Free Cash Flows Analysis:

In the comparative study (year to year) of the free cash flow figures of Reliance Energy
Generation Ltd., it is shown that the FYs 2004-05 and 2005-06 faced a Net Loss before Taxes
of Rs. 1, 32,119 and Rs. 11, 13,428 respectively. The net loss had increased by 742.75% from
FY 2004-05 to 2005-06. But since then, the company has been doing well in earning its Net
Profits before Taxes (NPBT). The FY 2006-07 has earned a profit of Rs. 54.19 lakhs. Then, a
sudden hike can be noticed in the profits of the company. In the FYs 2007-08 and 2008-09,
the company has earned a NPBT of Rs. 101.43 Crores and Rs. 256.47 Crores respectively.
The profits before taxes rose by -586.77% in FY 2006-07, 18616.25% in FY 2007-08 and
152.24% in 2008-09. The average rate of increase of NPBT of the company is 3785.01%.

Reliance Powers Ltd. is in the growth phase. The period taken for this study is the period
when the company has been growing. The company had to face losses, come up with profits
again, etc which are the indicators of the company are being in the growth period. The Net
Loss before Tax of the company in the initial years of this study indicates that the company
has been trying to bring its operations up to the mark but failed to do so. The Net loss of the
company increased by 7.43 times in the FY 2005-06. Then there was a sudden hike in the
profits of the company which indicates that the company has been able to come out of the
loss margin and step in the profits margin. In the FY 2007-08, the company witnessed a big
rise in its profits. This shows that the company has done really well to put together all its
efforts to bring the operations up to the expected standard.

A glance in the company’s history shows that the company had issued bonus shares in the
ratio 3:5, i.e. 3 shares will be issued to the shareholder holding 5 shares, all of the face value
of Rs. 10, fully paid up. This was the period when the market price of the shares had gone
below the IPO price of the shares. This was the FY 2007-08 when the company showed an
extraordinary increase in its profits. Though the company has been suffering in that period,
but the operations of the company has really done well.

Reliance Power Ltd. has been charging depreciation on a fairly good rate. It is hard to guess
the method of depreciation followed by the company. But it can be said that the company
has not been charging depreciation in the straight line method. The growth of depreciation
figures has been fluctuating. The average depreciation percentage provided by the company
is 75.93% which is again a big margin. In the FY 2005-06, the figures of depreciation rose by
293.15% which indicates that the company must have acquired some fixed assets in the
previous year 2004-05. But since then the company has been charging depreciation on a fair
basis. Though it is fluctuating, which may be an effect of increasing and decreasing fixed
assets, still it gives an idea of how rapid is the growth of the company.

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The requirement of the working capital of the company has been drastically increasing. The
company has been in the growth stage which is evident from the rate of increase of the
working capital. The company has been growing rapidly, which requires a lot of working
capital to be invested in the business for the smooth running of its operations. Therefore it
is not that surprising that the company has increased its working capital.

The capital expenditure of the company has also been rising. In the initial years, taken in this
study, the company the capital expenditure wasn’t much which finally rose to Rs.
10,77,46,873 in the year 2008-09. This shows that the company has been growing and is in
the growth stage. The company’s assets have been increasing. Procurement of the fixed
assets by the company has brought the capital expenditure at a pretty high level.

The free cash flow of a company shows how the company’s cash flows are safeguarding the
interest of the company’s shareholders. Reliance Power’s Free Cash flows shows how well
the company has been growing. The company has been in the growth stage and is still in the
growth stage.

Since the company has been in the growing stage, it is having a negative free cash flow
throughout the five years. But the negative cash flows have been decreasing at a very good
rate which is again encouraging for the company. Though the negative cash flows of the
company right now shows that the company’s position in the present scenario is not that
strong, it can be expected that the company’s free cash flows in the future will be good
(Assuming that the other external and uncontrollable conditions stay unchanged or may
change but to a very nominal level). The company being in the growing phase, the free cash
flows of the next few years may also be negative. But the company’s good and efficient
operations will bring the company’s free cash flows to a better position in the next five
years.

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