It is a Presentation on Analysis of Fixed and Floating Interest rates of PGCIl Bonds. Also has the issue procedure of Bonds Issue and Characterstics of Bonds( YTM, Duration and Convexity)

1. Analysis of Fixed and Floating
Interest Rates
FOR POWER GRID CORPORATION OF INDIA
LTD
SUMMER INTERNSHIP
Under Guidance of:
Prof. Nalin Jain and
Mr. K.C.Pant
By:
Madhusudan Partani
PGDM-18
FORE School of Management

2. Flow of Presentation
 Objectives, Scope, Data
 Financial Statement Analysis
 Process of Debt Raising
 Yield, Duration and Convexity of Bonds
 Floating and Fixed Interest Rates
 Findings and Recommendations

3. Introduction of Company
 Power Grid Corporation of India Limited ( PGCIL)
was incorporated on 23rd October, 1989 as National
Power Transmission Corporation Limited.. Renamed
on 23rd Oct, 1992
 Sole CTU( Central transmission Unit) in the country
 From Power Transmission, diversified into Telecom
and Consultancy.

4. Bond Market
 Fixed Income Instruments
 Major Players
 Government ( Central, State and Municipal Bodies)
 PSUs
 Corporate
 Banks
Usually Tradable ( NSE-WDM Segment)
Different Maturities ( 180 Days to 15 years)

5. Objectives
 Financial Statement Analysis of PGCIL
 Procedure of Debt raising through Bonds
 Characteristics of Bonds
 Analysis of Fixed and Floating Interest Rates

6. Scope
 Study of Bonds
 For FSA, the results of last 8 years and FY 2008-09
is considered
 For Understanding the procedural aspects, PG XXX
issue is studied
 Only 5 Bonds are considered for Analysis under fixed
and floating rates.
 FRBs of other issuers and also Gsec and few PSU
Bonds are also studied

7. Data
 Primary
 Working manuals of Company
 Approval letters, Files, Workings,
 Data pertaining to Bonds issue
 Discussion with merchant Banker and Internal staff of the co.
 Secondary
 FIMMDA and Reuters
 Balance Sheets of last 8 years
 IndiaStat.com and also NSE WDM Segment

8. Objectives
 Financial Statement Analysis of PGCIL
 Procedure of Debt raising through Bonds
 Characteristics of Bonds
 Analysis of Fixed and Floating Interest Rates

9. Financial Statement Analysis
 Capital Composition
 Sources and Applications of Funds
 Ratios
 Cash Flow Analysis
 To understand the financial performance and
position of the company

10. Capital Composition
Capital Compostion
100%
9.72%
14.62% 14.34% 11.69%
90% 17.82%
22.06%
27.69%
80%
24.56%
35.31%
25.53% 26.50%
26.28%
70% 23.78%
22.08%
18.54%
60%
16.03%
50%
58.38%
13.33% 23.45% 27.17% 32.14%
40% 36.55%
41.64%
48.73%
30%
20%
30.32% 28.68% 26.25%
10% 35.33% 22.55%
18.49%
13.08% 7.34%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Unsecured Loans Secured Loans Reserves Total Share Capital

11. Sources of Funds- 2008-09
Term Loans (Institutions)
1%
Term Loans
(Banks)
Total Current Liabilities 1%
19%
Unsecured
Loans Non Convertible
6% Debentures
28%
Secured Loans
47% Deferred Credit
Reserves and Surplus 17%
20%
Share Capital Reserves and Surplus Unsecured Loans
Total Current Liabilities Non Convertible Debentures Term Loans (Institutions)
Term Loans (Banks) Deferred Credit
Share Capital
8%

12. Applications of Funds- 2008-09
Total Current Assets
15%
Investments
3%
Net Block
Capital Work in Progress
Capital Work in Progress Investments
25% Net Block
57% Total Current Assets

13. 30000
Multi-Step Analysis of Incomes
25000
20000
Sales
15000 PBIDT
PBIT
PBDT
10000
Sales PBT
PAT
PBIDT
5000 PBIT
PBDT
PBT
0
PAT
2003 2004 2005 2006 2007 2008 2009

14. Cash Flow Analysis
200903Change 200803
Cash and Cash Equivalents at Beginning of the year 1865.59 1196.82
Net Cash from Operating Activities 6641.09 122% 2990.83
Net Cash Used in Investing Activities -9156.75 71% -5343.31
Net Cash Used in Financing Activities 3078.95 2% 3021.25
Net Inc/(Dec) in Cash and Cash Equivalent 563.29 -16% 668.77
Cash and Cash Equivalents at End of the year 2428.88 30% 1865.59
*Detailed Break-up is available on request

15. Ratios
 Debt Equity Ratios
 Interest Coverage ratio
 Other ratios are available on request

16. Debt-Equity Ratio
1.95
1.75
1.55
1.35
1.15
0.95
0.75
2008-09 2007-08 2006-07 2005-06 2004-05
Debt-Equity Ratio 1.77 1.69 1.64 1.5 1.47

17. Interest Cover Ratio
2.5
2.25
2
1.75
1.5
2008-09 2007-08 2006-07 2005-06 2004-05
Interest Cover Ratio 1.88 2.29 2.3 2.23 2.11

18. Procedural Aspects of Debt raising
(Bonds)
 Issue Process
 Dematerialization
 Listing Agreement
 Debt Servicing

19. Procedure of Issuing Bonds
Board Shortlist of Quotes' for Appointment of
Approval arrangers Arrangers fees Arrangers
Letters to and
Letter of In Principal
Draft Disclosure From
Commitments with Approval from
Document Trustee, Banker
Bids NSE
CRA
Allotment, Letters
Book Building to Arrangers and
Investors

20. Dematerialization Process
Tri-Partite Agreement between
Depository, Issuer and RTA
Letter to NSDL and CDSL along
with Application form, Master
File and Disclosures
Confirmation from NSDL and
CDSL and Details of Demat
Allotment

21. Debt Servicing
 Record date
 BO Position
 Registrar and Transfer Agents ( RTA)
 Demat and Physical Holding
 DP s
 PAN
 Master File
 List o Beneficiaries sent to Bank
 Single Investor

22. Characteristics of Bonds
 Yield
 Current
 YTM
 Duration
 Macaulay's
 Modified
 Convexity

23. Yield
 Current Yield
 Yield to Maturity
 Annualised yield
 Yield to Call/ Yield to Put

24. Duration and Convexity
 Macaulay’s Duration = Average time to receive back
the investment ( considering the YTM)
 Modified Duration= Sensitivity of bond's price to
changes in the yield to maturity
 Convexity is a measure of the curvature or 2nd
derivative of how the price of a bond varies with
interest rate, i.e. how the duration of a bond changes
as the interest rate changes

25. Analysis
 All PGCIL Bonds and two each of PFC and GOI.
 Tenure/ Maturity
 Average Tenure
 Coupon Rate
 STRPP

26. Yield Curve -PGXXX
3
2.5
2
Price
1.5
1
0.5
PRICE
0
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%
Yield
Yield Curve- GSec 8.20%
200
150
Price
100
50 Price
0
0.000% 5.000% 10.000% 15.000% 20.000% 25.000%
Yield
Yield Curve - PFC Bond 57
200
150
Price
100
50
Price
0
0% 3% 6% 9% 12% 15% 18% 21% 24% 27% 30% 33% 36% 39%
Yield

27. Characteristics of Duration
Duration- Yield
8
7.5
7
Duration
6.5
6
5.5 Macaulay's Duration
5
4.5
Modified Duration
4
7.000% 8.000% 9.000% 10.000%
Yield
Duration- Maturity
7
6
5
Maturity
4
3 Macaulay's Duration
2
Modified Duration
1
0
0 2 4 6 8 10 12 14 16
Duration

28. Characteristics of Convexity
Coupon Rate- Convexity-Maturity
10.20%
10.00%
Coupon Rate
9.80%
9.60%
9.40%
9.20%
9.00%
8.80%
8.60%
0.46000 0.46500 0.47000 0.47500 0.48000 0.48500 0.49000 0.49500 0.50000 0.50500
Convexity
Coupon Rate-Convexity-Duration
9.00%
8.50%
Coupon Rate
8.00%
7.50%
7.00%
6.50%
6.00%
0.20000 0.25000 0.30000 0.35000 0.40000 0.45000 0.50000 0.55000
Convexity

29. Analysis of Fixed and Floating Rate
 Fixed rates
 Floating rates
 FRBs
 Computation of Floating Rates

30. Fixed vs Floating
 Rate Determination
 Fixed: Book Building for Coupon Rate
 Floating: Book Building for Spread
 Effect of Interest Rates Movements

31. Indian issuers going for FRBs
 GOI
 GOI FLOATING RATE +0.13% 2011
 GOI FLOATING RATE +0.50% 2015
 Indian Railway Finance Corporation Limited
(IRFCL)
 Power Finance Corporation Limited,
 ICICI Bank
 EXIm Bank

32. Analysis
 All PGCIL Bonds and two each of PFC and GOI.
 Tenure/ Maturity
 Average Tenure
 Coupon Rate
 STRPP

33. Observations
Coupon Rate Vs Avg Gsec Yield
13.00%
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
Rate P.A. Avg Yield of GS

34. Coupon Rate Vs Gsec Rate
14.00%
13.00%
12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
Coupon Rate- PG Bonds Interest on Govt Securtiy

35. Bonds for Analysis
Bond Date of Loan Coupon Redemption Maturity Intrest Loan Repayment
Descriptio Drawn Rate Date (Yrs.) Payment Amount Structure
n (Rs. Crs)
Bonds VIII 27-04-2000 10.35% 4/2014 14 Half-Yrly 20.00 5 Yr.Moratorium
Issue + 10 Eq Ann.Inst
Bonds IX 22-08-2000 12.25% 8/2012 12 Half-Yrly 576.50 3 Yr.Moratorium
Issue + 10 Eq Ann.Inst
Bonds X 21-06-2001 10.90% 6/2015 14 Annual 761.52 3 Yr.Moratorium
Issue + 12 Eq Ann.Inst
Bonds XIII- 31-07-2002 7.85% 07/2008 6 Annual 250.50 1 Yr.Moratorium
Issue + 6 Eq Ann.Inst
Bonds 17-07-2003 6.10% 07/2015 12 Annual 699.00 1 Yr.Moratorium
XIV-Issue + 12 Eq Ann.Inst

36. Floating Rate
 Assumptions
 Reference Rates
 Average Monthly yield of 10 Year GSec preceding the reset
month
 Average Yield of 10 year GSec for 12 months preceding the
reset month.
Average Yield of 10 year GSec for 6 months preceding the
reset month ( for Semi Annual Intrest Payment)
 Average of 1 Year GSec for the past 3 days preceding the reset
date.

37. 14.000% 1 Yr Gsec Yield Vs PG Bonds
12.000%
10.000%
8.000%
6.000%
4.000%
2.000%
0.000%
IN1YT=RR PG Rate

38. Floating Rate under Reference Rate of Average yield of 1 Year
Gsec –PG VIII
 Date of Issue: 27th April, 2000
 Intrest Payment: Semi Annually
 Coupon Rate: 10.35%
 Loan Amount: Rs. 20 Crores
 Repayment: 5 years Moratorium and 10 equal
Instalments
 Maturity: 27th April, 2014

39. Determination of Spread
Date Yield-1yr GSec Average yield Coupon Rate Spread
26-04-
2000 9.291
25-04-
2000 9.306 9.3140% 10.35% 1.03600%
24-04-
2000 9.345 931.40%

40. Computation of Floating Rate
Average Yield of 1 years GSec ( 3 days preceding Intrest rate)
Intrest
Payment Reference Period Average Govt yield Spread Floating rate Fixed rate
1.036
27-Oct-00 Oct- 23, 24, 25 10.39233% % 11.428% 10.35%
1.036
Apr-01 Apr- 23, 24, 26 8.88833% % 9.924% 10.35%
1.036
Oct-01 Oct- 23, 24, 25 6.89533% % 7.931% 10.35%
1.036
Apr-02 Apr- 23, 24, 26 6.17367% % 7.210% 10.35%
1.036
Oct-02 Oct- 23, 24, 25 5.64967% % 6.686% 10.35%
1.036
Apr-03 Apr- 23, 24, 25 5.12000% % 6.156% 10.35%
1.036
Oct-09 Oct- 22, 23, 26 4.47700% % 5.513% 10.35%
1.036
Apr-10 Apr- 22, 23, 26 4.92367% % 5.960% 10.35%

41. Fixed and Floating Rates
Intrest Payment-Fixed Intrest Payment-Floating
Opening Opening
Year Balance Redemption Interest Year Balance Redemption Interest
Oct-00 20 0 1.035 Oct-00 20 0 1.142833
Apr-01 20 0 1.035 Apr-01 20 0 0.992433
Apr-08 14 2 0.7245 Apr-08 14 2 0.62202
Oct-08 12 0 0.621 Oct-08 12 0 0.50484
Apr-09 12 2 0.621 Apr-09 12 2 0.30672
Oct-09 10 0 0.5175 Oct-09 10 0 0.27565
Apr-10 10 2 0.5175 Apr-10 10 2 0.297983
17.595 12.57485

42. Floating Rate under Reference Rate of Average yield
of 10 year Gsec Bond XIII- Opt-II
Computation of Spread
Avg Spread for AAA Bonds for 10
Years
Jun-02 138
May-02 127
Apr-02 173
Mar-02 200
Feb-02 198
Jan-02 159
Avg. 165.8333

43. Computation of Floating Rates
Average Yield for 10Yrs GSec( 12 Months preceding Coupon period)
Interest Reference
Payment Period Average Govt yield Spread Floating rate Fixed rate
Jul-03 Jul 01 - Jun 02 8.11% 1.658% 9.77% 7.85%
Jul-04 Jul 02 - Jun 03 6.39% 1.658% 8.05% 7.85%
Jul-05 Jul 03 - Jun 04 5.28% 1.658% 6.94% 7.85%
Jul-06 Jul 04 - Jun 05 6.70% 1.658% 8.36% 7.85%
Jul-07 Jul 05 - Jun 06 7.33% 1.658% 8.99% 7.85%
Jul-08 Jul 06 - Jun 07 7.88% 1.658% 9.54% 7.85%

44. Fixed Vs Floating Rate
Rs. (Crs)
Interest Payment-Fixed Interest Payment-Floating
Opening Redemptio Opening
Year Balance n Interest Year Balance Redemption Interest
Jul-03 250.5 41.75 19.66425 Jul-03 250.5 41.75 24.47293
Jul-04 208.75 41.75 16.38688 Jul-04 208.75 41.75 16.80431
Jul-05 167 41.75 13.1095 Jul-05 167 41.75 11.5839
Jul-06 125.25 41.75 9.832125 Jul-06 125.25 41.75 10.46606
Jul-07 83.5 41.75 6.55475 Jul-07 83.5 41.75 7.508501
Jul-08 41.75 41.75 3.277375 Jul-08 41.75 41.75 3.983458
68.82488 74.81915

45. Summary
Average Yield for 10Yrs GSec( Preceding Interest Payment)
(Rs. Crs)
Maturit Interest paid Under Under
Bond y till Spread Fixed Floating Savings
VIII 14 Apr-10 1.00% 18.009 15.29789 2.71111
163.205
IX 12 Feb-10
0.75% 497.8798 334.674 9
95.4274
X 14 Jun-09
1.015% 560.2883 464.8609 5
1.658% 68.82488 71.82599 -3.00112
XIII-Opt-II 6 Jul-08
1.507% 68.82488 73.49 -4.66512
0.648% 255.49 320.3901 -64.9001
XIV 12 Jul-09
0.711%2 255.49 323.0287 -67.5387
[1] Spread is determined taking previous 12 months’ average of Spread as published by FIMMDA

46. Cont
Average Yield for 10Yrs GSec( Preceding Coupon period)
(Rs. Crs)
Interest paid Under
Bond Maturity till Spread Under Fixed Floating Savings
VIII 14 Apr-10 1.00% 17.59500 14.59242 3.002577
IX 12 Aug-10 0.75% 508.473 352.3925 156.0805
X 14 Jun-10 1.015% 601.7912 494.247 107.5442
1.658% 68.82488 74.81652 -5.99164
XIII-Opt-II 6 Jul-08
1.507%2 68.82488 70.4959 -1.67103
0.648% 286.4584 353.1248 -66.6663
XIV 12 Jul-10
0.711%2 286.4584 356.0833 -69.6249

47. Factors for Consideration
 Term
 Short Duration: Fixed
 Long: Floating
 Coupon Rate
 Market Condition
 XII Issue ( Unfavorable Market Condition)
 Quantum of Loan
 Repayment Structure

48. PG XIII- 10Year Gsec
12.00%
10.00% Term
8.00%
6.00%
4.00%
2.00%
0.00%
2002 2003 2004 2005 2006 2007 2008
10 Year Gsec + Spread PGXIII
XIV- 10 Year Gsec
12.00%
Coupon Rate
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2003 2004 2005 2006 2007 2008 2009
10 Yr Gsec + Spread XIV

49. Findings and Recommendations
 Fixed Coupon Rate
 Easy Budgeting
 Perferable by Fixed Income Section
 Suitable for Conservative Company
 But
 Cannot take advantage of Interest Fall
 True market situation is not reflected in interest payment
 Is to be used when market is very favourable.

50. Cont
 Floating Rate
 Advantage of Fluctuations
 Returns on security is reflected by Market conditions
 Suitable in case if market is not favorable at the time of issue
 But the company will not be able to budget, this can
be solved by maintaining Provisions

51.  Fixed Interest rate with Call Option to issuer
 Can Call for repayment in case of fall in Interest rates.
 Also, since the Investors do not have the Put Option the
uncertainty of Disbursements in case of sudden selling of
bonds by investors is avoided.

52. Recommendations
 The company can go for Fixed Intrest rate if the market
conditions are favourable at the time of issue.
 Also for the meagre loan amount, the company can be
indifferent between the Fixed and the Floating rate.
 For a longer maturity bond, Fixed interest is to be
preferred if the yield curve of the GSec is at its low, and
the floating is to be preferred if the yield curve is at its
high.
 In case of recession, the yield of GSec, the interest rates
are low; the investors become prudent and prioritise the
security to the returns. Thus at such conditions, fixed
coupon rate can be issued as the company will be able to
attract investment at low coupon rate.