sponsoring them
to various training programs

The HRD dept., strives continuously for improving the competencies of

all Singarenians so that the company can achieve the set goals and
simultaneously enable the employees to lead healthy, peaceful, stress
free and prosperous life.

The activities taken up by the department include in-house and external

management development programmes, maintaining libraries with
relevant books & journals, organizing study tours, yoga& meditation
camps, sports, games and cultural events, publishing in –house journals
and bulletins & implementation of effective system of performance
management.

3.24 Environment:

SCCL is environmentally conscious, responsible and proactive. SCCL‟s

initiatives in protection of environment starts from the exploration stage
itself where preferences are given for mining coal in non-forest areas
thereby reducing pressure on forest areas.

SCCL is following triple point agenda for sustainable and development;

Excel in operations & technology

Excel in environment management

Respect to the social order

Pollution control measures like dust suppression at the source of

generation at mines and units like coal handling plants, workshops etc.,
treatment of waste water, noise control and soil erosion control measures
and being scrupulously followed.

GK OCP, Kothagudem has been awarded in recognition of practicing

“cleaner production technologies and climate change mitigation

Capital budgeting Page 51

 measures” by AP Pollution Control Board on the occasion of World
Environment Day celebrations on 5th June, 2009.

So far 16 Effluent Treatment plants are in operation for removal of oil

and grease in workshops, 7 Sewage Treatment Plants are functioning at
different areas. WWF has organized 2-day field workshop on 19th & 20th
February, 2010 at Kothagudem for Singareni Collieries High School
teachers to impart practical learning experience on environment
education. Nature clubs are working in all schools of the Company with
the association of WWF.

Aforestation:

During the year 2009-10 SCCL has developed block and avenue
plantations covering an area of 551 Ha. and plantation 1,00,4696
numbers of seedlings were distributed for planting. In all 13, 35,902
numbers of seedlings were planted as against 4, 62,043 in the previous
year.

3.25 Research & Development:

During the year under review R & D activities were taken up in UG mines
viz., extraction of coal underneath dwellings and PWD road, design of
rhombus pillars for introduction of SDL in steeply inclined seams,
simultaneous extraction by BG method in 3 seam and LHDs in 4 seam in
Vakilpalli mine, parting stability between wide stall panels in 2 seam and
3 seam in RK 1A incline, induced caving of hanging roof in Goaf and
ventilation studies at RKNT; and in opencast projects viz., effect of dump
on Godavari river and fold protection bund and slope stability etc. The
activities benefited in expediting the new projects, improving safety, mine
ventilation, production & productivity and health of workmen.

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 S & T Projects:

3S&T Projects with the assistance of Govt. of India are ongoing and are
under implementation at PKOC, Manuguru and Anna University for
predicting slope failures using micro seismic technology. Investigation of
capability of over line strata for estimation of support capacity by CMRI,
NIRM & ISM and stability of parting between coal pillar a working in level
contiguous seams during depillaring by CMRI.

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 CHAPTER-4

CAPITAL BUDGETING

Capital budgeting Page 54

 CAPITAL BUDGETING

4.1 Concept of Capital Budgeting:

The term “capital budgeting” refers to long term planning for

proposed capital outlays and their financing. Thus it includes both rising
of long term funds as well as their utilization. It may thus be defined as
“the firms formal process for the acquisition and investment of capital” .it
is the decision making process by which the firms evaluates the
purchase of major fixed assets. It involves firm‟s decision to invest its
current funds for addition, disposition, modification, and replacement of
long term or fixed assets. However it should be noted that investment in
fixed assets is also to be taken as a capital budgeting decision. Ex: A new
distribution system may call for both new warehouse and an additional
investment in investors. An investment proposal of this nature must be
taken as capital budgeting decision evaluated as a single package but not
as an investment in a fixed asset (i.e. warehouse) and in a current asset
(investment) separately.

Capital budgeting is a many sided activity. It includes searching for DE

1:1 kind of more profitable investment proposals, investment engineering
and marketing consideration to predict the consequence of accepting the
investment and making economic analysis to determine the profit of each
investment proposal.

 Its basic feature can be summarized as follows:

 It has potentially of making large anticipated profits.

 It involves a high degree of risk

 It involves a relatively long-term period between the initial outlay and the
anticipated return..

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 On the basis of the above discussions it can be concluded that capital
budgeting consists in planning the development of available capital for
the purpose of maximizing the long term profitability of the firm.

4.2 The capital budget evaluation process:

Many companies follow a carefully prescribed process in capital

budgeting. The process usually includes the following steps:

Project proposals are requested from department‟s plants and authorize

capital budgeting. Capital expenditure is an outlay of cash for a project
that is expected to produce a cash flow over a period of time exceeding
one year. Ex: Investments in property, plant, and equipment, research
and development projects, large advertising company, or any other
project that requires a capital expenditure and generates a future cash
flow. Because capital expenditures can be very large and have a
significant impact on the financial performance of the firm, great
importance is placed on project selection. This process is capital
budgeting.

4.3 Criteria for capital budgeting decisions:

Potentially there is a wide array of criteria for selecting projects. Some

shareholders may want the firm to select project that will show
immediate surge in cash inflow, others may like to get long term growth
with little importance on short-term performance.

Viewed in this way, it would be quite difficult to satisfy the differing

interests of all the shareholders. Fortunately, there is a solution. The
goal of the firm is to maximize present shareholder value. This goal
implies that projects should be undertaken that result in a positive net
present value of the required capital expenditure.

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 Using Net Present Value (NPV) as a measure, capital budgeting involves
selecting those projects that increase the value of the firm because they
have a positive NPV. The timing and growth rate of the incoming cash
flow is important only to the extent of this on NPV.

Using Net Present Value (NPV) as the criterion by which to select projects
assumes efficient capital markets so that the film has access to whatever
capital is needed to pursue the positive NPV projects. In situation where
this is not the case, there may be capital budgeting process becomes
more complex. Note that it is not the responsibility of the firm to decide
whether to please particular groups of share holders who prefer longer or
shorter term results.

Once the firm has selected the projects to maximize its net present value,
it is up to the individual shareholders to use capital markets to borrow or
lend in order to move the exact timing of their own cash inflows forward
or backward. This idea is crucial in the principal-agent relationship that
exists may have their own individual preference. The common goal is
that of maximizing the present value of the corporation.

4.4 Objectives of a capital budgeting

 It determines the capital projects which can be started during the budget
after taking into account their urgency and the expected rate of return on
each project.

 It estimates the expenditure that would have to be incurred on capital

projects approved by the management together with the source from
which the required funds would be maintained.

 It restricts the capital expenditure on projects within authorized limits.

Capital budgeting Page 57

 4.5 Importance of capital budgeting:

Capital budgeting decisions are most crucial and crucial business

architectures. Special care should be taken in making these decisions on
account of the following reasons.

4.6 Involvement of Heavy Funds:

Capital budgeting decisions require large capital outlays. It is therefore

absolutely necessary that the firm should carefully plan its investment
programs so that it may get the finances of the right time and they are
put to most profitable use. An opportune investment decision can give
spectacular results and on the other hand an ill-advised and incorrect
decision can jeopardize the survival of even the biggest firm.

4.7 Long Term Implication:

The long term feel the effect of capital budgeting decision over a long
period and therefore they have a decisive influence on the rate and
direction of the growth of the firm.

For example, if a company purchases a new plant for manufacture of a

new product. The company commits itself to sizable amount of fixed cost
in terms of indirect labor such as supervisory staff salary and indirect
expenses such as rent etc. in case the product does not come out or
came out but proves to be unprofitable, the company will have to bear
the burden of fixed cost unless it decide to write off the investments
completely as a wrong decision. Therefore it can prove disastrous for the
long-term survival of the firm.

Similarly inadequate investment in assets would make it difficult for the

firm to run the business in the long run just as an unwanted expansion

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 4.8 Irreversible decisions:

In most cases capital budgeting decisions are irreversible. This is

because it is very difficult to find a market for the capital assets. The only
alternatives will be to scrap the capital assets so purchased or sell than
to incur a substantial loss in the event of the decision proved wrong.

The capital budgeting decision requires an assessment of future events,

which are uncertain. It is really a difficult task to estimate the future
events, the profitable benefits and costs accurately in quantitative terms
because of economic, political, social and technological factors.

On account of these reasons capital expenditure decisions are the class

of division, which is best, reserved for consideration by the highest level
of management. In case some parts of it are delegated, a system of
effective control by the top management has to be evolved.

It has already been said that the firm capital budgeting include both
planning for proposed capital outlays and their financing. However in
this chapter we are not dealing with selection of a particular project out
of several alternative projects available. Thus our study is restricted to
the process of deciding whether or not to commit resources to a project
whose benefits costs is in consonance with the profit maximization.

4.9 Capital Investment proposals:

A firm may have several investment proposals for consideration. It may

adopt some of them or all of them depending upon whether they are
independent or dependent of maguey excusal.

4.10 Capital budgeting – appraisal methods:

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 In view of the significance of capital budgeting decision, it is a absolutely
necessary that the method adopted for appraisal of capital investment
proposal is a sound one. Ant appraisal method should provide the
following:

 A basis of distinguishing between acceptable and non- acceptable.

 Ranking of project in order of their desirability.

 Choosing among which is applicable to any concealed project.

 Recognizing the fact that bigger benefits are preferable to smaller one
and every benefit is preferable to longer once.

There are several methods for evaluating and ranking the capital
investment proposal. In case of all these methods the main emphasis is
to the return which will be derived on the capital invested in the project.
In other words the basic approach is to compare the investment in the
project with the benefits derived there from.

a) Payback period method.

b) Discounted payback method

c) Accounted Rate of Return Method

d) Net Present Value Method.

e) Internal rate of Return Method

f) Profitability Index Method

g) Modified Internal rate of Return Method

(a) Payback period method:

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 Payback period shows the expected number of years required to recover
the original investment on a project. This is the oldest method of capital
budgeting. This method has several flaws-

a) It does not specify how much money is made by the project.

b) It does not take into account the cost of capital.

c) It completely ignores the time value of money.

(b) Discounted payback method:

Discount payback period is the same as pay back method, but the
expected cash inflows are discounted to the present at the cost of capital,
which removes one of the deficiencies of the payback method.

(c) Accounted Rate of Return Method:

Accounting rate of return focuses not on cash inflows, but on project‟s

contribution to the firm‟s net income. It is defined as average annual
income divided by average investment, where average annual income is
defined as average cash inflow minus average annual depreciation and
average investment is given as cost plus salvage value divided by 2.
Although it is the second lowest methods for capital budgeting, it ignores
the time value of money, and is an accounting rather than a financial
tool and as such may not really be used for financial decisions.

(d) Net Present Value Method:

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 The net present value of a project is defined as the summation of
discounted cash inflows expected over the life of the project minus the
initial investment. The return value may be positive or negative. If the
rupee value is negative the project should be probably rejected. In this
method, the return value expected for a project takes into account the
time value of money, and the cost of capital. It is one of three most
popular methods, but tends to be used less by real firms but more by
academics.

(e) Internal rate of Return Method:

The internal rate of return is the discount rate at which the discounted
expected cash inflows of a project equal to the initial cost may be used to
select mutually exclusive projects.

(f) Profitability Index Method:

The profitability index is defined as the present value of projects expected

cash inflows divided by the present value of all costs associated with the
project.

(g) Modified Internal rate of Return Method:

The modified internal rate of return better reflects the profitability of a

project. Unlike IRR, which assumes cash inflows from the project are
reinvested at the IRR, whereas the modified IRR assumes that all cash
flows are reinvested at the firm‟s cost of capital.

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 A distinction should be made about the uses of these capital budgeting
methods. If the indicators are used solely for an accept/reject decision
then the IRR MIRR, NPV and PI methods can be adopted.

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 CHAPTER – 5

CAPITAL BUDGETING IN SCCL

Capital budgeting Page 64

 CAPITAL BUDGETING IN SCCL

5.1 FEASIBILITY REPORT:

The SCCL Board has power to sanction the projects below Rs 50 crores.
The projects costing above Rs 50 crores are sanctioned by Government of
India .

Feasibility report is a study of project to enable the management and

Government to take investment decision. For preparation of project
reports a detailed exploration works will be undertaken to take
investment decision.

The methodology adopted for preparation of feasibility report differ from

Project – to project and industry – to – industry. Feasibility report in coal
sector is evolved over a period of time observing various guidelines and
suggestions issued by the evaluating agencies viz; Ministry of coal,
Planning commission, Investment board etc.

5.2 Evaluation Of Feasibility Report

The feasibility report outlines the type of technology like underground

method, with details of extractable coal resources, life of the project etc.
The feasibility report quantifies various physical input required viz. land,
building, plant and machinery (input) with year wise phasing of
requirement.

The physical parameters are converted into monetary terms evolving the
financial viability of the projects. The various methods adopted are:

I. Operation cost Vs Realization

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 II. Discounted cash inflow methods like I.R.R and N.P.V. drawn and
compared with required rate of return.

III. Payback period

IV. Economic analysis duly indicating overall benefits to the nation.

Keeping in view the different stages of project cycle emphasis is made to

analyze a new from the stage of projection i.e. preparation of the FR.

The structure and contents of the FR in SCCL have been evolved, as

stated earlier over period of time taking due consideration of the
guidelines of various Government agencies as well as the management of
the SCCL.

5.3 Annual Plans and 5 – Year Plan:

The Government of India will set the production target of SCCL. The
Annual plans and 5-year plans will be prepared and submitted to India.

These five year plan shows the total amount required during the plan
period considering various priorities. According to production schedule,
requirements of funds will be shown in each year.

Thus, annual plan will be drawn identifying all projects – prosperity,

formulation, construction, and infrastructure development.

Annual plan will be prepared considering the following:

o Completed mines and existing mines.

o Ongoing projects.

o Projects under formulation waiting for approval.

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 o Projects yet to be formulated and others.

The total capital requirement for the 5-year plan and for the annual
plans will be financed as follows:

o Government of Andhra Pradesh equity.

o Government of India equity.

o Bilateral credit.

o Government of India loan

o Suppliers credit

o Internal resources.

The total of the above resources is the total outlay.

5.4 Pattern of Finance:

The SCCL is tripartite Government Company. Government of Andhra

Pradesh is 51% equity and Government of India‟s 49%

5.5 Clearances by SCCL Board of Directors:

FR prepared is submitted for clearance of Technical committee of the

Board. After clearance by the technical committee, the F.R is cleared in
the Board of SCCL. The SCCL Board is delegated to approve projects up
to Rs 50.00 crores. The FR is then submitted to Government of India
after clearance from the Board.

5.6 Project cost estimation:

The capital requirement of the project is estimated under the following

major heads – land; Plant & Machinery; Coal Handling Plant and railway
siding, Vehicles, Furniture & fixtures, Cost of development,

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 Environmental management plan, Interest during management plan,
interest during construction, Capitalization of revenue expenditure. The
details of capital estimation under of a above heads.

(a)Land:

Based on the land requirement for mine area, laying of roads, auxiliary
services, building township etc are estimated in physical terms. Later the
land requirement is identified as to whether it is private land,
Government land, and forest land etc., for ascertaining the acquisition
cost. Taking into account the rate prevailing for different type of lands,
the cost of acquisition of land is estimated. Based on the yearly
requirement of land, the yearly capital projections are made for meeting
the cost of land.

(b) Prospecting and Boring:

The cost of drilling in the blocks was already incurred and booked to
Exploration capital account and the ideological information of the project
is fixed up with the help of bore holes drilled. The cost incurred in
connection with drilling of bore holes has to be capitalized.

(c) Cost of Building:

The capital requirements are estimated under the following sub groups:

I. Main plant structure

II. Residential building

III. Auxiliary structures.

Estimation of cost of production:

The estimation of year wise production is worked out keeping in view the
level of output, manpower, power requirement and stores cost etc.

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 various elements considered in the estimation of cost of production are
detailed below:

I. Wages

II. Stores

III. Power

IV. Generation administration expenses

V. Post project environmental monitoring.

VI. Interest on working capital

VII. Interest on loan

VIII. Depreciation

IX. Treatment And compensatory aforestation

X. Environment base line data generation

XI. Green belt development

XII. Pollution monitoring equipment

(e) Interest (during construction):

The total capital requirements under the above heads are registered with
yearly phasing keeping in view the prevailing debt equality ratio. The
capital distributed into loan capital constructions period of the projects
is worked out by adapting the prevailing interest rate @ 17% per annum.

(f) Capitalized revenue expenditure:

The revenue nature of expenditure such as wages, stores, power general

overheads expected to incur till the project is put on to revenue account
is estimated year wise. Necessary credit will be given for the production

Capital budgeting Page 69

 in value. During construction period the net revenue expenditure is
capitalized and included as an element of capital head in the project cost.

Separate statements are prepared for estimating the cost under each
head of expenditure. A summary of the capital cost of the project is
prepared and included as annexure in feasibility report, bringing out the
head wise total requirements with yearly phrasing for identifications of
total project cost.

(g) Vehicles:

Keeping in view the size of the project and its location, the requirement of
vehicles is estimated. The vehicle head normally covers jeeps, cars,
transport trucks, explosive vans, fork lifters etc. the capital requirement
for vehicles estimated taking into account the prevailing market prices.
The phrasing of vehicles was also shown as per requirement.

(h) Furniture & Fixtures:

The furniture and fixtures required for the project are estimated and
necessary provision is made under this head. Normally lump sum
provisions are made for tables, chairs, filling racks, computers etc.

(i) Cost of development:

Under this head necessary cost provisions are made for development
activities such as mine development, roads and culverts, water supply
and other amenities, research and development and cost of preparation
of feasibility report.

(j) Environmental Management Plan: (EMP)

Under this head necessary cost provisions are made for providing
rehabilitation to the displaced persons and for making compensation for
pollution.

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(k) Plant and equipment:

The plant & equipment is estimated separately under different groups for
conventional method of mining and open cast mining.

The requirement of plant and machinery under the subgroups is arrived

on the basis of mine capacity and its development plan. To meet the
contingencies for the items which have not been considered in the
subgroups, a suitable percentage of the total P & M cost is under
contingencies.

With estimating cost of the various plant and equipment required for the
mine the latest in – house process available based on the recent
purchases orders paced for similar items, tenders and quotation received
from the suppliers and CMPDIL price list are adopted for basic process in
the project equipment.

(j) Coal Handling Plant (CHP) & railway siding:

Taking into account the capacity of the existing Coal handling Plant in
the project area, additional requirement is assessed so as to provide
additional capacity to the existing CHP or to provide separate CHP.
Accordingly capital requirement is estimated and phasing is shown to
match the production phasing of the project. Provision for adequate
railway siding facilities will be made in the project estimate.

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 CHAPTER-6

KISTARAM PROJECT AREA

Capital budgeting Page 72

 Kistaram Open Cash Project, Kothagudem Area

6.1 Background:

To meet the ever increasing demand of coal, the company has drawn an
ambitious production plan to sustain the production from 40.60 MT
during 2007-08 to 40.80 MT by the end of XI plan period i.e., 2011-12.
However, due to increase in coal demand and negative coal balance of
about 25.00 MT in SCCL, the projections of the remaining period of XI
plan will be revised and the change in production projections of XI plan
will be finalized during the Mid- Term appraisal of XI five Year plan. The
coal demand can only be met by starting new mines and by reorganizing
and reconstructing some of the existing mines to set up production with
advanced technology.

SCCL is taking the following steps for increasing / maintaining the coal
production:

I. Reconstruction of existing mines for optimum production by intermediate

and high technology.

II. Opening of new mines in the adjoining / superjacent areas / seams for
higher production.

III. Adopting opencast working wherever possible for high rate of production.

IV. Conversion of shallow underground workings to opencast method for

extraction of balance coal reserves.

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 Demand and supply of coal (MT)

XI PLAN
2008- 2009- 2010- 2011-
s.no 2007-2008
2009 2010 2011 2012
I Demand
I. power(utilities) 28.6 30.6 32.66 32.66 32.66
ii.captive power 1.87 1.87 1.87 1.87 1.87
iii.cements 6.28 14.4 14.4 14.4 14.4
iv.others including colliery
7.57 12.75 16.45 16.85 16.85
consumption
Total 44.32 59.62 65.38 65.78 65.78
II Capacity available
i.existing capacity 15.095 14.975 14.775 14.42 10.92

ii. Under implementation 7.715 7.854 7.825 7.825 7.575

Total(II) 22.81 22.82 22.6 22.245 18.495

III Gap between demand
22.77 24.3 27.58 27.935 31.685
and supply(I-II)
IV capacity creation
proposals
I. approved projects 2.48 2.48 2.16 1.46 0.96
II.projects under
formulation(INCLUDING 12.75 13.23 14.32 16.295 21.345
KISTARAM PROJECT)
subtotal(IV) 15.23 15.71 16.48 17.755 22.305
V.total
capacity(INCLUDING 38.04 38.53 39.08 40 40.8
CAPACITY PROPOSALS)
overall gap (V-I) -6.28 -21.09 -26.3 -25.78 -24.98

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To meet the demand of coal, the exploration activities have been intensified in
the deeper areas as well as in the hitherto unexplored potential coal bearing
areas of Godavari valley coal field.

Detailed exploration has been conducted in the Venkatapuram block

located near JVR OCP I Expansion project to prove the persistency of
coal seams up to 191.20 depths. An opencast project, JVR OCP I
expansion is in operation since 2005-06. JVR OCP I expansion is located
about 2 km from the proposed property. The required infrastructure is
already developed.

In view of availability of infrastructure and feasibility of the deposit for

exploitation by opencast method, it is proposed to take up the project on
priority to meet the demand of coal. The proposed opencast project is
named as Kistaram OCP.

Detailed exploration in Kistaram OCP area was stared in August 2007

and a total of 5746.50 M have been drilled in 50 boreholes. Out of 50
boreholes 45 boreholes are falling in coal bearing area of 1.95 sq km
resulting in a density of about 29 boreholes/sq km.

6.2 Location of Kistaram OCP:

Sathupalli – Chintalapadu coal belt represents the South eastern

continuation of Kothagudem sub-basin covering an area of 11 sq.km.
Kistaram OCP is located on the North Western side of JVR OCP I
expansion project covering an area of 1.95 Sq.km. the project OCP forms
part of Kothagudem Region of SCCL.

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 The block is well connected by a 63 KM asphalt road from Kothagudem
Town in the northwest. Annapureddypalli – Kistaram PWD road is
passing along the western side of Kistaram OCP. Aswaraopet Khammam
state high way is passing about 500 m away from the project on the
southern side. Bhadrachalam road railway station (Kothagudem) is the
nearest railhead located in the northwest at about 63 KM on a branch
line from Dornacal junction of Chennai – New Delhi main line of SC
railway. The commercially important town Vijayawada is located 80 KM
away in SSW direction. Khammam the district head quarter is located at
a distance of 70 KM towards west of the project. Kistaram OCP is located
about 5 KM from Sathupalli town located on the eastern side.

6.3 Salient features of the project:

 Kistaram opencast project is designed with an installed capacity of

2.00Mtpa.

 The total mineable coal reserves are 21.61 MT and OB to be removed is

129.58 Mcum with an average stripping ratio of 6.00 cum/t.

 The life of the project is 13 years including construction period.

 Total land required to be acquired for this project is 435.68 Ha. Out of
the above, 285.44 Ha is forest land and 150.24 Ha is non forest land.

 The total man power 370 will be redeployed from other mines of SCCL
after suitable training in a phased manner. Contract man power is not
considered.

 The planned OMS is 20.73 tonnes at 100% performance level.

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 6.5 Coal seams:

Thickness
/ Parting
sseam Parting (m)

Range usual
B4 0.35-0.87 0.53
parting 6.20-9.75 8
B3 0.29-1.26 0.75
parting 0.94-4.44 1.5
B2 0.88-2.56 1.58
parting 0.75-5.11 3
B1 1.15-3.87 2.89
parting 21.88-28.75 25
Index-2 0.50-3.2 1.47
parting 7.48-14.17 12
Index-1 0.50-3.2 1.44
parting 1.08-10.50 7
A 4.10-8.72 6.44
parting 24.12-34.24 32
LB1 0.25-1.40 0.87
parting 14.96-21.90 20
LB2 0.30-1.94 0.88

The coal seams LB1 and LB2 are not considered for extraction since the coal
seams not developed over major portion of the area and have very limited
thickness.

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 Seam Net Mineable
Geological reserves (mt)
reserves
(mt)
B4 0.27 0.23
B3 0.57 0.48
B2 1.64 1.48
B1 3.11 2.80
Index II 2.06 1.85
Index I 2.51 2.25
A seam 13.90 12.51
TOTAL 24.06 21.61

6.6 Coal reserves:

Total coal (21.61 MT) to be extracted and OB (129.58 Mcum) to be

removed with a stripping ratio (6.00 cum/t)

Grading: The coal mined and marketed by SCCL is graded as for the
notification of Gol (S.O. 13/E dt jan 1984) w.e.f. 1.1.1985 as show below:

Grade Specific UHV

gravity (K.Cal/Kg)
B 1.45 5600-6200
C 1.50 4940-5600
D 1.55 4200-4940
E 1.60 3360-4200
F 1.67 2400-3360
G 1.75 1300-2400

Useful Heat Values (UHV) = 8900 – 138 (Ash%- + Moisture %)

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 Quality data available on 60% RH at 400 C is made use of in arriving at
the grades of the seam. For the estimation of the reserves the respective
specific gravity is considered.

The average UHV of the Kistaram project of 4330 K.Cal/Kg i.e. Grade D.
A 5% dilution is made for OC operations. After considering 5% dilutions
due to contamination, the coal from the project will be of E grade with an
average UHV of 4113 K.Cal/Kg. The percentage of availability of D grade
coal is 77.46% and F grade coal is 22.54%.

6.7 Mining system:

The geo mining characteristics of all the seams with their considerable
thickness and the potentiality of thin seams make them ideally suited for
exploitation by OC method. The OC mining system adopted in KISTARAM
OC both for coal and overburden is shovel dumper combination.

6.8 Cost of Overburden:

The cost of OB removal considered for the feasibility report of Kistaram

OC is estimated based on the recent contract awarded for similar work at
GK OCP with suitable escalation (updated & equated). The average cost
of outstanding OB removal is estimated at Rs 88.76 per cum.

Capital budgeting Page 79

 6.9 Equipment:

S.NO Description No

2
A
coal 12
3 – 3.50 cum Diesel hydraulic Shovel 1
35 T Rear Dumper 1
150-16- mm High speed, steep gradient 1
drills
410 HP Dozer
B
410 HP Dozer with rippers 1
1
Common 3
280 HP motor Grader 3
20 T Crane 3
8/10 T Crane 2
1 Cum Diesel backhoe 1
5-6 cum FEL 1
Diesel bowsers 1
Fire tender 2
Boom truck 1
Line truck 1
Tipping truck 2
Tyre handler
28 KL water sprinkler 1
Mobile maintenance Van 1
1
C Reclamation
280 HP motor Grader 1

Capital budgeting Page 80

 410 HP Dozer 1
28 KL water Sprinkler 1
Farm truck 1

6.10 coal Handling Arrangement:

A pit head CHP is proposed to be installed on the southern side of the

quarry. Kistaram OC is planned to produce two different grades i.e., D
and F through different streams of belt conveyors. These two grades are
handled and dispatched separately by providing two pre – weight bin
truck loading systems.

Rudrampur CHP is presently catering to the needs of JVR OCP I

expansion project and some of the mines of Kothagudem area.

The sized coal from this project will be transported by tippers to

Rudrampur CHP which is situated about 65 KM away from the project
site.

The two grades of coal crushed by 500 TPH feeder breakers to 200 mm
size will be transported by two spate 1X 125 HP 1000 mm wide belt
conveyors up to pre – weigh bin truck loading bunkers.

A provision of Rs 1868.28 lakhs is made in the cost estimates for the

above Pit Head CHP.

6.11 Rehabilitation and resettlement: (R & R policy):

Capital budgeting Page 81

 SCCL has been implementing the policy of the Government of AP known
as PRR 2005 issued vide GO Ms no. 68 I & CAD Department dt 8.4.2005
and subsequent amendments issued to the said GO so far that would be
issued from time to time.

6.12 cost of production (Rs in tonne):

As per FR May As per updated FR

2009. August 2010.
performance level
At
At 85% At 100% At 85%
100%
A Operating cost
1 Wages 63.17 69.78 58.61 64.75
2 power 6.95 7.1 8.43 8.61
3 stores 68.5 69.74 68.3 69.58
4 OB removal cost by hiring
433.04 434.03 461.24 465.65
HEMM.
5 post-project Environmental
1.53 1.84 1.53 1.84
monitoring.
6 Reclamation cost. 119.33 119.33 152.5 152.5
7 Mine closure cost. 0 0 14.93 14.93
8 General Administration 17.5 17.5 121.18 123.13
9 Interest on working capital 16.24 16.5 21.61 21.96
sub-Total(A) 726.27 735.81 908.33 922.94
B Fixed cost
1 Interest on loan. 17.72 17.72 17.73 17.73
2 Depreciation. 89.11 102.81 100.2 115.61
sub-Total(B) 106.83 120.53 117.94 133.35
Total cost of
833.1 856.34 1026.27 1056.29
production.

Capital budgeting Page 82

The construction of the project is scheduled to be completed by the 4th year.
The project is scheduled to yield rated production from 4th year onwards. All
the revenue nature expenses, net of sales receipts are capitalized up to 3 rd year
and the projects is brought to revenue from the beginning of 4th year.

Thus, revenue expenditure capitalized (REC) is estimated at Rs 41.57 Cr.

6.14 Tentative production schedule:

year Coal(MT) OB(m.cum) SR(cum)/T

1
2 0.5 15.51 31.02
3 1.5 12.78 8.52
4 2 11.5 5.75
5 2 10.58 5.29
6 2 10.68 5.34
7 2 12.25 6.13
8 2 12.08 6.04
9 2 12 6.01
10 2 12.26 6.13
11 2 12.15 6.08
12 2 5.45 2.73
13 1.61 2.34 1.45

Capital budgeting Page 83

Capital budgeting Page 84
6.15 Capital Requirement:

As per May As per

S.No Particulars 2009 updated FR
August 2010
1 Land 25.32 25.32
2 Cost of building 27.02 29.55
3 Prospecting & Drilling 1.23 1.23
4 Plant & Equipment 40.09 37.20
5 Furniture & Fixtures 0.93 0.93
6 Environment related cost 20.95 20.95
7 Development 25.39 25.80
Total capital outlay 140.9 140.99
8 Revenue expenditure 2 41.57
capitalized 28.00 25.17
9 Interest during 25.11 207.73
construction 194.0
Net capital requirement 3

Since the project attains rated capacity by 4th year, all revenue nature
expenses are capitalized up to 3rd year and the project is brought to
revenue account from the beginning of 4th year.

Keeping in view the availability of resources in SCCL, it is proposed to

fund the project in a combination of loan and internal resources at a

DEBT Equity Ratio of 1.806:1.

It is proposed to borrow loan during 1st and 2nd years. Balance capital
shall be met through internal resources.

Capital budgeting Page 85

 Ministry of coal vide letter no.43011/5/2001 – CPAM dt 24.11.2004 has
communicated the norms for bringing projects to revenue account for
compliance in all future projects:

I. The periods of construction and capacity build up in a project have to be

clearly defined in the Project Reports.

II. The periods of construction has to be defined to determine the

commercial readiness of the project to yield production on a sustainable
basis. Most of the basic infrastructure facilities like CHP, Railway siding,
development activities, service buildings, water supply etc., required for
implementing the project would need to be completed within the
construction period is over.

III. Based on the above, the capitalization of revenue expenses / opening of

revenue account will be decided. Revenue expenditure to be capitalized
should be net of sales receipt during the construction period.

IV. The initial capital of projects will be investment till the year of achieving
the rated capacity of coal production and corresponding overburden
removal in that year for opencast projects.

6.13 Interest during construction:

As per the policy interest payable during construction period is

capitalized. The project construction period is 4 years. It is proposed to
borrow loan during 1st and 2nd years, thus utilizing equity/ internal
resources for the balance capital outlay. The project is brought to
revenue from the beginning of 4th year. Interest payable up to 3rd year is
thus capitalized. Repayment of loan along with interest capitalized is
scheduled from 4th year onwards.

Capital budgeting Page 86

6.14 Power supply:

The total power requirement for this project is 2048 KVA as most of the HEMM
for OB and coal extraction are diesel operated. The estimated annual power
cost based on the two part tariff of APTRANSCO is Rs 142.41 lakh for the
targeted level of production. The capital investment for electrical power supply,
distribution etc., has been estimated at Rs 190.01 lakh.

6.15 Development:

Total capital requirement under various heads is estimated at Rs 25.80 Cr.

Capital budgeting Page 87

 Total capital
S.NO Particulars
(Rs Cr)

1 Power supply and other arrangements. 0.53

2 Roads and culverts. 5.04

3 Water supply and sewerage. 1.10

4 Coal handling arrangement.s 18.68

5 Pilot schemes and scientific research.

A Geo- technical investigations. 0.05

B Hydro geological investigations. 0.05

C Other investigations 0.20

D FR preparation cost 0.15

Total 25.80

6.16 Plan Provision:

Considering that the construction of project would start during 2011-12,

net capital requirement for the project is estimated at Rs 63.83 Cr during
XI plan period. Capital required during XII plan period is estimated at Rs
141.96 Cr.

6.19 Justification:

 Coal deposit is amenable for extraction by opencast technology with a

stripping ratio of 6.00 cum/t.

 Open cast method of work provides better recovery of coal with low
gestation period.

Capital budgeting Page 88

  Opencast method is as safe method of mining compared to underground
method.

 The development of coalfield will provide better social and economic life
to the area. It will also give a boost to the industrial activity in the area
and help in creating national wealth.

 In order to meet the ever increasing coal demand, it is essential to

enhance the production. The project will contribute 2.00 MT of coal per
annum.

 These seams, which are mot amenable for extraction by underground

method can now be extracted by Opencast method.

Capital budgeting Page 89

 CHAPTER -7.

FINANCIAL VIABILITY ANALYSIS

Capital budgeting Page 90

 FINANCIAL VIABILITY ANALYSIS

7.1 Total capital outlay of the project is estimated at Rs140.99 Cr. The project
attains rated capacity during 4th year. Considering the revenue expenditure
during construction period of initial 3 years, net of sales, net capital
requirement of the project is estimated at Rs 207.73 Cr at August 2010 price
level.

Overburden removal is envisaged to be outsourced through-out the life of

the project. Coal extraction is envisaged entirely with departmental
HEMM.

7.2 Capacity of the project and its schedule:

The year-wise schedule of production and capital outlay are as

shown below:

Year PS 1 2 3 4 5 Total
Coal
0 0.5 1.5 2 2
production(MT)
OB Removal
0 15.51 12.78 11.5 10.58
(M.cum)
Capacity outlay
1.42 57.45 48.78 24.82 7.74 0.77 140.99
(Rs cr)

7.3 OMS and EPM:

Output per manshift (OMS) at 100%performance level at mine level:

20.73 Tonnes

Earnings per manshift(EPM): Rs1196.07

Capital budgeting Page 91

7.4 Accounting analysis:

7.4.1 Cost of production: (Rs per tonne):

As per FR May As per updated FR

2009. August 2010.
performance level
At
At 85% At 100% At 85%
100%
A Operating cost
1 Wages 63.17 69.78 58.61 64.75
2 power 6.95 7.1 8.43 8.61
3 stores 68.5 69.74 68.3 69.58
4 OB removal cost by hiring
433.04 434.03 461.24 465.65
HEMM.
5 post-project Environmental
1.53 1.84 1.53 1.84
monitoring.
6 Reclamation cost. 119.33 119.33 152.5 152.5
7 Mine closure cost. 0 0 14.93 14.93
8 General Administration 17.5 17.5 121.18 123.13
9 Interest on working capital 16.24 16.5 21.61 21.96
sub-Total(A) 726.27 735.81 908.33 922.94
B Fixed cost
1 Interest on loan. 17.72 17.72 17.73 17.73
2 Depreciation. 89.11 102.81 100.2 115.61
sub-Total(B) 106.83 120.53 117.94 133.35
Total cost of
833.1 856.34 1026.27 1056.29
production.

Capital budgeting Page 92

(a) Wage cost:

At the rated capacity of the project, the requirement of manpower is

estimated as 344. The wage cost for manpower estimated considering
NCWA VII & Executive pay revision and latest AICPI of 3896 points valid
for the quarter ending August 2010. Average wage cost works out to Rs
58.61 per tone.

b) Stores cost:

The store cost per tonne has been considered at Rs 68.30 which
includes, spares, diesel, lubricants, tyres, POL of vehicles, explosives.

c) Power cost:

The total power units required at peak are 33.16 lack kwh and the total
cost at peak works out to Rs1.73 Cr. Power charges applicable for the
year 2010-11 are as per the notification of the APDISCOM. The average
power cost per tone works out to Rs8.43

d) OB removal cost (outsourcing):

Entire OB shall be removed by outsourcing. Drilling & excavation,

transportation and explosive cost are estimated based on the recent
contract awarded for similar work at GK OCP with suitable adjustment
for diesel price increase. This includes service tax and education cess @
10.30% on excavation component. The Average cost of OB removal per
tonne of works out to Rs 461.24.

Capital budgeting Page 93

S.NO Particulars Rs/Cum Rs/ Tonne of Coal

1 Excavation 44.80 232.78

2 Diesel 34.87 181.21

3 Explosive 9.09 47.24

Total 8.76 461.24

(e) Post-project Environmental monitoring costs:

An amount of Rs 30.00 lack has been provided per annum as recurring

cost towards post-project environmental monitoring activities from the
year of production. The cost per tone from revenue production works out
to Rs 1.53.

(f) Reclamation cost:

Keeping in view the stipulations of ministry of Environment & Forests.

The final void of the project is planned to be reclaimed with overburden
up to a depth of 35m from surface. As this activity shall be undertaken
after exhausting the coal reserves, a reclamation reserve is envisaged to
be created so as to meet the reclaimed during 14th to 16th year.

Capital budgeting Page 94

 Considering the prevailing rates, the total reclamation cost works out to
Rs 152.50 per tone of coal output at rated capacity.

(g) Mining closure cost:

As per guidelines of ministry of coal (dt 27.8.2009) an amount of Rs 6.00

lakhs per hectare of land in open cost mines is made available towards
the mine closure expenses. As per the methodology suggested in the
guidelines, this provision is made in the project which works out to Rs
14.93 per tone of coal produced.

(h) General Administration overheads:

In order to cover various administrative costs at area and corporate level

such as Establishment, personnel, finance, welfare, guesthouse, schools,
transport, traveling allowances, etc., Board of SCCL directed (17.7.2010)
to incorporate 15.83% of direct costs towards administrative overheads
which are based on actual expenditure incurred by SCCL during 2009-
10. This works out to Rs 121.18 per tonne at rated capacity.

(i) Interest on working capital:

The working capital for the operation of project is assumed at three

months operating cost. The current short term loan interest rate of
9.75% is considered to work out the interest on working capital. Based
on the above parameters, the interest on working capital per tonne of
coal works out to Rs 21.61 at 100% performance level.

(j) Interest on loan capita:l

The capital requirement of the project would be met from internal

resources and by raising loans from financial institutions. The total
capital outlay of the project is accordingly segregate into debt and equity
/ internal resources considering the debt equity ratio of 1:1806.1. it is
proposed to raise loans from financial institution to finance the project
capital requirement. An amount of Rs. 90.74 cr is proposed to be raised

Capital budgeting Page 95

 as loan during 1st and 2nd years. Since the project is under capital,
interest payable up to 3rd year is capitalized (at Rs. 25.17 Cr) and the
original loan along with capitalized interest are proposed to be repaid
from 4th year onwards. Accordingly, loan outstanding is Rs 115.92 Cr.
Accordingly the interest is calculated on loan component at 12.00% per
annum. The interest is calculated on principle that each loan amount
will be repaid in 5 equal installments in the respect of loan drawls.

The interest is computed every year on the reduced outstanding loan.

Average interest burden is Rs. 17.73 Cr per tonne.

(k) Depreciation:

The depreciation of the project is estimated taking into account the

effective life of each of the capital items. The average depreciation cost
per tonne works out to Rs. 100.20 at rated capacity.

7.4.2 Average selling price:

The project yields 77.46% of D grade and 22.54% of F grade coal

throughout the life. The average sales price during the revenue period is
Rs. 134.96 per tonne.

7.4.3 Profitability:

Based on the current selling prices of D and F grades of coal from project, the
profitability of the project at 100% and 85% performance levels is as given
below:

Capital budgeting Page 96

 Sl .No PARTICULARS AS PER FR MAY 2009 AS PER FR AUG

2010

1. Performance level 100% 85% 100% 85%

2. Production MT 2.00 1.70 2.00 1.70

3. Cost of production 833.10 856.34 1026.27 1056.29

Rs/T

4. Avg sales 1152.39 1152.39 1346.96 1346.96

realization Rs/T

5. Profit Rs/T 319.29 296.05 320.69 290.67

At the prevailing sales price, the project yields a profit of Rs. 320.69 per
tonne at 100% performance level and Rs. 290.67 per tonne at 85%
performance level.

7.4.4 Break-even analysis:

Break-even output where there is no profit no loss has been computed

for the project. The project breaks even at 55.28% of rated capacity by
producing 11.06 LT.

7.4.5 Financial IRR:

Base on flow of cost, replacement and operating cost together with sales
realization at the prevailing prices, internal rate of return for the project
id estimated.

Capital budgeting Page 97

s
PARTICULARS AS PER FR MAY AS PER FR AUG
2009 2010

Performance level 100% 85% 100% 85%

Financial IRR 30.61% 25.80% 29.64% 24.33%

Calculation of financial IRR at 100% performance level

(Based date: August 2010)

Year Output Capital Outflows Total Cash Net cash

(MT) cash operating outflow inflow for flows
outflow cost sales
outflow
PS 0.00 2 2 -2
1 0.00 60 60 -60
2 0.50 133 133 -133
3 1.50 21 -21 21
4 2.00 8 191 199 299 99
5 2.00 1 176 177 262 85
6 2.00 0 178 178 262 85
7 2.00 0 196 196 259 63
8 2.00 0 194 194 259 65
9 2.00 0 202 202 259 57
10 2.00 0 210 210 259 49
11 2.00 16 206 221 259 38
12 2.00 12 136 148 290 143
13 2.00 3 92 95 232 138
RV 1.61 -33 -33 33

Capital budgeting Page 98

 21.61 180 1781 1961 2641 680
Financial IRR: 29.64%

Capital budgeting Page 99

 Calculation of financial IRR at 85% performance level

(Based date: August 2010)

Year Output Capital Outflows Total Cash Net cash

(MT) cash operating outflow inflow for flows
outflow cost sales
outflow
PS 0.00 2 2 -2
1 0.00 60 60 -60
2 0.50 133 133 -133
3 1.50 -21 -21 21
4 1.70 8 171 179 254 75
5 1.70 1 160 160 223 63
6 1.70 0 159 159 223 64
7 1.70 0 164 164 220 56
8 1.70 0 169 169 220 51
9 1.70 0 167 167 220 53
10 1.70 0 175 175 220 45
11 1.70 16 173 189 220 31
12 1.70 12 168 180 247 66
13 1.70 3 151 154 222 68
14 1.43 0 98 98 202 104
15 1.18 0 54 54 170 116
RV -33 -26 26
20.11 187 1810 1997 2641 644

Financial IRR: 24.33%

Capital budgeting Page 100

s
Capital budgeting Page 101
7.4.6 Modified financial IRR:

Normally, the cash flows generated during the life of the project are
assumed to be Reddy-invested at the rate if IRR that the project yields.
The project yields high IRR with unrealistic returns on Reddy-
investments. Keeping this in view, modified IRR is estimated considering
the cost of capital for the company at 12% per annum. Based on this
presumption, the modified IRR is worked out as follows.

PARTICULARS AS PER Updated FR AUG

2010

Performance level 100% 85%

Modified Financial IRR 29.64% 24.33%

Calculation of financial IRR at 100% performance level

(Based date: August 2010)

outflows cash
capital Net
operating Total inflow
Year Output(MT) cash cash
cost outflow for
outflow flows.
outflow sales
PS 0 2 2 -2
1 0 60 60 -60
2 0.5 133 133 -133
3 1.5 -21 -21 21
4 2 8 191 199 299 99
5 2 1 176 177 262 85
6 2 0 178 178 262 85
7 2 0 196 196 259 63
8 2 0 194 194 259 65
9 2 0 202 202 259 57
10 2 0 210 210 259 49

Capital budgeting Page 102

11 2 16 206 221 259 38
12 2 12 136 148 290 143
13 2 3 92 95 232 138
RV 1.61 -33 -33 33
21.61 180 1781 1961 2641 680

Estimated cost of capital 12.00%

Estimated Re-investment rate 12.00%
Modified financial 18.26%

Calculation of financial IRR at 85% performance level

(Based date: August 2010)

Year Output Capital Outflows Total Cash Net

(MT) cash operatin outflow inflow cash
outflow g cost for flows
outflow sales
PS 0.00 2 2 -
2
1 0.00 60 60 -60
2 0.50 133 133 -133
3 1.70 -21 -21 21
4 1.70 8 171 179 254 75
5 1.70 1 160 160 223 63
6 1.70 0 159 159 223 64
7 1.70 0 164 164 220 56
8 1.70 0 169 169 220 51
9 1.70 0 167 167 220 53
10 1.70 0 175 175 220 45
11 1.70 16 173 189 220 31

Capital budgeting Page 103

 12 1.70 12 168 180 247 66
13 1.70 3 151 154 222 68
14 1.70 0 98 98 202 104
15 1.43 0 54 170 116
54
RV 1.18 -33 - 26
33
20.11 187 1810 1997 2641
644

Estimated cost of capital 12.00%

Estimated Re-investment rate 12.00%
Modified financial 16.37%

Capital budgeting Page 104

 7.4.7 Sensitivity analysis

Sensitivity analysis is carried out considering variation in grade mix of

coal. OB removal cost and capital cost. Even with 20% increase in OBR
cost over the base case, the project is still viable. The following are the

As per updated FR August 2010.

S.no particulars
Financial IRR at Modified IRR at
100% 85% 100% 85%
Base case(D Grade 77% + F Grade
1 29.64% 24.33% 18.26% 16.37%
23%)
2 Variation in Grade mix of coal.

(D Grade 50% + F Grade 50%) 13.95% 10.31% 12.56% 14.50%

(E Grade 100%) 18.13% 14.07% 14.40% 16.59%

RS/per
3
Variation in OB Removal cum

Base case OBR cost 88.76

5% increase in OBR cost over base
93.2 27.86% 2.70% 17.71% 20.01%
case
10% increase in OBRcost over Base
97.64 26.20% 21.21% 17.19% 19.44%
case
15% increase in OBRcost over Base
102.08 24.49% 19.67% 16.64% 18.84%
case
20% increase in OBRcost over Base
106.51 22.71% 18.08% 16.06% 18.20%
case
4 capital cost increase by 10% 27.14% 22.21% 17.71% 20.28%
capital cost +operating coal increase
5 21.14% 16.59% 15.52% 17.81%
by 10%
details.

Capital budgeting Page 105

8. Financial viability:

The working relating to financial viability have also been updated taking
the various norms and costs prevailing in the third quarter.

The summary of the viability analysis in comparison with original FR is

given below:

Sl No Item As per FR May As per FR May 2009

2009

Performance At 100% At 85% At 100% At 85%

level

Debt Equity 1.806:1 1.806:1

Ratio

I. Production(MTP 2.00 1.70 2.00 1.70

A)

II. Cost of production(Rs/Tonne)

A. Operating cost

i. Wages 63.17 69.78 58.61 64.75

ii. Power 6.95 7.10 8.43 8.61

iii. Stores 68.50 69.74 68.03 79.58

iv. OB removal cost 433.04 434.03 461.24 465.65

by hiring HEMM

v. Post- project 1.53 1. 1.5 1.84

Environmental 84 3
monitoring

vi. Reclamation cost 119.33 119.33 152.50 152.50

Capital budgeting Page 106

vii. Mine closure 14.93 14.93
cost

viii. General 17.50 17.50 121.18 123.13

administration

ix. Interest on 16.24 16.50 21.61 21.96

working capital

Sub Total(A) 726.27 735.81 908.33 922.94

B. Fixed cost

i Interest on loan 17.72 17.72 17.73 17.73

ii Depreciation 89.11 102.81 100.20 115.61

Sub – total (B) 106.83 120.53 117.94 133.35

Total cost of 833.10 856.34 1026.27 1056.29

production

iii Average sales 1152.39 1152.39 1346.96 1346.96

realization

iv Profit / loss 319.29 296.05 320.69 290.67

V Break-even 9.96 11.06

production(LT)

VI Break even 49.79% 55.28%

capacity (as % of
rated capacity)

VII Financial IRR 30.61% 25.80% 29.64% 24.33%

Capital budgeting Page 107

 VIII Modified 18.26% 16.37%
financial IRR

The above analysis indicates the project yields positive IRR on equity at a
debt equity of 1.806:1

9. Conclusions:

The project is forwarded for appraisal and sanction by government of India.

 The total capital outlay of the project is estimated at Rs. 140.99 Cr

and the project attains rated capacity during 4th year. The net
capital requirement of the project is estimated at Rs. 207.73 Cr. At
August 2010 price level.

 The grade of the coal is D Grade 77% and F Grade 23%. Even with
20% increase in overburden removal cost over the base case the
project is still viable.

 SCCL present debt-equity ratios are 1.806:1. The project yields an

IRR of 29.64% at 100% performance level.

 The project yields a profit of Rs.320.69 per tonne at 100%

performance level and RS. 290.67 Per tonne at 85% performance
level.

 Other consideration for accepting this project:

 The demands for coal highly increased because of the gap between
supply and demand especially in southern region

 Through open – cast technology extraction of coal becomes faster.

 Nearness of Vijayawada thermal power station and Kothagudem

thermal power station with established roads and railway lines.

 This project helps SCCL to strength economically.

Capital budgeting Page 108

10. Suggestions:

Following few suggestions are drawn from the above mentioned

conclusions:

 The company may pursue Government of India for budgetary

support to generate internal resource to avoid any delays in
sanction of new projects for wants of funds.

 The company may allocate more funds for repayment of loan

installments to reduce the debt component and ensure regular
credit obligations.

 To revise selling price of coal periodically whenever cost of inputs

are increased as otherwise the company may suffer losses.

 While making cost estimate of the project, revenue expenditure to

be spent to be clearly mentioned and it should not fluctuate.

 Delays in commissioning of projects to be minimized.

Capital budgeting Page 109

 11. BIBILIOGRAPHY.

1. IM PANDEY : CAPITAL BUDGETING.

2. PRASANNA CHANDRA : FUNDAMENTALS OF CAPITAL

BUDGETING.

3. S.N.MAHESHWARI : CAPITAL BUDGETING

(PRINCIPLES& PRACTICE)

Capital budgeting Page 110