Microsoft Word - MAC_Final Report

8/3/2019 Microsoft Word - MAC_Final Report

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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

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10

15

20

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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

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12

14

16

CPM (%)

CPM (%)

0

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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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