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    Managerial Accounting and Control-1

    Financial Analysis of BHEL

    Group members:

    Debika Subhalagna, (PGP2011614) Dhruv Shandil, (PGP2011622) Landge Suhas Gangadhar, (PGP2011704) Prahlad Kushwaha, (PGP2011786) Priya Zutshi, (PGP2011797) Sayan Gupta, (PGP2011859) Sundeep Suthar, (PGP2011909)

    PGP-1

    IIM Indore

    Section D

    Group 7

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    BHEL

    Established more than 40 years ago, BHEL is the largest engineering and manufacturing enterprise of

    India in the energy & infrastructure related sectors. BHEL is amongst worlds rarest few who have the

    capability to manufacture entire range of power plant equipment. Since its inception, BHEL is

    maintaining a consistent track record of growth, performance and profitability. The company has grown

    in stature over the years with continued inflow of orders, manufacturing prowess, continued thrust on

    technology leading to a strong presence in domestic and international markets as a major supplier of

    power plant equipments besides establishing substantial inroads in select segment of products in

    Industrial sector and Railways. The company has realized the capability to deliver 15,000 MW p.a. power

    equipment capacities and the further expansion program is underway to reach 20,000 MW p.a. by 2012.

    BHEL caters to core sectors of the Indian Economy viz., Power Generation and Transmission, Industry,

    Transportation, Renewable Energy, Defense, etc. The wide network of BHELs 15 manufacturing

    divisions, 2 repair units, 4 power sector regions, 8 service centers, 15 regional offices, 2 subsidiaries and a

    large number of Project Sites spread all over India and abroad enables the company to provide most

    suitable products, systems and services- efficiently and at competitive prices. The company has entered

    into a number of strategic joint ventures in supercritical coal fired power plants to leverage equipment

    sales besides living up to the commitment for green energy initiatives.

    In Power generation segment, BHEL is the largest manufacturer in India supplying wide range of

    products & systems for thermal, nuclear, gas and hydro-based utility and captive power plants. BHEL has

    proven turnkey capabilities for executing power projects from concept-to-commissioning. BHEL supplied

    utility power generating sets have crossed the landmark of 1, 00,000 MW and continue to maintain the

    record of nearly two-third of the overall installed capacity and around three-fourth of the power generated

    in India. BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW

    ratings, including sets of 660/700/800 MW based on supercritical technology. BHEL has facilities to go

    up to 1000 MW unit size. To make efficient use of high ash content coal available in India, BHEL also

    supplies circulating fluidized bed combustion (CFBC) boilers for thermal plants. BHEL is the only Indian

    company capable of manufacturing large-size gas-based power plant equipment, comprising of advanced-

    class gas turbines up to 289 MW (ISO) rating for open and combined-cycle operations. BHEL engineers

    and manufactures custom-built hydro power equipments.

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    As per the 47th

    Annual Report on the Business and Operations of the Company For the Year ended March

    31, 2011 the Financial Performance of the BHEL is as follows:

    Financial Year

    (In Rs. Crore except per share data) 2010-11 2009-10

    Turnover(Gross) 43337 34154

    Profit before depreciation and tax 9605 7083

    Less: Depreciation 544 458

    Less: Interest & Finance charges 55 34

    Profit before tax 9006 6591

    Less: Provision for Taxes(including deferred tax) 2995 2280

    Profit after Tax 6011 4311

    Add:/(less) Statutory appropriation - 1Distributable Profit 6011 4312

    Add: Balance brought forward from

    the previous year

    575 595

    Balance available for appropriation 6586 4907

    Dividend (including interim dividend) 1525 1141

    Corporate Dividend tax

    (incl. on interim dividend)

    249 191

    Amount transferred to

    General Reserve

    4000 3000

    Balance in P&L account to be

    carried forward

    812 575

    Earnings per Share (Rs.) 122.80 88.06

    NAV per share (Rs.) 411.71 352.16

    Economic Value Added (Rs. Crore) 3793 2670

    FINANCIAL HIGHLIGHTS

    During the year, the company witnessed growth in Turnover by 26.89% to Rs.43337 Crore from

    Rs.34154Crore in the previous year. The Turnover (net of excise duty) increased by 26.49% from Rs.

    32861 Crore in 2009-10 to Rs. 41566 Crore in 2010-11. Profit before Tax for the year 2010-11 is

    placed at Rs. 9006 Crore as against Rs. 6591 Crore during 2009-10, a growth of 36.64% as compared

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    to previous year which is because of technological cost benefits and accounting policy changes.

    Company has taken a number of initiatives. Localization of technologies, continuous working on

    supply chain and lower material costs helped in good profit.

    Profit after Tax is placed at Rs. 6011 Crore as against Rs. 4311 Crore during2009-10, a growth of

    39.43% over previous year. Change in the company's accounting policy on provision for warranty

    obligation for construction contracts also pushed revenues and profits higher. BHEL forayed into the

    Yemenese and Kenyan markets, mainly for supply of motors apart from entering Hong Kong and

    Turkey solar power markets and as a result BHEL has earmarked a capital expenditure amount of Rs

    1,700 crore for the current financial year

    Increase in turnover coupled with savings in material cost over previous year has contributed to the

    better financial performance during the year.Net worth of the company has gone up from Rs.

    15917Crore to Rs. 20154 Crore registering an increase of26.62%. Net asset value (NAV) per share

    has increased from Rs. 325.16 in 2009-10 to Rs. 11.71 in 2010-11.

    DIVIDEND

    The Board has recommended a Final Dividend of179% (Rs. 17.90 per share), Rs. 876.24 Crore, for

    the year 2010-11. An interim dividend of 132.50% (Rs. 13.25per share), Rs. 648.61 Crore, on share

    capital of Rs. 489.52Crore, has already been paid for the year 2010-11.Thus the total dividend

    payment for the year 2010-11 is Rs. 1524.85 Crore (exclusive of dividend tax) as against Rs.1140.58

    Crore paid in the previous year. Provision of Rs. 142.15 Crore has been made for Corporate Dividend

    Tax on the Final dividend proposed. BHEL's shareholders have been paid an interim dividend of

    132.5 per cent while the earnings per share in the previous fiscal climbed to Rs 123 per share. The

    firm is looking at business opportunities in the gas turbine segment in Japan increasing the

    shareholder faith to grow in the company and creating an economic value for the BHEL.

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    Review of Financial Performance of 10 years

    Year

    Reserves

    &

    Surplus

    %

    Change

    Sales &

    Operatin

    g Income

    %

    Chang

    e PBDIT

    %

    Change PBT

    %

    Change

    2002 4221 - 7287 - 930 - 664 -

    2003 4708 11.54 7482 2.68 1042 12.05 802 20.79

    2004 5278 12.11 8662 15.78 1272 22.08 1014 26.44

    2005 6027 14.2 10336 19.33 1882 47.96 1582 56.02

    2006 7301 21.14 14525 40.53 2869 52.45 2564 62.08

    2007 8788 20.37 18739 29.02 4052 41.24 3736 45.71

    2008 10775 22.62 21401 14.21 4762 17.53 4430 18.58

    2009 12939 20.09 28033 30.99 5214 9.5 4849 9.46

    2010 15917 23.02 34154 21.84 7082 35.83 6591 35.93

    2011 20154 26.62 43337 26.89 9605 35.63 9006 36.65

    Average 19.08 22.37 30.48 34.63

    1) Reserves and SurplusIt can be observed from the above table that the reserve surplus has been increasing over the years

    but at different rates. The rate of growth on the reserves is the highest (26.6 %) in 2011. Since the

    base changes percentage increase, it might not reflect the actual increase of the revenue and

    surplus. Although the constant high rate of increase signifies that the company is doing fairly

    well.

    2) Sales and Operating Income

    The growth rate of sales and operating income has been at an average of 22.37 % with minor

    fluctuations, which is a good sign of operating efficiency. There has been a decline in the growth

    of about 15% in 2008 possibly due to the effect of recession.

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    3) PBDIT

    Profit for the company has been continuously increasing from 2002 -2007 reaching a peak growth

    of 50%, but declined drastically to 9.5% in 2009 on the account of recession. Company has

    gained the momentum back and the PBDIT has grown at an average of 35 % for the last two

    years.

    4) PBT

    It shows similar trend as of PBDIT that means it shows increasing pattern from year 2002-2007.

    The PBT for the year 2005- 2007 shows some steep increase, which indicates high growth in

    sales and operating income. During the year 2008 & 2009 the growth rate declined drastically

    during recession

    5) Loans

    Unsecured Loan represents credit for assets taken on Finance Lease. It increased from 128 Crore

    in 2009-10 to 163 Crore in 2010-11.

    6) Investments

    Long term trade investments have increased by Rs 359 Crore mainly on account of Equity

    participation in Joint Venture Companies and Subsidiary Company.

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    Year

    Gross

    Fixed

    Assets

    %

    Change

    2002 9298 -

    2003 9587 3.11

    2004 11658 21.61

    2005 14491 24.31

    2006 17506 20.81

    2007 22280 27.28

    2008 29554 32.65

    2009 39581 33.93

    2010 46960 18.65

    2011 57097 21.59

    Average 22.66

    7) Fixed Assets

    Company has been increasi

    result of expansion strategy

    and 212 Crore respectively

    capacity augmentation prog

    commissioning facilities at

    8) Market Value AddedMarket Value Added (M

    the capital contributed by t

    negative, the firm has destfirm's investors could have

    the firm relative to the mar

    The formula for MVA is:

    Capital

    Employe

    d

    %

    Change

    Market

    Value

    Added

    %

    Change P

    4527 - 3074 -

    4772 5.42 3248 5.67

    5212 9.23 3680 13.31

    5950 14.16 4254 15.6

    7001 17.67 5683 33.6

    7640 9.13 7182 26.38

    8873 16.14 8323 15.89

    10091 13.73 9894 18.88

    12968 28.52 13171 33.13

    16391 26.4 18476 40.28

    15.6 22.53

    ng its gross assets at an average rate of 22 % for the

    . Gross Block and Capital Work in progress increas

    during the year due to Capital expenditure incurred

    ramme at various manufacturing units and the erecti

    the project sites.

    A) is the difference between the current market v

    he investors. If MVA is positive, the firm has ad

    oyed value. The amount of value added needs toachieved investing in the market portfolio, adjusted

    et.

    T

    %

    Change

    469 -

    444 -5.34

    657 47.98

    953 45.06

    1679 76.19

    2415 43.84

    2859 18.39

    3138 9.76

    4311 37.39

    6011 39.44

    34.75

    last ten years as

    d by 1470 Crore

    on ongoing

    on and

    alue of a firm and

    ded value. If it is

    e greater than thefor the leverage of

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    Where:

    MVA is market val Vis the market val Kis the capital inv

    From the 10 years data it is

    rate of 22.53 %.

    9) Net Profit (PAT)

    Net profit of the Company

    the 2002, growing at an ave

    10)Deferred Tax Assets (

    Deferred Tax Assets (Net)

    11)Inventories

    Inventory increased by Rs 1

    operations but in terms of d

    in 2010-11.

    0

    2000

    4000

    60008000

    10000

    12000

    14000

    16000

    18000

    20000

    e added

    e of the firm, including the value of the firm's equit

    sted in the firm

    evident that there has always been a growth in MV

    or the year 2011 stood at 6011 Crores as compared

    rage rate over 34% the last 10 years.

    et)

    ave increased by Rs.637 Crore mainly due to incre

    728 Crore over previous year in tune with the incre

    ays of turnover, it has decreased from 99 days in 20

    MVA

    y and debt

    at an average

    to 469Crores in

    se in provisions.

    ase in volume of

    9-10 to 93 days

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    12)Sundry Debtors (Net)

    In terms of days of turnover debtors increased from 221 days in 2009-10 to 230 days in 2010-11

    which is mainly on account of increase in deferred debts.

    13)Cash and Bank Balances

    The cash and cash equivalents at the year end are placed at Rs 9630 Crore as against Rs 9790

    Crore in 2009-10.

    14)Loans and advances & other Current Assets

    Loans & advances have increased by Rs 444 Crore in line with increased level of operations.

    Other current assets represent interest accrued on bank deposits and investments.

    15)Current Liabilities and Provisions

    The increase in current liabilities is mainly due to increase in advances from customers by Rs

    1200 Crore and sundry creditors & other liabilities by Rs 2123 Crore. The increase in provision is

    mainly on account of increase in provision for Contractual Obligation in line with revised policy

    on warranty provisions.

    16)Turnover

    Turnover net of Excise Duty increased by 26.49% during the year, Power segment and Industry

    segment contributed 79% and 21% respectively for the total revenue of the company.

    17)Other IncomeOther income increased by Rs.53 Crore during the year. The increase in operational income is in

    tune with increase in the volume of operations and the reduction in interest income is due to

    reduced interest rates and decrease in short term investments.

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    18)Consumption of Material, Erection & Engineering Expenses

    The increase in Consumption of Material, Erection & Engineering Expense by s 2537 Crore or

    12.27% is mainly on account of increase in Turnover / volume of operation, which has increased

    by 26.89%. As percentage of net turnover it decreased from 62.91% in 2009-10 to 55.84% in

    2010-11 (59.83% without considering the impact of additional turnover on a/c of policy change).

    19)Employees Remuneration & Benefits

    Employees remuneration & benefits increased from Rs.5244 Crore in 2009-10 to Rs.5397 Crore

    in 2010-11. Employees Remuneration & benefits include provision for pension scheme.

    20) Other Expenses of Manufacturing, Administration, Selling & DistributionThe increase in other Expenses of manufacturing, Administration, Selling & Distribution is

    Rs.471 Crore or 22.81% as compared to 2009-10 in line with the increased level of operations of

    the company.

    21)Provisions (Net)

    The Increase in Provisions (Net) is mainly on account of increase in provision for Contractual

    Obligations in line with revised policy on warranty provisions.

    22)Interest and other borrowing costs

    The interest cost represents the interest component of the lease rentals on assets taken on Finance

    lease and interest on short term borrowings during the year.

    23)DepreciationThe increase in depreciation by Rs.86 Crore is on account of increase in gross block on

    commissioning of assets.

    24)Provision for taxation

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    The increase in provision f

    25)Economic Value AddIn corporate finance, EconCo., is an estimate of a fir

    return of the company's inv

    profit earned by the firm l

    created when the return on

    capital.

    EVA is net operating profit

    product of the cost of capit

    where:

    , is is the weighted aver is the economic ca NOPAT is the net oper

    the amortization of goo

    items.

    NOPAT is profits derived f

    costs and non-cash bookke

    return to those who provide

    Capital is the amount of cas

    the sum of interest-bearing

    current liabilities (NIBCLs)

    EVA is the relevant yards

    operating profit after tax,

    higher than the cost of c

    companies earning returns l

    r taxation is in line with the growth in profit for the

    d

    mic Value Added or EVA, a registered trademark's economic profit being the value created in exc

    estors (being shareholders and debt holders). Quite

    ess the cost of financing the firm's capital. The id

    the firm's economic capital employed is greater th

    after taxes (or NOPAT) less a capital charge, the la

    l and the economic capital. The basic formula is:

    the Return on Invested Capital (ROIC);

    ge cost of capital (WACC);

    ital employed;

    ting profit after tax, with adjustments and translatiodwill, the capitalization of brand advertising and ot

    rom a companys operations after cash taxes but bef

    ping entries. It is the total pool of profits available t

    capital to the firm.

    h invested in the business, net of depreciation. It ca

    debt and equity or as the sum of net assets less non-i

    .

    tick for measuring economic profits. EVA is t

    after deducting the cost of capital. Companies,

    apital, create wealth for the shareholders and o

    ower than the cost of capital, destroy shareholders

    year.

    f Stern Stewart &ess of the required

    imply, EVA is the

    ea is that value is

    an the cost of that

    ter being the

    ns, generally forers non-cash

    ore financing

    o provide a cash

    be calculated as

    nterest-bearing

    he companys net

    hich earn returns

    n the other hand

    ealth.

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    Cost of equity (%age)

    WACC (%age)

    Average capital employed

    NOPAT

    Less: Cost of capital

    Economic value added

    Growth in EVA

    Market Value of equity

    Add: Debt

    Less: Cash and cash equivalents

    Enterprise value

    0500

    1000

    1500

    2000

    2500

    3000

    3500

    4000

    2006-07 2007-08

    2010-11 2009-10 2008-09 2007-0

    14 13.3 13.4 14.4

    14.1 13.3 13.4 14.4

    14680 11540 7751 6467

    5867 4206 3047 2739

    2074 1536 1039 929

    3793 2670 2008 1810

    42.1 33 11 9.3

    100971 117027 73944 10090

    163 128 149 95

    9630 9790 10315 8386

    91504 107365 63778 92616

    2008-09 2009-10 2010-11

    EVA

    2006-07

    14.6

    14.4

    5544

    2454

    797

    1657

    N.A

    55349

    89

    5809

    49629

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    Cash and Profitability

    Reported Net Profit 6,011.20 4,310.64 3,138.21 2,859.34 2,414.70

    This is the absolute data on the cash flow and reported net profit. As we can see the cash and cash

    equivalents have shown a change in the positive direction over the years but it has shown a decline in the

    last 2 years. Ironically, the net profits have not declined; in fact, they have been rising. This shows

    that it is not necessary that cash flows must be increasing with increase in net profits. A contrary situation

    is perfectly possible.

    There may be various reasons for such kind of a situation.

    There is an observable increase in the net cash used in investing activities: After March 2008,purchase of fixed assets has shown an increase from 703 crore to 1730 crore. Before 2008 it was

    more or less constant at this level, now it is constant at the new level. 2011 has also seen a loss of

    360 crore in the investment in subsidiaries. There is an obvious use of cash here which does not

    alter the profits.

    More dividends have been paid: The payment of dividend has seen an increase, under theheading net cash used in financing activities of about 200 crore in 2010 and about 350 crore in

    2011. There is obviously an outflow in cash here which does not influence profits.

    Mar 11 Mar 10 Mar 09 Mar 08 Mar 07

    Cash Flow Summary

    Cash and Cash Equivalents B.O.Y. 9790.08 10314.67 8386.02 5808.91 4133.97

    Net Cash from Operating Activities 2658.62 1585.06 3291.22 3477.9 2821.37

    Net Cash Used in Investing Activities -1342.82 -966.64 -512.82 -12.54 -212.66

    Net Cash Used in Financing Activities -1475.73 -1143.01 -849.75 -888.25 -933.77

    Net change in Cash and Equivalent -159.93 -524.59 1928.65 2577.11 1674.94

    Cash and Cash Equivalents E.O.Y. 9630.15 9790.08 10314.67 8386.02 5808.91

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    These were the main reasons why the company showed a decline in cash despite of increase in net

    profits over the years, especially recently.

    CASH

    INCREASE DECREASE

    PROFITS INCREASE + +

    These companies are in a

    good financial condition.

    + -

    The company is not earning

    profit from the cash investedin the business. It probably

    needs to diversify in other

    business.

    DECREASE - +

    The companys C to C cycle

    is not able to produce cash

    despite earning profits.

    - -

    These companies are in a bad

    financial condition. Company

    needs a restructuring of its

    business.

    Cash flow for BHEL falls in the 2nd quadrant as its profits are constantly rising but the cash inflow

    has shown a considerable decline in recent times. Though the declines are decreasing, it can be hoped

    that the company will again begin to show positive cash inflows. Most of the cash outflow has been

    due to the dividends paid and the cash used in investing activities that will yield results in the long

    run. Thus, cash decline is not a cause of big worry for the company as of now.

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    Key Financial Ratios:

    11-

    Mar

    10-

    Mar 9-Mar 8-Mar 7-Mar 6-Mar 5-Mar 4-Mar 3-Mar 2-Ma

    Key Ratios

    Debt-Equity Ratio 0.01 0.01 0.01 0.01 0.04 0.08 0.1 0.11 0.13 0.2

    Long Term Debt-Equity

    Ratio 0.01 0.01 0.01 0.01 0.04 0.08 0.1 0.11 0.13 0.1

    Current Ratio 1.37 1.37 1.4 1.45 1.47 1.54 1.57 1.66 1.7 1.56

    Turnover Ratios

    Fixed Assets 6.01 5.86 5.89 5.07 4.78 3.96 2.98 2.6 2.35 2.41

    Inventory 4.33 4.03 4.17 4.35 4.78 4.43 4.21 4.32 3.84 3.7

    Debtors 1.83 1.89 2.04 2.01 2.27 2.24 2 2.04 1.77 1.7

    Interest Cover Ratio 165.54 197.73 158.89 126.08 87.22 44.65 20.43 21.67 18.39 9.88

    PBIDTM (%) 21.84 20.47 18.3 21.92 21.31 19.46 17.82 16.92 15.55 15.12

    PBITM (%) 20.6 19.14 17.13 20.55 19.87 17.79 15.75 14.69 13.14 12.85

    PBDTM (%) 21.72 20.37 18.19 21.76 21.08 19.06 17.05 16.24 14.84 13.82

    CPM (%) 14.91 13.78 12.19 14.53 14.13 13.06 11.1 11.11 9.34 10.22

    APATM (%) 13.67 12.46 11.01 13.16 12.7 11.39 9.03 8.88 6.92 7.95

    ROCE (%) 49.83 45.47 40.73 45.23 45.16 36.37 26.86 23.55 19.89 20.14

    RONW(%) 33.33 29.88 26.47 29.23 30.02 25.2 16.84 15.58 11.45 14.28

    1) Debt-Equity Ratio:

    Debt-Equity ratio is a measure of a company's financial leverage calculated by dividing its total

    liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to

    finance its assets.

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    Debt-Equity ratio=

    A high debt/equity ratio generally means that a company has been aggressive in financing its growth with

    debt, which may lead to volatile earnings as a result of the additional interest expense. A high debt to

    equity ratio helps a company generate more earnings than it would have without this outside financing. If

    the earnings increase by a greater amount than the debt cost, then the shareholders benefit

    as more earnings are being spread among the same amount of shareholders. However, the cost of this debt

    financing may outweigh the return that the company generates on the debt through investment and

    business activities and become too much for the company to handle. This can lead to bankruptcy, which

    would leave shareholders with nothing. The debt/equity ratio also depends on the industry in which the

    company operates.

    Debt-Equity ratio from Mar 10 to Mar 02:

    As we can see from the graph, the debt-equity ratio gradually decreases across the years and has become

    constant at a low value of 0.01. This is a positive indication to the shareholders and attracts new

    0

    0.05

    0.1

    0.15

    0.2

    0.25

    Debt/Equity

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    shareholders as the value of debt for the company has decreased from a higher value of 0.2 to a quite

    lower value of 0.01.

    The debt-equity ratio is decreasing with year due to increase in the Governments grants as these are

    Government owned entities and moreover, their profits have been increasing with these years. So, debts

    have been decreasing in comparison to equities.

    2) Long-term Debt-Equity Ratio:

    Long term debt-equity ratio is quite similar to the debt-equity ratio. But, in place of total liabilities, only

    long term debts are considered. It refers to money the company owes that it does not expect to pay off in

    the next year. Long term debt consists of things such as mortgages on corporate buildings, land, business

    loans etc. A great sign of prosperity is when the balance sheet shows the amount of long term debt has

    been decreasing for one or more years. When debt shrinks and cash increases, the balance sheet is said to

    be improving. When its the other way around, it is said to be deteriorating. Companies with too

    much long term debt will find themselves overwhelmed with interest payments, a risk of having too little

    working capital and ultimately, bankruptcy.

    As seen from the graph Long term debt-equity ratio also decreases due to increased Governments grants.

    0

    0.02

    0.04

    0.06

    0.08

    0.1

    0.12

    0.14Long term Debt/Equity

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    3) Current Ratio:Current Ratio is a liquidity ratio that measures a companys ability to pay short term obligations.

    Current Ratio =

    This ratio is used to give an idea of the companys ability to pay back its short term liabilities(debt and

    payables) with its short term assets(cash, inventory and receivables). The higher the ratio, the more

    capable the company is payable of its obligations.

    A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at

    that point. While this shows the company is not in good financial health, it does not necessarily mean that

    it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign.

    The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its

    product into cash. Companies that have trouble getting paid on their receivables or have long inventory

    turnover can run into liquidity problems because they are unable to alleviate their obligations.

    Because business operations differ in each industry, it is always more useful to compare companies within

    the same industry.

    This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory and

    prepaid as assets that can be liquidated. The components of current ratio (current assets and current

    liabilities) can be used to derive working capital (difference between current assets and current liabilities).

    Working capital is frequently used to derive the working capital ratio, which is working capital as a ratio

    of sales.

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    Current Ratio is decreasing due to increase in current assets and decrease in current liabilities of the

    company. This is due to increase in the Governments grants over the decade.

    4) Fixed Asset Turnover Ratio:A financial ratio of net sales to fixed assets. The fixed-asset turnover ratio measures a company's ability

    to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) -

    net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in

    using the investment in fixed assets to generate revenues.

    The fixed-asset turnover ratio is calculated as:

    Fixed Asset turnover ratio=

    This ratio is often used as a measure in manufacturing industries, where major purchases are made for

    PP&E to help increase output. When companies make these large purchases, prudent investors watch this

    ratio in following years to see how effective the investment in the fixed assets was.

    0

    0.2

    0.4

    0.6

    0.8

    1

    1.2

    1.4

    1.6

    1.8

    Current ratio

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    Fixed asset turnover ratio has been constantly increasing over the decade as there has not been a constant

    increase in the infrastructure of the company as compared to the sales of the company. This attracts the

    shareholders in investing in the company. But, the company does not need much investment being a PSU.

    5) Inventory Turnover Ratio:Inventory turnover ratio is a ratio showing how many times a company's inventory is sold and replaced

    over a period. Inventory Turnover ratio=

    . Alternatively, it can be calculated as,

    Inventory turnover ratio=

    To calculate Inventory Turnover Days, the days in the period is divided by the inventory turnover formulato calculate the days it takes to sell the inventory on hand. Although the first calculation is more

    frequently used, COGS (cost of goods sold) may be substituted because sales are recorded at market

    value, while inventories are usually recorded at cost. Also, average inventory may be used instead of the

    ending inventory level to minimize seasonal factors. This ratio should be compared against industry

    averages. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either

    strong sales or ineffective buying. High inventory levels are unhealthy because they represent an

    investment with a rate of return of 0. It also opens the company up to trouble should prices begin to fall.

    0

    1

    2

    3

    4

    5

    6

    7

    Fixed Asset Turnover Ratio

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    Inventory turnover ratio increases till the year 2007 and then decreases. It increases due to increase in

    costs of the goods sold and increased demands. After 2007, inventory turnover ratio decreases. This is due

    to decreases in cost of goods sold as compared to inventory because the industry was hit by recession at

    that period. Hence, costs of goods sold have reduced due to a decrease in demand. This dip in the cost of

    goods sold continues till the year 2010. It increases from the year 2011 corresponding to increase in the

    goods and a corresponding increase in demand or reduced inventory.

    Margins

    1)

    Profit before Interest Depreciation Taxes Margin

    0

    1

    2

    3

    4

    5

    6

    Inventory Turnover ratio

    0

    5

    10

    15

    20

    25

    PBIDTM (%)

    PBIDTM (%)

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    A measurement of a company's operating profitability. It is equal to profit before interest, tax,

    depreciation (PBITD) divided by total revenue. Because PBITD excludes depreciation and interest,

    PBITD margin can provide an investor with a cleaner view of a company's core profitability.

    The PBIDT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBIDTM

    in the year 2008-2009.Since then PBIDTM has been increasing from the year 2009 to the year 2011. A

    similar trend is followed by PBDTM. Generally, a higher value is appreciated for these ratios as that

    would indicate that the company is able to keep its earnings at a good level via efficient processes that

    have kept certain expenses low. The increase in PBIDTM and PBDTM can be attributed to increase in

    turnover coupled with savings in material cost over previous year and this has contributed to the better

    financial performance during the year.

    2) Profit Before Depreciation and Taxes Margin

    The PBDT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBDTM in

    the year 2008-2009.Since then PBDTM has been increasing from the year 2009 to the year 2011.

    3) Profit Before Interest and Tax Margin

    0

    5

    10

    15

    20

    25

    PBDTM (%)

    PBDTM (%)

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    The PBIT margin was increasing from the year 2002 to the year 2008.There was a dip in the PBDTM in

    the year 2008-2009.Since then PBDTM has been increasing from the year 2009 to the year 2011.

    There has been a change in accounting policy. The method of calculating the % completion has been

    modified to remove the mismatch in recognition of revenue and creation of provision for contractual

    obligation at 2.5% of the contract revenue on completion of trial operation and also to ensure that only

    2.5% of the contract revenue is recognized on completion of trial operation with corresponding provision

    for contractual obligation. This was necessitated as the company observed the provisioning for contractual

    obligation made ranged between 1% to 5% from project to project and this anomaly was corrected. Sincethe % completion is done on estimated cost the variation between estimate and actual has been written

    back actually. And this has resulted in increase in STO for the quarter to the tune of Rs 444 crore. The

    impact at PBT and PAT level was Rs 88 crore and Rs 60 crore respectively. This is a one off item and as

    this anomaly was corrected there will be no future impact/occurrence.

    Industrial sector is expanding. The demand for the products has gone up. The company sees the unit size

    are increasing, the players who were earlier ordering for 60 MW are ordering 150 MW sets and who

    earlier went for 150 MW sets moves up to 250 MW sets. The demand for compressor and motors are also

    picking up. The high voltage transmission product ordering is happening. Transportation is another

    growth area where the company has picked up impressive orders from railways and private sector

    recently. This increase in demand has attributed to the increased sales turnover.

    4) Cash Profit Margin

    0

    5

    10

    15

    20

    25

    PBITM (%)

    PBITM (%)

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    Cash profit margin ratio is used to measure operating performance. A higher cash profit margin is

    desirable. Here we can observe that CPM is increasing from the year 2009-2011.This can be attributed to

    increased PAT over the period due improved industry condition and increased sales turnover for BHEL.

    Formula: (Profit after Tax+ Depreciation)/Gross Sales

    So these are the very important concept for fundamental analysis.

    5) Return on Capital Employed (ROCE)

    0

    2

    4

    6

    8

    10

    12

    14

    16

    CPM (%)

    CPM (%)

    0

    10

    20

    30

    40

    50

    60

    ROCE (%)

    ROCE (%)

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    ROCE reflects a companys ability to earn a return on all of the capital that the company employs .ROCE

    is calculated by determining what percentage of a companys utilized capital it made in pre-tax

    profits,before borrowing costs.

    The companys ROCE increases from year 2002 to 2008 and there is a decrease in the year 2008.ROCE

    again increases from year 2009-2011.There is an increased ROCE which shows that BHEL has utilized its

    capital employed in a more efficient way.The prime objective of making investments in any business is to

    obtain satisfactory return on capital invested. Hence, the return on capital employed is used as a measure

    of success of a business in realizing this objective. It is the best measure of profitability in order to assess

    the overall performance of the business. It indicates how well the management has used the investment

    made by owners and creditors into the business.

    ROCE should always be higher than the rate at which the company borrows; otherwise any increase in

    borrowing will reduce shareholders' earnings. ROCE tells us how much profit we earn from the

    investments the shareholders have made in their company. A negative ROCE would mean that the firm

    had made a loss. ROCEs are typically between 5% and 15%. This will depend on the sector in which the

    firm operates.

    6) Return on Net worth (RONW)

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures acorporation's profitability by revealing how much profit a company generates with the money

    shareholders have invested.

    ROE is expressed as a percentage and calculated as:

    Return on Equity = Net Income/Shareholder's Equity

    0

    5

    10

    15

    20

    2530

    35

    RONW (%)

    RONW (%)

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    Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends

    to preferred stock.) Shareholder's equity does not include preferred shares.

    Also known as "return on net worth" (RONW).

    The ROE is useful for comparing the profitability of a company to that of other firms in the same

    industry.

    There are several variations on the formula that investors may use:

    1. Investors wishing to see the return on common equity may modify the formula above by subtracting

    preferred dividends from net income and subtracting preferred equity from shareholders'

    equity, giving the following: return on common equity (ROCE) = net income - preferred dividends /

    common equity.

    2. Return on equity may also be calculated by dividing net income by average shareholders' equity.

    Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period

    to the shareholders' equity at period's end and dividing the result by two.

    3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity

    figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-

    of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating

    both beginning and ending ROEs allows an investor to determine the change in profitability over the

    period.

    This gives a continuously increasing trend from year 2003 to year 2007 and then we observe that there is

    a decreasing trend from year 2008-2009.We can again observe an increasing trend from 2009-2011.This

    ratio gives you an idea of the returns generated by investing in the company. While ROCE is an effective

    measure to get a general overview of the profitability of the company's business operations, RONW lets

    you gauge the returns you can earn on your investment. This ratio indicates the return on stockholder's

    total equity. RONW/ROE is the single most important financial ratio applying to stockholders and the

    best measure of performance by a firm's management.

    A high return on equity indicates that the company is spending wisely and is likely profitable; a low

    return on equity indicates the opposite. As a result, high returns on equity lead to higher stock prices. A

    negative RONW would mean that the firm had negative earning.

    After Tax Profit Margin

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    A financial performance ratio, calculated by dividing net income after taxes by net sales. A company's

    after-tax profit margin is important because it tells investors the percentage of money a company actually

    earns per rupee of sales. This ratio is interpreted in the same way as profit margin - the after-tax profit

    margin is simply more stringent because it takes taxes into account.

    Often, a company's earnings don't tell the entire story. The amount of profit can increase, but that doesn't

    mean the company's profit margin is improving. For example, a company's sales could increase, but if

    costs also rise, that leads to a lower profit margin than what the company had when it had lower profits.

    This is an indication that the company needs to better control its costs.

    Here we observe that the APATM has decreased in the year 2008-2009 and has increased over 2009-

    2011.The decrease can be attributed to economic slowdown and decrease in the revenues earned and also

    a decrease in demand for heavy electrical products.

    Du Pont Analysis:

    BHEL showed the following trends in the important parameters governing the Du Pont Chart analysis:

    1. Profit margin: Profit margin is given by the formula

    0

    2

    4

    6

    8

    10

    12

    14

    16

    APATM (%)

    APATM (%)

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    In this analysis this term has been c

    The following graphs show the vari

    The ratio PBDIT/Sales gives the op

    PBDIT arises due to the fixed rates

    following graph shows, this ratio b

    is a clearly apparent upward trend i

    be attributed to the economic down

    The ratio is a measure of operating

    far as operations are concerned, it is

    0

    5

    10

    15

    20

    25

    PBI

    alculated by dividing it further into two terms:

    ation for the two relevant terms for the last 10 fiscal

    erating efficiency of the firm. The difference betwe

    of depreciation and taxes that have to be taken into

    sically has stayed more or less constant over the las

    the ratio over the last 10 years, apart from the dip i

    urn that the world witnessed in 2008.

    fficiency of the company, and an increasing trend s

    moving in the right direction.

    T/Sales(%)

    s.

    n PAT and

    ccount. As the

    10 years. There

    n 2009, which can

    hows that that as

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    2. Asset turnover ratio:The asset turnover ratio is g

    Asset turnover ratio of the

    manufactures usually earn i

    0

    10

    20

    30

    40

    50

    60

    70

    PA

    0

    2

    4

    6

    8

    10

    12

    14

    PA

    iven by the formula:

    ngineering services industry is typically low, since

    t a large profit margin. BHEL possesses Asset turno

    /PBIDT(%)

    /Sales (%)

    he products that it

    ver in the range of

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    1.5-2, and the trend is on th

    industry which is not a sale

    3. Financial Leverage ratio:

    0

    0.5

    1

    1.5

    2

    2.5

    Sale

    0

    0.05

    0.1

    0.15

    0.2

    0.25

    0.3

    0.35

    0.4

    0.45

    0.5

    PBDI

    e increase. However, this ratio is not of great import

    s-dominant industry.

    /Net Assets

    /Net Assets

    ance to this

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    The formula for financial le

    This ratio is also not of so gthis ratio is consistently lo

    industries. However, a high

    BHELs present value is ta

    4. Return on Equity:ROE (Return on Equity) is

    determining a companys fi

    value creation. Return on e

    total amount of shareholder

    accounting that represents t

    in capital of the owners. A

    capable of generating cash i

    compared to its industry, th

    0

    0.2

    0.4

    0.6

    0.8

    1

    Net Ass

    verage ratio is given by:

    reat an importance to the Engineering sevices indusfor BHEL. This ratio is generally high for finalcial

    financial leverage ratio is considered risky for othe

    ged at 1.01.

    arguably the most important ratio to the shareholder

    nancial position. It is the most important indicator o

    uity reveals how much profit a company earned in

    equity found on the balance sheet. Shareholder equ

    he assets created by the retained earnings of the busi

    usiness that has a high return on equity is more like

    nternally. For the most part, the higher a company's

    e better.

    ets/Net Worth

    try, and as suchservices

    industries, and

    s and investors for

    f shareholder

    omparison to the

    ity is a creation of

    ness and the paid-

    ly to be one that is

    return on equity

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